Shareholder Oppression in Close Corporations / “Business Divorce” Cases
“Business divorce” is a term applied to legal cases involving shareholder oppression or minority owner “freeze outs” in close corporations and other small business. A close corporation is usually a small business whose shareholders are also the company’s executives, board members, and employees. Small businesses that are formed with partnerships among close friends or family members seem like a safe investment in the beginning, but if the majority of the corporation’s shareholders begin to oppress or attempt to squeeze out a minority shareholder, those friendly relationships can quickly become very unfriendly. As might be expected in today’s economic climate, business disputes or shareholder disputes such as these are becoming increasingly more common as majority shareholders attempt to “grab” a bigger share of the dwindling corporate earnings.
Shareholder oppression occurs when the majority shareholders in a corporation take action that unfairly prejudices the minority. Since minority shareholders in large public corporations can usually sell their shareholdings if they are not happy with how the company is run, shareholder oppression usually occurs in close corporations because of the lack of a public market for the company’s shares. Without the opportunity to sell their holdings in an open market, the minority shareholders are unable to escape mistreatment by selling their stock and exiting the corporation.
Oppression usually involves a “squeeze-out” or a “freeze-out” of the minority shareholder. By terminating the minority shareholders from their employment positions (including forced retirements), taking away their decision-making powers, and/or refusing to declare dividends, the majority shareholders attempt to harm the economic interests of the minority shareholder and force them to take inadequate compensation in exchange for his or her shares. For example, majority shareholders attempt to “freeze out” the minority from the decision-making process, rendering minority voting rights useless and allowing the majority to make decisions that don’t necessarily benefit the minority shareholder. In addition, the majority may physically lock the minority shareholder out of the corporate premises and deny the minority shareholder the right to inspect corporate records.
The Philadelphia employment lawyers of Sidney L. Gold & Associates are very knowledgeable when it comes to shareholder disputes, shareholder oppression and “business divorces”. Our Pennsylvania and New Jersey employment lawyers have represented numerous oppressed minority shareholders that have been banned from shareholder meetings, excluded from shareholder decisions, or forced out of their position within the corporation. Our business attorneys have recovered damages for minority owners that include lost wages, bonuses, and employee health and retirement benefits.
Oppressed Shareholder Laws Protect the Rights of Minority Shareholders in Close Corporations
Both Pennsylvania and New Jersey have Oppressed Shareholder laws that protect the minority shareholder against oppressive behavior by majority shareholders in close corporations.
Inspection Rights of Minority Shareholders
As with ordinary Pennsylvania corporations, shareholders in close corporations have “inspection rights”. During regular business hours, upon written demand, shareholders can examine and copy the share register, books and records of accounts and the records of proceedings of the incorporators, directors and shareholders. The minority shareholder’s purpose in the inspection must be relevant to his or her interest as a shareholder, but the purpose does not require an allegation of fraud or mismanagement. It can be a more general purpose of ascertaining whether the corporation is being run properly.
If the corporate officers or directors refuse to allow a properly demanded inspection or fail to respond to the demand within five days, the minority shareholder may apply for an order from the court requiring the corporation to comply. Before ordering inspection of books and records other than the share register or list of shareholders, the court must determine, based on the minority shareholder’s proofs, if the demand for inspection was proper. When the minority shareholder is seeking inspection of only the share register or list of shareholders, the corporate directors have the burden of proving that the minority shareholder’s purpose was improper.
Additionally, corporate directors, even if they are minority shareholders, have an unqualified right to inspect corporate books, records and other documents, because they are fiduciaries of the corporation and need full access to information in making decisions on its behalf.
Dissolution of the Corporation
Pennsylvania shareholder oppression laws provide for judicial dissolution of a close corporation upon application by a minority shareholder if the acts of the corporate directors or majority shareholders are illegal, oppressive or fraudulent, and dissolution of the corporation is beneficial to the interests of the shareholders. When determining what conduct by the majority shareholders constitutes oppression, the courts will typically apply the “reasonable expectations of the minority shareholders” test. The courts have held that it is impossible to ascertain a complete set of “reasonable expectations” common among all minority shareholders because of the unique personal relationships between shareholders in a close corporation; however, it is likely all minority shareholders have several expectations in common: employment in the corporation; input in corporate management; and a share in the corporate earnings.
Our New Jersey employment attorneys are very familiar with the applicable NJ laws. The New Jersey Oppressed Shareholder Statute also recognizes the “special vulnerability” of minority shareholders in close corporation:the majority’s ability to control the corporation over the objection of the minority; corporate productivity and efficiency decrease when relationships between family or friends often owning close corporations break down resulting in loss of value; and lack of a market for oppressed minority shareholders in which to sell their shares. For this reason, the New Jersey oppressed shareholder laws also provide for dissolution in appropriate circumstances.
The Philadelphia Business Dispute Lawyers at Sidney L. Gold & Associates Can Help You with Your Minority Shareholder Oppression
When oppression occurs, the minority shareholder must rely on the experience and knowledge of a qualified “business divorce” attorney. Whether negotiation, mediation or arbitration is employed to resolve the conflicts between the minority shareholder and the majority shareholders, or a petition to the court to dissolve the corporation is necessary, the Philadelphia business dispute attorneys at Sidney L. Gold & Associates work diligently to protect the oppressed shareholder’s interests. Our New Jersey employment attorneys will fight to secure fair value for our clients’ shares, despite the forces in place attempting to prevent this from happening.
The oppressed shareholder’s valuation in a shareholders dispute is determined using market value, investment value, or net asset value of the stock, or by using a combination of these valuation methods. Pennsylvania courts can also refer to the valuation methods used by the Internal Revenue Service in determining the value of stock. These include, but are not limited to:
- Evaluation of the business and its history
- Assessment of the corporation’s financial health, and an overview of the economic future of the industry
- Market value of similar stock being traded in the open market
- The corporation’s earning potential
- Amount of stock available
As competent and experienced shareholder dispute attorneys, we work to justify to the court a determination of fair value most beneficial to our clients. Because fair value is firmly established using the date of the day before the petition for dissolution is filed, it is imperative that the petition is strategically filed with this in mind. Filing the petition in a timely manner could result in a substantially higher valuation for the minority shareholder. Experienced in all types of business disputes and shareholder disputes, our business attorneys strive to employ the best valuation strategy for our clients’ positions.
Philadelphia Business Attorneys at Sidney L. Gold & Associates Understand Emotional Aspects of Business Disputes in Closely Held Companies
The impact of a business divorce can be just as emotionally overwhelming as a marital divorce. Close corporations are commonly created through partnerships with family members, relatives, and close friends. Expectations at the start up of the business are positive and often exclude separation or dissolution clauses. As the business develops, personal relationships among partners can be damaged by the stress of business ownership, financial obligations, and differences in management styles. If the corporation’s majority shareholders become oppressive, minority shareholders can lose valuable assets which can destroy their financial futures.
The Philadelphia business disputes attorneys of Sidney L. Gold & Associates understand the emotional aspects of shareholder disputes in closely held corporations. Our business divorce attorneys focus their efforts on helping the oppressed shareholder navigate through the complex array of legal issues surrounding his or her business dispute. As highly skilled mediators and arbitrators, our NJ employment attorneys are dedicated to helping our clients meet their goals, protect their rights, and resolve their disputes outside of the courtroom. If litigation becomes necessary, our accomplished business attorneys will devise the best legal strategy to successfully represent you throughout all proceedings.
Contact the Philadelphia Business Dispute Law Firm of Sidney L. Gold & Associates for Help with Your Shareholder Dispute
If you are experiencing minority shareholder oppression or another business dispute in your close corporation, contact the New Jersey and Pennsylvania shareholder dispute attorneys at Sidney L. Gold & Associates to see how we can help you. Located in Center City Philadelphia, we serve clients throughout the Southeast Pennsylvania and New Jersey region. Call us at 215-569-1999 to schedule a consultation with a qualified Pennsylvania employment lawyer or contact us online.