If you have read my prior articles, you know that an oppressed minority shareholder in New Jersey is often entitled to the remedy of a court-ordered buyout of his or her shares. However, not only is that not always the remedy a court will impose, but it is also not always the remedy a minority shareholder wants. Sometimes a minority shareholder simply wants to be treated fairly.
When that is the case, there are several possibilities. In some cases, the majority shareholder simply changes his behavior – usually to try to stave off expensive shareholder dispute litigation, not because he suddenly realized “the error of his ways.” Nevertheless, if the behavior that led to the dispute genuinely changes, that can be seen as good enough.
But more often, if a change in the relationship going forward is promised, a temporary change in the majority shareholder’s behavior will not be good enough. Real change may need to be structural so that it becomes permanent. So, how do you guarantee a real resolution to the problems, and not just a temporary change that will fade with time?
Probably the only way is to enter into a written agreement – possibly an entirely new shareholders agreement or operating agreement – that guarantees certain things to the minority owner going forward. It could promise a cap on compensation to the majority. Or it could guarantee (at least on paper) that the minority shareholder has total say in a certain area. For example, in one case, the minority shareholder was head of sales, yet the majority shareholder took it upon himself to interfere in almost everything he was doing. So, they reached a written agreement that once the majority shareholder approved a new hire in the budget, the minority shareholder would have total control over who was hired and what her responsibilities would be.
Of course, such a solution is far from perfect. An existing law (the oppressed minority shareholder statute) effectively precludes a majority shareholder from paying himself an amount that would be unfair or oppressive to the minority shareholders. So, what is to prevent him from violating this new piece of paper too?
That is where judgment and gutfeel come in. It would be very easy for a shareholder (or LLC member) dispute attorney to say not to try something like this, because it will never work, and you are only asking for a subsequent lawsuit. Sometimes – perhaps even most of the time – it would be better to be separated from each other once a significant rupture in the relationship has emerged. But your attorney must recognize it is not his or her money being spent on the litigation – it is yours. There are cases in which something like this can be tried. With the proper language, such an agreement need not release any rights you may already have. For example, it can make explicit that, if the new arrangement does not work out in six months, you can bring any claims you have at that point and the delay won’t be held against you.
Getting bought out is often the right solution for a business owner who thinks he or she is being mistreated, but it isn’t always. If you have any questions about this post or any other related business law matters, please feel free to contact me at email@example.com.