If you are a minority shareholder of a corporation or a minority member of a limited liability company and you are thinking about bringing a lawsuit against the majority shareholder(s)/member(s), it is important to determine whether the lawsuit would be: (1) a direct action; or (2) a derivative action. This determination is critical because the two types of claims have different elements of proof and different procedural prerequisites.

To maintain a direct action, the plaintiff must allege facts sufficient to establish that he/she has suffered a “special injury” resulting from the alleged misconduct. This “special injury” must be unique from any damages suffered by the other shareholders. In contrast, claims redressing harm to the company as a whole (and not just the individual shareholder/member) are derivative.

When a plaintiff brings a derivative lawsuit, the plaintiff must meet a heightened pleading standard. The reason for this requirement is the recognition that derivative lawsuits are an infringement on the right of a company to govern its own affairs. A derivative cause of action actually belongs to the company, but an individual is permitted to bring the action on the company’s behalf where the company has failed to take action for itself. Because derivative actions could be ripe for abuse, New Jersey law requires as a prerequisite for bringing a derivative action that a demand to redress the harm must first be made to the company’s board. As explained by the New Jersey Supreme Court:

The demand requirement serves at least two purposes. First, it provides corporate managers with the opportunity to address a shareholder’s claims. Along those lines, if the board determines that the allegations are meritorious it may choose to remedy the situation internally or embrace the litigation. Second, if managers disagree with the shareholder’s concerns, the demand requirement provides the board with an opportunity to reject the demand and, if necessary, seek early dismissal of the suit.

In re PSE&G S’holder Litig., 173 N.J. 258, 278 (2002) (internal quotations omitted).

Pursuant to New Jersey law, if the lawsuit you seek to file is a derivative action, you must file a verified complaint asserting with particularity: (1) that a demand was made on the board before instituting the action; or (2) that such a demand would have been futile (for example, the board is controlled by people who you believe were involved in the misconduct).

Spector & Ehrenworth, P.C. has extensive experience representing clients in minority shareholder and LLC member disputes. Attorneys at the firm would be happy to help you to determine whether your claims are direct or derivative and advise you regarding the steps that need to be taken before you file a lawsuit. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com

In New Jersey, the Uniform Partnership Act defines “partnership property” as property in the name of:

1. the partnership; or
2. one or more partners with an indication in the instrument transferring title to the property of the person’s capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership.

Additionally, property is presumed to be partnership property if it is purchased with partnership assets. For example, assume that a partnership has two partners and a bank account in its name. The money in that bank account would be considered partnership property. If one of the partners buys a house with the funds from the partnership bank account, the house would be considered partnership property. That would be true even if the partner took title of the house in his own name (without any indication in title of the partner’s capacity as a partner of the partnership or the existence of the partnership).

The analysis of what is considered partnership property can become complicated when there are numerous transactions that have taken place over a long period of time, using multiple bank accounts, and involving the commingling of partnership and personal assets.

Spector & Ehrenworth, P.C. has extensive experience analyzing and advising on issues relating to partnership property. If you are involved in a partnership dispute, attorneys at the firm would be happy to discuss with you the specifics of your case and advise you with respect to your legal options. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

In the age of the internet, it is incredible easy to find out information about the people and companies that we do business with. It has become common for businesses to conduct background checks on potential employees, but it is not necessarily common practice for a business to conduct routine background research on landlords, customers, and vendors. Employing such a practice could save you significant time and money down the road.

For example, even if you run a small business (with limited resources), if you are planning on signing a contract with a landlord to lease commercial office space, it may be worthwhile to run a public records search on the landlord before you sign on the dotted line. Public records searches are not overly costly or time consuming but they could reveal useful facts that may impact whether you enter into the lease. The search could reveal that your future landlord has been sued by other tenants for failing to maintain the building or that the landlord is currently being foreclosed upon by its bank.

Similarly, if you land a new client, it may be helpful to conduct some brief research on the client to ensure that you know who you are doing business with. Such research could reveal whether the client is being sued by other companies for non-payment, whether the company even exists (and, if so, whether it is registered to conduct business in your state), and whether the company (or the principal of the company) has recently declared bankruptcy.

The failure to perform basic, inexpensive background research on your company’s landlords, customers, vendors and employees could result in your company being dragged into a lawsuit that could have been completely avoided from the outset.

Spector & Ehrenworth, P.C. has extensive experience advising businesses how respond to (and potentially avoid) business disputes. Attorneys at the firm would be happy to discuss with you the specifics of your company and/or business dispute. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

If you own a small limited liability company or closely held corporation, it may seem burdensome to comply with all of the requirements in your company’s governing documents (such as an operating agreement). For example, it may be inconvenient to hold annual shareholder meetings or to maintain all corporate records at a specific location. It may also seem unnecessary to maintain a separate bank account for the company (and to never commingle the funds between your company and individual bank accounts). However, adhering to such corporate formalities may be far more important than you think.

Generally, when a limited liability company or corporation is sued, the plaintiff cannot reach the assets of the underlying members or shareholders. This is one of the main reasons why individuals choose to form limited liability companies and corporations. In New Jersey, under a doctrine called “piercing the corporate veil,” a court may disregard the corporate structure (and allow a plaintiff to collect against the assets of the underlying members, shareholders, officers and/or directors) if the court determines that the corporate entity is being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise evade the law.

The main factors that courts look to in determining whether to pierce a corporate veil are as follows:

1. Undercapitalization of the company;
2. Failure to observe corporate formalities;
3. Siphoning of funds of the company by the dominant member/shareholder;
4. Absence of corporate records;
5. Pervasive commingling of company assets and identities;
6. The company is being used as a facade for the operations of the dominant member/shareholder;
7. The company is insolvent at the time it enters into particular debts; and
8. Two such companies have identical owners.

If you wish to ensure that your corporate structure will be protected, it is essential that you adhere to all corporate formalities, maintain a separate bank account for the business, and never commingle company and personal assets.

Spector & Ehrenworth, P.C. has extensive experience advising members, shareholders, directors, and officers regarding their obligations as set forth in governing documents and as required under New Jersey law. Attorneys at the firm would be happy to discuss with you the specifics of your company and help you to determine whether you are satisfying all such obligations. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

A large number of business disputes involve an alleged breach of an agreement between the parties. The first question the courts will consider when presented with such a dispute is whether there is legally recognizable contract between the parties. To establish that a contract exists, a plaintiff must prove that:

1. there was a “meeting of the minds”: (in others words, an actual agreement was reached);
2. one party offered to enter into the agreement and the other party gave some outward indication that they accepted the offer;
3. the parties each promised to exchange something of value; and
4. the terms of the agreement were reasonably certain.

In most instances, a contract does not need to be written to be valid and enforceable. However, the failure to memorialize an agreement in writing leaves both parties vulnerable to a prolonged lawsuit regarding whether a contract was formed and, if so, what were the terms of the contract. Generally, when an agreement is in writing, the court does not need to look any further than the written agreement itself to determine whether a contract was formed and evaluate the contractual rights and obligations of the parties. In contrast, when there is no written agreement, the parties may be forced to engage in extensive and costly discovery with respect to these issues.

Although it may seem burdensome to always put your agreements in writing, it could save you and your business significant litigation costs down the line. Additionally, a written contract – especially one drafted by an attorney – can be tailored to protect you in the future (by, for example, including a provision that if you need to bring a lawsuit against the other party due to that party’s breach of the contract, you will be permitted to recoup your legal fees).

Spector & Ehrenworth, P.C. has extensive experience representing clients in drafting business contracts and litigating contractual disputes. Attorneys at the firm would be happy to discuss with you the specifics of your case and help you to determine how best to proceed. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

If you are a shareholder in a company, it is important to know your rights. Otherwise, you could be taken advantage of and miss out on opportunities for more profit or benefit from your investment position. One of the key concepts you need to understand is shareholder oppression.

What is Shareholder Oppression?

When majority shareholders in a company take actions that prejudice the minority shareholders, this is considered oppression. This happens particularly often in closed corporations, where the shares are not open to the public market. This is because the majority shareholders have leverage in this situation due to the minority shareholders not being able to readily sell their shares and avoid the oppression. Because of this, there have been many laws implemented to help minority shareholders assert their rights and avoid mistreatment, even if their shares are not public.

NJ Specific Laws

In New Jersey, minority shareholders are given slightly different tools to fight back against injustices done to them by majority shareholders. For instance, they can receive a buyout, which allows them to be paid the value of their shares instead of remaining captive as a minority shareholder in a company that is not treating them well. They can also receive a portion of misappropriated funds in the form of back-pay. This is one of the advantages that New Jersey has over other states.

How to Deal With It

When it comes to being a shareholder, there are a lot of obstacles to navigate. You need to make sure that you are properly represented and that your minority stake is not taken for granted. Don’t hesitate to get a business lawyer if you think you are being oppressed.

Spector & Ehrenworth, P.C. specializes in helping to get minority shareholders the justice they deserve in New Jersey. With their deep knowledge of these cases in New Jersey, they can help you by going step-by-step through your case and determining what kind of litigation you should pursue in order to receive compensation for your oppression.

Under New Jersey law, a partnership can be formed in the absence of a written agreement. Without a written agreement, it is not always clear whether an individual is a partner of the business even when the individual holds himself out to be a partner and receives a share of the profits from the business.

Pursuant to the New Jersey Uniform Partnership Act, a partnership is “an association of two or more persons to carry on as co-owners a business for profit.” Because a “partnership agreement” may be “written, oral, or implied,” when there is a dispute regarding whether a party is a partner of a business, the courts engage in a fact-sensitive inquiry based on the following central factors:

1. the intention of the parties;
2. the sharing of the partnership’s profits;
3. the sharing of the partnership’s losses;
4. the ownership and control of the partnership’s property and business;
5. the “community of power in administration and the reservation in the agreement of the exclusive control of the management of the business”;
6. whether the language of the agreement excludes one party from “most of the ordinary rights of a partner”;
7. the conduct of the parties toward third persons, including taxing authorities, clients, and others; and
8. the rights of the parties on dissolution.

“A person who receives a share of the profits of a business is presumed to be a partner in the business,” but such presumption can be overcome by, for example, showing that the share of the profits was received as payment for services or wages.

In the absence of a written partnership agreement, it may difficult for you to determine, based on the above factors, whether you are a partner. Spector & Ehrenworth, P.C. has extensive experience representing clients in partnership disputes involving these issues. Attorneys at the firm would be happy to discuss with you the specifics of your case and help you to determine how best to proceed. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

Starting a family business is a time-honored tradition and a sense of pride for many families. However, it can also be a nightmare. Whether your business is the latest Asian-fusion restaurant or a construction company, hiring the services of a business law firm such as Spector & Ehrenworth, P.C., can help keep your family relationships intact and your business running smoothly. Here are seven pitfalls that a business lawyer can help you avoid if you plan to go into business with your family.

1. Ownership Problems

Things such as going into business with someone who is married may have legal ramifications on the business. What happens if that person gets a divorce? How much is their spouse entitled to?

2. Having No Exit Strategy

The time to plan for an exit strategy is when you start. You must plan for anticipated retirement and the long-term fate of the business.

3. Not Hiring Non-Family Members

Sometimes, there is no one in the family who has the necessary skill set. You may want to keep everything in the family, but it is always best to have someone on the team who knows the business inside and out.

4. Not Having Clearly Defined Roles

Families are dynamic, and it is often expected that everyone will do whatever is needed for the business. Having clearly defined roles can help avoid misunderstandings.

5. Co-signing Loans and Lending Money

These agreements are often entered in the best faith, but sometimes things go wrong. Money lending in families can tear them apart.

6. Sharing Power

Sharing power is asking for trouble, particularly when you consider the power dynamics in families that occur when the younger generation is now in charge.

7. Mixing Family and Business Relationships

This is perhaps the most difficult pitfall to avoid. It is also the reason why many family businesses breakup, taking family relationships with it.

Spector & Ehrenworth, P.C. can help you navigate the waters of starting a family business and help you balance professional and personal relationships. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.

The grounds upon which a partnership may be dissolved are typically set forth in a written partnership agreement. A partner may file an application in the courts to dissolve the partnership if the grounds for dissolution, as set forth in the partnership agreement, have been met.

In addition, the New Jersey Uniform Partnership Act permits any partner (even if there is no partnership agreement) to file an application in the courts to dissolve the partnership based on the following grounds:

1. the economic purpose of the partnership is likely to be unreasonably frustrated;
2. another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or
3. it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.

When presented with an application to dissolve a partnership, the court will evaluate the relevant circumstances and determine whether dissolution is appropriate and fair to all parties. In such instances, the courts have broad discretion to order the dissolution of the partnership or to fashion some alternative remedy (such as the appointment of a receiver).

Spector & Ehrenworth, P.C. has extensive experience advising partners with respect to filing and opposing applications to dissolve partnerships. If you are considering filing such an application (or if your partner has filed such an application), attorneys at the firm would be happy to discuss with you the specifics of your case and advise you with respect to your legal options. To schedule an appointment to speak with a business attorney, call (973) 845-6525 or e-mail info@selawfirm.com.