Shareholder disputes often arise because of a lack of information being disclosed by the majority to the minority shareholders. In New Jersey, there are limitations as to what financial documents must be shared with minority shareholders. However, most of the time business owners believe that their business partners should share more information than the bare minimum dictated by law.
A common tactic employed by majority shareholders who do not want to disclose any more financial information than required, yet want to stave off a minority shareholder lawsuit, is to provide a “slow drip” of information. For example, when five years of tax returns, financial statements, and general ledgers are requested, the majority shareholders will start by providing two years of financial statements and nothing else. Then, they will supplement with last year’s tax return. Then two years’ worth of returns. Then, after much back-and-forth and several weeks (or even months), they will give you everything you asked for, except, of course, for the general ledger, which is the main thing you really wanted.
The purpose of this strategy is to create the appearance of providing financial information. The majority shareholders’ lawyer will be able to point to four or five letters where they gave you information, and argue to the court (when the inevitable shareholder dispute litigation arises) that you are never satisfied, and that they have been extremely cooperative. Then, they will fall back on the argument that they have already given you more than you are legally entitled to under the law, anyway.
Do not fall for it. When I represent majority shareholders, I advise them to go above-and-beyond what the statute requires, and you should settle for nothing less. After all, if shareholder dispute litigation is filed, the minority shareholder will be entitled to every financial document under the sun as part of the discovery process. Better to provide the documents the easy way than the hard way.
If you want an explanation as to why things are occurring a certain way, or why a certain expense keeps recurring, you should be entitled to know, even if the statute does not specifically say so. The relationship between you and your business partner should be an “open book,” based upon trust and cooperation. If you suddenly want to see documents that you never historically looked at, chances are there is already at least the start of a schism in the relationship. A refusal to provide even the most basic financial information, or to answer certain fundamental questions about business operations, can only make that schism worse.
If you are being completely shut out from financial information and seem to have hit a wall, contact an experienced shareholder dispute litigation attorney. Chances are, he or she will be able to get you the documents you want to see – either the easy way or the hard way.