In a recent decision, New Jersey’s Appellate Division addressed the standard of proof for minority shareholder oppression under New Jersey law, reaffirming the “reasonable expectations” standard. In Matusow v. Iznec, et al., the court analyzed the parameters for what constitutes the “reasonable expectations” of a minority shareholder pursuant to New Jersey’s Minority Shareholder Oppression Act providing additional guidance in meeting that standard.
In Matusow, the parties were gastroenterologists who had owned and operated a medical practice and related endoscopy center. As is common in business divorces, the parties, as shareholders of their medical practice, developed a deep (and unfortunate) animosity towards each other and could no longer work together. As a result of the fall-out between them, plaintiff Matusow filed a claim for minority shareholder oppression, as well as ancillary business tort claims, against his two former “partners”, Iznec and McLoughlin. Defendants countersued against Matusow for similar claims of minority shareholder oppression.
In affirming the Chancery Court’s decision to enter judgment in favor of defendants for shareholder oppression, the appellate court revisited the standard under New Jersey law for what is required to succeed on a minority shareholder oppression claim. The court reasserted that a minority shareholder must show that the officers/directors, or those who are in control of management of the company, must have acted in a way that was fraudulent, illegal, mismanaged the company, abused their authority, or acted oppressively or unfairly towards the minority shareholder(s). The court confirmed proving fraudulent or illegal conduct is not necessary to successfully establish minority oppression, rather the focal point must be the reasonable expectations of the minority shareholder. In addressing what qualifies as “reasonable expectations”, a court must examine the understanding made between the shareholders concerning their roles in participating in the company’s affairs, management, and operations. However, the expectations of any minority shareholder must be fairly balanced with the company’s ability to exercise its good faith business judgment to run the company in an effective manner. Therefore, mere disagreement between shareholders does not, in and of itself, rise to the level of oppression.
The critical import of the appellate court’s decision in Matusow is the affirmation that each claim for shareholder oppression is inherently fact specific and must be adjudicated pursuant to the circumstances of the conduct, understandings, and objective reasonable expectations of the shareholders themselves in relation to the company’s management, finances and operations.
As a result, to protect against shareholder oppression claims based on outlandish or unreasonable “expectations”, it is in the inherent interests of the shareholders, directors, officers, and any other managers of a company to record and maintain specific and complete corporate books and records. This starts with a detailed, clear and comprehensive Operating Agreement, or set of By-laws for the company. Each company should also have a Membership Agreement, or a Shareholder Agreement, that sets forth with specificity the rights, duties and obligations that the owners have to and between each other. Best practice would also include written notices for the regularly scheduled shareholder/member meetings; written agenda for such meetings; recorded minutes from such meetings; and, formal company resolutions for each decision voted upon at each meeting. Such prudent efforts in management would help prevent a rogue partner from asserting a minority oppression claim premised on unreasonable, subjective or unfounded expectations.
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Timothy D. Lyons is a senior partner and Co-Chair of the Business Litigation Department of Jardim, Meisner and Susser, P.C. Mr. Lyons specializes in representing business owners in business dissolution cases and intra-company disputes, and “business divorce” matters at both the pre-litigation and trial stages. Such cases often include claims centering on minority oppression alleged by a shareholder in a close corporation, or a member in a limited liability company or partnership.
