I’ve written extensively about minority shareholder oppression.- Sometimes there is abusive and unfair conduct by a co-shareholder(s) that do(es) not legally qualify as shareholder oppression.
- NJ corporate law allows a court to fashion an equitable remedy to address unfair shareholder conduct.
- When valuing a closely held corporation, “[t]he goal is to arrive at a fair market value for a stock for which there is no market.” Although “[n]o general formula may be given that is applicable to the many different valuation situations”, the IRS recommends that “all available financial data, as well as all relevant factors affecting the fair market value, should be considered.” (first alteration in original) (quoting Rul. 59-60). Those factors include “the history of the firm, the nature of the company, the outlook for the industry, the book value of the stock, the size of the book to be valued, the earnings and dividend-paying capacities of the company, and the existence of goodwill or other intangible assets.” Additionally, “[t]he very nature of the term ‘fair value’ suggests that courts must take fairness and equity into account . . . .”
In shareholder litigation, courts often find an absence of shareholder oppression. Nonetheless, “a minority shareholder’s failure to demonstrate conduct that rises to the level of oppression does not necessarily deprive him or her of a remedy” because the oppressed shareholder statute, N.J.S.A. 14A:12-7(1)(c), “does not limit the equitable power of the courts to fashion remedies appropriate to an individual case.” In such case, a trial court has broad discretion to consider such statutory and equitable remedies as may be appropriate to this setting, including but not limited to an accounting of the income and expenditures of the parties.
Remember, for there to be a forced buyout of a shareholder’s interest, a complaining shareholder must identify oppression, fraud, illegality, mismanagement, or misconduct by the defendants. If not, then a court can conclude an accounting is appropriate, after which it can reconsider a buyout remedy. The accounting is to include “all revenues and distributions, assets and liabilities from a set point in time to the present, and include an accounting of the use and disposition of all assets, including contracts, for that time period.”
The court held that while N.J.S.A. 14A:12-7(8) only authorizes a voluntary stock buy out, “in appropriate circumstances a court exercising its equitable powers, as an alternative to dissolution, can compel the purchase of a shareholder’s stock by the corporation; and under exceptional circumstances, the court’s equitable power might encompass the power to compel an involuntary buy-out by the other shareholders.” Neither the statute nor the court’s decision limits the court’s equitable powers to fairly restore a mistreated shareholder.
For shareholders who flee NJ to another country to avoid their wrongful conduct, the fugitive disentitlement doctrine (FDD), the jurisdiction of the court deals with parties who flee after secretly diverting assets overseas to frustrate a party’s ability to collect on the judgment. In such a case, the court can order the imprisonment of shareholders unless the assets are returned, file a dismissal of any pending appeals in a pending case and impose fees, costs and compensatory damages.
In the absence of a failure to prove oppression, “a broad range of remedies” remain available and the statute does “not limit the equitable power of the courts to fashion remedies appropriate to an individual case”.
So How Does a Court Value the Corporation?
Although expert testimony as to valuation is appropriate, the judge has discretion to reject the expert’s opinion, even if it is the only expert evidence offered at trial.
As part of the valuation process, the court must decide whether to apply a marketability discount to determine the value of shares in a closely-held corporation and “must take into account what is fair and equitable.” “A minority discount adjusts for lack of control over the business entity, while a marketability discount adjusts for a lack of liquidity in one’s interest in an entity.” A court recognizes that while “marketability discounts generally should not be applied in determining the ‘fair value’ of a dissenting shareholder’s stock in an appraisal action [,] . . . there may be situations where equity compels another result.”
In deciding whether to apply a marketability discount to determine the ‘fair value’ of shares of a shareholder forced to sell his stock in a judicially ordered buy-out [, courts] must take into account what is fair and equitable.” The court explained:
It is important to note the distinction between applying a discount at the corporate level to one or more of the values initially determined in valuing the entire corporation, as opposed to applying a discount at the shareholder level after the corporation has been valued.
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 or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Shareholders Attorney