Minority Shareholder Oppression and Partner Right and Remedies

Public corporations and private, closely held companies have shareholders, and LLCs and partnerships
have multiple members. Those who own less than half of the shares in a company are considered
minority shareholders, and LLCs and partnerships can have minority members: though their initial
investment may be integral to the organization’s success, their minority status means that their voting
rights aren’t strong enough to block either ordinary or special resolutions, or any other decision that
must be passed by a higher majority. They are often subject to what is referred to as minority
shareholder oppression, which is defined as conduct that keeps them from enjoying the full benefits of
their stake in the company.

New Jersey Law

The New Jersey Shareholders’ Protection Act, N.J.S.A. 14A:10A-1, et seq. protects minority shareholders, who suffer oppression, which is defined as situations where the majority shareholders act in a way that is illegal, fraudulent, or oppressive to the minority shareholders. The New Jersey Supreme Court defined this as the point where the majority’s actions are “burdensome, harsh, or wrongful” to the minority. When the majority’s actions rise to this level and “objectively” unreasonably “substantially interferes” with the minority’s friability to participate in the way that their investment deserves, legal remedies are available. Oppressed minority shareholder situations often occur in family business or in divorce situations.

When an investor purchases shares in a corporation, they do so with the expectation that they will share
in the economic benefits of the company and have a voice in the way that the company operates.
Minority shareholder oppression deprives them of their rights or interests, and can take many forms,
including:

• Being excluded from management decisions regarding business operations
• Being deprived of information necessary for them to make informed decisions about their investments as shareholders
• Not receiving expected and appropriate distributions of dividends or profits
• Having their votes diluted through manipulation of the voting process
• Having the value of their shares diluted by majority shareholders issuing equity only to themselves
• Having majority shareholders or officers pay themselves at levels that are detrimental to the minority shareholders or the business itself
• Identifying fraud, waste, or misappropriation of assets on the part of majority shareholders or officers to the detriment of the minority shareholders or the business itself
• Termination of employment of shareholders who are employed as part of their investment in the business

In response to evidence of the oppression of minority shareholders, New Jersey courts are empowered to take a variety of actions. These range from requiring the majority shareholders to pay damages to the minority shareholders, requiring the majority shareholders to purchase the minority members’ interest at a fair value, or even to ordering the sale of the corporation. This last remedy is specifically available in cases of deadlock or failure to elect directors, and for corporations that have fewer than 25 shareholders when there is evidence of fraudulent or illegal mismanagement or abuse of authority on the part of the officers or directors.

Proving that minority shareholder oppression has taken place requires meeting the standards that have been established by legal precedent. Much of this relies upon the court’s views on whether the minority shareholders’ expectations regarding their participation in the management and direction of the corporation were reasonable, as well as whether they were stymied by the majority. This determination will be based on the specific situation, but factors to be weighed include:

• The corporation’s history
• The relationships between the shareholders
• The minority shareholders’ expectations based upon their investments
• The role that minority shareholders play in the corporation’s management

Based upon their examination of these elements, the courts will determine whether the minority’s expectations are reasonable, and whether the actions of the majority have frustrated those expectations. If so, the following remedies are available:

• The court may appoint a forensic accountant, at the cost of the corporation, to determine a fair valuation for buy out.
• The court can order the majority to purchase the minority shareholder’s shares at fair value.
• The court can order the corporation sold in its entirety to a third party, followed by proportionate distribution of the proceeds.
• The court may appoint provisional directors or a special fiscal agent to address and correct the oppressive operations.
• The court may appoint a receiver or custodian to take control of the organization pending the resolution of litigation.
• The court can order the oppressive conduct halted and require the majority to amend their behavior and act in the best interests of the business or the minority as appropriate
• The court can order that the minority shareholders be paid damages for losses that resulted from the majority’s oppressive actions.
• The court can order that the corporate governance structure and policies be changed to provide the minority with greater ability to participate in the corporation’s direction or management.
• The court can order that attorneys’ fees be paid by the majority to the oppressed minority shareholders where the court determines that they have not acted in good faith or if the minority brought their claim as a derivative lawsuit on behalf of the corporation.

Minority LLC Members and Partner Protection

Though minority shareholder oppression laws are specific to corporations, similar protections exist relevant to limited liability companies (LLCs) and partnerships. Since the adoption of the New Jersey Revised Uniform Limited Liability Company Act in 2014, N.J.S.A. 42:2C-1, et seq., minority members of LLCs are able to seek remedies for oppression by majority members. A minority LLC member can ask the state’s superior court to dissolve the LLC, appoint a custodian or provisional manager, order the sale of a member’s entire interest in the business, or grant other remedies if the court finds that the managers or members in control of the company have acted in a way that is illegal or fraudulent or have acted in a manner that is oppressive and was, is, or will be directly harmful to the minority member. Though the LLC can try to subvert these remedies through their operating agreement, the law expressly prohibits members from denying the courts’ ability to dissolve an LLC where oppression is proven.

Similarly, New Jersey protects the rights of minority partners through its Uniform Partnership Act, N.J.S.A. 42:1A-1. This law protects partners even when the partnerships are marital or family businesses. This law provides the ability for a partner to seek judicial intervention to force dissolution and buyout of a partnership at a fair price when abusive practices or conduct exist. The law specifies that when a minority partner’s reasonable expectations in the management, participation, or general affairs of the business are frustrated or they believe that majority partners have failed to uphold their fiduciary duty to them as a minority partner, they have the right to take legal action, asking the courts to appoint a receiver, fiscal agent, or provisional managing partner. The court can also determine the value of the partner’s interest so that they can be given fair value as determined by a valuation expert.

Minority owner suppression cases are often resolved quickly and can be initiated without a large investment. Being prevented from sharing in the benefits of ownership is frustrating, and may lead to significant financial damages. We have been successfully representing minority owners for 30 years. For assistance in leveling the playing field, contact our experienced minority shareholder oppression legal team today.