New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

Prospective corporations are free to incorporate in any state, regardless of where the corporation plans to physically operate or transact business.  It is of no consequence that the corporate organizers or shareholders reside in the state where the corporation chooses to incorporate. Moreover, it is of no consequence that the corporation actually operate or conduct business in the state of incorporation.  Despite the same, the state of incorporation may be extremely important to the internal affairs of the corporation. The exclusive right of regulation is known as the “Internal Affairs Doctrine.” That is because, corporate law is state law.

 

Until recently, American Courts have uniformly expressed their reluctance to entertain controversies arising from the “internal affairs” of corporations incorporated in other states. Previously, it was generally accepted doctrine that State Courts will not interfere in the management of the internal affairs of a foreign corporation. Rather, they would dismiss without prejudice cases concerning them.

 

Several states legislatures have resisted the absolute right of an incorporating state to regulate the internal affairs of a corporation. See N.J.S.A. § 14A:13-2(2) (foreign corporations “shall be subject to the same duties, restrictions, penalties and liabilities” imposed on domestic corporations). Like New Jersey, New York and California have a long history of regulating foreign corporations operating inside its borders.  California’s rationale for the regulation is the  protection of its residents who have a personal stake in foreign corporations’ as shareholders or employees.  Provident Gold Mining Co. v. Haynes, 159 P. 155, 156-157 (1919). In 1977, the California legislature enacted Corporations Code Section 2115 to allow it to regulate all corporations that conducted a majority of their business in California, despite the fact that they are incorporated elsewhere and considered “foreign corporations.”

 

New Jersey Courts have lead the way of “modernizing” the Internal Affairs Doctrine with an adaption of modern choice of law doctrine. In Krzastek v. Global Resource Industrial Power, Inc, A-1815-06T2, the New Jersey Appellate Division had to decide whether or not a Bergen County, Chancery Court properly applied New Jersey’s minority oppression statute while declining to apply Massachusetts’ law to a Massachusetts’ corporation. The Krzastek Court affirmed the Trial Court’s application of New Jersey over Massachusetts law. In doing so, the Krzastek Court reaffirmed New Jersey’s utilization of the flexible “governmental-interest” standard, which requires the application of law of the state with the greatest interest in resolving the particular issue that is raised in the underlying action. Id., (citing Gantes v. Kason Corp., 145 N.J. 478, 484 (2007)).  The “governmental-interest” standard, involves the consideration of some of the following factors:

• the needs of the interstate and international systems;
• the relevant policies of the forum;
• the relevant policies of other interested states and the relative interest of those states in the determination of the particular issue;
• the protection of justified expectations;
• the basic policies underlying the particular field of law;
• certainty, predictability and uniformity of result; and
• ease in the determination and application of the law to be applied.

Fu v. Fu, 160 N.J. 108, 122 (1999) (adopting, Restatement (Second) of Conflicts of Laws § 6 (1971)).

 

In Conway v. DialAmerica Marketing, Inc., BER-C-116-08, Judge Doyne applied the “governmental interest test” and held that New Jersey corporate law applied to DialAmerica, a Delaware corporation, because: the corporation’s principle place of business and headquarters were located in New Jersey; the entire board of directors resided here; and the corporation maintained critical books and records in the Garden State. Moreover, Judge Doyne found that the New Jersey legislature has “demonstrated a commitment to protecting minority shareholders,” and as such, “the relevant policies of the forum” state would be best served by applying New Jersey’s minority oppression law to the Delaware corporation. Id.

 

These decisions clearly demonstrate New Jersey Courts have the power to adjudicate foreign corporations under certain circumstances. New Jersey is on the forefront of modernizing the Internal Affairs Doctrine.

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Statutory protections may be found in the minority oppression statutes, such as in New Jersey’s Minority Oppression Statute, N.J.S.A. 14A:12-7(c).  New Jersey statutory law also provides rules, rights and obligations relating to: notice to shareholders, meetings and inspection of the company’s books and records.  Sometimes, the majority’s actions run afoul of other statutory laws such as the New Jersey Law Against Discrimination. For example, in one of my recent cases, a majority shareholder asserted retaliation claims against a minority shareholder after the majority changed her responsibilities after the minority brought serious concerns about sexual harassment of a company employee. 

 

The common law also offers minority shareholders protections from oppression. An oppressed minority shareholder could assert a breach of fiduciary duty claim, if the majority puts their interests over the interests of the company or the minority shareholder. A claim based upon common law fraud may be used in certain circumstances where the majority knowingly (with scienter) makes false or misleading statements which are detrimentally relied upon by the minority shareholder. Sometimes, a minority shareholder may successfully assert breach of contract claims against the majority.  If the majority is stealing corporate assets the minority may successfully assert conversion or misappropriation of company asset claims. 

 

Finally, courts possess equitable powers.  Courts may use their inherit equitable powers to remedy oppressive situations. For example, in one of my recent cases, the Judge appointed a provisional director to serve as a tie-breaker when two fifty-percent (50%) shareholders could not reach agreement. Moreover, Courts may enter a Temporary Restraining Order enjoining a party from engaging in behavior it deems to be detrimental to the corporation, a shareholder, or both. 

 

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

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Choosing the right attorney to represent you in a minority oppression claim is a very important decision. You need to select an attorney who has a good working knowledge of the oppressive tactics utilized by majority shareholders.

Sometimes prospective clients describe a situation they believe is not actionable when, in fact it is a form of oppression. Oppression is not always self-evident. Other times, prospective clients will describe situations they believe constitutes oppression when those facts, even if true do not create a cause of action for minority oppression.

I hope my previous blog posts help you identify what may and may not constitute minority oppression. And if you believe you are a victim of minority oppression, please contact me to set up a meeting here in my firm's Lawrenceville, New Jersey office to discuss your matter in more detail.

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N.J.S.A. 14A:12-7(1)(c) provides that a court may take remedial action upon proof that the directors or those in control (of a corporation having less than twenty-five shareholders) have mismanaged the corporation, abused their authority as officers or directors, or acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees. Bonavita v. Corbo, 300 N.J.Super. 179, 187 (Ch. Div. 1996) “The thrust of Subsection (1)(c) of the statute is protection from the abusive exercise of power,” which is “clear from the broad language referring to wrongful acts by either directors or “those in control” of the corporation, and the further reference to abuse of authority by “officers or directors.” Id. “The label worn” by those accused of oppression is not critical; rather, the inquiry is whether those accused of oppression had the power “to work their will on others” and to have done so improperly. Id. 

 

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

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It is clear from the decision of the New Jersey Supreme Court in Brenner v. Berkowitz,134 N.J. 488 (1993), that the majority’s conduct need not be fraudulent, illegal or even “wrongful” to constitute actionable “oppression” within the meaning of N.J.S.A. 14A:12-7.

 

In evaluating the majority’s conduct, particularly in close corporations of less than 25 individuals, courts must determine whether the majority has acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors, or have acted oppressively or unfairly toward a minority shareholder as provided under N.J.S.A. 14A:12-7(1)(c). Oppressive conduct has been defined as including that which frustrates a minority shareholder’s reasonable expectations. Brenner, 134 N.J. at 506 (citing 2 O’Neal’s Close Corporations § 9.29 at 132 (Callaghan & Co., 3rd ed.1988)).

 

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

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A minority shareholder who is a victim of shareholder oppression by the majority shareholders, officers and directors may be entitled to have their stock purchased for “fair value.”. N.J.S.A. 14A:12:7(8) provides: 

Upon motion of the corporation or any shareholder who is a party to the proceeding, the court may order the sale of all shares of the corporation's stock held by any other shareholder who is a party to the proceeding to either the corporation or the moving shareholder or shareholders, whichever is specified in the motion, if the court determines in its discretion that such an order would be fair and equitable to all parties under all of the circumstances of the case. 

N.J.S.A. 14A:12-7(8). Pursuant to N.J.S.A. 14A:12-7(1)(c), N.J.S.A. 14A:12-7(8), along with the Court’s common law powers a buy-out of the minority’s stock for “fair value” may be Ordered.

 

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

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In a previous blog post, I discussed the sale of corporate assets by the majority as a form of minority oppression. Sometimes, the majority does not transfer all assets to another corporation owned or controlled by them. Sometimes, they simply transfer a portion of the corporation to another owned or controlled by them. In doing so, the majority shareholder obtains an inequitable share of the entire business by decreasing distributions to the oppressed minority shareholder by splitting off profitable components of the business to another corporation owed or controlled by them.

 

An example of this oppressive technique is a corporation who has many divisions: sales, manufacturing and design. The sales and manufacturing divisions are profitable. The design portion of the company is not. The majority shareholder votes to have the sales and manufacturing divisions of the company transferred or sold for an inequitable price to another corporation owed solely by them (not the minority).

Fortunately, the minority shareholder may have recourse to prevent or stop this form of oppression.

 

First, if the transferring corporation did not receive anything for the division or assets which were transferred, it may be successfully argued that the transfer may be set aside for lack of consideration. Moreover, the transfer could be set aside because the majority shareholder engaged in "self-dealing." Again, as discussed in previous blog posts, the majority shareholder owes both the minority shareholder and the corporate enterprise itself certain fiduciary duties. By engaging in this form of oppression, a compelling argument may be made that the transfer of a profitable division to another entity controlled or owed by the majority (and not the minority) constitutes a breach of fiduciary duty. Finally, as discussed in previous blog posts, New Jersey law provides that it is unlawful, actionable minority oppression to interfere with the "reasonable expectations of the shareholders."

 

By engaging in the above-described activities, the minority's distributions may be reduced. Moreover, the corporation may be less profitable. A successful argument may be made that the transfer or a profitable division to another entity owed or controlled by the majority only interferes with the reasonable expectations of the shareholders." Hence, it is probably actionable under New Jersey's minority oppression statute. 

 

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

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Self-dealing is a common occurrence in minority shareholder oppression claims. When majority shareholders sell the corporate assets of one entity to another in order to eliminate a minority shareholder(s) from the enterprise, the oppressed shareholder can claim the shareholder agreement was violated. The minority shareholder may be successful in petitioning a Court of law to set aside the sale of the corporate assets if they can show that there was "self-dealing" involved and that the price or terms or both were unreasonable to the corporation.  

 

Arguably, in New Jersey, all the minority may have to show is that the corporate assets were sold to another entity controlled or owed by the majority. Even if the company receives a fair price for the business and assets, if the minority shareholder does not receive stock in the going concern (and had a reasonable expectation of future profits or employment) then they may be deprived the prospect of future earnings. The test in New Jersey is whether or not the minority shareholders "reasonable expectations" have been interfered with by the actions or in-actions of the majority. 

 

In states which require an inquiry into whether or not the purchase price was reasonable, Courts will subject that sale to "close" or "rigorous" scrutiny. In most states, whenever a corporation enters into a transaction with one of it's officers or directors or with a controlling shareholder, the insider has the burden of showing that the transaction between the corporation and one of its officers, directors or controlling shareholder is an arms length transaction. If it is found not to be, the Court may set aside that transaction. 

 

On the other hand, if the sale was made to outsiders as opposed to corporate officers, directors or to the majority shareholders (or those related to them), Courts are reluctant to reluctant to set aside the sale. That is because Court's adhere to the "business judgment rule" which provides that Judges should not substitute their judgment for the parties concerning matters of business judgment. 

 

If you believe you are a victim of self-dealing which violates your shareholder agreement, feel free to contact me in my Lawrenceville, New Jersey office. 

 

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While jurisdiction over the dissolution of a corporation was once limited to the Courts of its state of incorporation, apparently, that is no longer an absolute rule. See, Stuart L. Pachman, Title 14A: Corporations 538 (GANN 2007).  In fact, New Jersey has lead the way in “modernizing” the law in this field with the adaptation of modern choice of law doctrines. In Krzastek v. Global Resource Industrial and Power, Inc., No. A-1815-06T2 (App. Div. Sept. 11, 2008), the New Jersey Appellate Division upheld an application of New Jersey’s oppressed minority shareholder statute in a suit brought by a minority shareholder of a Massachusetts corporation. 

In Conway v. DialAmerica Marketing, Inc., BER-C-116-08 (Super. Ct. Sept. 30, 2008), the trial did the same in a case brought by a minority shareholder of a Delaware corporation. In both Conway and Krzastek, the New Jersey dissolution statute afforded the plaintiffs rights and/or remedies broader than those available under the laws of the states of incorporation. 

In both cases, the defendants unsuccessfully argued for dismissal based on the “internal affairs doctrine.” In other words, an oppressed minority shareholder of a foreign corporation with significant ties to the Garden State to have their matter adjudicated in New Jersey. These cases are good for oppressed minority shareholders. That is because New Jersey law protects oppressed minority shareholders.

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In previous blog entries, I focused on the causes and final remedies available in minority oppression cases. This posting focuses on what happens during the pendency of the litigation if the parties cannot run the subject company.  Depending on the circumstances, the Court possesses the inherit power to appoint a custodial receiver to manage the subject corporation’s affairs during the pendency of the minority oppression claim. See, N.J.S.A. 14A:12-7(4).  A custodial receiver is generally charged with protecting and preserving the corporation itself while the case is pending.

 

Just because the Court may appoint a custodial receiver does not mean it will or should exercise that equitable power. Generally, a Court will appoint a custodial receiver when it views their appointment as necessary to maintain the “status quo” during the pendency of the litigation. Kassover v. Kassover, 312 N.J. Super. 96, 100 (App. Div. 1998). Typically, a receiver may be appointed if the corporation is insolvent; there is deadlock amongst the shareholders; or the Court believes that a party running the day to day affairs of the company engaged in gross or fraudulent mismanagement of its corporate affairs. Ravin, Sarasohn, Cook, Baumgarten, Fish and Rosen, P.C., 365 N.J. Super. 241, 249 (App. Div. 2003). 

 

When considering whether or not to appoint a custodial receiver, the Court will determine: (1) whether or not the corporation itself or any owner would suffer irreparable harm if the Court does not make the appointment; (2) the likelihood that the party seeking the appointment will ultimately be successful at the conclusion of the case based upon the disputed facts known at the time; (3) whether or not the possible good associated with the appointment is outweighed by the problems to the corporation itself or the non-moving party in making the appointment; and (4) the effects on third-parties (i.e. the public, customers, vendors, employees, etc.) in appointing or not appointing a custodial receiver.

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