Protection Against Minority Oppression in a New Jersey Partnership

Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Partnership Attorney

partnership_agreementNew Jersey has a rich tradition of protecting the rights of partners when abusive practices or conduct is demonstrated. It keeps the playing field even and causes partners to think twice before initiating an ill thought plan of bad faith or misconduct towards their co-partners. Even still, many minority partners of New Jersey partnerships suffer from what is known as “minority partner oppression”. While not specifically defined under NJ law, this term means action taken by a majority partner(s) that frustrates a minority partner’s reasonable expectations in the management, participation, or general affairs of the business.

Your Rights As A Minority Partners Ownership

Common Reasons for Minority Partner Lawsuits

Partnerships often begin with friendly, profitable relationships between the partners. Unfortunately this positive relationship does not always last. The businesses of the partnership may fail to meet expectations, resulting in differing opinions as to the direction in which the partnership should proceed. Attitudes of partners change, as some may feel as though they are being left out or even doing too much of the work for the business. Whatever the reason, disagreements often surface between partners. New Jersey partnership law uses numerous legal terms when referring to partner disputes. Along with claims of minority partner oppression by the majority members of the partnership, all partners of NJ partnerships may have a cause of action stemming from one of these terms.

  • Breach of Fiduciary Duty of Care;
  • Breach of Fiduciary Duty of Loyalty;
  • Breach of Partnership Agreement;
  • Usurpation of a Partnership Opportunity;
  • Breach of the Covenant of Good Faith and Fair Dealing;
  • Tortuous Interference With a Prospective Economic Advantage;
  • Fraud
  • Conversion
  • Failure to Account or Make Partnership Records Available

Fiduciary Duties Owed to Co-Partners

All partners of closely-held partnerships owe what is known as a fiduciary duty to one another. This fiduciary duty stems from the small nature of the relationship. The relationship between partners is often compared to that of co-venturers in a Joint Venture. It is a relationship that is built upon trust, confidence, and good faith. Every partner owes this duty to all of his/her fellow partners.

The New Jersey Uniform Partnership Act states that legal action may be taken by a partner against all other partners, (sometimes mistakenly referred to as officers and directors) of partnerships who violate their fiduciary duty by operating the partnership business in a manner that is detrimental to other partners. For example, a majority partner is prohibited from making a decision on behalf of the partnership for the sole purpose of personal financial gain, regardless of whether or not the decision is in line with the partnership’s normal business operations.

In corporate transactions where the majority partners, directors, and/or officers stand to realize a sizeable personal benefit, it is of the utmost importance that they follow their fiduciary duty owed to the minority partners. If they do not uphold this duty and a minority or other partner brings a claim alleging a breach of fiduciary duty on their behalf, the burden is on the majority partner to prove that the transaction was fair and equitable to all partners. One must also keep in mind that the fiduciary duty of good faith and fair dealing requires truthfulness and transparency on behalf of majority partner, directors, and officers. Any information that is misleading, inaccurate, or simply false is considered a breach of this duty and the injured partner will have a cause of action under NJ law.

Let me repeat this again. As a partner, it is important to understand your fiduciary obligations. All partners throughout the state owe a reciprocal fiduciary duty to other partners within their partnership. This relationship is one of trust, confidence, loyalty and good faith, and is to be honored at all times.

It is important that all partners understand that the fiduciary duty of good faith and fair dealing requires honesty and transparency. Majority partners must provide proper information regarding business decisions to all minority partners. If they give false, misleading, or intentionally inaccurate information, they are subject to a claim for breach of their fiduciary duty. When a partner brings a breach of fiduciary duty claim questioning a business transaction where majority partners gained a significant profit, the burden of proving that the transaction was fair and equitable fall on the majority partner.

Contact me personally to discuss your NJ Partnership matter. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. You can reach me toll free at (855) 376-5291 or email me at fniemann@hnlawfirm.com.

NJ Partner Rights

When an investor acquires an interest in a partnership, they also receive a number of rights with regard to this ownership interest as well. In a partnership, each partner is both an owner and co-manager, each partner has control of the day-to-day operations of the partnership absent a contrary provision in the partnership agreement. A partner is subject to personal liability for the partnership’s actions, exposing them to the debts and obligations that the partnership faces as an entity. While partners risk losing time and money invested in the partnership, fortunately, NJ law protects partners and their investments.

As a partner in a New Jersey partnership, your specific rights depend largely on your partnership’s Certificate of Filing and/or Partnership Agreement. When seeking to determine your specific partner rights, one should always initially check these documents. Some typical NJ Partner rights include:

  • The right to vote on issues that affect partnership interests;
  • Rights related to partnership transfers of ownership rights;
  • Rights related to partnership assets and property;
  • The right to receive profits as declared by the partnership’s majority members;
  • The right to inspection of the partnership’s records and books;
  • The right to a share of the proceeds the partnership receives when selling its assets;
  • The right to bring legal action in a NJ court against the partnership for wrongful acts of the co
  • partners and managing partners of the partnership.

Partner Meetings and Voting Rights

One of the most significant rights that partners have is the right to request general meetings and elect managing members of the partnership. These meetings are typically held on an annual basis, but can also be at other times throughout the year as dictated by the by-laws of the partnership. During these meetings, partners vote on electing a managing partner(s), and on numerous other issues as well. Depending on whether the by-laws or a written partner agreement allows it, partners may also call for special meetings at different times throughout the year. These meetings are typically called only when certain partnership issues require immediate action. A Notice of Special Meeting is allowed to the partners of the partnership if provided in the agreement and must indicate the matters to be voted on. The partners present at the meeting may only vote on issues indicated in the notice.

In order for decisions that are voted on by partners to take effect, a quorum of all the partners must be present at the meeting. The standard quorum consists of more than half (50%) of the partnership interests, meaning these interests must be represented at the meeting. Depending on the partnership’s by-laws and/or the partnership agreement, the required percentage of votes that must be accounted for may be more or less than a standard quorum.

In most partnerships, partners are allowed to appoint a proxy to represent them at partner meetings and cast a vote in their place. This often takes place not only in larger, public partnerships, but in smaller partnerships as well. Unless indicated in the partnerships by-laws, the proxy does not have to be a partner in the partnership. New Jersey has few specific laws pertaining to proxies, with most addressing the revocation of certain appointments. Always put your proxy appointment and instructions in writing to help ensure its validity. By law, the proxy always must listen to the instructions of the partner.

Partners may also make decisions on behalf of the partnership without conducting a meeting if they have Unanimous Consent, meaning ALL partners are in agreement on the decision. Since this is impractical for large public partnerships with, it usually occurs in only in smaller partnerships with few partners. Larger partnerships are forced to deal with a diverse group of partners who have different objectives.

What Do Partners Get to Vote On?

As previously stated on this page, the issues that partners vote on are often dictated in the by-laws or terms of the partnership agreement. The following are some of the typical and most significant decisions that partners have the right to vote on within their partnerships:

  • Approval and disapproval of proposed changes to the partnership agreement;
  • Approval and disapproval of a potential merger with other partnerships;
  • Approval and disapproval of the sale of significant partnership assets;
  • Approval and disapproval of any partnership transaction involving a managing partner that has a
  • conflict of interest with the transaction;
  • Approval and disapproval of a potential dissolution of the partnership;
  • Approval and disapproval of amendments to the by-laws of the partnership;
  • Whether or not to issue additional partnership shares;
  • Recommendations to the operational managers of the partnership about running the business;
  • Admission of new partners (typically in smaller partnerships).

What Don’t Partners Have the Right to Vote On?

The articles of partnership filing, by-laws and/or the partnership agreement dictates what rights partners do and don’t have. Typically, partners have the right to vote on and/or participate in the day-to-day operations of the business. By electing directors/managing partners of the partnership, partners are essentially granting them the power to run the partnership as they deem fit, as long as this is in the best interests of the partnership. In most cases, the partners cannot compel the partnership to take action, as long as the action is one within the ordinary course of business.

If you have any questions regarding partner rights, please don’t hesitate to contact Fredrick P. Niemann, Esq., a knowledgeable NJ Partnership Attorney. He can be reached toll-free at (855) 376-5291 or by email at fniemann@hnlawfirm.com. Mr. Niemann has experience with NJ Partners throughout New Jersey and would be more than happy to assist you.

NJ Courts: Protectors of a Partnership During Times of Controversy

Did you know that New Jersey Courts are often called upon to protect partnerships during periods of controversy, dispute, and conflict? Under NJ Law, the Courts have a wide range of powers they may use to ensure the best interests of a partnership are protected. The Chancery Judge is often in charge of deciding what powers to use. The following are some of the powers available to the court:

Appointment of a Receiver

Arguably the broadest power available to the Courts is the power to appoint a receiver to oversee a partnership during a time of controversy. When a court is presented with evidence of gross and/or fraudulent mismanagement, gross abuse of trust, or a violation of a fiduciary duty by those with significant decision-making powers (such as board members, officers, directors, etc.), they often choose to appoint a receiver to oversee the company throughout the controversy. There are two basic types of receivers that courts may choose from to appoint: The statutory receiver and the custodial receiver. What type of receiver is appointed by the Courts depends on the unique situation that the partnership is in.

The Statutory Receiver

A statutory receiver may be appointed when one of the following exists within the partnership:

  • The partnership has become insolvent;
  • The partnership has been forced to suspend its business operations due to a lack of cash flow;
  • The partnership is operating at a loss, assuming the situation is one that is fraudulent and
  • prejudicial to the interests of partners and/or creditors.

Once appointed, the statutory receiver has numerous powers. Initially, the receiver is granted title to the partnership’s property. He/she then has the power to take the following actions:

Institute and defend all legal actions on behalf of the partnership, even against those in positions of power within the partnership that have committed wrongdoings;
Negotiate and settle any claims that the partnership may have with creditors and debtors;
Take control over all of the partnership’s assets, including property and cash;
Assign, sell, convey, transfer, or dispose of any of this property.

The Custodial Receiver

The Custodial Receiver is the other type of receiver that the Courts may appoint to overlook a partnership. These receivers are appointed for the limited purpose or preserving assets for a specified time period, usually the time while the controversy is being decided. One common example is the appointment of a custodial receiver to ensure assets are preserved while there is an internal litigation dispute between partners. Custodial receivers do not have many of the powers that the statutory receiver has. They do not acquire legal title to the partnership’s property and therefore cannot sell, transfer, or dispose any of the assets nor dissolve the partnership.

Appointment of a Fiscal Agent

The appointment of a receiver is significantly intrusive to a partnership. Courts may elect to appoint a Fiscal Agent, rather than a receiver, as a less-intrusive means. This typically occurs when partners are able to convince the NJ Court that the interests of the partnership can be accomplished without a receiver being put into place. If the Court is persuaded, they may elect to appoint a fiscal agent, one who has specific, limited powers.

The Fiscal Agent is viewed as more of a temporary, interim solution to a partnership’s problems. Courts purposely limit their powers and responsibilities due to their temporary status. Typically, these powers and responsibilities relate to safeguarding the partnership’s financials and resources. For example, a Fiscal Agent may approve or deny any potential officer compensation or corporate expenditures when partners bring claims of fraud.

Appointment of Provisional Managing Partner

Another power of the NJ Courts is the power to appoint one or more provisional managing partners to handle the partnership’s affairs. If in the best interests of the partnership and the partners, the New Jersey Courts may appoint a provisional director/partner regardless of what the partnership’s certificate of filing, by-laws, or any other governing resolution says. The Courts appointment will always triumph any of the partnership’s policies or documents. Once appointed, the provisional partner will have the same rights and powers as all the elected directors and managing partners until the Court removes them. Sometimes the partners may vote/consent to the removal of a provisional director, but typically the Court must approve this removal nonetheless. Their powers are always limited to those of an elected partner. They lack the power that a receiver has over a partnership.

Court’s may also elect to appoint a custodian for the partnership. This can be in addition to or in the alternative to the provisional managing partner. Once again, the Court will only do so if it is in the best interests of the partnership and its partners. Corporate custodians have the same powers as the directors and managing partners, to the extent necessary to manage the affairs of the partnership. They also lack the broad powers that a receiver has. Similar to the provisional director under corporation law, they remain in their position until the Court removes them or until the majority of partners vote/consent to the removal, subject to court approval.

There are numerous situations in which a provisional managing partner and/or custodian may be appointed. The Court may appoint provisional partners until the partners are able to come to a consensus and elect a new managing partner(s). Another example is when partners are unable or refuse to take action on certain partnership matters for a number of different reasons. Provisional acting partners may be appointed when partnership funds or transactions have repeatedly been mismanaged, authority has been abused, partners have been oppressed, or a number of other incidents has occurred that the Court deems an appointment proper for the sake of the partnership.

New Jersey law prohibits any court-appointed official from being a partner or creditor of the partnership. All court-appointed officials are obligated to report to the Court on the progress of the partnership concerning business matters and the overall functionality of the partnership. Provisional managing partner(s) and custodians often file their recommendations to the Court concerning what action they believe is proper in regards to the partnership matter in which they were appointed.

If you have any further questions regarding Court-appointed officials or Partner issues in general, please contact me today. You’ll be happy to find me very approachable willing to offer practical, easy to understand advice. I can be reached toll-free at (855) 376-5291 or by email at fniemann@hnlawfirm.com.

Determining the Value of Your Interest in a Partnership

When a minority partner feels as though their partnership is not operating in a manner that they are satisfied with, they often seek to be bought out. When the majority partner refuses to buy them out and operates the partnership in a manner that personally benefits themselves at the expense of the minority partners, this is a form of Minority Partner Oppression.

When a minority partner brings such an action, the NJ Courts will need to determine how much your interest is worth. In doing so, the courts will apply a “minority” and “marketability” discount in determining how much it is worth. In addition, New Jersey law provides that you will be given the “Fair Value” of your interest, determined by a valuation expert’s testimony. This value may be different from the “Fair Market Value”, the amount you might think your partnerly interest is worth on the open market, assuming you could sell it.

One key factor that will affect the value of your partnership interest is the valuation date. Under NJ law, this date is the date of the filing of your lawsuit or any earlier/later date the court may deem equitable. The court has complete discretion to decide the date and determine the value of your interest. As one can imagine, this value can fluctuate depending on when your lawsuit is filed and when the court decides to place a value on your interest.

Fredrick P. Niemann Esq.

Fredrick P. Niemann Esq.

Call Fredrick P. Niemann, Esq., an experienced NJ Partners attorney, today to discuss your partner matter. He is easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. Mr. Niemann can be reached toll-free at (855) 376-5291 or by email at fniemann@hnlawfirm.com. He looks forward to hearing from you.