Minority Shareholder Oppression: The Court’s View of “Unfair” Action

Statutory remedies are made available to shareholders in a small, closely held corporation should harmful actions be undertaken by other shareholder or directors of the corporation. Importantly, these statutory remedies are available only to owners of a corporation with 25 or fewer shareholders.

Pursuant to N.J.S.A. 14A:12-7(1)(c), a shareholder in a closely held corporation may seek judicial remedies if the directors or other persons in control of a corporation have:

• Acted fraudulently;
• Mismanaged the corporation;
• Abused their authority as officers or directors; or
• Acted oppressively or unfairly towards one or more minority shareholders in their capacities as shareholders, directors, officers or employees.

The last of those circumstances has been the subject of substantial litigation and the courts in New Jersey have provided guidance to business owners and their attorneys about what the phrase “acted oppressively” means.

One characteristic of oppressive conduct is that it must result in individualized harm to the minority shareholder. This means that if the action results in similar detriment to all shareholders, then it cannot be deemed to constitute oppressive conduct. For example, if the controlling directors decide to stop paying dividends and no shareholder receives a dividend, all shareholders have been treated equally and there is no oppression. Conversely, if the directors pay dividends to certain shareholders and not to other shareholders, then the shareholders who have not received a dividend would likely have a valid claim of oppressive conduct by the directors of the corporation.

In the seminal case of Brenner v. Berkowitz, 134 N.J. 488 (1993) the New Jersey Supreme Court examined the oppressed shareholder statute and provided an important definition for the term “minority shareholder oppression.” According to the Brenner court ‘minority shareholder oppression: includes that conduct which frustrates the reasonable expectations of the minority shareholder.’ Thus, any analysis or review of corporate actions to see if they might constitute oppression must begin with an inquiry into the minority shareholders reasonable expectations.

Among the principle benefits and expectations of owning stock in a small corporation that have been recognized by the courts are the ability to be employed in that business and be compensated for your services and to have a voice and role in the management of the company. Accordingly, some of the most common forms of minority shareholder oppression are the termination of the employment of the minority shareholder or the reduction of their compensation without adequate justification. In those circumstances when the reasonable expectation of the minority shareholder is the opportunity for employment of their spouse or children, then the termination of such employment, although not directly affecting the minority shareholder, may nevertheless be found by the courts to constitute oppression.

In some circumstances it may be reasonable to cease making salary payments to a minority shareholder. For instance, when a shareholder dies, in the absence of a binding buy/sell agreement, their heirs will succeed to their stock interest in the company but may have no interest in or aptitude for participating in the operation of the company. Under those circumstances it is reasonable not to pay them the salary that the deceased shareholder was earning from working in the business, however, the New Jersey courts have ruled that under those circumstances those in control of the company must try and provide an alternate benefit to the heirs of the deceased shareholders.