By Rick Shulman, Member of the Firm
Assume that through hard work, good fortune or both, a company employee is invited to become a minority (less than 50% ownership) shareholder in her company. She will probably feel elated and secure, believing that her ownership interest will be sufficient to ensure that, assuming an absence of cause, she will continue to be employed by the company for as long as she would want. A recent decision from the Appellate Division of the New Jersey Superior Court, Metro Commercial Management Services, Inc. and Daniel Hughes v. Nancy Van Istendal[1], makes it clear, however, that her expectations were not justified. Her express acknowledgement of her employment-at-will status was insufficient to save her job, even though she was a company shareholder.
Defendant Van Istendal joined plaintiff Metro as an accounting employee in 1993. In 2001, she became the owner of 12% of the outstanding shares of the company in conjunction with her promotion to the position of Chief Financial Officer (CFO). A year later, she signed a Shareholder’s Agreement that contained her stipulation that she was an employee-at-will, and could be terminated by Metro “at any time for any reason.” Upon termination of employment, she would be deemed to have made an offer to resell her shares to the majority shareholder for fair market value, as determined by three appraisers.
In 2015, defendant was terminated. She brought a lawsuit seeking to compel her rehiring as Metro’s CFO. Her complaint was dismissed without prejudice, and Metro brought a second action to compel Van Istendal to sell her shares in accordance with the terms of the Shareholder’s Agreement. She filed a counterclaim, again seeking her reinstatement, and asserting a variety of claims for damages based upon New Jersey’s minority shareholder’s oppression statute.[2] This statute permits a shareholder in a company having less than 25 shareholders to bring an action against company directors or others who have acted fraudulently, illegally, abusively or heavy-handedly in terms of management with respect to their treatment of the minority shareholder. Upon proof of such oppression, a court has wide authority to compel a wide variety of remedies.[3] The trial court granted Metro’s motion for summary judgment dismissing Van Istendal’s claims, from which order the former employee appealed.
On appeal, the Appellate Division began its analysis with a review of the minority oppression statute, and concluded that it had limited applicability in the presented situation, finding that a number of the company decisions questioned by defendant did not arise to the necessary level of abuse. It then recognized that her expectation of continued employment by the company could constitute a relevant factor in determining whether there was company misconduct, but concluded that the employee’s expectation was not reasonable, given that that the agreement she had signed many years earlier unambiguously provided for her acknowledgment of at-will employment, and that she could “be terminated by the Corporation at any time for any reason.” Thus, despite what Van Instendal may have believed when she became a company shareholder, or during the succeeding years, the employer had the right both to cause her employment to be terminated, and to redeem her shares under the mechanism set forth in the parties’ agreement.
The significance of this decision is apparent. Simply because an individual rises to a level of equity ownership within the organization he or she works for does not guarantee continued employment if the employee has agreed that the employment may be terminated for any reason. Accordingly, in such a situation, a shareholding employee with sufficient leverage to effectively negotiate the deal between the parties should, at a minimum, make sure that his or her employment may only be terminated for “cause,” however that term shall be defined. Alternatively, if employment is terminable at will, the employee might attempt, at the outset, to negotiate for an “enhanced” purchase price for the forced sale of his or her shares, in order that the equity premium, in whole or in part, compensates him or her for the loss of assumed continuing employment. The moral of this story is that even an ownership interest, standing alone, does not guaranty that one’s employment status cannot be adversely impacted.
Rick Shulman
Contact Rick at rshulman@pricemeese.com should you have questions about this article.
[1] Docket No. A-0275-17T4 (November 19, 2018).
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[2] N.J.S.A. 14A:12-7(1)(c)
[3] The remedies available to a minority shareholder include appointment of one or more provisional directors or a custodian to manage the company’s business, the court’s ability to compel the division of the company, and/or the entry of an order compelling the forced sale of shares by one party to another.
