Majority or controlling shareholders sometimes use a statutory merger as a method for squeezing out or altering minority shareholder’s rights and preferences. New Jersey law provides a statutory procedure by which two or more corporations can be combined into a single corporation even if all of the shareholders do not agree with the merger. N.J.S.A. 14A:10-3.  Under New Jersey law, the directors of the combining companies adopt a plan for merger, which sets forth the terms and conditions of the merger including the manner in which the shares of each of the constituent corporations are to be converted into shares, obligations, cash or other securities of the surviving corporation.  N.J.S.A. 14A:10-2.  The boards of directors then submits the plan to the shareholders of each constituent corporation. N.J.S.A. 14A:10-3.  New Jersey law requires that the board of directors provide at least twenty (20) but no more than sixty (60) days notice to the shareholders before a shareholders’ meeting is scheduled to vote on the proposed merger. N.J.S.A. 14A:10-3(1).  The notices to the shareholders must include: (1) a copy or summary of the plan of merger or consolidation; and (2) a statement informing the shareholders who do not agree with the merger or consolidation that they have the right to dissent and have their shares purchased by the corporation for “fair value.”  N.J.S.A. 14A:10-3(1)(a)-(b).

Hence, mergers or consolidation can be used to eliminate minority shareholders. Fortunately, Courts have been willing to intervene to prevent fraudulent transactions. As discussed in previous blog postings, majority shareholders owe minority shareholders and the corporation certain fiduciary duties. Fortunately, New Jersey Courts have closely scrutinized mergers in which the majority shareholder’s conflict of interest produces benefits for the majority at the expense of the minority and the purpose of the merger was to get rid of the minority. Berkowitz v. Power/Mater Corp., 135 N.J. Super. 36 (Ch. Div. 1975); Outwater v. Public Service Corp. of New Jersey, 103 N.J. Eq. 461 (Ch. 1928), aff’d, 104 N.J. Eq. 490 (E & A 1929). The central factor Courts consider when determining whether or not to set aside a merger is: does the proposed merger have a valid business purpose?  If it does, it will probably be upheld. If the Court finds that the merger did not have a valid business purpose it is subject to being disallowed.