Shareholder Oppression is Frustration of Minority Shareholder’s Reasonable Expectations

• This seminal case by the New Jersey Supreme Court identifies minority oppression as the frustration of a shareholder’s reasonable expectations.
  

• A court may order the compelled purchase of a shareholder’s interest as a remedy for shareholder oppression when it is the only practical alternative to judicial dissolution.

• The minority shareholder seeking to force the purchase of shares must show a connection between the oppressive conduct of the majority and the minority’s interest as a shareholder.

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Brenner v. Berkowitz, 134 NJ 488 (1993)

Statutes: N.J.S.A. 14A:12-7(1)(c)

Facts: Partners Resnick and Berkowitz formed successful company. Members of both families were employed in the business. When Resnick died, his shares were distributed to family members, including his daughter, the plaintiff Brenner. Relations between the two family members soured and Brenner’s son was fired. Brenner alleged illegal and oppressive conduct.

Trial court found that Brenner’s expectation was solely as director and investor, not in management of business affairs. Trial court found that some conduct of majority was illegal, but that it was not directed to plaintiff. The oppression was insufficient to trigger the statute.

The Appellate Division reversed and remanded with instructions to entertain a buyout motion from either party. The Supreme Court reversed and remanded with instructions to reinstate the plaintiff as director and to enjoin any further illegal conduct.

• Held: Court may compel corporation to purchase of shares in its equitable powers in exceptional circumstances as an alternative to dissolution, even though statute provides only for voluntary purchases (statute permits court to order sales, not purchases).  Because the involuntary purchase of stock, it must be reserved primarily for those instance in which the only practical alternative to an involuntary buy-out would be dissolution.

• Held: Court must balance dissolution against the loss to society if entity is liquidated including shareholders loss of goodwill because the corporation is not sold as a going concern, the loss of jobs by employees, the loss of income to suppliers.

• Held: Minority shareholder may be estopped to allege oppression when aware of misconduct and failed to act or participated in the misconduct.

• Held: Shareholder oppression is frustration of the minority shareholder’s reasonable expectations.  Illegal and fraudulent conduct may not quality as oppression when not directed at the minority shareholder.