A case I recently litigated pitted a shareholder’s alleged “reasonable expectations” to continued employment, under a shareholder oppression statute, against the employment agreement he had signed allowing for termination “with or without cause.”  The result might surprise many business owners.

Under New Jersey law (as in many states), a claim for minority shareholder oppression has been described thus:

A finding of illegality or fraud is not required to establish oppression; rather, oppression is defined “as frustrating a shareholder’s reasonable expectations.” Brenner, supra, 134 N.J. at 506. To determine whether a minority shareholder’s reasonable expectations have been thwarted, “a court must determine initially the understanding of the parties in this regard. Armed with this information, the court can then decide whether the controlling shareholders have acted in a fashion that is contrary to this understanding . . . .” Exadaktilos, supra, 167 N.J. Super. at 155.

Goret v. H. Schultz & Sons, Inc. (N.J. Super. App. Div., 2013).  At the same time, however, “‘minority shareholders’ expectations must . . . be balanced against the corporation’s ability to exercise its business judgment and run its business efficiently.’”  Muellenberg v. Bikon Corp., 143 N.J. 168, 179 (1996) (citing Brenner, supra, 134 N.J. at 517).

An important evidentiary resource for evaluating the expectations of the parties with regard to their participation in corporate affairs are any written agreements into which they themselves entered.  Exadaktilos v. Cinnaminson Realty Co., Inc., 167 N.J.Super. 141, 400 A.2d 554 (N.J.Super.L., 1979).  In the case I litigated, the parties’ relationships were governed by an employment agreement that expressly allowed for termination without cause, and which then triggered a share buyout under specified terms.

Under such circumstances, numerous courts around the country have held that shareholders who entered into employment agreements that contemplate involuntary termination do not have a reasonable expectation of continued employment.  This is probably the outcome most business owners would anticipate.

For instance, in Blank v. Chelmsford OB/GYN, P.C., 649 N.E.2d 1102, 1105-06 (Mass. 1995), the Massachusetts Supreme Judicial Court affirmed the dismissal of a minority shareholder’s breach of fiduciary duty claim based on termination of employment where the shareholder-employee had executed an employment agreement providing that he could be terminated without cause upon six months’ notice and that his shares were to be repurchased upon termination of his employment for any reason whatsoever.

Similarly, in Ingle v. Glamore Motor Sales, Inc., 535 N.E.2d 1311, 1312-1313 (N.Y. 1989), the New York Court of Appeals affirmed the dismissal of Ingle’s shareholder oppression claim arising out of the termination of his employment where he had entered into a buy-sell agreement providing that his shares must be repurchased if he ceased to be an employee for any reason.  Because of that agreement, the majority refused to consider Ingle’s argument that his status as a minority shareholder protected him from arbitrary termination.

Other courts around the country have reached the same conclusion.  See, e.g., Grady v. Grady (R.I. Super, 2012) (“not all expectations of continued employment are reasonable. Written agreements entered into by shareholders are presumed to reflect their reasonable expectations”); Gunderson v. ALLIANCE OF COMPUTER PROF., 628 N.W.2d 173, 190 (Minn. App., 2001) (“shareholders who sign buyout agreements permitting termination of employment for any reason and obligating shareholders to sell their shares to the corporation upon termination of employment would not likely have a reasonable expectation of continuing employment”); Kortum v. Johnson, 755 N.W.2d 432, 2008 ND 154 (N.D., 2008) (“when the shareholders of a close corporation have entered a specific agreement concerning particular matters, that agreement is presumed to reflect the parties’ reasonable expectations concerning the matters dealt with in the agreement”).

An academic commentator has also argued for the same result: “A finding that a shareholder who signs an employment agreement providing for termination without cause does not have a reasonable expectation of continued employment makes sense.”  See Samuel E. Neschis, Reasonable Expectations of Shareholder-Employees in Closely Held Corporations: Towards a Standard of When Termination of Employment Constitutes Shareholder Oppression, 13 DePaul Bus. & Com. L.J. 301, 314-315 (2015).

Notwithstanding the weight of this authority, the Court handling our matter denied our motion to dismiss the terminated shareholder’s oppression claim.  In our motion, we had argued that the shareholder could not reasonably expect employment security given that he had entered into a written agreement allowing for his termination with or without cause.  But the Court found that, because of the “informality” of small corporations, a terminated shareholder could conceivably have a reasonable expectation of continuing employment notwithstanding the contrary terms of his employment agreement.

In so holding, the Court arguably erred, but it did so in a way that is characteristic of many judicial rulings: it favored additional process to fully develop the record prior to issuing a final ruling that risked reversal.  Courts often do not approach decisions using the sort of cost-benefit analysis that is so familiar in the business world.  Rather, if there is even a slim possibility that a litigant’s position may have merit, they will often allow the litigant to pursue a lawsuit that may impose wholly disproportionate costs.  That’s one reason why business people sometimes feel as if they have stepped through Alice’s looking glass when they find themselves in court.

Because such judicial approaches generate significant delay and expense, they can dramatically undermine the ability of the parties to actually enjoy the rights for which they expressly bargained.  Once a preliminary motion to dismiss is denied, the parties are launched, almost inevitably, into an expensive and time-consuming litigation.

The question thus becomes how to avoid that outcome.  The best opportunity to do so may arise when drafting shareholder and employment agreements in the first place.  In such documents, the prudent practice may well be to carefully consider articulating (in detail) an express waiver of shareholder oppression statutes to the extent they conflict with the explicit terms of the agreement.  Even then, of course, one can never be sure that courts will enforce contracts as written.  But drafting a clear waiver at the outset of the parties’ relationship may well be the best hope for businesses seeking to protect themselves.  Otherwise, they may find themselves ensnared in protracted litigation after exercising termination rights they had mistakenly thought were authorized by the parties’ agreements.