Archive for April, 2007
How Are Shares Valued by a Court?
April 8th, 2007 | 
Author: Shareholders engaged in a dispute or disagreement with their business partners may attempt to negotiate their own buy-out in resolution of the grievance. However, all too often shareholders in New Jersey improperly assess the value of their shares, usually leading them to accept less than their shares are really worth, and sometimes far less than he or she would have recovered in a lawsuit. There are several steps to avoid, and several that should be taken, when trying to assess a proposed buy-out.
Majority shareholders often will tell a minority shareholder that, if they do not want to be a shareholder anymore, they should follow the procedures set forth in the Buy-Sell Agreement. Of course, those agreements usually contain a formula that yields substantially less than the shares are really worth. However, if the acts of the majority shareholders fit within the language of the New Jersey statute, the Buy-Sell agreement, which usually does not contemplate an “involuntary” sale resulting from “oppression,” may not govern.
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Reading Your Business
Minority and majority shareholders alike may learn valuable information from reading your company’s financial statements on a regular basis. Your financial statements are not just for the accountants and auditors. They can be a great source of information to help you run your business, big or small.
Comparative financial statements reflect current period information for the month or year along with the information for the same period of the prior year. This allows us to compare and contrast the current financial data and look for reasons why the various income and expense categories have changed. Some explanations are obvious. Others can be a bit surprising, requiring more analysis and changes in the way a company does business or disclose the need for organizational change.
Fraud By The Majority
When you suspect that your New Jersey business “partners” may have committed fraud, either on someone else or upon you, what steps should you take, and what remedies might you have? In New Jersey, certain steps often must be taken as quickly as possible, including retaining a forensic accountant who has experience in uncovering fraud and testifying in court. And certain pitfalls must absolutely be avoided.
Corporate fraud is certainly not limited to the huge companies of the world like Enron. In fact, it is all too common in small, closely held businesses, as anyone with an interest in reading this article may know all too painfully well. When a minority shareholder suspects that the majority shareholders (or partners) in control are committing fraud or “cooking the books,” what should he or she do? It is critical for the minority shareholder to realize the impact this may have upon him or her. Defrauding customers, vendors or taxing authorities (like the IRS) could cause the company significant liability, which could impact profoundly on the value of your investment. It is also possible that a shareholder who becomes aware of the fraud but fails to stop it may face personal liability to those defrauded – sometimes even criminal liability.
Minority Shareholder Rights
Minority shareholders, despite the fact that they cannot control the direction of the company, still have significant rights in New Jersey. The majority cannot engage in what the statute refers to as “oppression,” which broadly defined means that it cannot trample the rights of minority shareholders.
Shareholders who are not employed by the company in which they own stock, a situation most often found in family-owned companies, still have protection under New Jersey law. The most prevalent way such minority shareholders’ rights are disregarded is for them to receive no benefit whatsoever for their investment or stake in the company. When the majority shareholders work for the company, taking huge (or even not-so-huge) salaries and leaving nothing for shareholder dividends for their business partners, that may violate the rights of the minority shareholders. In essence, the majority in such a case is using the minority’s capital investment for themselves, while giving no benefit to the minority.