Two courts recently held that a New Jersey statute protecting minority shareholders in closely held corporations can be applied to foreign corporations that are sued in New Jersey. In Conway v. DialAmerica Marketing, Inc. (Chancery Div., Bergen Co., Sept. 30, 2008) two shareholders filed a minority shareholder oppression claim under N.J.S.A. 14A:12-7 against DialAmerica and its controlling shareholder and Chief Executive Officer. The plaintiffs alleged breach of fiduciary duty, fraud and corporate waste arising from a plan to deprive them of their share of profit distributions by payment of excessive compensation and expenses to defendant, and other directors and officers.

Although DialAmerica is a Delaware corporation, its principal place of business is in Mahwah, N.J., and its controlling shareholder and the members of its entire board of directors are New Jersey residents. Since 1997, all of the board meetings have taken place in New Jersey and the company maintains virtually all of its critical books and records at its New Jersey headquarters.

Defendants moved to dismiss the minority shareholder oppression claim on the ground that the oppression statute only applied to corporations incorporated in New Jersey. The trial court had to decide whether to apply the law of New Jersey or Delaware. While recognizing that the law of the state of incorporation is presumed to govern issues involving the internal affairs of a foreign company, the court resolved the choice of law question in Conway using a flexible governmental-interest analysis to determine which state had the greater interest in resolving the lawsuit.

As Judge Peter Doyne explained, the court’s first step was to determine whether a conflict existed between the two states’ laws. If no conflict existed, it did not matter which state’s law applies. If a conflict existed, the court must then determine which state had the “most significant relationship to the occurrence and the parties.” To resolve that issue, the court considered a number of different factors, including the relevant policies of each state, the need to protect the parties’ justified expectations, the policies underlying the particular field of law, the need for uniformity of results and the ease in determining and applying the appropriate state’s law. In Conway, the court found ample precedent for applying New Jersey corporate law to cases involving the internal affairs of foreign corporations.

Next, the court applied the choice-of-law analysis to determine whether New Jersey or Delaware law should govern the dispute. Analyzing the seven factors described above, Judge Doyne determined that New Jersey had the most significant relationship to the dispute and the parties. In contrast to the overwhelming relationship New Jersey had with the parties, the company and the issues, DialAmerica’s only connection to Delaware was that it was the state of its incorporation. The company maintained no offices or any other presence there.

Finally, the court cited New Jersey’s history of protecting minority shareholder rights to support its conclusion that relevant polices of the forum state would best be served by applying New Jersey law.

In his decision in Conway, Judge Doyne relied heavily on the Appellate Division’s recent decision in Krzastek v. Global Resource Industrial and Power, Inc. (Sept. 11, 2008). Krzastek affirmed a trial court’s ruling that a minority shareholder was entitled to a buyout of his shares in a closely held Massachusetts corporation under New Jersey’s Minority Shareholder Oppression Act, despite the lack of any similar statutory authority under Massachusetts law. Plaintiff, a New Jersey resident and an entrepreneur with experience in building power plants, was a minority shareholder in Global Resource, a start-up Massachusetts corporation. Global’s principal place of business was in Woodcliff Lakes, N.J. Shortly after joining Global, plaintiff was instrumental in obtaining a lucrative contract to construct a power plant in New York.

After disagreements arose with the majority shareholders, plaintiff was terminated. He filed a lawsuit in New Jersey asserting his entitlement to a buyout under the New Jersey Minority Shareholder Oppression Act. After a bench trial, the court found in plaintiff’s favor and awarded damages. Defendants appealed, arguing that the trial court should have applied Massachusetts law to the minority shareholder oppression claim.

In an unpublished per curiam opinion, the Appellate Division affirmed the trial court’s ruling that plaintiff was entitled to a buyout under New Jersey law. The court noted that there was no express statutory buyout remedy and no clear judicial authority for a buyout under Massachusetts law. Nevertheless, the court concluded that Massachusetts law and New Jersey law were similarly protective of minority shareholders, even though “New Jersey’s statutory remedies for an oppressed minority shareholder provide broader remedies.” The Appellate Division also noted that, even if there were a conflict between Massachusetts and New Jersey law, New Jersey had the greater interest in the lawsuit because Global maintained its headquarters and conducted its business in New Jersey.

Conway and Krzastek demonstrate that, merely because a closely held corporation is incorporated in another state does not insulate it from New Jersey’s minority oppression statute. When a foreign corporation has significant contacts with New Jersey, the courts can disregard the law of the state of incorporation in favor of New Jersey law. Foreign companies that conduct a substantial part of their business in New Jersey must evaluate whether they run the risk of minority oppression claims in the event they take actions that disadvantage minority shareholders.