Sometimes, controlling shareholders use the sale of corporate assets as a means to squeeze-out minority shareholders. This is often performed by the majority transferring those assets to a new entity which is not owned by the minority shareholder. New Jersey corporate law provides some level of protection for the minority shareholder if the transfer is not in the ordinary course of the company’s business.
The treatment of said transfers under the New Jersey Business Corporations Act depends on whether or not they are made in the “regular course of business.” For example, if the sale or transfer is made in the regular course of the corporation’s business then “no approval of the shareholders is required.” N.J.S.A. 14A:10-10. If, on the other hand, the transfer of corporate property is not in the usual and regular course of the corporation’s business then shareholder approval with specific notice requirements are required. N.J.S.A. 14A:10-11.
The problem for minority shareholders lies in the vagueness of the distinction between transactions which are and are not within the ordinary course of the corporation’s business. Typically, the majority will assert that the proposed sale of assets is within the usual and regular course of its business. The minority will assert it is not.
The seminal case in New Jersey interpreting this important distinction is Good v. Lackawanna Leather Co., 96 N.J. Super. 439 (Ch. Div. 1967). In Good, the Court considered whether or not the sale of almost all of the company’s assets without shareholder approval violated the statute. The Good Court held the “test to be applied is not the amount or value of the assets disposed of, but rather the nature of the transaction, i.e., is the sale in furtherance of the express objects of the corporation’s existence.” Id. Obviously, the Court’s answer to that inquiry will depend on the specific facts of relating to the transfer of the corporation’s assets.