By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Shareholder Rights & Corporate Litigation Attorney
When you think about selling stock in a company, you think about calling up a stock broker and telling him or her to put your 500 or 1,000 shares of XYZ Corporation up for sale in the market, and have somebody buy the shares. But not every corporation is run the same. There are many corporations who have only a few shareholders who also manage the corporation. These closely held (closely held means only a few owners) corporations often have power struggles, which leave a shareholder, often in the minority, frustrated about the direction of the corporation. Unlike calling a stock broker and just selling shares like in a large corporation, selling the shares of stock in a small company is a lot harder to do. Many companies have shareholder agreements which allow different ways for shareholders to sell their shares, whether it is back to the corporation or to another shareholder. But in New Jersey, when all else fails N.J.S.A. §14A:12-7 provides three ways for a court to order a shareholder to sell his or her shares.
Two of the three ways to force a shareholder sale is with a concept known as “corporate deadlock,” that is, the failure of the company to act because of a deadlock between the shareholders or between the directors. There is no majority vote. The other way concerns shareholders being divided in voting power. If after two annual shareholder meetings, there is a failure to “elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors,” a deadlock exists such that a court can intervene. N.J.S.A. §14A:12-7 (1) (a). To effectuate this approach you need to go at least one year without having a proper number of members for a board of directors to act and to show that the shareholders cannot come to a consensus on who to vote for. The other way occurs when the directors (or management of the corporation) cannot effect “one or more substantial matters respecting the management of the corporation’s affairs. N.J.S.A. §14A:12-7 (1) (b). So for example, directors not being able to agree on how to pay down debts and whether or not to take a loan or sell property when the corporation is facing cash flow disruptions can be sufficient for a court to intervene.
The other method concerns shareholder oppression, which we discuss in detail on this website, so I will only summarize the main points here. Oppression only applies if a corporation has 25 or less shareholders, and occurs when a shareholder is being unfairly oppressed by the majority, or the directors have acted illegally or fraudulently, mismanaged the corporation, or abused their authority. Oppression does not occur if the shareholder is merely being out-voted at meetings. As the Supreme Court points out in Muellenberg v. Bikon Corp., 143 N.J. 168, 180 (1996), it can occur when majority shareholders award themselves excessive compensation, issue inadequate dividends, or waste corporate funds. It can also occur when the corporation frustrates the reasonable expectations of the minority shareholder in running the business. Often times, we see this in cases where a minority shareholder’s employment was terminated unexpectedly and without cause by the majority shareholders.
If one of these events occurs, a court can order the shares to be sold to the majority shareholder or the corporation. In some instances, the majority shareholders may be compelled to sell their shares to the minority shareholder depending on the nature of the infraction and dynamics of the business. Note that with all of these options, a court is not bound to require minority stockholders to sell the stock back to the corporation. If the court feels that a provisional director would best serve the interests of the corporation, it will appoint a director. N.J.S.A. §14A:12-7 (3). The court can also appoint a custodian that can subsume the power of the board of directors and run the corporation in the best interests of the shareholders or creditors. N.J.S.A. §14A:12-7 (4). Both would be answerable to the court and can only be removed upon order of the court or by a majority of voting shareholders.
To discuss your NJ Shareholder matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.