Scott I. Unger, Shareholder and member of Stark & Stark’s Litigation and Shareholder Oppression groups, will present the Bucks County Bar Association CLE Seminar “Litigating Shareholder/ Member/ Partnership Disputes in P.A. and N.J.,” held in Doylestown, PA on Wednesday, July 31, 2013.  The seminar, which begins at 12:30pm, will discuss the prosecution and defense of minority oppression litigation and corporate divorces.  It will also explore the differences between corporations, limited liability companies and partnerships.  The seminar is approved for 2.5 substantive credits and .05 Ethics Credits.  For more information or to register for the course, click here.

Scott I. Unger, Shareholder in Stark & Stark’s Litigation and Shareholder & Partner Disputes Groups, authored the article, “What is Minority Oppression?” published in U.S. 1 Newspaper on June 5th, 2013.

The article discusses the real meaning behind minority oppression and how companies go about trying to terminate shareholders who have the smallest amount of share in the company.  Mr. Unger discusses the techniques involved during termination of the minority shareholder’s employment, excessive compensation and withholding distributions.  Additionally, Mr. Unger describes the different obstacles that a minority shareholder may face when challenging the majority’s failure to issue dividends.  

To read the full article, click here.

 

The Minority Oppression statute sets forth four remedies which a Court “may” order to remedy oppressive conduct.   The Minority Oppression Statute provides that a Court may appoint a custodian, appoint a provisional director, order the sale of the corporation’s stock (per the statute) or enter a judgment dissolving the corporation.  Id. The Statutory power of a Court to Order a stock sale is described in further detail in N.J.S.A. 14A:12-7(8).  On its face, it appears that N.J.S.A. 14A:12-7(8) does not authorize a mandatory purchase by someone otherwise unwilling to buy the stock.   Nevertheless, a Court may use it’s equitable powers to Order that shareholder to buy another shareholder’s stock if oppression is found.  Bonavita v. Corbo, 300 N.J. Super. 179, 197-198 (Ch. Div. 1996).   That is because in Brenner v. Berkowitz, 139 N.J. 488, 512-514 (1993), the New Jersey Supreme Court held that when a statutory violation such as oppression occurs, Courts retain their equitable discretion to fashion remedies.  Hence, if a Court finds that the majority oppressed the minority it could order the majority to purchase the minority shares for “fair value,” even if the majority does not want to buy that interest. 

Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.

The Minority Oppression statute sets forth four remedies which a Court “may” order to remedy oppressive conduct.   The Minority Oppression Statute provides that a Court may appoint a custodian, appoint a provisional director, order the sale of the corporation’s stock (per the statute) or enter a judgment dissolving the corporation.  Id. The Statutory power of a Court to Order a stock sale is described in further detail in N.J.S.A. 14A:12-7(8).  On its face, it appears that N.J.S.A. 14A:12-7(8) does not authorize a mandatory purchase by someone otherwise unwilling to buy the stock.   Nevertheless, a Court may use it’s equitable powers to Order that shareholder to buy another shareholder’s stock if oppression is found.  Bonavita v. Corbo, 300 N.J. Super. 179, 197-198 (Ch. Div. 1996).   That is because in Brenner v. Berkowitz, 139 N.J. 488, 512-514 (1993), the New Jersey Supreme Court held that when a statutory violation such as oppression occurs, Courts retain their equitable discretion to fashion remedies.  Hence, if a Court finds that the majority oppressed the minority it could order the majority to purchase the minority shares for “fair value,” even if the majority does not want to buy that interest.  
 
Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation For questions, or additional information, please contact Mr. Unger.

The New Jersey Revised Uniform Limited Liability Company Act gives Courts discretion to remedy oppressive conduct.  If a court determines that a member or controlling member has, is or will act illegally, fraudulently, harmfully or oppressively towards a member, a Court may:  (1) appoint a custodian or provisional manager; (2) order the sale of a member’s LLC interest to the LLC or the members (N.J.S.A. 42:2C-48(b));  (3) dissolve the company; and (4) award legal fees and other expenses if a party acted vexatiously or otherwise not in good faith (N.J.S.A. 42:2C-48(c)).
 
The New Jersey Supreme Court in Brenner v. Berkowitz, 134 N.J. 488, 512 (1993) held that in addressing corporate minority oppression, Courts were not limited to the statutory remedies contained in the statute.  That means at least within the context of a shareholder dispute within a corporate entity, Courts may utilize its common law powers to fashion an equitable remedy.   At this point, it is unclear whether or not the same equitable powers will be given to Courts when confronted with remedying an oppressive conduct within an LLC.   Based upon my review of the Brenner decision, I believe Chancery Courts will have the same equitable powers to remedy oppression whether the entity is a corporation or an LLC.  That is because the Supreme Court in Brenner held “when a statutory violation occurs, a court retains its discretion to fashion equitable remedies.”  Brenner v. Berkowitz, 134 N.J. at 514.   

Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.

Typically, when oppression is demonstrated New Jersey Chancery Courts will Order either the corporation itself or the majority shareholders to purchase the minority’s interest in the closely held company for “fair value.” In Muellenberg v. Bikon Corporation, 143 N.J. 168 (1996), the New Jersey Supreme Court considered whether a Court had the authority to order the majority shareholders to sell their shares to a minority shareholder whose rights have been oppressed by the majority.  The New Jersey Supreme Court affirmed the trial court’s Order requiring the minority to purchase the majority shares.  Id. at 182-183. 
 
The case involved three shareholders who formed a closely held New Jersey company, Bikon Corp. (“Bikon”).  Mr. Muellenberg was a mechanical engineer and inventor. He held more than 80 patents.  His goal was to establish a family of companies related through common ownership and contract to market his invented products throughout the world. Messrs. Muellenberg, Burg and Passerini incorporated Bikon with the purpose of marketing Muellenberg’s inventions.  Around the time they incorporated Bikon, the shareholders executed a License Agreement and a Distribution Agreement which granted Bikon the exclusive right to sell Muellenberg’s inventions in the United States.  In consideration for those contractual rights, Muellenberg received quarterly distributions of five percent of the gross sales of Bikon.  Minority shareholder Burg handled the day-to-day business of Bikon. The company operated out of Burg’s New Jersey home.   Despite the success of the company, disputes arose amongst the shareholders.  Those disputes centered around the introduction of new products into Bikon’s line, the patent and trademark royalty fees, the rent Burg paid to himself for the company’s use of his home, and Muellenberg’s desire to see detailed reports of sales and activities. 
 
Those disputes led to Muellenberg commencing litigation against Bikon seeking dissolution of Bikon and other relief. Shortly after Muellenberg commenced the litigation, he called a shareholders’ meeting.  As a result of Burg’s refusal to attend, only Muellenberg and Passerini attended and participated in the post-litigation meeting.  At that meeting, Muellenberg and Passerini voted to declare a dividend, to retain an outside accountant to determine accrued royalties, to require the signatures of Muellenberg and Burg or Muellenberg alone for future bank withdrawals, and to require Board approval for the selection of suppliers and purchases over $1,000.  Assuming that they gained control of Bikon, Muellenberg and Passerini dismissed most of the litigation except for the prayer to purchase Burg’s minority interest in Bikon. Around that time, they terminated Burg’s employment with Bikon. 
 
Burg filed counterclaims against Muellenberg and Passerini asserting that he was an oppressed minority shareholder and petitioned the Court to allow him to buy-out the majority’s shares. 
 
As a result of the trial, the Chancery Judge found that Burg was an oppressed minority shareholder. Considering Burg’s reasonable expectations, the Trial Court found that Burg was oppressed.  It found “that at the January 20, 1993, shareholders’ meeting Muellenberg and Passerini had begun efforts to freeze out Burg.  They had declared a $180,000 dividend that they should have know would deprive Bikon of needed cash to operate and thus take away Burg’s ability to perform successfully as generally manager.  In addition, despite the lack of showing of abuse by Mr. Burg in operating the company, they began to strip Burg of his day-to-day control as general manager by resolving that bank account withdrawals should be made only by plaintiff or by joint signatures of plaintiff and Defendant Burg.  And, finally the court found that the majority directors, as plaintiffs acknowledged by plaintiff’s counsel in summation intended to vote Burg out as a director and terminate him as general manager and employee of the company.”  Id. at 173-174. 
 
The Trial Court weighed the equities and found that “Burg had devoted the most productive years of his life to building up the company.” Id. at 181-182.  Moreover, it found as a result of Burg’s efforts Bikon’s sales increased steadily over time.  Id. The Court also considered the fact that Burg could “not reasonably have expected that after ten years as general manager” be frozen out.  Id.  In doing so, it allowed Burg, the minority, to buy out Muellenberg and Passerini (the majority shareholders). 
 
In addressing the central question, whether or not the Trial Court could Order the majority to sell to the minority, the New Jersey Supreme Court began by discussing the reasons behind the minority oppression statute. The New Jersey Supreme Court recognized the vulnerabilities of being a minority shareholder in a closely held company.  Id. at 176-180. The Muellenberg Court followed precedent by allowing the Trial Court to consider those vulnerabilities when crafting an appropriate and equitable remedy.   
 
Next, the Muellenberg Court considered whether or not Burg was oppressed. The New Jersey Supreme Court agreed with the Trial Court in its findings that Burg was oppressed.  In previous blog posts, I discussed that the termination of a shareholders’ employment and reduction of their responsibilities within the company could constitute oppression. The Muellenberg decision is yet another example of a Court finding that the termination of a shareholder’s employment, and the reduction of their responsibilities, constitutes oppression.  The Court held, in addition “to the security of long-term employment and the prospect of financial return in the form of salary, the expectation includes a voice in the operation and management of the business and the formulation of its plans for future advancement.”  Id. at 181 (citing, Ingle v. Glamore Motor Sales, 535 N.E.2d 1311, 1319 (NY 1989) (Hancock, J., dissenting)). 
 
Finally, the New Jersey Supreme Court found that the minority oppression statute gives the Trial Court great latitude in fashioning an appropriate remedy. Id. at 183 (“courts are not limited to statutory remedies, but have a wide variety of equitable remedies available to them”). After considering all of those factors, the Muellenberg Court upheld the Trial Court’s decision Ordering the minority to purchase the shares of the majority shareholders. 
 
Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.

 

The term "minority" in the context of Pennsylvania shareholder litigation does not mean a person who owns or controls less than 50% of the corporate stock.  Baron v. Pritzker, 2001 Pa. Dist. & Cnty. Dec. LEXIS 447 (Pa. 2001). Under certain circumstances, a 50% shareholder could be oppressed by a more dominant shareholder who also controls 50% of the company. The Baron Court looked to Delaware and Oregon law in finding that "equal owners of a close corporation are each entitled to the other’s performance of fiduciary duties of loyalty, good faith, and full disclosures.”  Id. (Citing, Delaney v. Georgia-Pacific Corp., 564 P.2d 277, 281 (Or. 1977); Gilbert v. El Paso Co., 490 A.2d 1050, 1055 (Del. Ch. 1984).  Under Pennsylvania law, the controlling shareholder owes a fiduciary duty or quasi-fiduciary duty to the non-controlling shareholder from using their powers in such a way as to exclude the non-controlling shareholder from their proper share of the benefits of the corporation.  In re Jones & Laughlin Steel Corp., 488 Pa. 524, 530-31 (1980); Weisbecker v. Hoisery Patents, Inc. 356 Pa. 244, 250 (1947). 
 
Hence, under Pennsylvania law controlling shareholders not only owe a duty to the corporation itself, but they owe certain fiduciary duties to the non-controlling shareholders. In the context of oppressed minority shareholder litigation, Pennsylvania employs the "reasonable expectations" of the shareholder test to determine what actions or inactions could constitute oppression. The Baron Case follows the law in Oregon, Delaware and New Jersey by focusing on the level of control rather than the amount of stock the shareholder holds.  Thus, a person could control 50% and assert breach of fiduciary duty and oppression claims against the equal partner. 
 
Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.
 
Scott I. Unger, Shareholder in Stark & Stark’s Shareholder Oppression Group, authored the article, The Minority Oppression Statute, for the June 2012 issue of Mercer Business Magazine.
 
The article discusses the amended Minority Oppression Statute which enables minority shareholders to protect themselves from oppressive majorities in closely held corporations.  Mr. Unger explains the different examples of minority oppression and how shareholders are affected by the Business Judgment Rule. He also discusses some of the factors that Courts consider when determining what is reasonable compensation at trial.
 
Mr. Unger states, “Minority oppression litigation will often times come down to the majority’s contention that it is governing or making decisions in the best interest of the corporation versus the minority’s assertions that those decisions were made in order to oppress the minority. So as to avoid minority oppression litigation, or to place the majority in the best possible light should litigation be commenced, majority shareholders should consider and document the business reasons behind their decisions. They should also be cognizant that the business judgment rule is not an absolute bar to the majority’s decisions.”
 
You can read the full article here.
In previous blog posts, I’ve commented on New Jersey’s flexible approach as to which a state’s laws governs the relationships between the shareholders.  Almost every state (with the exception of New York and New Jersey) will apply the State’s law where the corporation was formed or incorporated. The "internal affairs doctrine" provides that when litigation involves the internal affairs of a foreign corporation, the Court will usually apply the law where the corporation was formed.  Velasquez v. Franz, 123 N.J. 498, 528 (1991).  New Jersey law does not find that the location of incorporation is dispositive. See, O’Connor v. Busch Gardens, 255 N.J. Super. 545, 548 (App. Div. 1992).  Rather, New Jersey courts apply a flexible "governmental-interest" standard, which requires application of the law of the state with the greatest interest in resolving the particular issue that is raised in the underlying litigation.  Gantes v. Kanson Corp., 145 N.J. 478, 484 (1996). 
 
In determining which law should apply, New Jersey courts have adopted the factors set forth in the Restatement (Second) of Conflicts of Laws §6 (1971).  Fu v. Fu, 160 N.J. 108, 122 (1999). These factors include:
  1. the needs of the interstate and international systems;
  2. the relevant policies of the forum;
  3. the relevant polices of other interested states and the relative interests of those states in the determination of the particular issue;
  4. the protection of justified expectations;
  5. the basic policies underlying the particular field of law;
  6. the certainty, predictability and uniformity of result; and 
  7. the ease in the determination of justice.  
In Krzastek v. Global Resources Industrial & Power, Inc., 2008 N.J. Super. Unpub. LEXIS 1360 (App. Div. 2008), the Appellate Division considered the appeal of a trial court decision to apply New Jersey law relating to an oppression claim involving a Massachusetts corporation.  In that case, the trial court applied New Jersey law because: (a) the plaintiff, a minority shareholder, was a New Jersey resident; (b) the corporation was involved in a single project in the Garden State; and (c) the corporation maintained offices in New Jersey.  The Appellate Division considered those facts and engaged in comparison between New Jersey and Massachusetts laws. In doing so, the Appellate Division determined that Massachusetts offered similar protections to oppressed minority shareholders as are afforded under New Jersey law. The only significant difference between Massachusetts and New Jersey laws was that in New Jersey the Courts may award counsel fees and costs to an oppressed minority shareholder.  After considering all of those factors, the Appellate Division affirmed the trial court’s application of New Jersey law. 
 
The Krzastek decision is yet another example of New Jersey’s flexible approach in determining the choice of law with regard to foreign corporations who find themselves litigating in the Garden State. 
 
Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.

As I’ve stated in many of previous blog posts valuation is one of the most important issues in minority oppression litigation. The majority wants the valuation to come in lower, so they are required to pay less for the minority’s shares. On the other hand, the minority wants the valuation to come in high, because they want to receive more for their interest in the closely held company. 

Experts generally like to review five (5) years worth of financial records when providing their opinion as to the minority’s "fair value" interest in the subject company. The problem is not all companies which are the subject of a shareholder divorce are at least five (5) years old. Sometimes, the company which is the subject of the shareholder divorce or minority oppression action is a start-up. 
 
In Krzastek v. Global Resource Industrial & Power, Inc., 2008 N.J. Super. Unpub. LEXIS 1360 (App. Div.), Certification Denied, 197 N.J. 259 (2008), the Appellate Division was asked to question the valuation of a start-up entity which only had one project credited to the subject company.  In that case, the Plaintiff was a business entrepreneur with extensive experience in engineering, procurement and construction of power plants. Through the course of his work on hundreds of nuclear power plant projects, the Plaintiff developed a business relationship with Darryl Jenkins of DiFazio Electric, Inc. Mr. Jenkins introduced the Plaintiff to Vincent Barletta, who was the President of Barletta Engineering & Construction, Inc. The Plaintiff learned that Mr. Barletta was interested in starting a power and industrial group of his own.  They discussed forming a new business which they eventually named Global Resource Industrial and Power, Inc. ("GRIP"). Mr. Barletta, or one of his companies, would own 90% of GRIP. The remainder would be owned by the Plaintiff or anyone he wished to share his interest with.  Shortly thereafter, GRIP entered into a joint venture agreement with DiFazio Electric, where the two entities formed a third, Pinelawn Contractors, LLC, which was created to construct a power plant in Babylon, New York. The joint agreement between GRIP and DiFazio Electric provided that each entity would equally split the profits in Pinelawn Contractors, Inc.  
 
At trial, Plaintiff retained a certified public accountant with expertise in business valuations. That expert testified that he was unable to evaluate GRIP because it was a start-up entity. So as to provide an opinion as to value that expert performed a valuation of GRIP’s single achievement — the Pinelawn joint venture.  In that regard, the expert prepared two sets of calculations to determine Plaintiff’s 7% interest in GRIP.  One was based on the actual performance of the Pinelawn joint venture; the other based on the projected profits of Pinelawn as of January 31, 2005 (the time when the majority oppressed Plaintiff by terminating his employment). 
 
The expert also engaged in the process of "normalizing" the financials of the project. With regard to the same, he determined that the bonuses paid to the majority shareholder from the joint venture were really profits which would have been payable to the company. Moreover, he normalized automobile expenses (as well as other costs). 
 
In its appeal, the Defendants asked the Appellate Division to overrule the trial court’s determination that GRIP could be valued by simply looking at the profits of the Pinelawn project. The Appellate Court did not overrule the trial court. Rather, it looked at the evidence presented at trial and determined that there was enough evidence for the trial court to find that, although the plan was for GRIP to find other projects or business, it was a single purpose entity (because it never found any other business). The Krzastek decision reaffirms what other courts have said about valuation — "it’s an art not a science."  The decision provides attorneys and experts the ability to "think outside the box" in terms of valuing a start-up or single purpose entity. 
 
Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.