Many clients ask at the start of a business divorce lawsuit, “Is it fatal to a shareholder oppression claim if I was doing some of the same things that the majority owners are doing that I am now complaining about?” As often happens when it comes to a nuanced legal analysis under New Jersey law, the answer is, “It depends.”
For example, suppose you are a one-third shareholder, and the other one-third shareholders collectively run and control the business operations, especially the finances. Over the years, they have treated the company as their personal piggy bank, using it to reimburse them for such things as family vacations, family dinners, and personal golf expenses (not with clients). Putting aside the tax implications of having the business deduct personal expenses as business expenses, financial improprieties such as these often form the basis of a shareholder oppression action. But what if you also got reimbursed by the company for personal expenses, or simply used the company credit card for them, having the company pay directly?
Majority shareholders will undoubtedly argue that such conduct on the minority shareholder’s part constitutes “acquiescence” to the very conduct claimed to be oppressive, meaning that it cannot form the basis of an oppression claim. But the fact that you may have been doing many of the same things does not necessarily end the analysis. What if you had been complaining about such expenses all along, and received the same benefit essentially “under protest,” merely to avoid getting shortchanged? In that case, were you really an active participant in the now-complained-of conduct?
What if your business partners received multiples of what you received in such improper benefits? For example, what if the company paid for your weekend in Cape May, but only paid for your business partner’s week in Paris? What if you knew part of what was being expensed by the majority shareholders, but were unaware of the extent of the benefits being received?
Had you not participated in receiving improper reimbursements, the majority shareholders would likely have been doing it anyway, thus placing the company in jeopardy of tax problems. So, arguably, oppressive conduct would have been occurring even had you not “acquiesced.” Is this still oppression?
You will note that these last few paragraphs phrased the issues as questions rather than answers. That is because New Jersey courts have not yet ruled on such issues in a way that would give definitive guidance to shareholders in closely held businesses. The best thing to do if you face a similar situation is retain an attorney experienced in assessing the totality of the circumstances. Together, you can determine whether it is worth filing shareholder dispute litigation.