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Shareholder Oppression Resulting From Terminating an Employee/Shareholder

I have previously written about one of the most common forms of business partner dispute – the case of an employee/shareholder who is fired as an employee.  Of course, one’s shares cannot be taken away, but without a job, the shares may seems useless.

I previously discussed the fact that, when a shareholder can successfully show that he or she had a reasonable expectation of continued future employment, termination can constitute what is called “shareholder oppression” and may entitle a shareholder to the remedy of a forced buy out of his or her shares.  However, lately I have had clients come in seeking advise about suing their business partner who do not fit neatly into such a category.  For one reason or another, they probably could not demonstrate that they had a “reasonable expectation” of lifetime employment.

When a shareholder is one of the company’s founding members, it may be possible to argue that his “reasonable expectation” was that share ownership would be tied to employment, and vice-versa.  But, when someone joins a company as an employee/shareholder that was formed by others long ago, it is a much harder argument to make.

Fortunately, if you find yourself in a dispute with your business partner, leading to your termination, that does not necessarily mean you are entirely out of luck.  While the termination of employment itself may not be considered oppression under New Jersey law, it is likely that the majority shareholders will engage in additional acts that may constitute oppression.

If a significant (but still a minority) shareholder is unfairly fired, chances are quite good that other acts of unfairness will follow.  For example, shareholder distributions may cease, financial records may not be shared, and critical information about the company may be withheld.  Additionally, majority shareholders often just can’t help themselves, and wind up taking the terminated employee’s salary and dividing it among themselves.  If it can be shown that this was improper, and resulted in excess compensation to the majority (rather than a dividend that must, by law, be paid pro rata to all shareholders), oppression may still be shown and the majority could be compelled to buy out your shares.

Therefore, when a dispute with your business partner arises, and you are terminated as an employee, make sure you consult with an attorney who is familiar with all aspects of shareholder oppression under New Jersey law.  Just because one avenue of relief is not available to you, does not mean that there are not others that are.