Shareholder Dispute NJ

Archive for January, 2011

Lately I have been giving seminars to accountants on how members of that profession should handle business disputes between owners in closely held businesses.  In fact, just last week I gave a presentation on this issue to the accountants at JH Cohn, one of the region’s largest accounting firms.  (I was disappointed that I did not get to meet their spokesperson, Joe Torre, but at least they provided lunch.)  Preparing for these seminars got me to thinking how the company accountant can be a minority owner’s ally in a business dispute between business partners.

To start with, it is critical for a business owner to realize that the accountant often represents the company, and not the individuals.  Therefore, when you, as a minority shareholder, ask an accountant for corporate documents, he/she may not have to give them to you.  In fact, he/she may be prohibited from turning them over if ordered not to by the company president or majority shareholder.  However, that does not mean that the accountant cannot be a useful ally to a minority shareholder.

Often by the time someone reads an article such as this that they found in a Google search, it is too late, and the bitter dispute with one’s business partner has already materialized.  However, if it is not too late, and the dispute is only feared, and has not yet passed the point of no return, there are actions that you can take, often with the help of the company accountant, which can help prevent the dispute from taking place.

For example, it is quite often the failure to share corporate financial information that leads to disputes.  When a minority shareholder feels that he or she is being kept “in the dark,” problems are often not too far behind.  However, the accountant is usually a “trusted business advisor” of all of the business partners, and can be the one who helps establish some guidelines regarding what financial information is to be automatically shared with all shareholders (or members, if an LLC).  If the accountant can be convinced to recommend rules under which information is freely shared among all the owners, perhaps the majority shareholders will listen and establish such guidelines in the beginning.

Some accountants, depending on the personalities of the individual owners involved, may not want to inject themselves in such matters.  However, others may decide that clear rules regarding the free flow of financial information to even the minority shareholders may help keep him or her out of future conflicts among the shareholders.  He may even realize that the free flow of information may maintain the relationship between all of the owners, and may even help save the business from being torn apart.  Because once oppressed minority shareholder litigation is begun, it rarely is a good thing for any New Jersey company.

I have previously written about one of the most common forms of business partner dispute – the case of an employee/shareholder who is fired as an employee.  Of course, one’s shares cannot be taken away, but without a job, the shares may seems useless.

I previously discussed the fact that, when a shareholder can successfully show that he or she had a reasonable expectation of continued future employment, termination can constitute what is called “shareholder oppression” and may entitle a shareholder to the remedy of a forced buy out of his or her shares.  However, lately I have had clients come in seeking advise about suing their business partner who do not fit neatly into such a category.  For one reason or another, they probably could not demonstrate that they had a “reasonable expectation” of lifetime employment.

When a shareholder is one of the company’s founding members, it may be possible to argue that his “reasonable expectation” was that share ownership would be tied to employment, and vice-versa.  But, when someone joins a company as an employee/shareholder that was formed by others long ago, it is a much harder argument to make.

Fortunately, if you find yourself in a dispute with your business partner, leading to your termination, that does not necessarily mean you are entirely out of luck.  While the termination of employment itself may not be considered oppression under New Jersey law, it is likely that the majority shareholders will engage in additional acts that may constitute oppression.

If a significant (but still a minority) shareholder is unfairly fired, chances are quite good that other acts of unfairness will follow.  For example, shareholder distributions may cease, financial records may not be shared, and critical information about the company may be withheld.  Additionally, majority shareholders often just can’t help themselves, and wind up taking the terminated employee’s salary and dividing it among themselves.  If it can be shown that this was improper, and resulted in excess compensation to the majority (rather than a dividend that must, by law, be paid pro rata to all shareholders), oppression may still be shown and the majority could be compelled to buy out your shares.

Therefore, when a dispute with your business partner arises, and you are terminated as an employee, make sure you consult with an attorney who is familiar with all aspects of shareholder oppression under New Jersey law.  Just because one avenue of relief is not available to you, does not mean that there are not others that are.