Outnumbered or Outrageous: Understanding Shareholder Oppression in New Jersey

By Seth M. Rosenstein

The concept of majority rule is not only a defining characteristic of democracy but also the way decisions are made in a wide range of contexts every day. No matter the issue – whether choosing between candidates for public office or deciding what toppings to put on a pizza, those on the winning side will be happy with the result, while those in the minority may be disappointed or even angry about the outcome. This same dynamic applies in closely held New Jersey corporations every time shareholders have to make decisions involving their company.

Being a minority shareholder (i.e., one who owns less than half of a company’s voting shares or otherwise does not control the business’s operations) often means your views and preferences, while perhaps considered by the majority, will ultimately be set aside after votes are tallied.

While being in the minority may be undesirable, it isn’t inherently unfair. If agreed-upon rules are followed, and if votes and decisions are made in good faith and not with the intent or effect of harming minority shareholders or infringing upon their rights, that is just the way the chips fall. But when majority shareholders abuse their power and act in inappropriate, illegal, or “oppressive” ways, most jurisdictions, including New Jersey, provide minority shareholders with mechanisms to protect and remedies to vindicate their rights and shield themselves and the corporation from majority misconduct.

Understanding the difference between shareholder oppression and the simple frustration that comes with being outvoted can spare a company and its owners from disruptive and destructive litigation that can pose an existential threat to the business’ ongoing viability. 

What Is Shareholder Oppression in New Jersey?

Under Section 14A:12-7(c) of the New Jersey Business Corporation Act (the “Act”), minority shareholder oppression in a closely held corporation (defined in that section as one with 25 or fewer shareholders) sufficient to justify court intervention occurs when the directors or those in control have acted “oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.”

Since the statute does not define the terms “oppressively” or “unfairly,” it is left to New Jersey courts to determine what exactly constitutes conduct that falls within those two terms. The seminal case in this regard is the 1993 New Jersey Supreme Court decision in Brenner v. Berkowitz. After noting that “Mere disagreement or discord between the shareholders is not sufficient for a violation of” Section 14A:12-7(c), the Court stated that “oppression has been defined as frustrating a shareholder’s reasonable expectations.”

“In determining whether a shareholder’s expectations are reasonable and whether the corporation or controlling shareholders or directors unreasonably thwarted them,” the Court went on to say that “courts should consider even non-monetary expectations of the shareholder.” In other words, oppression is not simply a matter of dollars and cents and can constitute a wide range of actions that can be “burdensome, harsh, or wrongful” to the minority shareholders.

Actions That Can Constitute Shareholder Oppression

Such actions that could warrant retaining legal counsel and triggering court intervention may include:

• Forcing a minority shareholder to sell their shares at unfairly low prices.
• Freezing out a shareholder, making their shares essentially worthless through corporate restructuring.
• Locking a shareholder out of the company’s property.
• Refusing to allow a shareholder to inspect the company’s books and business records.
• Terminating a minority shareholder’s employment.
• Creating a redemption plan for stock that only favors the majority shareholders.
• Engaging in transaction(s) that cuts minority shareholders out of fair compensation.
• Refusing to notify shareholders of official shareholder meetings.
• Trying to alter minority shareholder terms to reduce their rights.
• Falsifying company records or books.
• Paying for personal expenses of majority shareholders with corporate funds.

Remedies for Shareholder Oppression

If a court determines that a majority shareholder is acting oppressively towards a minority shareholder in a closely held corporation, the Act provides several possible remedies to protect the minority’s rights and interests, including appointing a custodian or a provisional director to manage the corporation’s affairs, ordering a sale of the corporation’s stock, or entering a judgment dissolving the corporation. 

While the Brennan court noted that “Most acts of misconduct or oppression will warrant some type of remedy,” it also stated that “only the most egregious cases will warrant the drastic remedies permitted by the statute.” Outside of statutory remedies, the Court held that the Chancery Court (where such matters are brought and heard) has broad discretion under its inherent powers of equity to fashion an appropriate remedy based on the nature of the conduct and harm inflicted as well as a consideration of all the surrounding facts and circumstances.

Thus, in addition to the remedies outlined in the act, the equitable remedies that a court may order in cases of shareholder oppression include:

• Canceling or altering problematic provisions of the corporation’s articles of incorporation or the bylaws.
• Canceling, altering, or enjoining any resolution or other act of the corporation.
• Directing or prohibiting any act of the corporation or the shareholders, directors, officers, or other persons party to the action.
• Providing for the sale of all the property and franchises of the corporation to a single purchaser.
• Requiring dissolution at a future date, effective only if the parties do not resolve their differences before that time.
• Appointing a receiver or special fiscal agent to continue the operation of the corporation for both majority and minority until differences are resolved or until oppressive conduct ceases.
• Retaining jurisdiction for the protection of minority shareholders without the appointment of a custodian, receiver, or similar official.
• Ordering an accounting or ordering access to corporate records.
• Enjoining continuing acts of oppressive conduct, e.g., by reducing unjustified or excessive salary or bonus payments to controlling shareholders.
• Requiring the declaration of a dividend.
• Permitting minority shareholders to purchase additional shares.
• Rescinding a corporate act that is unfair to the minority.
• The performance, prohibition, alteration, or setting aside of any action of the corporation, its shareholders, directors, or officers of or any other party to the proceedings.

If you have questions or concerns about minority shareholder oppression and how to protect your interests when it occurs, please contact Ansell Grimm & Aaron Partner Seth M. Rosenstein.