Minority Oppression

August 15, 2023

When Are Limited Liability Companies Required to Distribute Profits?

There is no statutory right to receive a distribution of profits from a limited liability company before it dissolves and winds up its affairs. Distributions before then are discretionary.
Profit distributions are in the discretion of the majority members or commonly in the discretion of the managers of the limited liability company.
A minority member who is not receiving distributions may have a claim under the operating agreement or as an oppressed minority member if the majority refuses to make profit distributions.

Profit distributions are a frequent source of dispute among the members of a limited liability company. The fundamental question of who decides when distributions are made, how much is made, and how to deal with the tax issues related to distributions, profits and losses can all be the source of conflict.

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The short answer to the question of when a limited liability company must distribute profits is that ‘it depends.’ And many minority owners of LLC interests are frustrated to learn that they have less control over the process than they anticipated. New Jersey minority oppressed LLC member attorney

Limited Liability Companies Often Do Not Have Operating Agreements

Entrepreneurs choose limited liability companies as the form of a new business far more often than corporations or partnerships. They are cheap and easy to form and do not require the type of documentation and formalities that you generally see associated with other entities, corporations in particular. Continue reading

June 20, 2023

Defending the Oppressed Minority Lawsuit

by Jay R. McDaniel, Esq.

Majority Owners of closely held businesses may face claims that they engaged in minority oppression of shareholders, limited liability company members or partners.
Defending the minority oppression claim requires examination of written agreements and consideration of the reasonable expectations of the owners when the business was formed.

New Jersey oppressed minority defense lawyer | corporations | limited liability company | parntership | limited partner Claims of minority oppression are asserted in any number of disputes between the majority owners of a business and one or more of the minority interest holders. The oppressed minority lawsuit is disruptive, expensive and can threaten the investments and value of the majority owners.

May 23, 2023

The Equitable Value of an Oppressed Minority Shareholder’s Interest

by Jay R. McDaniel, Esq.

A New Jersey Court conducing the valuation of a business may use any technique or method generally acceptable in the financial community.
The application of a minority discount is a question of law, but likely will be based on the factual determinations of the court about the culpability of the litigants.
Business divorces cases are commonly heard in the Chancery Division, a court of equity in which principles of fairness and justice may be applied in addition to any statutory cause of action.
New Jersey’s statutory cause of action for oppression of a minority shareholder does not prevent the court from providing equitable remedies available outside the statute as a matter of common law.

New Jersey Business Valuation ATORNEY In Sipko v. Kroger, the New Jersey Supreme Court declined to apply a minority discount in valuing the interest of a minority shareholder.

There was no real surprise there. New Jersey courts are reluctant to apply a minority discount in the valuation of closely held businesses, which reduces the value of the minority interest. Those discounts, which can signicantly lower the value of an interest — often by a third, or more — tend to reward wrongdoers. Continue reading

May 16, 2023

Reasonable Expectations Define Oppression of Minority LLC Member

by Jay R. McDaniel, Esq.

Limited Liability Company laws in New Jersey and many states provide a cause of action for the oppression of minority members of company against those in control of the business.
Oppression of a minority LLC member is measured by the reasonable expectations of the minority member in those states that have adopted the Uniform Limited Liability Company Act
Courts assess reasonable expectations by looking at the operating agreement, the behavior of the members and purpose of the members in joining the business.

Majority rule in any limited liability company is not without its risks, in particular the potential for the majority owners to oppress the minority members, together with the difficulty the minority member is likely to have in recouping the investment in the business.

Minority members of a limited liability company may always voluntarily dissociate, or resign, as a member, at which point they give up the right to participate in management. As a “dissociated member,” the minority member who has resigned is entitled to his or her share of profits, but not to participate in decisions or get full information about the operations of the business. Continue reading

February 15, 2023

Minority Shareholder Oppression Under New Jersey Law

by Jay R. McDaniel, Esq.

Minority shareholders of a closely held corporation may be subjected to oppressive conduct by the controlling majority that deprives them of the benefits of their investment.
Oppressed minority shareholder actions vindicate the rights of the minority owner to participate in the management and share in the economic benefits of the company.
A court may order the majority to buy the minority member’s interest at fair value, to sell the corporation as a going concern, for damages or take other actions to fashion an appropriate remedy.

anger-2728273_1920-1024x683 Under New Jersey business law, minority oppression refers to conduct in which the majority shareholders or directors of a corporation engage in behavior that prejudices the rights or interests of the minority shareholders unfairly.

We see shared holder oppression in a variety of action: Continue reading

February 7, 2023

Hostility Among Owners Blocks LLC Derivative Lawsuit

by Jay R. McDaniel, Esq.

A plaintiff seeking to bring a derivative claim on behalf of a corporation, limited liability company or limited partnership must be “suitable” and represent the interests of the business.
A member of a limited liability company may sue individually to recover or protect the member’s individual right. New Jersey law does not, however, permit a member to bring a claim for involuntary dissociation, or expulsion, as a direct claim.
Courts have discretion to treat derivative claims as direct claims under New Jersey law, but may bar a derivate claim brought by a limited liability company that is antagonistic to the other owners.

Derivative claims in limited liability company lawsuit

Family in South Jersey Sand and Gravel Business Torn by Claims of Wrongdoing in Derivative Action

Hostility among the owners of a limited liability company is a staple in business divorce litigation, as are the derivative claims commonly asserted by the minority against the majority. But one New Jersey court has dismissed minority derivative claims because that hostility, the court said, made the member an unsuitable derivative plaintiff.

Is this case, Cave v. Cave, from the Superior Court in Burlington County, an outlier? Or does it merely reflect a more thorough analysis of the requirements for a derivative action. If this decision were to be widely followed, it could change the landscape of litigation among the owners of closely held businesses. Continue reading

October 1, 2022

Anatomy of a Business Divorce Lawsuit

by Jay R. McDaniel, Esq.

- A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.
- These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.
- Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

February 2, 2021

One Business Divorce, Multiple Actions

by Jay R. McDaniel, Esq.

An agreement to arbitrate that is contained in the governance documents of a business, e.g, an operating agreement or shareholder agreement, may result in multiple proceedings when the dispute ripens into litigation.
A party may seek to stay a pending federal court action based on a collateral arbitration proceeding that is part of a state court action under the abstention doctrine, but it is sparingly applied.
Parties to a business dispute may be required to simultaneously litigate in different forums when not all of the parties are subject to an agreement to arbitrate the dispute.

Multiple lawsuits from a business divorce may not be entirely commonplace, but it does happen when the controlling governance documents contain an arbitration clause, but there are outsiders not bound by the agreement to arbitrate that are involved in the dispute. These may be former employees, agents, competitors or vendors. gavel-2492011_1920-1024x569

Simultaneous Arbitration and Litigation in Court

The result is that some of the parties may be obligated to arbitrate, or that some of the dispute may not be subject to the agreement to arbitrate. Consider the case in which there are disputed events that occurred while the parties still had fiduciary obligations to each other – such as between partners or employer and employee – and those that occur outside the fiduciary obligation. These might include unfair competition or claims arising from a competitor hiring someone under a restrictive covenant. Continue reading

November 4, 2020

Controlling Shareholders owe Fiduciary Duties to Minority Members

by Jay R. McDaniel, Esq.

The controlling shareholders of a corporation owe fiduciary duties to the minority shareholders by virtue of their ability to control the affairs of the company.
Even when a merger complies with statutory requirements, where it benefits the controlling shareholders and does not have an apparent business purpose, it must also satisfy equitable principles of fairness.
The fiduciary duties owed by controlling shareholders is a basis to grant injunctive relief, even it is appears that money damages might make the minority shareholders whole for any misconduct.

Corporations Attorney

Berkowitz v. Power/Mate Corp., 135 N.J. Super. 36 (Chancery Division 1975)

Statute: NJSA 14:14-1(1)(a)

Synopsis: In class action seeking injunctive relief blocking merger of defendant Power/Mate with corporation controlled by the majority shareholders, on application for a preliminary injunction, the court enjoined a going-private merger by the defendant controlling shareholders to compel the sale by the minority shareholders to a corporation they controlled. Held that despite compliance with statutory requirements, the merger would be preliminarily enjoined. See opinion Berkowitz v. Power/Mate Corporation. Continue reading

September 21, 2018

Business Judgment Rule Trumps Oppression; Minority Shareholder Entitled to Attorney’s Fees in Defense of Counterclaim

by Jay R. McDaniel, Esq.

The business judgment rule insulates decisions made in good faith and in the best interests of the enterprise from being subject to judicial second guessing ordinary business decisions
Majority shareholders that failed to pay dividends to a non-employee minority shareholders in valid exercise of business judgment rule did not engage in wrongful conduct.
Common law dissolution under New York law is available only for a palpable breach of duty so egregious as to disqualify the majority from exercising rights over dissolution.
A minority shareholder subject to a counterclaim has a right to be indemnified against legal fees and an advance of funds for expenses.
A trial court may preclude individual defendants from using corporate funds to defend an oppressed minority shareholder lawsuit.

Feldmeier The decision of controlling shareholders that a corporation will not pay dividends to a former employee and director is subject to the business judgment rule, in this case defeating the shareholder’s claim of oppressive conduct by the majority.

The Fourth Department of the Appellate Division of New York Supreme Court rejected the claim brought by a minority shareholder of a family-owned equipment business in Syracuse, applying the presumption that an action taken in good faith by a business in the best interests of the business should be free from second-guessing by the minority and the Court. (Opinion in Feldmeier v. Feldmeier Equipment, Inc. here.) Continue reading

There is no statutory right to receive a distribution of profits from a limited liability company before it dissolves and winds up its affairs. Distributions before then are discretionary.

Profit distributions are in the discretion of the majority members or commonly in the discretion of the managers of the limited liability company.

A minority member who is not receiving distributions may have a claim under the operating agreement or as an oppressed minority member if the majority refuses to make profit distributions.

Limited Liability Companies Often Do Not Have Operating Agreements

Majority Owners of closely held businesses may face claims that they engaged in minority oppression of shareholders, limited liability company members or partners.

Defending the minority oppression claim requires examination of written agreements and consideration of the reasonable expectations of the owners when the business was formed.

A New Jersey Court conducing the valuation of a business may use any technique or method generally acceptable in the financial community.

The application of a minority discount is a question of law, but likely will be based on the factual determinations of the court about the culpability of the litigants.

Business divorces cases are commonly heard in the Chancery Division, a court of equity in which principles of fairness and justice may be applied in addition to any statutory cause of action.

New Jersey’s statutory cause of action for oppression of a minority shareholder does not prevent the court from providing equitable remedies available outside the statute as a matter of common law.

Limited Liability Company laws in New Jersey and many states provide a cause of action for the oppression of minority members of company against those in control of the business.

Oppression of a minority LLC member is measured by the reasonable expectations of the minority member in those states that have adopted the Uniform Limited Liability Company Act

Courts assess reasonable expectations by looking at the operating agreement, the behavior of the members and purpose of the members in joining the business.

Minority shareholders of a closely held corporation may be subjected to oppressive conduct by the controlling majority that deprives them of the benefits of their investment.

Oppressed minority shareholder actions vindicate the rights of the minority owner to participate in the management and share in the economic benefits of the company.

A court may order the majority to buy the minority member’s interest at fair value, to sell the corporation as a going concern, for damages or take other actions to fashion an appropriate remedy.

A plaintiff seeking to bring a derivative claim on behalf of a corporation, limited liability company or limited partnership must be “suitable” and represent the interests of the business.

A member of a limited liability company may sue individually to recover or protect the member’s individual right. New Jersey law does not, however, permit a member to bring a claim for involuntary dissociation, or expulsion, as a direct claim.

Courts have discretion to treat derivative claims as direct claims under New Jersey law, but may bar a derivate claim brought by a limited liability company that is antagonistic to the other owners.

A business divorce is the process by which the owners of a business separate their business interests. The process involves negotiation and may also require litigation.

These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

An agreement to arbitrate that is contained in the governance documents of a business, e.g, an operating agreement or shareholder agreement, may result in multiple proceedings when the dispute ripens into litigation.

A party may seek to stay a pending federal court action based on a collateral arbitration proceeding that is part of a state court action under the abstention doctrine, but it is sparingly applied.

Parties to a business dispute may be required to simultaneously litigate in different forums when not all of the parties are subject to an agreement to arbitrate the dispute.

Simultaneous Arbitration and Litigation in Court

The controlling shareholders of a corporation owe fiduciary duties to the minority shareholders by virtue of their ability to control the affairs of the company.

Even when a merger complies with statutory requirements, where it benefits the controlling shareholders and does not have an apparent business purpose, it must also satisfy equitable principles of fairness.

Berkowitz v. Power/Mate Corp., 135 N.J. Super. 36 (Chancery Division 1975)

The business judgment rule insulates decisions made in good faith and in the best interests of the enterprise from being subject to judicial second guessing ordinary business decisions

Majority shareholders that failed to pay dividends to a non-employee minority shareholders in valid exercise of business judgment rule did not engage in wrongful conduct.

Common law dissolution under New York law is available only for a palpable breach of duty so egregious as to disqualify the majority from exercising rights over dissolution.

A minority shareholder subject to a counterclaim has a right to be indemnified against legal fees and an advance of funds for expenses.

A trial court may preclude individual defendants from using corporate funds to defend an oppressed minority shareholder lawsuit.