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.