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Termination of LLC Member Employee Could Soon Be Considered “Oppression”

Recently, a defendant testified in a deposition that I was conducting that there was no reason that he could not fire my client, who was a 28% minority shareholder in a New Jersey corporation.  Since the defendant was the majority (51%) owner, he believed he could fire whomever he wanted.

Of course, he is right.  He could fire whomever he wants.  Most employees in New Jersey are employees at will and everyone knows that they can be fired at any point with or without reason (as long as the termination is not discriminatory, of course).   So, yes, I had to admit that he had the right to fire my client.  But that does not mean that there can be no consequences that flow from the termination.

Since my client had always been a valued employee and was one of the founding members of the company, he had a “reasonable expectation” that he would continue to be an employee as long as he was a shareholder (or so I argued, backed by New Jersey law).  In other words, the status of shareholder and employee were inexorably intertwined with him, and rightfully so.

Because of this, my adversary’s attorney knew full well what his client did not – that the law in New Jersey protects minority shareholders in closely held corporations from termination.  So, while the majority shareholder had every right to fire him as an employee, my client also had the right to be paid fair value for his shares.  As a policy, New Jersey courts believe that majority shareholders should not be permitted to terminate a shareholder as an employee, but keep his capital captive.  If not for this remedy, the shareholder would not only no longer be working as an employee, but he may also be precluded from getting any return on his investment.

Courts know that, while the law requires distributions to be made pro-rata to all shareholders, it is very easy for business owners to play games with salary and bonuses and overcompensate themselves, leaving little money left over for shareholder distribution.

This protection has been afforded to shareholders in New Jersey corporations for many years.  As of March 2014, the LLC statute in New Jersey is being amended to apply the concept of “oppression” to New Jersey LLCs.  While there is nothing specific in the amended statute detailing exactly what this means, there is every reason to believe that a New Jersey LLC member who is terminated as an employee, frustrating his or her reasonable expectations, will soon have the full weight of law in their corner.  Finally, LLC owners will be afforded the same relief that is available to owners of corporations.