I have previously posted on this blog in the past about how the termination of a minority shareholder’s employment can constitute minority shareholder oppression in New Jersey, possibly entitling the minority shareholder to a buy-out. This is based on the theory that an owner of a small, closely-held business reasonably expects employment as long as he is a shareholder. When that owner is pushed out as an employee and is no longer working for the company, his equity is essentially being held hostage by the company. Recently, though, a New Jersey appellate court made it clear that termination does not always equal oppression.
In that case (Metro Commercial Mgmt. v. Hughes), an employee who was not one of the company’s original owners was subsequently given an opportunity to become a minority shareholder. As part of the buy-in, she signed an employment agreement stating that she was an at-will employee and could be terminated for any reason. It further stated that she understood that if she was terminated for any reason, she would have to sell back her shares at a pre-determined formula.
The court found that someone who signed a document acknowledging that she could be fired at any time, for any reason, could not possibly have a reasonable expectation that her employment could not be terminated as long as she was an owner.
This result might seem self-evident. After all, how can a shareholder argue that she expected lifetime employment after signing a document saying she could be fired tomorrow? But this case is important because of its impact on other cases involving written agreements. For example, will a court now say that a shareholder agreement that provides for a buy-out formula apply that formula even when shareholder oppression exists? Likely not, since this case does not deal with the remedy for shareholder oppression, but rather addresses whether oppression exists in the first place. But it will be interesting to see how courts apply it.
One might conclude from this case that it would be foolish to sign such a rights-limiting employment agreement. However, without knowing exactly the circumstances involved, it is impossible to know if the plaintiff in that case would have received her ownership interest had she not signed. It is also impossible to know if modifying language could have been added that would have satisfied the majority owners, without waiving her right to be deemed an oppressed minority shareholder. But if she had seen an attorney at the time with experience dealing with such issues, she would at least have known that her rights were as protected as they could have been, and could have made a fully informed decision.
If you have any questions about this post or any other related matters, please contact me at firstname.lastname@example.org.