When Should Termination Constitute Shareholder Oppression?

When Should Termination Constitute Shareholder Oppression?

New Jersey’s shareholder oppression statute is intended to protect minority shareholders in closely-held corporations. However, it cannot be used to prevent the termination of an at-will employee subject to a shareholders agreement which expressly so provided, according to a recent Appellate Division decision. The court’s decision in Metro Commercial Management Services, Inc. v. Istendal is noteworthy because it considers the potential interplay between at-will status and a minority shareholder’s “reasonable” expectations of continued employment.

New Jersey’s Oppressed Minority Shareholder Statute

Minority shareholders in closely-held corporations are uniquely vulnerable because they may be frozen out of the decision-making process. The Oppressed Minority Shareholder Statute (N.J.S.A. 14A:12-7(1)(c)) establishes the circumstances under which a shareholder oppression action may be brought. Among these circumstances are the following:

[where] the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders directors, officers, or employees.

Notably, oppression in the context of an oppressed minority shareholder action does not require illegality or fraud by majority shareholders or directors. As the New Jersey Supreme Court observed in Brenner v. Berkowitz, 134 N.J. 488, 506 (1993), “[o]ppression has been defined as frustrating a shareholder’s reasonable expectations.”

In an oppressed shareholder action, the court must first determine the shareholders’ expectations of the corporation and whether these expectations are reasonable. The complaining shareholder then has the burden to demonstrate a nexus between the alleged oppressive conduct and his or her interest in the corporation. In determining that nexus, Brenner instructs that “[t]he court has discretion to determine which factors are pertinent to its evaluation of the quality and nature of the misconduct . . .”  A minority shareholder’s expectations must also be balanced against the corporation’s ability to exercise its judgment to run its business efficiently. If a court determines that a person is an oppressed minority shareholder, it may in its discretion impose equitable remedies, such as the appointment of a custodian or the sale of stock.

In the employment context, termination of a minority shareholder’s employment may constitute oppression under the Oppressed Minority Shareholder Statute because a person who acquires a minority share in a closely-held corporation often does so based on the assurance of employment in the business in a managerial position. As the New Jersey Supreme Court explained in Muellenberg v. Bikon Corp., 143 N.J. 168, 181(1996), these expectations often include not only “the security of long-term employment and the prospect of financial return in the form of salary,” but also having “a voice in the operation and management of the business and the formulation of its plans for future development.” Where these expectations are frustrated by majority shareholders or directors, a court may find that oppression has occurred.

Alleged Shareholder Oppression

Defendant Nancy Van Istendal worked as an accountant for Metro Commercial Management Service, Inc. (Metro), a closely-held real estate management company. In 2001, she became the chief financial officer and a 12 percent shareholder, subject to a Stock Purchase and Transfer Restriction Agreement. In 2002, the parties entered into a Shareholders Agreement (Agreement) providing for Metro to issue stock options to Van Istendal for the purchase of nine shares of common stock, paid through bonuses. The Agreement specifically stated that Van Istendal was an “employee-at-will” and could be terminated by Metro “at any time for any reason.”

In September 2015, defendant was terminated. Shortly thereafter, she brought suit seeking reinstatement of her employment with Metro and position as CFO. In her complaint, defendant alleged she was an “oppressed shareholder” under N.J.S.A. 14A:12-7(1)(c), based upon her reasonable expectation of continued employment, notwithstanding her at-will status. The trial court dismissed her complaint, without prejudice, finding that her termination did not constitute shareholder oppression because it was expressly authorized under the Agreement and, therefore, she could not have had any reasonable expectation of continued employment.  The lower court added that  defendant was “not without recourse since the [Agreement] provides a repurchase option for [her] stocks.”

Appellate Division’s Decision in Metro Commercial Management Services, Inc. v. Istendal

The Appellate Division affirmed the lower court ruling, concluding that Van Istendal could not have had a reasonable expectation of continued employment in light of the Agreement to which she was a party.

As the appeals court noted, the Agreement expressly stated that Von Istendal was an at-will employee who could be terminated “at any time for any reason.” The panel further explained:

The judge duly recognized that there is no statute, case law, or rule in New Jersey that addresses whether an employee’s at-will status is a relevant consideration in analyzing whether an employee has a reasonable expectation of continued employment. Here, the record contains ample evidence to support the judge’s conclusion that the parties entered into the Agreement and stipulated that defendant was an at-will employee.

The Appellate Division’s decision in Metro Commercial Management Services, Inc. v. Istendal is noteworthy because it specifically addresses the reasonable expectations of employment of at-will employees in closely-held companies. In this case, the express terms of the Agreement defeated any claims of shareholder oppression. Closely-held companies, therefore, should review the material terms in their operative documents and their employment contracts with shareholder members to address any ambiguities regarding the status of their shareholder members. 

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Charles H. Friedrich, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.