Articles Posted in Team Building Phase

bookThe structure of a corporation establishes a division of rights and responsibilities among at least three groups. Ownership of the corporation is vested in the shareholders, while directors are charged with its overall management. Officers are responsible for the corporation’s day-to-day operations. A shareholder who is not also a director or officer may not have much of a role in the operation or management of a corporation, but they have rights to information about the corporation’s financial status. The Delaware Court of Chancery recently ruled in favor of a shareholder seeking access to a corporation’s books. Rodgers v. Cypress Semiconductor Corporation, No. 2017-0070-AGB, order (Del. Chanc. Ct., Apr. 17, 2017). The court’s order offers useful guidelines for shareholders seeking access to corporate information.

New Jersey law defines “shares” as “the units into which the proprietary interests in a corporation are divided,” and a “shareholder” as “a holder of record of shares in a corporation.” N.J. Rev. Stat. §§ 14A:1-2.1(l), (m). Any shareholder has the right to request financial documents, including balance sheets and profit and loss statements, from the corporation. Certain shareholders “have the right for any proper purpose to examine…[the corporation’s] minutes of the proceedings of its shareholders and record of shareholders.” Id. at § 14A:5-28(3).

Delaware law goes further, giving shareholders the right to inspect a wide range of corporate documents upon a “written demand under oath stating the purpose” of the shareholder’s request. 8 Del. Code § 220(b). If the corporation denies the shareholder’s demand, the shareholder can petition the Court of Chancery to compel production. A plaintiff in such a case must establish standing as a shareholder, compliance with the “form and manner of making a demand for inspection,” and a “proper purpose” for the inspection.” Id. at § 220(c).

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stormtroopersIn closely held businesses, minority shareholders—generally meaning shareholders with less than 50 percent of the company’s voting shares—can easily find themselves at a disadvantage in disputes with majority shareholders. New Jersey’s Oppressed Shareholder Statute (OSS), N.J. Rev. Stat. § 14A:12-7 et seq., provides shareholders with a means to assert their rights when they suffer from bad-faith actions by other shareholders. They do not necessarily have to be in the minority to qualify as oppressed shareholders under the OSS, according to New Jersey courts. A recent decision illustrates how shareholders can benefit from this statute. RP v. SP, No. UNN-C-108-13, mem. op. (N.J. Super. Ct. Chanc. Div., Dec. 22, 2016).

Avoiding conflicts that lead to litigation is obviously the goal of any business owner. Still, it is useful to know which options are available should a company’s operating agreement fail to provide an adequate means for dealing with conflict. The OSS authorizes courts to intervene in a business for various reasons, with remedies ranging from the appointment of a custodian or provisional director to the dissolution of the business entity. If a corporation has no more than 25 shareholders, the OSS allows court intervention if “the directors or those in control…have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.” N.J. Rev. Stat. § 14A:12-7(1)(c).

“Control,” in this context, refers to control of the corporation’s voting stock. A “minority shareholder” can include not only a shareholder with a minority of shares but also one who “does not have control of the corporate shares with respect to voting rights.” Berger v. Berger, 249 N.J. Super. 305, 317 (1991). A minority shareholder, under this definition, can also be an “oppressed shareholder” under the OSS, regardless of whether they actually own a minority of shares. Balsamides v. Perle, 313 N.J. Super. 7, 16 (1998).

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meetingThe owners of a corporation, typically known as shareholders or stockholders, are shielded from individual liability for corporate debts. This is one of the main purposes of organizing a business venture as a corporation. Protection from liability is not absolute, however, and courts can “pierce the corporate veil” to hold shareholders individually liable for a variety of reasons under both statutes and common law. New York’s Business Corporations Law includes a provision that allows courts to hold the “10 largest shareholders” of a corporation liable for unpaid wages owed to the corporation’s employees. N.Y. Bus. Corp. L. § 630. The New York Legislature amended the law in 2016 to ensure that it applies equally to domestic and foreign corporations.

Shareholders, as a matter of general legal principle, may not be held individually liable for the corporation’s debts as long as any actions by the shareholders are reasonable and directed toward the benefit of the corporation. Self-dealing by a shareholder, the use of a corporation by a shareholder as an “alter ego,” or acts that are illegal or grossly negligent may result in individual liability. A wide array of court decisions have identified circumstances in which courts may pierce the corporate veil. Certain situations also allow courts to hold all shareholders or a distinct group of shareholders strictly liable for corporate debts.

Section 630 effectively imposes a strict liability standard on a group of corporate shareholders. An employer with a claim for unpaid wages must serve written notice on a shareholder, either within 180 days of being terminated or 60 days after reviewing the corporation’s shareholder records. The statute identifies the 10 largest shareholders based on “the fair value of their beneficial interest as of the beginning of the period during which the unpaid services…are performed.” N.Y. Bus. Corp. L. § 630(a). These shareholders are jointly and severally liable for the amount of unpaid wages.

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Fox NewsCorporate directors and officers owe a fiduciary duty to the corporation and its shareholders to act in the corporation’s best interest. This is commonly known as the “duty of loyalty.” A breach of this duty may expose both the individual officer or director and the corporation itself to liability to the shareholders. Allegations against the former chairman and chief executive officer of a large New York City media company have led to a discussion of whether this individual might have breached the duty of loyalty in connection with an ongoing scandal. While it is important to note that these are only allegations, the ongoing story provides a useful demonstration of the duty of loyalty, as well as a possible defense to a claim of breach.

Under New York law, corporate officers, directors, and majority shareholders are considered “guardians of the corporate welfare.” Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 568 (1984), quoting Leibert v. Clapp, 13 N.Y.2d 313, 317 (1963). Even if a particular action does not violate any specific law, it might violate the duty of loyalty if its purpose is “the aggrandizement or undue advantage of the fiduciary to the exclusion or detriment of the stockholders.” Alpert, 63 N.Y.2d at 569.

“Self-dealing” is a common example of a breach, such as when an officer or director has a significant financial interest in a corporate transaction and prioritizes their own interests over those of the corporation. An officer or director can avoid legal liability if they disclose the conflict of interest to the corporation ahead of time and receive approval from a majority of disinterested directors or shareholders. See N.Y. Bus. Corp. L. § 713.

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birdThe directors of a corporation owe a duty of loyalty to the corporation’s shareholders, which requires them to act only in the interest of the corporation and avoid self-dealing. Claims alleging a breach of this duty range from the relatively benign, such as a failure to disclose a conflict of interest, to overt acts of bad faith. A recent decision from the Delaware Court of Chancery addressed a claim of bad-faith breach, which the court noted is very difficult to prove. In re Chelsea Therapeutics Int’l Ltd. Stockholders Litig., No. 9640-VCG, mem. op. (Del. Ct. Chanc., May 20, 2016). A group of shareholders alleged that certain directors breached the duty of loyalty by disregarding higher financial projections before recommending the sale of the company. The court found that the plaintiffs had failed to establish that the defendants acted egregiously enough to meet the legal standard for bad faith. It described a situation that would constitute bad faith under the duty of loyalty as a rara avis, a “rare bird.”

Directors and officers are obligated to direct their efforts toward the interests of the corporation and its shareholders. The mere existence of a conflict of interest, however, does not automatically breach the duty of loyalty. A director with a conflict of interest, such as a personal financial stake in a board decision, must make a full disclosure to the other directors and the shareholders. Any related transaction requires majority approval from the disinterested directors or shareholders. A breach of the duty of loyalty could result in civil liability to the corporation, or to some or all shareholders.

Typically, it is in the corporation’s interest, and the interests of its shareholders, to maximize profits and minimize expenses, but this is not always the case. If a corporation is currently the subject of negotiations incident to a proposed merger or acquisition, for example, obtaining the best possible price is generally considered the top priority for the directors. This was the situation in the Chelsea case.

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By U.S. Bureau of Labor Statistics, Division of Information and Marketing Services (http://www.bls.gov/opub/ted/2006/oct/wk1/art02.htm) [Public domain], via Wikimedia CommonsNew York Governor Andrew Cuomo signed several bills into law in late October 2015 that affect employers, including amendments to the state’s equal pay law. Senate Bill 1, the Achieve Pay Equity (APE) law, amends the New York Labor Law’s provisions on pay disparities based on sex. New York business owners—both those with employees and those who might have employees some day—should be aware of how these new laws could affect them.

Federal and state laws prohibit employers from paying different wages to employees based on sex, if the requirements, qualifications, and working conditions of the jobs are otherwise the same. Both laws provide defenses for employers against claims of unlawful wage disparity based on sex if they can demonstrate that the difference in wage is actually based on a system of seniority, merit, quality of work, quantity of production, or “any other factor other than sex.” 29 U.S.C. § 206(d)(1), N.Y. Lab. L. § 194. The same legal standard generally applies to claims brought under either law. Moccio v. Cornell University, 889 F.Supp.2d 539, 570 (S.D.N.Y. 2012). The APE expands employees’ rights beyond the protections offered by federal law.

Some employers prohibit employees from inquiring about or discussing co-workers’ wages or salaries. The current version of New York’s equal pay law is silent on this type of policy, although federal law already prevents some New York employers from prohibiting employees from discussing wages with one another. Section 7 of the National Labor Relations Act (NLRA), 29 U.S.C. § 157, for example, protects employees’ rights to form unions for the purposes of collective bargaining. Discussion of wages is considered essential to such activity. Federal contractors are prohibited from enacting policies against discussing wages under Executive Order 13665.

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Simon Cunningham [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrCorporate directors and officers owe the corporation certain fiduciary duties, meaning they are legally obligated to act solely in the corporation’s interest. The duty of loyalty requires officers and directors to act on behalf of the corporation without economic conflict. A breach of the duty of loyalty might consist of a transaction that benefits an individual employee over the corporation, or a corporate opportunity that the employee withholds for their own benefit. Remedies for a breach of the duty of loyalty may include economic damages and an equitable remedy known as disgorgement, by which the employee must give up any personal gains obtained from their breach. The New Jersey Supreme Court recently considered whether a court could award disgorgement to a corporation that did not suffer economic loss. Kaye v. Rosefielde, No. A-93 Sept. Term 2013, 073353, slip op. (N.J., Sep. 22, 2015).

The plaintiff in Kaye hired the defendant in 2002 as Chief Operating Officer (COO) of several companies. Under a formal employment agreement, the defendant received an annual salary of $500,000, paid in equal parts by a corporation and a limited liability company (LLC) controlled by the defendant. The defendant served as COO and General Counsel of both companies, which managed and sold timeshares in properties owned by those two companies and several others.

According to the court’s ruling, the plaintiff alleged multiple acts by the defendant that breached the duty of loyalty to the companies that employed him. In one case, the defendant created a separate LLC in 2003 to manage certain timeshare interests, but he did not follow the plaintiff’s instructions regarding the allocation of ownership interests. The defendant drafted the new LLC’s operating agreement in a way that increased his own ownership interest and that of a corporation he owned and controlled. In 2005, the plaintiff learned of some of the defendant’s acts and terminated his employment.

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By Ken Lund [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsManaging employment-related matters can be one of the trickiest, most difficult aspects of owning and running a business. A vast array of laws at the local, state, and federal levels affect the employer-employee relationship, including wages, hours of work, workplace safety, family and medical leave, non-discrimination, and reasonable accommodations for certain needs and conditions. While the vast majority of employment statutes and regulations have the best of intentions, maintaining full compliance with all applicable laws can be difficult for businesses with entire staffs devoted to the task. Small businesses may inadvertently run afoul of an employment law and face substantial penalties as a result. Recent news from the U.S. Department of Labor (DOL) illustrates the magnitude of the issue for New Jersey businesses. The DOL is holding more than $7 million collected from New Jersey employers in wage and hour claims, which remains unclaimed by employees.

The DOL’s Wage and Hour Division (WHD) enforces certain provisions of the federal Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., the statute that sets the nationwide minimum wage. Since 2010, the federal minimum wage has been $7.25 per hour. 29 U.S.C. § 206(a)(1)(C). The FLSA also establishes overtime pay of time-and-a-half for employees working over 40 hours in a week, with some exceptions. 29 U.S.C. § 207(a). The WHD can take legal action against employers for alleged violations of FLSA wage and hour provisions. The DOL maintains a website entitled “Workers Owed Wages,” or “WOW,” where people may search to see if their employer is listed, and then if they are included in any recovery of back wages.

New Jersey’s equivalent statute is the New Jersey Wage and Hour Law, N.J. Rev. Stat. § 34:11-56a et seq. It has similar provisions for overtime but sets a higher statewide minimum wage. As of January 1, 2015, New Jersey’s minimum wage is $8.38 per hour. N.J.A.C. § 12:56-3.1(a). The New Jersey Department of Labor and Workforce Development enforces state wage and hour laws.

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By Employeeperformance (Own work) [Public domain], via Wikimedia CommonsBuilding a team is a critical step in the process of growing a small business, but it brings unique issues and challenges. Employment laws at the federal, state, and local levels affect almost every aspect of the employer/employee relationship. Here is a brief overview of some laws that New Jersey small business owners should know, with a focus on laws at the state level.

Minimum Wage

The New Jersey Wage and Hour Law (WHL), N.J. Rev. Stat. § 34:11-56a et seq., governs wage rates throughout the state. As of January 1, 2015, the minimum wage for employers in the State of New Jersey is $8.38 per hour. The federal minimum wage has been $7.15 per hour since 2010. 29 U.S.C. § 206(a)(1)(C).

The minimum wage for employees, such as food servers, who receive gratuities or tips from customers is $2.13 per hour. This is the same as the federal rate. If an employee’s tip income is less than $6.25 per hour for a pay period, however, the employer must make up the difference to bring their wage up to $8.38 per hour.

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teamwork-382673_640.jpgThe New York City Council approved its fiscal year 2015 budget (PDF file) in late June. The new budget includes $1.2 million for the support and development of worker-owned cooperative businesses, commonly known as “worker cooperatives.” The defining feature of a worker cooperative is that the employees own all, or at least a substantial majority, of the company. Advocates for worker cooperatives state that they can benefit local communities by keeping ownership close to home and promoting good employment practices. The allotment of funds by the City Council is reportedly the largest investment ever by a city government in this type of business.

The U.S. Federation of Worker Cooperatives (USFWC), the only nationwide organization for worker cooperatives, defines the business form as an entity that is “owned and controlled by [its] members, the people who work in [it.]” Worker cooperatives have two “central characteristics,” according to the USFWC: (1) investment in and ownership by “worker-members,” who receive distributions of profits; and (2) a democratic decision-making process involving one member, one vote. Profits are often known as “surplus,” which is one of many ways that worker cooperatives seek to distinguish themselves from other models of business ownership.

Article 5-A of New York’s Cooperative Corporation Law allows businesses incorporated in the state to elect to be governed as a worker cooperative. Businesses that make this election are subject to parts of both the business corporation law and the cooperative corporation law. New Jersey does not have a specific business form for worker cooperatives, but businesses can choose to form as a corporation under subchapter C or S, as a limited liability company (LLC), or as other business forms.
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