Minority Oppression

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

July 31, 2018

Single Business or Amalgamation Theory Applies to Related Businesses

by Jay R. McDaniel, Esq.

The Single Business Theory permits a court to treat related businesses as though they were one enterprise.
Courts apply the single business theory in rare cases to prevent injustice.

Pertuis v. Front Roe Rests., Inc., 2018 S.C. LEXIS 85 (2018)

Cases-of-Note-Corporations-300x166 Statutes: S.C. Code Ann. § 33-18-420; S.C. Code Ann. § 33-15-105; S.C. Code Ann. § 33-18-200 to -210; S.C. Code Ann. § 33-18-220; S.C. Code Ann. § 33-18-230; N.C. Gen. Stat. § 55-14-31

An action by minority shareholder and manager of three restaurants, two organized in North and one in South Carolina, seeking valuation and purchase of interests as oppressed shareholder, and alleging that each of three closely held “s corporations” are a single business entity located in South Carolina. On appeal, the South Carolina Supreme Court recognizes the amalgamation theory under which multiple enterprises may be treated as single entity, but reverses because plaintiff was not assigned the burden of proof and because a South Carolina court has no authority to consider the internal affairs of a foreign corporation. (Opinion here.) Continue reading

July 11, 2018

Shareholder Oppression is Frustration of Minority Shareholder’s Reasonable Expectations

by Jay R. McDaniel, Esq.

This seminal case by the New Jersey Supreme Court identifies minority oppression as the frustration of a shareholder’s reasonable expectations.
A court may order the compelled purchase of a shareholder’s interest as a remedy for shareholder oppression when it is the only practical alternative to judicial dissolution.
The minority shareholder seeking to force the purchase of shares must show a connection between the oppressive conduct of the majority and the minority’s interest as a shareholder.

Brenner v. Berkowitz, 134 NJ 488 (1993)

Cases-of-Note-Corporations-300x166

Statutes: N.J.S.A. 14A:12-7(1)(c)

Facts: Partners Resnick and Berkowitz formed successful company. Members of both families were employed in the business. When Resnick died, his shares were distributed to family members, including his daughter, the plaintiff Brenner. Relations between the two family members soured and Brenner’s son was fired. Brenner alleged illegal and oppressive conduct.

Trial court found that Brenner’s expectation was solely as director and investor, not in management of business affairs. Trial court found that some conduct of majority was illegal, but that it was not directed to plaintiff. The oppression was insufficient to trigger the statute. Continue reading

September 13, 2017

Failure to Object to Business Practices Waives Minority Shareholder Rights

by Jay R. McDaniel, Esq.

Cases-of-Note-Corporations

Digital Camera International, Ltd. v. Antebi, et al., 11-cv-1823 (E.D.N,.Y. July 13, 2017)

Statutes: N.J.S.A. 14A:12-7(1)(c)

Facts:Shareholders of a New Jersey corporation participated in a variety of activities that would be classified as oppressive behavior, including the payment of persona expenses with corporate funds, operating a competing business, insider contracts at inflated prices and corporate payments of personal tax liabilities

August 22, 2017

Minority Shareholder’s Silence Waives Oppression Claim

by Jay R. McDaniel, Esq.

It was the stuff of which a good minority oppression claim is easily cooked up. The party in control of the corporation had used the corporate bank accounts as his personal piggy bank while operating a competing business, paid himself inflated office rents and bankrolled an extra-marital affair with money taken from the business.

None of that, however, could carry the day in a lawsuit brought by the minority shareholders of a New Jersey corporation because they waited years to complain.

Minority Shareholder Oppression Alleged by Ousted Officer of Closely Held Corporation

June 28, 2017

Oppressed Shareholder Wins $750,000 Fee Award

by Jay R. McDaniel, Esq.

An oppressed minority shareholder was awarded approximately $750,000 in attorneys fees and expert expenses — some eight times the amount of the buyout — even though the majority had good reason to fire him from his position as the corporation’s CEO.

Fee Award Under Oppressed Shareholder Statute to Selling Shareholder

This case is a 14-year-old litigation involving a dispute between the family members of a family-owned business, and the outsider executive who was brought in to take over the management of the corporation. The relationship quickly deteriorated amid allegations of misappropriation and sexual harassment in the workplace.

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.

The Single Business Theory permits a court to treat related businesses as though they were one enterprise.

Courts apply the single business theory in rare cases to prevent injustice.

Pertuis v. Front Roe Rests., Inc., 2018 S.C. LEXIS 85 (2018)

This seminal case by the New Jersey Supreme Court identifies minority oppression as the frustration of a shareholder’s reasonable expectations.

A court may order the compelled purchase of a shareholder’s interest as a remedy for shareholder oppression when it is the only practical alternative to judicial dissolution.

The minority shareholder seeking to force the purchase of shares must show a connection between the oppressive conduct of the majority and the minority’s interest as a shareholder.

Brenner v. Berkowitz, 134 NJ 488 (1993)

Digital Camera International, Ltd. v. Antebi, et al., 11-cv-1823 (E.D.N,.Y. July 13, 2017)

Minority Shareholder Oppression Alleged by Ousted Officer of Closely Held Corporation

Fee Award Under Oppressed Shareholder Statute to Selling Shareholder