After a marathon mediation session that started at 9:30 a.m. and ended at 2:15 a.m. the next day, I helped a fifty percent owner in a New Jersey corporation settle his dispute with his co-equal shareholder. The other shareholder claimed he and his wife had a 2 to 1 majority on the board of directors, and they called a board meeting for the express purpose of removing my client as President of the company. I wrote to the shareholder attempting to toss my client out of the company that any attempt to go forward with the board meeting would instantly result in my request for a temporary restraining order, asking the court to stop the board meeting from going forward and stopping any attempts to remove my client as President.
The main basis for this argument to the court to stop such conduct is based on a legal doctrine known as shareholder oppression. This concept imposes a legal duty on shareholders in a closely held corporation not to act oppressively or unfairly toward other shareholders in their capacities as shareholders, directors, officers, or employees. In this case, shareholder oppression was governed by New Jersey law since my client’s company was incorporated in New Jersey. There, a statute spells out the types conduct that can be found to be oppressive to shareholders. Not only that, the remedies provided by the statute are unique. For example, the statute allows an aggrieved party to buy out the oppressive shareholder. That is a great remedy especially if one is on the receiving end of the misdeeds and is effectively squeezed out of the company.
New Jersey case law establishes that shareholders have a duty not to frustrate the reasonable expectations of other shareholders. One’s rights in ownership and management can easily be frustrated by orchestrated conduct where a 2-1 decision by a board of directors would effectively eliminate the co-shareholder’s rights in management. A shareholder’s reasonable expectations are determined by considering the special circumstances, arrangements, and personal relationships among the shareholders.
Under the powers afforded the court by the statute, the court can even disregard the corporate formalities to preserve the shareholder’s expectations. So, for example, if the bylaws say a majority vote of the board of directors is all that is necessary, an oppressed shareholder could convince the court that the bylaws on that vote be suspended in order to preserve the oppressed shareholder’s expectations. New Jersey’s shareholder oppression case law is not particularly well developed, but it offers insights on how courts can deal with difficult management and ownership issues that routinely crop up in closely held corporations.