Welcome to Part 3 in The Jayson Law Group LLC’s look at the new derivative suit law passed by the New Jersey legislature.  Part 1 looked at the requirements placed on shareholders to bring a derivative suit.  Part 2 looked at the court’s involvement in the derivative suit.  Part 3 will be examining which shareholders can bring a derivative suit by reviewing N.J.S.A. 14A:3-6.8.

Section N.J.S.A. 14A:3-6.9 makes N.J.S.A. 14A:3-6 et seq applicable to any action brought in state or federal court if the corporation made them applicable through its articles of incorporation.

Which Shareholders Can Bring a Derivative Suit?

Subsection 8 of A3123, now N.J.S.A. 14A:3-6.8, states that if a shareholder or class action brings a derivative suit against a corporation that shareholder must either own 5% of the outstanding shares of any class or series of stock of the corporation, or own shares with a market value greater than $250,000.

So what happens if a shareholder or class action brings a derivative suit but does not qualify under the 5% or $250,000 threshold?  Under these circumstances, the corporation can require that the shareholder or class action to give security for reasonable expenses.  The corporation can require this any time prior to final judgment of the derivative suit, and such expenses include attorney’s fees for both the corporation and any third party’s legal fees for which the corporation may be liable.

If the shareholder or class action bringing the derivative suit does not qualify under the 5% threshold, how is the market value of $250,000 calculated?  The courts will look at the market value of the shares on the date the plaintiff or class action plaintiffs file the derivative suit.  If there is an intervener in the derivative suit, the market value of the intervener’s shares will be calculated on the date the intervener becomes a party to the derivative suit.

Upon dismissal of the action under N.J.S.A. 14A:3-6.7, the corporation is entitled to the security amount placed with the court.  The court will be the final arbiter as to what amount shall be awarded to the corporation.

Conclusion

So what does all of this mean for shareholders of New Jersey corporations?  In a statement released by the New Jersey State Senate Commerce Committee on January 14, 2013, the changes to the previous derivative suit law were “based on section 7.40 to 7.47 of the Model Business Corporation Act, with substantial additions based on section 7.44 of Chapter 156D of the Massachusetts Business Corporation Law.”  While the legislature ultimately adopted the State Assembly’s version of the bill, it is clear from both versions that the legislatures “purpose of the bill [was] to allow corporations to avoid derivative lawsuits that impose excessive and unnecessary costs on New Jersey corporations.”  New Jersey businesses should speak with an experienced business attorney to make sure that they are protected under the changes to the law.