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Squeeze-Out Technique: Withholding Information

Many times a majority shareholder seeking to squeeze-out a minority shareholder will deliberately withhold information relating to the closely held corporation. Withholding information is usually coupled with another form of oppression. The reason for the same is by leaving the minority shareholder in the dark about the status of the corporations and the actions of its officers and directors the minority shareholder will be unaware of the other forms of oppression. For example, a majority shareholder may award herself an excessive salary without disclosing that it or the underlying financial data which would reveal the excessive nature of the salary.  By keeping the minority shareholder in the dark she will more often than not be in a position to complaint about it.
 

Unfortunately, unlike publicly traded companies which have disclosure and reporting requirements pursuant to federal securities laws, shareholders in a closely held corporation do not have such broad disclosure requirements. Nevertheless, state courts have recognized that a person who owns shares in a closely held company is a part owner of that company who is entitled for participation of their interest, to information about the company.  The problem is Courts differ on what shareholders are entitled to receive under their state's laws and what obligations corporate managers have affirmatively to supply information.
 

The New Jersey legislature granted shareholders a statutory right to inspect the corporation's books and financial records. N.J.S.A. 14A:5-28.  It is well settled law in New Jersey that a shareholder has the right to inspect the books and records of the corporation if 'he is acting in good faith and for some purpose germane to his status or interest as a shareholder.'  Pilat v. Broach Systems, 108 N.J. Super. 88, 94 (Law Div. 1969).   Hence, unless bad faith is shown, New Jersey Courts will order the production of financial records.

Full post as published by New Jersey Law Blog on July 21, 2009 (boomark / email).