In Goret v. H. Schultz & Sons, Inc., Docket No. A-4281-10T1, Supreme Court of New Jersey, Appellate Division, September 10, 2013, a group of minority shareholders [and third-generation owners] of a closely-held company H. Schultz & Sons, Inc. (the "Company"), sued their cousins and siblings who were officers and directors of the Company, alleging breach of fiduciary duty to the Company and violations of New Jersey's minority shareholder oppression statute, N.J.S.A. 14A:12-7(1)(c).

For many years, the Company distributed annual profits to all shareholders in proportion to their ownership interests. The minority shareholders were never involved in the operation of the Company and were never consulted about business decisions. The Company did not hold regular shareholders meetings. In 2004, after several years of declining profits, the minority shareholders met with the Company's president and demanded redemption of their stock or liquidation of the Company. The president rejected these requests and litigation ensued.

The trial court ruled that the minority shareholders had not proven that they were "oppressed" as defined in N.J.S.A. 14A:12-7. While a finding of illegality or fraud is not needed to establish oppression, the statute requires that minority shareholders must prove a "frustration" of their reasonable expectations.

Although less profitable than in the past, the Company was a viable going concern with a sound financial position and limited debt. The court ruled that the rejection of the buyout offer from the minority shareholders, which would have required outside financing, was a permissible exercise of business judgment that would not be disturbed. In addition, although the minority shareholders had a reasonable expectation that the Company would be profitable each year, there was no expectation that the officers would forgo reasonable compensation during less profitable periods.

A specific incident in which the Company's president rejected an offer to sell the Company's warehouse for an amount in excess of $7 million without consulting any other shareholders was determined to be a breach of fiduciary duty. The remedy for this breach was a requirement to provide the minority shareholders with information and notice regarding future Company acquisitions and major business decisions. Although the trial court ruled that this requirement would be in place until the Company started paying regular distributions again, the Appellate Court ruled that the disclosure obligation should be ongoing.

The trial court's ruling, and affirmation by the Appellate Court, confirms that claims under the New Jersey oppressed shareholders statute are fact sensitive. The critical analysis is the determination of the shareholders' reasonable expectations. Often, the most significant proof of such expectations is the parties' prior conduct.