Shareholder Dispute NJ

Archive for July, 2011

I have posted several times (most recently in January) about termination of an employee/shareholder constituting oppression, because this type of misconduct by majority shareholders happens all the time.  If one had a reasonable expectation of continued, even indefinite, employment, the act of termination itself could constitute shareholder oppression under New Jersey law, possibly giving the terminated shareholder the right to be paid for his or her shares.  Or, if one is terminated and then receives no financial benefit for his shares, the mere lack of dividends could be grounds for the terminated employee/shareholder to obtain a buy-out, especially if the majority shareholders continue to give themselves huge (and undeserved) bonuses.

I want to revisit this issue because I have seen majority shareholders actually ratchet up this type of misconduct in light of the stubbornly high unemployment rate.  Unscrupulous business partners have made the argument that they can’t be blamed for firing a minority owner, because the economy is so bad and unemployment is so high.  One adversary even thought this should be an absolute defense to his action – what I dubbed the “things are tough all over” defense.  A majority owner who wants to throw out his business partner will often resort to any morsel of an argument he can latch onto.

Don’t buy it.  If you are a minority owner of a New Jersey company, and the majority owner uses the economy as an excuse to terminate you or eliminate your job, you do not lose your rights as an owner.  You still have the same rights of inspection of certain corporate financial documents; and you still have the right to receive some benefit for your shares, if at all financially possible.  Use these rights, and find out as much about the company’s financial picture as you can.  You may see that your firing was necessary only to permit your business partner to line his own pockets, with you now out of the way.

Perhaps even more importantly, your termination in and of itself might amount to shareholder oppression or misconduct, entitling you to be paid for your shares.  Quite often, the termination occurs after a dispute between business partners has arisen – such as over a suspected fraud, or asking too many financial questions.  Remember, a court will take this timing into account when determining whether you should be paid for your shares.

In the past, when writing about “corporate divorces” and disputes between business partners, I have stressed the importance of documentation and making sure that certain things are in writing.  However, I have recently encountered a case making perhaps the best argument possible about the need for documentation – a co-owner claiming that his business partner did not actually own any interest in the company.

There are many closely-held companies out there in which the owners have never gotten around to issuing stock certificates.  As ridiculous as it may sound, it may be the case that the only evidence one has of ownership is the tax returns of the company.  Amazingly, the majority owner actually claimed in one recent case that the tax returns reflecting his brother’s ownership were inaccurate – a “mistake” by the accountant.

The novel (and absurd) argument is likely to go nowhere, but it has cost my client many months of unnecessary litigation, and an enormous amount in legal fees.  However, much of this aggravation could have been avoided with a letter or an email from before the litigation started, asking why he was never issued his stock certificates.

There are numerous other things that could, and should, be documented somewhere.  The exact percentage that one owns is an obvious fact to have documented.  And, if a chief complaint is the absence of financial disclosure and sharing of documents, this is more easily proven if contemporaneous written complaints exist, rather than merely complaining after the fact. One of the more common issues that often needs to be proven, but is difficult to do without documentation, is the fact that you are not the one involved in any way on preparing financial information for inclusion in the company tax returns.  Yes, the accountant may be able to corroborate this, but he may not.  Often the accountant will have no idea how the documents that are delivered to him were prepared.

Disputes between business partners, even fights leading to a company’s demise, sometimes arise almost overnight.  But, more often than not, the aggrieved shareholder has some inkling for years, or at least many months, that something may be amiss, or at least not quite right.  No matter what you’re feeling toward your business partner, everything should be documented at all times.