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.