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Majority Shareholder Abuses Could Harm The Minority Shareholders In More Ways Than One

I have written previously about majority shareholder abuses that may constitute oppression, entitling a minority shareholder to be paid fair value for his or her shares.  Now I would like to focus on how such abuses by a majority shareholder may wind up harming the (oppressed) minority shareholder in more ways than simply cheating him out of money.

Majority shareholders using the company as a “personal piggy bank” is often how a minority shareholder proves that he is being treated unfairly.  Personal vacations are paid for by the company; family members are placed on the payroll for “no show” jobs; health insurance is paid for adult family members who don’t even work for the business; home improvement contractors are paid from corporate funds.  The list is endless.  Such abuses occur quite often.  In many cases all a minority shareholder has to do is open his eyes to see what is going on right under his nose.

But abuses like this might mean more – much more – than potential liability to pay a minority shareholder for his shares.  If the corporate form is abused, meaning that the distinction between the corporation and its owners are ignored in a widespread and pervasive manner, in New Jersey the individuals may lose the protection of the corporate form and subject themselves to personal liability.  (This principal may be applied to both LLCs and partnerships in New Jersey, as well.)

At first blush to an abused minority shareholder, this may seem like a good thing.  After all, if the shareholders in the majority, and not you (the minority owner), were the ones sucking all the money out of the company for personal expenses, you may feel that they deserve to be held personally liable for corporate debts.  But to an outsider looking in, there is often no way to distinguish at the outset who is involved in the abuse; someone filing a suit will likely not know who is really in control of this company  and who is not.

When the corporate debtor sues the individuals, he will likely sue them all, including you.  You may be given representation by the very business partners whom you no longer trust, or you may have to hire your own lawyer.  You probably can’t use the same lawyer who is representing the company and the majority shareholders, because you are going to have different interests, and a different viewpoint, than they do.  Either way, you are in a lawsuit arguing that you did not know what was transpiring, with all of the wasted time, money and opportunity costs associated with litigation.  The next posting will discuss how to protect yourself from just such a situation.