As I have said many times in this blog, when minority shareholder oppression occurs, the most likely remedy is a buyout. In other words, courts in New Jersey have the power to compel the majority shareholder to pay “fair value” to an oppressed minority shareholder so the victim of wrongdoing is not forced to remain captive as a shareholder in a company that is treating him improperly. Many clients think the issues can become circular, since the oppression often decreases the value of their shares. However, courts are usually unwilling to impose such an inequity on a minority shareholder who is being treated unfairly, and wind up taking such action into account.
For example, suppose a majority shareholder has been paying his family members hefty salaries for no-show jobs. If such largesse cost the company $500,000 over the past three years, that would have a significant impact on value. A true, arms-length, third party buyer would assume that $500,000 could go right to the bottom line, because after a purchase, those no-show jobs could be eliminated. Thus, the future impact of such conduct could be taken care of by “normalizing” expenses and eliminating these salaries in the valuation process. But what about the past three years? How is the $500,000 accounted for?
The law allows an oppressed minority shareholder potentially to be awarded damages so that he or she is essentially made whole. In this instance, if the minority shareholder owned 1/3 of the company, then 1/3 of that $500,000 essentially “belonged” to the minority shareholder. Thus, it could be argued that $165,000 in damages would make the minority shareholder whole.
However, there is another way to assess damages. The $500,000 paid to the majority shareholder’s family could essentially be viewed by the court as a $500,000 distribution to the majority shareholder. Thus, in order to be made whole, the 1/3 shareholder could argue that it would take $250,000 in damages to level the playing field (if the 2/3 owner gets $500,000, the 1/3 owner should get $250,000).
There is no case in New Jersey ruling exactly how damages should be assessed in such a situation. But minority shareholders who assume that the majority’s wrongdoing has destroyed all value, thus making a lawsuit a waste of time, may be selling themselves short. Legal counsel, potentially with the input of a valuation expert and/or a forensic accountant, may be able to put together an argument for more damages than you thought the company was even worth.
You wouldn’t diagnose your own illness or injury; you would visit a health care professional. Don’t treat your legal issues any differently. Your case, and your argument for damages, may be stronger than you think.