Oppression in the LLC: Will New Jersey affirmatively adopt it as a cause of action?

By Janie Byalik, Esq.
jbyalik@pashmanstein.com

Oppression of minority owners occurs when majority owners in a company take actions that unfairly prejudice the rights of the minority, such as harming their economic interests through failing to declare dividends, squeezing out the minority members, mishandling corporate assets to the detriment of the minority, awarding the majority members excessive compensation or making other management decisions that frustrate the reasonable expectation of the minority.  Oppression commonly occurs in close corporations, since lack of a public market leaves the minority shareholders susceptible to the maltreatment of the majority and does not afford minority shareholders an exit strategy of selling their stock and leaving the corporation.

Unfortunately, oppression can occur in any business organization, not just a close corporation.  It frequently occurs in Limited Liability Companies (“LLC”), which by their nature and character, are similar to close corporations, particularly with respect to the lack of a public market for most LLC interests.  This leaves minority members of LLCs vulnerable to oppression like the minority shareholders in a closely held corporation.  While the New Jersey Business Corporations Act expressly provides a remedy for shareholder oppression, the LLC Act does not.  But the lack of express statutory remedies for LLC members in various contexts has not stopped the New Jersey courts from crafting remedies to address the problem.

New Jersey courts routinely look to corporate principles in the context of an LLC in defining a Chancery Court’s ability to create appropriate remedies. Given the law and reasoning supporting the application of principles under the Business Corporations Act to LLCs, an equity Court may, by analogy, import remedies for corporate oppression to comparable situations in LLCs.

But what may be an equitable power of a Chancery Court to grant an appropriate remedy for oppression, may soon become a statutory protection for all LLCs like it exists for corporations.  A revised version of the LLC Act was introduced in the New Jersey Senate, including sections designed to assure that remedies for oppression available to shareholders will be applicable to members in LLCs. One of the notable changes in the LLC Act is the specific inclusion of remedies for oppression modeled on those in the Business Corporations Act.  While the legislation did not pass this term, it was reintroduced as Senate Bill No. 742 for the 2012 session last month.  It is quite possible that within the coming months minority members of LLCs will have concrete remedies for oppression.  Until then, oppressed minority LLC members will have to continue to try to persuade courts of equity to use the Business Corporations Act as a guide to fill in gaps in the LLC Act.

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