New Jersey statutes provide important rights and protections to “minority” shareholders of small, closely held companies. The applicable statute provides a right to file a lawsuit for relief under the following circumstances:
In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees. N.J.S.A. 14A:12-7(1)(c) (emphasis added).
This is not the only justification for filing a lawsuit against fellow shareholders, but it is one that the legislature has seen fit to create.
As can be seen from the language of the statute, these rights are provided only to minority shareholders and then only to minority shareholders in corporations with 25 or less total shareholders. Minority shareholder status can be a somewhat confusing term. One might assume that to be a minority shareholder you cannot own more than 50% or more of the stock in a corporation. As with most definitions in the law, however, there is room for argument and interpretation and the definition of “minority shareholder” is not quite so simple. Fortunately, the New Jersey courts have provided guidance for attorneys and business owners through their decisions in shareholder disputes.
The fundamental definition of “minority shareholder” as provided by the New Jersey Supreme Court is any shareholder or group of shareholders who, in the eyes of the court, cannot control the corporations. Berger v. Berger, 249 N.J. Super. 305 (Ch. Div. 1991). Thus, any shareholder or group of shareholders that own 50% or less of a corporation are considered to be minority shareholders. The reason why you can own 50% and still be considered a minority shareholder is that if there are two shareholders who each own 50% of the corporation’s stock, neither can make a decision without the other’s agreement and neither shareholder can control the corporation. Bonavito v. Corbo, 300 N.J. Super. 179 (Ch. Div. 1996).
That analysis, however, is not the end of the debate. There has been one court that has held that the beneficial owner of 95% of the stock of a corporation qualifies as a minority shareholder. In the Berger case the court was confronted with a rather unique situation. There was a shareholder who owned 98% of the stock of the corporation, but they did not have any voting power for that stock. The right to vote that stock and therefore, to control the corporation, had been transferred to a voting trust under which another shareholder was entitled to exercise the voting rights for their own shares and the shares held by the 98% owner. Under those circumstances the court found that since the 98% shareholder did not have the right to vote those shares he could not exercise control over the corporation and he therefore qualified as a minority shareholder and was permitted to bring a claim as an oppressed minority shareholder pursuant to the New Jersey Business Corporation Act.
The moral of the story, therefore, is that if you own stock in a corporation with 25 or less shareholders and feel that you are being treated unfairly, never accept things at face value, you may very well be able to seek relief from that situation.