At-Will Employees/Minority Shareholders May Not Have Reasonable Expectation of Continued Employment With Corporation

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

The New Jersey Appellate Division recently held, in 
Metro Commercial Management Services, Inc. v. Istendal, that a minority shareholder in a corporation, who was also an at-will employee of that corporation, could not argue that her termination as an employee was an act of minority shareholder oppression. The key to the court’s holding was that the shareholder agreement provided that shareholders were at-will employees. While this makes the decision distinguishable from the somewhat more common situation where the shareholder agreement is silent on this issue, Metro Commercial Management is still an important decision, about which counsel representing both corporations and shareholders should be aware.

In Metro Commercial Management, plaintiffs were a corporation and its president. Defendant was a former shareholder in the corporation. Defendant began as the corporation’s accountant, but later became a 12% shareholder in the corporation, and the corporation’s CFO. The shareholders agreement contained a stipulation that all shareholders were employees-at-will and that they could be terminated by the corporation “at any time for any reason.” The shareholders agreement also provided that, upon termination, a shareholder would be “deemed to have made an offer to sell the shares to [the president/majority shareholder], the non-selling shareholder and/or [the corporation]” pursuant to an agreed upon formula.

In September 2015, defendant was terminated. Three months later, she sued the corporation, alleging that she was an oppressed minority shareholder. The court dismissed her complaint, holding that her termination was authorized under the shareholders agreement, therefore she did not have a reasonable expectation of continued employment and her firing did not constitute shareholder oppression. In April 2016, the parties’ roles were reversed, as plaintiffs sued defendant to compel her to sell her shares back to the corporation. Defendant filed a counterclaim again alleging shareholder oppression.

After discovery, plaintiffs moved for summary judgment on defendant’s counterclaim. The trial court granted the motion and defendant appealed. 

The Appellate Division affirmed the trial court’s decision. It observed that minority shareholder oppression includes illegal or fraudulent conduct, but also encompasses conduct that might not rise to the level of illegality or fraud. If a majority shareholder’s actions frustrate a shareholder’s reasonable expectations, then those actions will be deemed oppressive. But the shareholder has the burden of proving that its expectations were reasonable and that there is a nexus between the oppressive conduct and the shareholder’s interest in the corporation.  

Minority shareholders who are also employed by a corporation often allege that they reasonably expected that their employment would continue for as long as they were shareholders. As the Appellate Division noted, “a person who acquires a minority share in a closely-held corporation often does so ‘but for the assurance of employment in the business in a managerial position.'” Shareholders who do this have a reasonable expectation that they will enjoy “the security of long-term employment and the prospect of financial return in the form of salary,” and will also have “a voice in the operation and management of the business and the formulation of its plans for future development.” 

But, in Metro Commercial Management, the Appellate Division noted that there was no “statute, case law or rule in New Jersey that addresses whether an employee’s at-will status is a relevant consideration in analyzing whether an employee has a reasonable expectation of continued employment.” The Appellate Division held that it was relevant, at least when agreed upon in a shareholder agreement.

The Appellate Division agreed with the trial court that the shareholder agreement controlled. Because it provided that defendant was an at-will employee who could be fired at any time for any cause, defendant could not argue that she had a reasonable expectation of continued employment. The Appellate Division further noted that defendant was not without recourse in connection with her termination because the agreement provided for the repurchase of her stock upon termination. 

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