New Jersey Courts Are Limited Only By Imagination When Resolving Business Disputes Between Partners

When dealing with shareholder oppression claims the court has a broad arsenal of remedies at its disposal. In fact, the remedies available to the court are limited only by its own imagination and the court’s sense of fairness.

The statute applicable to oppressed minority shareholders does provide some remedies along with its rights. N.J.S.A. 14A:12-7 (1)(c)(8) states that “Upon the motion of the corporation or any shareholder who is a party to the proceeding, the court may order the sale of . . . the corporation’s stock held by any other shareholder who is a party to the proceeding to either the corporation or the moving shareholder . . . if the court determines in its discretion that such an order would be fair and equitable to all parties under all of the circumstances of the case.”

The statute also gives the court the power, under the appropriate circumstances, to order the dissolution of the company. Although this is a favored threat of a party claiming oppression, it is quite unlikely to be ordered by the court. The court is extremely reluctant to dissolve an operating business and will go the great lengths to preserve a business, including to the extent of ordering a sale of the business to a third party. At least one court has ruled that the statute contemplates the ongoing existence of the corporation or the existence of a successor operating the business as a requirement of any remedy that might be imposed. Thus, dissolution is likely to be the remedy only if the parties agree that it should be the ultimate remedy in the case.

Shareholder oppression disputes are brought in the Chancery Division of New Jersey Superior Court. The Chancery Court is a court of equity and the Chancery Judge is given broad power to fashion a remedy that he or she thinks to be fair. In fact, there is a well-known maxim that applies in a court of equity, which is that “Equity will not suffer a wrong without a remedy.” Thus, as recognized by the New Jersey Supreme Court the Chancery Court has broad discretion to fashion the remedy that it thinks is fair and equitable under the facts and circumstances of that particular case. This is an important ruling to keep in mind when thinking about challenging the ruling of the Chancery Court. Normally, a trial court’s interpretation of the law is not entitled to any deference by the appellate court and they will make their own analysis of the applicable law. However, since the Chancery Court has discretion in deciding the remedy, that Chancery Court’s exercise of that discretion is subject to a much different review standard and is more likely than not going to be upheld on review. The abuse of discretion view standard provides that the exercise of discretion by the trial court will only be reversed when that exercise of discretion is clearly against the evidence of the case or reason. Thus, the Chancery Court’s discretion to fashion a remedy is a powerful tool in oppressed shareholder cases.

As a result, the range of remedies that can be imposed by the court are essentially limitless and provide a cautionary tale for those who think the worst that can happen is that they can opt to buy out their oppressed partner. For instance, the court is not limited to the sale option and can, in fact, order a division of the assets among the shareholders. This can be particularly applicable to businesses that have separate but similar operations in different locations, such as restaurants. More importantly, while the statute only permits a voluntary buy-out, the statute requires an affirmative motion by the party seeking to purchase the shares; the court’s equitable powers allow the court to require the purchase of the oppressed shareholder’s stock even in the absence of a motion by the majority shareholder seeking to purchase the stock. Moreover, under certain circumstances the Chancery Court has actually ordered the majority shareholder to sell its stock to the oppressed shareholder. Therefore, the best course of action is to avoid, if at all possible, any oppressed shareholder action since one cannot predict with any certainty the remedy that the court will impose.