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The New Jersey Oppressed Minority Shareholder Act

Thomas W. Hartmann
The Hartmann Law Firm LLC
Tom.Hartmann@gmail.com; 908-769-6888

The New Jersey Oppressed Minority Shareholder Act, N.J.S.A. 14A-7, enables minority shareholders to protect themselves from harmful actions by majority shareholders. This issue often arises in small companies for which there is no ready market for transferring shares - such as in family-owned businesses.

The Act applies to corporations with 25 or fewer shareholders and permits action when the controlling shareholders act fraudulently, illegally engage in mismanagement, abuse authority or act oppressively or unfairly toward minority shareholders. Similar protection is available to minority members of a limited liability company.

Such abuse might occur when majority shareholders award themselves excessive compensation, pay inadequate dividends, waste corporate funds or try to squeeze out a minority shareholder. Oppression may also be found when the majority tramples on the "reasonable expectations" of the minority. This might occur when a minority shareholder of a corporation had an expectation that employment was secure or when the minority shareholder reasonably expected meaningful participation in the management of the business.

In evaluating the misconduct of the majority, courts consider the seriousness of the violation, the investment at risk, and whether the minority shareholder acquiesced or participated in the misconduct, among other things. Courts also review accounting systems for evidence of irregularity, unfairness and oppression.

At the same time, the Act also protects majority shareholders from harassment by the minority who have not truly been oppressed but simply disagree with a corporate action.

A court's power to remedy the oppression is broad. The Court can appoint a custodian or director to manage the business; order the sale of the corporation's stock; dissolve the company; force a buyout by either the minority shareholder or the corporation; reduce salaries paid to majority shareholders who are officers; and impose an effective accounting system, among other equitable remedies. The court can also award attorney fees if it determines a party has acted arbitrarily or in bad faith.

The Oppressed Minority Shareholder Act can be an extremely powerful tool to assist minority shareholders in preventing abuse in the first place or in finding a remedy for the abuse after it has occurred.

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Watchung, NJ 07069
Telephone: 908-731-6976 
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