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Misunderstandings Among Owners Can Lead To Business Divorce Litigation

Posted on October 16th, 2017 | Author: David C. Roberts, Esq.

One of the most common reasons for a minority shareholder to file “business divorce litigation” is because that minority owner feels left out, pushed out, squeezed out – simply not part of the process in any significant way.  Quite often, the minority owner is pushed out for a reason that is not entirely unjustified.  But just as often, these feelings are the result of a misunderstanding that has spiraled out of control.

For example, suppose there are three equal owners of a New Jersey corporation or LLC.  All three of them work at the company, but in different areas.  One runs sales, another finance, and the third is the office manager.  It may very well be that those running sales and finance do, in effect, have more critical roles in the company.  After all, for some companies, it may cost less to hire an unrelated third party to manage the office than it would to fill the other two roles with outsiders.  So, it is not necessarily unfair for the three salaries to be unequal.  (Of course, in any given company, running the office may be the most vital role, so no one reading this should be offended.)

In one case, the minority owner who ran the office simply could not accept the fact that the three shareholders did not have equal salaries, and started causing problems within the company.  Not surprisingly, the two majority owners did not react well, and started leaving the third owner out of certain decisions, inevitably leading to the self-fulfilling prophesy by the office manager-owner that he was being “squeezed out.”

What should have happened is that the owners should have sat down and discussed matters honestly and openly, and perhaps sought some legal advice as to how to handle the situation.  As you no doubt have surmised, that is not what happened.  Instead, the majority owners overplayed their hand and started paying themselves way more than was justified, leaving themselves wide open to the argument that they were, in fact, oppressing the minority shareholder. Expensive shareholder divorce litigation ensued, and the minority owner was able to be bought out.  But that wasn’t what he really wanted.  All he really wanted was respect, and to be treated fairly.  The worst part is, he was being treated fairly in the beginning, but the resulting misunderstanding, and subsequent reactions that worsened that misunderstanding, led to the end of the business relationship, and helped several law firms pay their bills.

If you have any questions about this post or any other related matters, please contact me at dcroberts@nmmlaw.com.