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Amendments to Certificate Of Incorporation May Constitute Minority Oppression

By Scott I. Unger

Amendments to a corporation's Certificate of Incorporation may be used either alone or with other 'squeeze out' techniques to oppress, eliminate or alter the minority shareholder's rights.  For example, the New Jersey Business Corporation Act provides that a corporation may amend its Certificate of Incorporation to:   

• 'exchange, classify, reclassify or cancel all or any party of its shares, whether issued or unissued,' N.J.S.A. 14A:9-1(f)
• 'create new classes or series of shares having the rights and preferences superior or inferior to, or equal with, the shares of any class or series then authorized, whether issued or unissued'; N.J.S.A. 14A:9-1(j);
• 'cancel or otherwise affect the right of the holders of any shares of any class or series to receive dividends which have accrued but have not been declared'; N.J.S.A. 14A:9-1(k); or
• 'limit, deny or grant to shareholders of any class the preemptive right to acquire additional or treasury shares of the corporation whether then or thereafter authorized.'  N.J.S.A. 14A:9-1(p).    

Amendments to the Certificate of Incorporation may result in major negative changes to the way the corporation is governed. For example, the majority may seek an amendment which eliminates minority shareholders by making their stock redeemable and then seeking to redeem it.
   

Thankfully for minority shareholders, the New Jersey Business Corporation Act on its face offers some protections.  It requires that any amendment to the Certificate of Incorporation must be approved by the class of shareholders who will be affected by the change sought. N.J.S.A. 14A:9-2; N.J.S.A. 14A:9-3.  Notwithstanding the same, a minority shareholder could still be negatively  affected by an amendment to the Certificate of Incorporation if the majority controls a large enough percentage of the class.
 

Courts will sometimes block an amendment to the Certificate of Incorporation if they find that the amendment is unfair or is being used as a tool to act oppressively or illegally towards a minority shareholder. For example, in Whetsone v. Hossfeld Mfg. Co., 457 N.E.2d 380 (Minn. 1990), the Minnesota Supreme Court held that the majority shareholders vote to amend the Certificate of Incorporation whereby eliminating the minority's veto rights allowed the minority to be brought out for 'fair value.'

Full post as published by New Jersey Law Blog on February 01, 2011 (boomark / email).