Monthly Archives: July 2013

New Jersey Supreme Court Affords Remedies to Minority Shareholder in the Absence of Oppression

By Dennis Smith, Esq.
dsmith@pashmanstein.com

Many businesses are family-owned corporations in which ownership percentages are split among relatives.  When intra-family disputes arise about issues either inside or outside the business, it can threaten the orderly operation of the business and lead to a majority of family members ganging up against one shareholder – usually referred to as the minority shareholder (a person who owns 50% or less of the corporation).

Generally, if the minority shareholder believes that the majority shareholders have acted fraudulently, illegally, mismanaged the corporation, abused their authority or acted oppressively or unfairly toward the minority shareholder, he may bring an oppressed shareholder action under the New Jersey Business Corporation Act, N.J.S.A. 14A:12-7(1)(c) seeking, among other things, to force the majority shareholders to buy out his interest.

What happens if the family members create an intolerable working environment for the minority shareholder resulting in his voluntarily exit from the company, but a court determines that the conduct does not rise to the level of oppression?  Up until last week, the minority shareholders would be out of a job and own unmarketable shares in a corporation for which he cannot force a buyout.

Sipko v. Koger, ____ N.J. ____(2013) corrected this inequitable result.  There the court addressed a case that arose from a bitter dispute that divided a family and its successful multi-million dollar software development business.  Plaintiff Robert Sipko became estranged from his father and brother over the choice of a woman whom he was dating (and later married).  Their displeasure in his choice made the working environment intolerable and he resigned.

Because the trial and Appellate courts determined that Robert’s father and brother’s conduct toward him did not rise to the level of oppression, he was unable to force a buyout and was, in effect, left remediless.  The Sipko court corrected this injustice holding that “a minority shareholder’s failure to demonstrate conduct that rises to the level of oppression does not necessarily deprive him of a remedy.”

In so holding, the court emphasized that N.J.S.A. 14A:12-7(1)(e) does not limit the equitable power of the court  to fashion remedies appropriate to an individual case and Chancery Court Judges have a broad range of remedies available to them when adjudicating disputes over closely held corporations.   The opinion holds that even in the absence of oppression remedies available under the statute may be implemented by the court if the circumstances justify it.

The take away from the Sipko decision is that it invests broad discretion in Chancery Court Judges to formulate remedies for minority shareholders who can no longer co-exist within the majority.  No longer will Chancery Judges believe that their “hands are tied” in providing appropriate relief to minority shareholders who have not demonstrated oppression, the ropes have been loosened.

Conflicting Decisions Regarding Premises Liability Create Uncertainty for Commercial Shopping Center Tenants

By Louis Pashman, Esq.
lpashman@pashmanstein.com

You are a tenant in a commercial shopping center.  Someone visiting your store is injured in a fall outside your store.  As is common in shopping center leases, the landlord is responsible to maintain all common areas.  Are you responsible for the injury to the person who visited your store?  Two recent appellate decisions reached different results.

In Kandrac v. Marrazzo’s Mkt., a 2012 decision, a customer who had been at defendant’s store fell on a hump in the parking lot.  The court found the tenant not liable.  While refusing to rule that such a tenant is automatically relieved of liability, it cited three reasons for its decision.  First, the accident did not occur on a route fixed by the tenant.  Second, it was not in close proximity to the defendant’s store and, third, the area where the accident occurred was not in defendant’s control.  The lease provision imposing maintenance responsibility on the landlord was a “significant” factor.

In a 2013 decision, Nielsen v. Wal-Mart Store # 2171, an independent contractor at Wal-Mart to perform exterminating services alleged he slipped and fell in loose sand and gravel in an area outside the store.  The lease imposed on the landlord the same duty to maintain the common areas, which included the area where the plaintiff fell.  The court could have distinguished the Kandrac case.  The route the independent contractor took was prescribed by Wal-Mart.  It was in closer proximity than Kandrac.  Neilsen, however, did not rest on any of those distinctions.  Rather, the court in Nielsen disagreed with Kandrac.  Although Wal-Mart had no contractual obligation to maintain the area, nothing prevented them from doing so.  While in Kandrac the court found that the duty imposed on the landlord was a “significant” factor, in Nielsen it carried little weight.  Neither ownership nor control, the Nielsen court said, is determinative.  The language used by the parties is not of great import.  Basic fairness and public policy considerations are paramount.

If this leaves you uneasy about your responsibility if you are a tenant in a commercial shopping center—it should.

US Supreme Court Decides Who Qualifies As a “Supervisor” Under Title VII

By Maxiel Gomez, Esq.
mgomez@pashmanstein.com

On June 24, 2013, the U.S. Supreme Court issued a decision limiting an employer’s liability under Title VII.  In Vance v. Ball State University, the Supreme Court resolved a split in the circuit courts over the definition of a “supervisor” under a Title VII claim for workplace harassment.  This decision is significant because under Title VII, if the harassing employee is a co-worker, the employer is liable only if the plaintiff can show that the employer was negligent in failing to control the working conditions.  However, if the harassing employee is a supervisor and the harassment culminates in a tangible employment action such as a termination, demotion or pay cut, the employer is strictly liable.  In situations where there is no tangible employment action taken against the plaintiff and the harassing employee is a supervisor, the employer can establish an affirmative defense by showing that (1) it exercised reasonable care to prevent and correct any harassing behavior and; (2) that the plaintiff unreasonably failed to take advantage of the preventive or corrective opportunities that the employer provided.

In Vance, plaintiff alleged that she was the victim of a racially hostile work environment created by another employee that she alleged was her supervisor.  The trial court granted the employer’s summary judgment motion finding that the alleged harasser was not a “supervisor” under Title VII because she did not have the power to fire or hire.  The Supreme Court agreed with trial court holding that an employee is to be considered a supervisor when the employer has empowered that individual “to take tangible employment actions against the victim”.  In reaching this decision, the Court explicitly rejected the more expansive definition of “supervisor” advocated by the Equal Employment Opportunity Commission and adopted by several courts of appeals including the Second, Fourth and Ninth Circuits which ties the definition of supervisor to the ability to exercise significant direction over the employee’s daily work.   The Court argued that the narrow definition will help to ascertain liability early on in litigation commenting that, “[a]n alleged harasser’s supervisor status will often be capable of being discerned before (or soon after) litigation commences and is likely to be resolved as a matter of law before trial.”

The dissenting opinion, written by Justice Ruth Bader Ginsberg and joined by Justices Stephen Breyer, Sonia Sotomayo and Elena Kagan, argued that the majority’s approach fails to capture all employees that should qualify as supervisors and that the key consideration should be whether the employee was vested with the authority to control the conditions of the subordinate’s daily work life used to aid in his or her harassment.

In view of this decision, employers should review employees’ job descriptions to assure that they accurately reflect the individuals’ and authority to hire and fire and watch for new guidance from the EEOC that is consistent with the Court’s ruling.

New Act Will Apply to All Limited Liability Companies – Part Two

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

Link to Part One

New Jersey’s new law affecting every limited liability company (“LLC”) is the Revised Uniform Limited Liability Company Act (“RULLCA”), which took effect September 19, 2012.  This Part Two will address several major changes in the new Act, which controls all LLC’s formed on or after March 18, 2013, and all LLC’s regardless of when formed as of March 19, 2014.

Under the earlier law, the member’s rights to manage were “in proportion to the then current percentage or other interest of members in the profits of the LLC,” with the decision of the members owning more than 50% controlling.  In contrast, RULLCA provides that the members have “equal rights in the management and conduct of the company’s activities” and that a difference among the members in the ordinary course is decided by “a majority of the members” (not by majority percentage of ownership).  However, an act outside the ordinary course of the LLC’s activities can only be taken with the consent of all members.  Naturally, there is no definition of what is “ordinary course.”  The operating agreement can address decision making as well as the definition of “ordinary course,” to avoid or lessen later disputes, again highlighting the greater importance of addressing all issues in an integrated document defining the members’ rights.

As to the effect of the operating agreement, in the old LLC Act, the effect of the agreement upon a member was left to having a provision in the agreement that provides either that the member signs the operating agreement or another agreement showing the intent to become a member, or, failing such signature, if the member meets the conditions to become a member as provided in the operating agreement.  In contrast, under RULLCA, “[a] person that becomes a member of a limited liability company is deemed to assent to the operating agreement.”  Again, RULLCA emphasizes the importance of a properly fashioned operating agreement.

In New Jersey’s earlier LLC law, each member was, in effect, an agent of the LLC having the authority to bind the company.  In contrast, under RULLCA a member is specifically not an agent of the LLC just by being a member.  Instead, the law of agency applies, such as actual and apparent authority.  Finally, the LLC has the option to file with the State a certificate of authority designating individuals that can act and bind the LLC as well as the limitations on acting for the LLC.

The final subject for this Part II is the allocation of profits and losses.  Under the former LLC Act, either the operating agreement dictated the allocation of profits and losses, or the law took over and dictated that they would be divided by “the agreed value … of the contributions made by each member.”  However, under RULLCA, there is no provision to allocate profits and losses among the members.  Therefore, the operating agreement must address the issue.

In Part Three of this discussion, we will address the treatment of members under the old and new law in regard to the treatment of members as to each other, the payment of distributions and how members withdraw from an LLC or are removed as members.

Link to Part Three

Employers Must Comply with DOMA Decision

By CJ Griffin, Esq.
cgriffin@pashmanstein.com

Last week, in United States v. Windsor, the United States Supreme Court struck down a key provision of the Defense of Marriage Act (DOMA) which paves the way for more equal treatment of same-sex relationships at a federal level.  At the same time, Supreme Court’s decision to dismiss the Proposition 8 case continues to allow individual states the right to decide for themselves whether to allow same-sex couples to marry. These rulings leave employers scrambling to figure out how to draft policies that best comply with the current status of the law.

The two rulings create confusion that likely only future judicial opinions will clarify, especially for companies with multi-state offices. For example, will a company based in New Jersey with employees who live and same-sex married in New York have to provide family leave, pension, and other benefits to these employees, even though New Jersey does not allow gay marriage? Or, what happens when an employee marries a same-sex partner in a state that allows for gay marriage but then relocates to work in another of the company’s locations in a state that does not recognize gay marriage? The answers are unclear, as some of the federal benefits of marriage are tied to domicile and some are granted regardless of domicile.

Employers must consult with legal counsel to ensure that they are in compliance with the current status of the law as it pertains to same-sex relationship recognition.  Health insurance plans (including the handling of COBRA and open enrollment periods) and retirement plans will likely need to be adjusted, as well as the way some benefits are treated by the IRS (for example, an employee will no longer be taxed for their same-sex spouse’s insurance premiums).  Family Medical Leave Act policies, as well as sick time policies, will also need to be adjusted. An employment lawyer can help a company determine which policies should be modified to ensure the employer is compliant with the law, which must be done within 25 days of the Windsor decision.