A May 2022 Gallup survey reported that 58% of Americans own stock. And it’s not just wealthy people. 25% of households earning less than $40,000 reported owning stocks. If you own stock in a company, it means you have an ownership interest in that business.
In New Jersey, investors who purchase an interest in a company have what’s often referred to as “shareholder rights.” Whether you own a lot of shares or just a few shares, you have a number of rights that derive from your ownership interests. Unlike a partnership, where the partners are owners of a business and typically manage the partnership, being a shareholder does not typically obligate you to be involved in the day-to-day operations of the company. It is this lack of daily control that shields shareholders from personal liability for the obligations and debts of the company. But being a shareholder carries risks. You can lose all of your investment if the corporation fails.
Shareholders’ rights are typically set forth in the corporation’s shareholder agreement. A strong, well-drafted shareholder agreement is critical to ensuring that shareholders’ rights are fairly addressed. Shareholders can protect themselves by ensuring that their shareholder agreements contain provisions such as buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements. Strong shareholder agreements will also contain provisions regarding confidentiality and dealing with competitors. However, shareholder agreements that address the future are rare – unfortunately, people often enter into business arrangements optimistically and are not well prepared to deal contractually with problems that may arise.
In addition to rights that may be contained in a shareholder agreement, New Jersey has laws that protect shareholders’ rights. For example, shareholders may request a copy of the company’s balance sheet for the most recent fiscal year and the company’s income statement. Shareholders that have at least 5% of the outstanding shares of any class of stock, or any shareholder that has held his or her stock for at least six months, may ask for the right to inspect certain books and records. These include minutes of proceedings of its shareholders, board and executive committees, and its record of shareholders. However, the shareholder making such a request must have a “proper purpose.” What constitutes a proper purpose has been the subject of much litigation and typically focuses on whether the demand is reasonably related to the shareholder’s interest as a shareholder.
Types of Shareholder Disputes
Business disputes happen even in the best-run and most successful corporations. Disputes can arise from any number of issues, including theft by a shareholder, miscommunications, or unbalanced salary and dividend payments to certain shareholders.
One major type of shareholder dispute relates to minority shareholder oppression. If a shareholder has a dominant position, either because of owning more shares or due to managing the business, and misuses that dominant position to violate the rights of a non-dominant shareholder (known as a minority shareholder regardless of the percentage of shares), that is known as “minority shareholder oppression.” The New Jersey Oppressed Minority Shareholder Act protects the rights and interests of minority shareholders in closely held corporations, with twenty-five or fewer shareholders, against oppressive conduct.
Another common area of dispute involves a breach of fiduciary duty. This occurs when an individual acts out of self-interest rather than doing what is best for the company and other shareholders. A fiduciary duty arises when an individual is in a position of trust within a company. In a business context, fiduciaries are required to act in good faith and have a duty of loyalty to the company. A breach of fiduciary duty may occur, for example, if a member of the company shares confidential information with a competitor.
Other common types of shareholder disputes include the following:
- Actual and constructive fraud
- Failure to pay dividends
- Breach of contract
- Failure to disclose financial information
- Termination of a shareholder’s employment
Direct Shareholder Suit v. Shareholder Derivative Suit
Shareholders can either file suit on their own behalf, known as a direct action, or on behalf of the corporation itself, which is known as a shareholder derivative suit. A shareholder derivative suit is brought against the corporation’s directors, officers, or other third parties, and the claim of the lawsuit belongs to the corporation.
Shareholder Alternative Dispute Resolution and Litigation
Shareholder disputes can often be resolved through mediation or arbitration. When parties are in dispute, alternative dispute resolution (“ADR”) may provide an effective way to resolve conflicts. Often, ADR is specified in a shareholder agreement. If it is not, the parties must agree to this path. The primary methods of alternative dispute resolution are mediation and arbitration. In mediation, a neutral third-party mediator intervenes and tries to bring the parties together to a mutually agreeable settlement. In arbitration, a neutral third-party known as the arbitrator hears evidence and issues a binding, unappealable decision, which is generally faster and less expensive than litigation.
When shareholder disputes cannot be resolved either informally or through alternative dispute resolution, they normally proceed to court. While New Jersey shareholder litigation can be heard in federal court, it is normally litigated in state court.
New Jersey’s Superior Court has two divisions that handle shareholder disputes: the Law Division and the Chancery Division. The Law Division can normally only award money judgments. As most shareholder disputes involve complex issues beyond money, most shareholder litigation proceeds in the New Jersey Superior Court’s Chancery Division. The Chancery Division can award “equitable” relief, such as restraining orders, forced buyouts, or corporate dissolutions.
Contact Shareholder Rights Attorney Daniel P. Silberstein Today
Attorney Daniel P. Silberstein has decades of experience in various areas of business law, including shareholder actions. Shareholder litigation is complex and often involves issues such as business valuation, forensic accounting, and extensive document discovery. Contact an experienced New Jersey shareholder rights attorney for a consultation and discuss your case and what we can do for you. Our office is conveniently located in Union County, New Jersey, and we serve clients in Newark, Elizabeth, and other New Jersey locations.