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How An Employee/Shareholder Can Protect Oneself Against Oppression

Because termination of one’s employment does not necessarily equate to shareholder oppression under New Jersey law, as seen in my last post, it is often a good idea to take proactive measures to inoculate yourself against a termination that leaves you in the company as a shareholder, but not as an employee.  This is especially critical if you have invested your own money, since an adverse result in a shareholder oppression litigation would leave your shares held hostage by the majority shareholders, essentially allowing the majority to use your capital in a manner over which you have little or no control.

A new shareholder/employee can ask that the shareholder agreement (or operating agreement in a LLC) be amended to reflect the fact that, if employment ceases, a buyout will result.  At first blush, one may ask why the majority shareholder(s) would make such a concession.  However, when things are going well and everyone is still on the same page, there may be an opportunity to make just such an amendment.

To begin with, when one is hired into a company and given an ownership stake, that usually means that person is bringing something valuable to the table.  Your bargaining power may never be as strong as it is in the beginning of the relationship.  From the majority shareholder’s view, he may have no desire to have another shareholder in the company if that shareholder does not pan out as an employee.  What often happens is that neither party even thinks about what happens if the relationship does not work out, because everyone just assumes future success.  Then, when things go south, everything depends upon the “facts on the ground” at that precise point in time.  If the company’s value has skyrocketed, a buyout will be costly, so it is easier, cheaper, and more convenient simply to keep the minority shareholder’s capital in the business, even if he was fired as an employee.  This is the point when the minority shareholder wishes he had insisted on a buyout-upon-termination provision, and is now left seeking legal advice to see if he can sue for shareholder oppression.

The New Jersey shareholder oppression statute is a powerful tool that gives significant rights to minority shareholders and LLC members.  However, it is significantly easier – and less costly – to simply enforce a clear and unambiguous contractual right.  In other words, don’t let the protections afforded in the shareholder oppression statute lull you into a false sense of security and cause you to be any less vigilant in protecting your rights at the outset.