Brief survey of New Jersey shareholder law.

New Jersey Shareholder Law Survey

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Inspection Rights

Shareholder Inspection Rights

Shareholders in New Jersey close corporations have the same inspection rights as those in ordinary New Jersey corporations. See § N.J. Stat. Ann. § 14A:5-28(3) (West 2003). Upon written request, any shareholder may obtain from the corporation a copy of the corporation’s balance sheet for the preceding fiscal year. § 14A:5-28(2).

Additionally, shareholders who have been record owners for at least six months or who own at least five percent of the outstanding shares of any class of 28(3). The documents available for inspection under this rule are the corporation’s books and records of account, record of shareholders and minutes of proceedings of the board, committees thereof and shareholders. Id. However, the court may order an inspection upon a showing of a proper purpose regardless of whether the requesting shareholder satisfies the standing requirements outlined above. § 14A:5-28(4).

Additionally, the directors of a corporation have an unqualified and absolute right to inspect corporate books and records regardless of the motive for the inspection. Pilat v. Broach Systems, Inc., 260 A.2d 13, 17-18 (N.J. Sup. Ct. Law Div. 1969).

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Shareholder Oppression

New Jersey law provides a dissolution remedy for shareholders in closely held corporations where there are “25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.” § 14A: 12-7(1)(c). The inquiry into whether a person is a minority shareholder entitled to exercise the statutory right does not consist of a simple calculation of ownership percentages, but instead requires an examination of the actual degree of control the particular shareholder has over the corporation. Bonavita v. Corbo, 692 A.2d 119, 124 (N.J. Sup. Ct. Ch. Div. 1996).

Dissolution is available under this section because of the “special vulnerability” of minority shareholders in close corporations. Brenner v. Berkowitz, 634 A.2d 1019, 1027 (N.J. 1993). This vulnerability exists for several reasons: the majority has the ability to control the direction of the corporation over the objection of the minority interest; corporate productivity and efficiency decrease when the relationships between the family or friends that often own close corporations break down; and there is no readily available market for dissatisfied minority shareholders in which to sell their shares. Id. However, the limited basis on which the remedy is available reflects the policy that minority shareholders are or should be aware of the situation they are entering when they make their investment. Id. To be actionable as oppression, the conduct in question does not need to be fraudulent or illegal but need only to frustrate the reasonable expectations of the minority shareholders. Id. at 1028.

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This approach recognizes that shareholders in close corporations generally have different expectations than those in public corporations and, therefore, this inquiry is heavily fact based. Muellenberg v. Bikon Corp., 669 P.2d 1382, 1387 (N.J. 1996). Furthermore, majority shareholders in close corporations owe fiduciary duties to the minority interest of the “utmost good faith and loyalty in transacting corporate affairs.” Walensky v. Jonathan Royce Intern., Inc., 624 A2d 613, 616 (N.J. Sup. Ct. App. Div. 1993). These duties are encompassed in the statutory language authorizing dissolution for oppressed shareholders and are based on recognition of the fact that traditional corporate law has been ineffective in preventing abuses of corporate power by majority interests in close corporations. Id.

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Derivative Suits

Shareholder Derivative Suits

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. N.J.. Sup. Ct. R. 4:32-3. In order to have standing to bring a derivative suit, a plaintiff must adequately and fairly represent the interests of the other shareholders and have been a shareholder at the time the cause of action arose or received the shares by operation of law from someone who held them at that time. Id. In his or her complaint, the shareholder must allege the actions taken to obtain appropriate relief from the corporation or state why no such actions were taken or why the actions taken failed. Id. However, a complaining shareholder is not required to first make a demand on the corporation before instituting suit if doing so would be futile. In re PSE & G Shareholder Litigation, 801 A.2d 295, 307 (N.J. 2002). Furthermore, the court, only after a hearing on the matter, may approve any settlement, dismissal or compromise of the derivative claim and direct that notice be given to affected class members. N.J.. Sup. Ct. R. 4:32-2(e).

New Jersey courts may discretionarily treat what would normally be derivative actions as direct in some circumstances involving closely held corporations. Brown v. Brown, 731 A.2d 1212, 1216,17 (N.J. Sup. Ct. App. Div. 1999). Where the risk of multiple suits and prejudice to other shareholders and creditors is low, the traditional justifications for requiring a derivative suit are not present and the shareholder may obtain an individual recovery. Id.