Can the Minority Force the Majority to Sell?
by: David C. Roberts of Norris McLaughlin P.A.  -  Business Divorce in NJ
Thursday, October 26, 2023

I have written many times about the most common remedy in business divorce litigation: a buyout of the oppressed minority shareholder by the majority. But what if the minority shareholder who is being mistreated wants to be the buyer? Is such a goal realistic?

One mistake business owners make in determining the strength of their argument in such litigation is focusing too much on what they “want.” When it comes to a buyout remedy, what one “wants” will hardly ever be the determinative factor. If you and your partner are getting what is casually referred to as a “business divorce,” the company is sometimes regarded as the “child.” And the court is going to look to the best interest of the “child” in awarding custody, at least in New Jersey. In other words, the person who is most likely to keep the company in business, and its employees employed, will often be awarded the company.

Usually that means the majority shareholders will maintain control, because most often they are the ones who have been keeping the company in business, and judges usually prefer not to impose their business judgment on a viable company. While this is nowhere codified in law,  the realistic presumption is that the majority will be the buyer. But a case may sometimes be made that it is in the company’s best interest for the minority to be the buyer, not the seller.

There are cases where the minority shareholder is already managing the company, and the majority shareholders are considered “absentee owners.” Or there may be a case where the minority shareholder used to run the company but no longer does. If performance has slipped during the reign of new management, an argument may be made that the company’s best interest lies with the resurrection of the old management. Sometimes the conduct of current management is simply so egregious that it is difficult to fathom the company staying in the hands of the wrongdoer. For example, if the shareholder running the company is caught diverting to himself the monies that were supposed to be paid out as employee bonuses, it may be difficult for that owner to argue convincingly that his stewardship is critical to keeping those employees off the unemployment line. Realistically, though, a minority shareholder with no experience running the company will have a hard time convincing the court that they are the better alternative, no matter what the majority may have done.

 

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