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Minority Oppression: Shareholders' Agreement Do Not Govern If Minority Oppression

By Scott I. Unger

Sometimes defendants who are sued for minority oppression will try to utilize a valuation formula contained in a shareholder's agreement instead of 'fair value.'  That is because shareholders' agreements will  utilize a formula such as 'book value' which more favorable to the oppressor than the statutory required valuation methodology–   'fair value.'

It is well settled in New Jersey that the formula or methodology set forth in a shareholder's agreement does not apply to fixing the price of the minority shareholder's stock interest where the sale being ordered because of minority oppression.  Hughes v. Sego Int'l. Ltd., 192 N.J. Super. 60, 69-70 (App. Div. 1983).  In Hughes, the Appellate Division revised a Trial Judge who utilized a formula contained in a shareholder's agreement without first determining the 'fair value' of the stock. Hughes, 192 N.J. Super. at 69-70; see, Hamilton, Johnson v. Johnson, 256 N.J. Super. 657, 672 (App. Div.), certif. den. 130 N.J. 595 (1992); see also, Torres v. Schripps, 342 N.J. Super. 419, 433-435 (App. Div. 2001). That is because N.J.S.A. 14A:12-7(8)(a) requires that the purchase price be 'fair value' of the shares.  Hamilton, 256 N.J. Super. at 672.  Hence, if the Court finds minority oppression it will not apply the valuation formula contained in the shareholder's agreement unless that formula resembles 'fair value.'

Full post as published by New Jersey Law Blog on December 06, 2010 (boomark / email).