The small, closely-held corporation is in many ways a conceptual hybrid. It has many attributes in common with large, publicly traded corporations, such as legal “personhood,” independent life and limited liability for its shareholders. On the other hand, the small closely-held corporation also has many attributes in common with partnerships, such as limited transferability of shares, possible obligations to provide services to the company or employment to a shareholder, and possible requirements to invest more in the company. Additionally, the shareholders in a close corporation usually know each other and work together. This introduces the personal element.
In a large publicly-traded company, majority rules. The shareholders elect directors who appoint officers and engage managers to run the company. A shareholder who holds a controlling interest can pretty much dictate how the company is run. If a non-controlling shareholder doesn’t like it, or believes that the return on his investment is inadequate, or wants to make some kind of political statement, he is free to sell his shares on the open market and invest somewhere else.
For the unhappy minority shareholder in a closely-held corporation, however, the options are limited. His shares are not readily transferable, either because there is a shareholders agreement which places restrictions on transfers, or there is simply no market for the shares, or both. He may be unhappy because he does not agree with decisions taken by the majority pertaining to employment, distributions, business opportunities, a merger or acquisition, purchase of sale of company assets, or the general running of the company. Without some kind of protection, he is at the mercy of the majority who may engage in actions which unfairly deprive him of the benefit of his investment, terminate his employment and make his life miserable.
In New Jersey, both the legislative and judicial branches have stepped in to protect oppressed minority shareholders. Judge-made law has developed through precedents over time to articulate a fundamental principle – that controlling shareholders in a close corporation have a fiduciary duty to minority shareholders. The fiduciary standard is a very high one – it is sometimes described as requiring that the fiduciary use the same care and attention in protecting the other party as he uses to protect and care for his own interests. Judges use this principle, as well as others, to require that majorities treat minority holders fairly.
The New Jersey Business Corporation Act (BCA) also provides for protection of minority shareholders in a close corporation, which it defines as one having 25 or fewer shareholders. The statute and its remedies come into play when there is a shareholder or director deadlock which renders the company unable to function, or when the controlling shareholders have acted fraudulently or illegally, mismanaged the company, abused their authority or acted oppressively or unfairly toward minority shareholders. Needless to say, reasonable people may differ as to what is oppressive or unfair. In applying and interpreting the statute, courts refer to principles, including the fiduciary standard, as they have been developed in case law. Part of the analysis is consideration of the expectations of the parties when they set up in business together.
It is important to note that every disagreement among shareholders does not amount to deadlock, let alone abuse or oppression. The actions of those running the company are entitled to some degree of deference under the “business judgment rule,” which may permit the majority to make decisions in the best interest of the company as a whole, even if a minority shareholder is disadvantaged. Again, this requires judicial interpretation.
Both the BCA and traditional common law provide remedies in the event of deadlock or oppression. Under the BCA, a court may order the dissolution of the company, the appointment of a director or custodian, or the buying or selling of shares among shareholders. Under traditional fairness principles, the court may also fashion a remedy based the particular circumstances of the case, even if the BCA does not specifically authorize it.
It’s impossible for people going into business together to avoid all possibility of deadlock or oppression – nobody can predict the future. A well-drafted shareholders agreement, however, can go a long way toward reducing the chances of a distracting, costly and potentially destructive battle among shareholders.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning business arrangements and all other legal matters, consult an attorney.
THE MINORITY SHAREHOLDER “OPPRESSED” BY THE MAJORITY
The small, closely-held corporation is in many ways a conceptual hybrid. It has many attributes in common with large, publicly traded corporations, such as legal “personhood,” independent life and limited liability for its shareholders. On the other hand, the small closely-held corporation also has many attributes in common with partnerships, such as limited transferability of shares, possible obligations to provide services to the company or employment to a shareholder, and possible requirements to invest more in the company. Additionally, the shareholders in a close corporation usually know each other and work together. This introduces the personal element.
In a large publicly-traded company, majority rules. The shareholders elect directors who appoint officers and engage managers to run the company. A shareholder who holds a controlling interest can pretty much dictate how the company is run. If a non-controlling shareholder doesn’t like it, or believes that the return on his investment is inadequate, or wants to make some kind of political statement, he is free to sell his shares on the open market and invest somewhere else.
For the unhappy minority shareholder in a closely-held corporation, however, the options are limited. His shares are not readily transferable, either because there is a shareholders agreement which places restrictions on transfers, or there is simply no market for the shares, or both. He may be unhappy because he does not agree with decisions taken by the majority pertaining to employment, distributions, business opportunities, a merger or acquisition, purchase of sale of company assets, or the general running of the company. Without some kind of protection, he is at the mercy of the majority who may engage in actions which unfairly deprive him of the benefit of his investment, terminate his employment and make his life miserable.
In New Jersey, both the legislative and judicial branches have stepped in to protect oppressed minority shareholders. Judge-made law has developed through precedents over time to articulate a fundamental principle – that controlling shareholders in a close corporation have a fiduciary duty to minority shareholders. The fiduciary standard is a very high one – it is sometimes described as requiring that the fiduciary use the same care and attention in protecting the other party as he uses to protect and care for his own interests. Judges use this principle, as well as others, to require that majorities treat minority holders fairly.
The New Jersey Business Corporation Act (BCA) also provides for protection of minority shareholders in a close corporation, which it defines as one having 25 or fewer shareholders. The statute and its remedies come into play when there is a shareholder or director deadlock which renders the company unable to function, or when the controlling shareholders have acted fraudulently or illegally, mismanaged the company, abused their authority or acted oppressively or unfairly toward minority shareholders. Needless to say, reasonable people may differ as to what is oppressive or unfair. In applying and interpreting the statute, courts refer to principles, including the fiduciary standard, as they have been developed in case law. Part of the analysis is consideration of the expectations of the parties when they set up in business together.
It is important to note that every disagreement among shareholders does not amount to deadlock, let alone abuse or oppression. The actions of those running the company are entitled to some degree of deference under the “business judgment rule,” which may permit the majority to make decisions in the best interest of the company as a whole, even if a minority shareholder is disadvantaged. Again, this requires judicial interpretation.
Both the BCA and traditional common law provide remedies in the event of deadlock or oppression. Under the BCA, a court may order the dissolution of the company, the appointment of a director or custodian, or the buying or selling of shares among shareholders. Under traditional fairness principles, the court may also fashion a remedy based the particular circumstances of the case, even if the BCA does not specifically authorize it.
It’s impossible for people going into business together to avoid all possibility of deadlock or oppression – nobody can predict the future. A well-drafted shareholders agreement, however, can go a long way toward reducing the chances of a distracting, costly and potentially destructive battle among shareholders.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning business arrangements and all other legal matters, consult an attorney.