I’ve previously written about the fact that, in many cases, a minority shareholder who knows with absolute certainty that he or she is an owner still may have such status challenged. I have heard some crazy – and some not so crazy – arguments as to why someone is not actually an owner. In small, closely held businesses, it is not uncommon for the company to keep abysmal records. When no share certificates were ever issued to anyone, and no shareholders meetings were ever held (and no records kept of any that were held), it may be difficult to prove you were ever really an owner.
A recent case by the New Jersey Appellate Division has made it clear that, in cases that are not clear cut, the court may reach a middle ground resolution. For example, there are some instances where the parties clearly had some sort of agreement regarding ownership, but it isn’t entirely clear just what that agreement was. When someone new joins the company, and contributes significantly to its success, claiming that there was a promise he would be made a shareholder, how do you deal with the fact that no shares were ever issued to him, and his ownership was never formalized in any way? If the new person signs on the guarantee, and contributes capital, that certainly is evidence that the parties’ intent was to make him or her a shareholder. But, it is not conclusive proof.
In New Jersey, an Appellate Court dealt with a similar issue by declaring that the person may not be a “shareholder,” with voting rights, but at the very least may be an “equitable owner,” with the right to share in profits and losses.
Clearly, many people reading this website may know in their bones that they are shareholders, and the other side arguing that they are not seems absolutely ludicrous to them. But, at least now there is clear law supporting that argument that, even if confusing circumstances renders you unable to prove to the court you were ever a shareholder, you will not lose your entire investment, and may be declared an equitable owner.
If you have any questions about this post, or other related matters, please email me at firstname.lastname@example.org.