One of the most common allegations of shareholder persecution in New Jersey, which often leads to business divorce lawsuits, is the failure to pay dividends to shareholders. Obviously, there can be many reasons for not paying distributions, including, simply, not being able to do so. But when the company has the funds available but always finds a reason not to pay the distributions, it may be seen as unfair or oppressive.
Often, dividends are not made because the shareholders who run the company have set their own compensation unfairly high so that there is no money left for dividends. If their compensation is significantly above the market price, the court can decide that the excess compensation is a deliberate way to avoid making any payment to minority shareholders. The minority owner’s capital is effectively held hostage and has no value unless the business is sold, which is fundamentally unfair.
Even when this happens, the circumstances of a particular case matter. For example, in one of the experiments that just ended (successfully for my client), my clients did just that – they paid themselves high salaries and bonuses and did not distribute to minority shareholders. The circumstances, however, were extenuating, because share ownership between the brothers involved was part of an agreement within the family. Son No. 1 received a large amount of money from their parents, and son No. 2 received work. There was an unwritten – but very real – agreement that all the money from the company would go to Son No. 2, regardless of the fact that Son No. 1 was a 10 percent owner, because another significant amount of money was paid to Son No. 1. As a result, We were able to defend against the claim of subjugation for our failure to distribute shareholders.
It is highly unlikely, of course, that anyone reading this article would have the same or similar circumstances in their case. But the point is, the facts matter. Had the attorney representing the losing brother in the above scenario had more experience with these types of cases, he could have avoided wasting time and money filing an unsuccessful litigation. In the view of the majority of shareholders, seeking legal advice in advance about whether their actions (failure to make distributions or otherwise) could lead to shareholder persecution lawsuits may save untold legal fees and avoid a court order to purchase a minority shareholder. In more than one case, clients have been advised to make at least some distribution to shareholders to avoid litigation, according to the theory that some payment would appear better to the court than no payment.
Whether you are the majority shareholder or the minority owner of 10 percent, don’t take any action until you’ve consulted with an attorney experienced in divorce litigation.
© 2022 Norris McLaughlin PA, All rights reservedNational Law Review, Volume XII, No. 18