Source: https://law.justia.com/cases/new-jersey/supreme-court/1993/a-13-93-opn.html
Timestamp: 2019-04-19 17:18:06+00:00

Document:
Garibaldi, J., writing for a unanimous Court.
In 1973, Irving Resnick formed Arbee Associates, Inc., (Arbee), a wholesale furniture company. Resnick retained ten shares in the closely held corporation for himself and distributed thirty-six shares to his daughter, Ruth Berkowitz; thirty-five shares to his daughter, Judith Brenner; and nineteen shares to Ruth's husband, Howard Berkowitz (hereinafter Berkowitz).
Resnick entrusted Berkowitz with the management of the company. The shareholders, who had each been named directors, unanimously resolved at their first meeting that Berkowitz would be president of the company, that he would completely manage and supervise the corporation, and that any action taken by the shareholders or directors required his consent. When Resnick died in 1984, his ten shares were divided equally between his two daughters. Thereafter, Judith Brenner retained forty shares in the company, Ruth Berkowitz retained forty-one shares in the company, and Howard Berkowitz retained nineteen shares in the company. The Berkowitzes were then vested with a sixty-percent interest in Arbee.
After Resnick's death, the relationship between the Brenners and the Berkowitzes soured. In September 1987, Brenner's future daughter-in-law, Nancy McGrath, left the company, and Brenner's son was fired. Brenner believed that these incidents demonstrated Berkowitz's attempt to squeeze her family out of active involvement in the company. On November 14, 1987, Brenner sued Arbee and the Berkowitzes, alleging that Ruth and Howard Berkowitz, as directors and officers of Arbee, had mismanaged the company, had abused their authority, and had acted illegally, oppressively, and unfairly toward Brenner, a minority shareholder, in violation of N.J.S.A. 14A:12-7(1)(c), a statute concerning involuntary dissolution. In 1989, Brenner amended her complaint to assert additional acts of misconduct that allegedly jeopardized her interest in Arbee, including: (a) the misapplication of a supplier's discount to acquire an account; (b) the misrepresentation of union identity for some of Arbee's non-union employees; (c) the failure to pay sales tax on cash sales to employees; (d) the failure to file W-2 and 1099 forms for temporary employees who earn more than $600 in one year; and (e) the misappropriation of cash funds by Berkowitz. Brenner also alleged that the termination of her son and daughter-in-law had been unfair. Brenner sought the following relief: an appointment of a custodian, an order for the sale of the Berkowitzes' stock to Brenner, an order for the purchase of Brenner's stock by Arbee or the Berkowitzes, dissolution of Arbee, counsel fees and costs, and other relief.
The Chancery Division determined that oppression was required to trigger N.J.S.A. 14A:12-7(1)(c). The court held that to demonstrate oppression, the minority shareholder must show that his or her reasonable expectations had been frustrated, that the majority shareholders had breached their fiduciary duty to the minority shareholder, or that the majority's misconduct had led to a change in the minority's position within the corporate structure. With regard to each of Brenner's allegations, the court determined that she had failed to demonstrate oppression sufficient to trigger the statute.
that because of the size of the company, the few isolated acts of mismanagement had not substantially affected Brenner or put her investment in the corporation at risk. The court did order Brenner's reinstatement to the Board and did enjoin Berkowitz from engaging in future misconduct in violation of his fiduciary duties. It did not award counsel fees or costs. Brenner's motion for reconsideration was denied.
On appeal, the Appellate Division reversed the Chancery Division's judgment holding that a finding of oppression is not necessary to trigger the statute if mismanagement, fraud, or illegality has been shown. Further, even if oppression were required, proof of fraud or illegality establishes a per se cause of action under the statute. In addition, the Appellate Division disagreed with the trial court's holding that the statute seeks to remedy only on-going misconduct. Based on its conclusion that Brenner's proofs had triggered the statute, and its finding that a buy-out was a more desirable remedy than dissolution, the Appellate Division remanded the case to the Chancery Division to entertain a buy-out motion from either party. The Appellate Division also ordered reconsideration of whether counsel fees should be awarded. The Supreme Court granted certification.
HELD: N.J.S.A. 14A:12-7(1)(c) is written in the disjunctive and therefore a finding either of fraud or of illegality, without a finding of oppression, may be sufficient to permit a court to conclude that the statute has been violated. Moreover, the statute does not require that the misconduct be continuing for a violation to be established. The court must consider the quality of the misconduct to determine whether the minority shareholder has demonstrated that the misconduct caused harm to the shareholder or to his or her interest in the corporation. Further, the available statutory remedies are discretionary.
The judgment of the Appellate Division is REVERSED and the judgment of the Chancery Division is REINSTATED. No costs.
CHIEF JUSTICE WILENTZ and JUSTICES CLIFFORD, HANDLER, POLLOCK, O'HERN, and STEIN join in JUSTICE GARIBALDI's opinion.
On certification from the Superior Court, Appellate Division, whose opinion is reported at 261 N.J. Super. 63 (1992).
Jonathan L. Goldstein argued the cause for appellants (Hellring, Lindeman, Goldstein & Siegal, attorneys; Mr. Goldstein and Richard K. Coplon, of counsel and on the briefs).
Martin J. Brenner argued the cause for respondent (Brenner & Falkin, attorneys).
shareholder's interest in a corporation under N.J.S.A. l4A:l2-7(8).
Resnick entrusted Berkowitz, who had worked for the preceding ten years in Resnick's previous furniture company, with ultimate authority to manage Arbee. The shareholders, at their first meeting, unanimously named Berkowitz president and resolved that "the complete management and supervision of the corporation be . . . vested in its president, Howard V. Berkowitz." Further, the shareholders, who had each also been named directors, unanimously resolved that any action taken by the shareholders or directors would require Berkowitz's consent. Berkowitz managed the company between 1981 and 1984 without the benefit of any formal shareholder or board meetings.
equally between his two daughters. Thereafter, the 100 shares of the company were divided as follows: forty shares to plaintiff, Judith Brenner, forty-one shares to defendant Ruth Berkowitz, and nineteen shares to defendant Howard Berkowitz. That share allocation vested a sixty-percent interest in the Berkowitzes.
After Resnick's death, relations between the Brenner family and the Berkowitz family soured. In September 1987, Brenner's future daughter-in-law, Nancy McGrath left the company, and Brenner's son was fired. Plaintiff believed that these incidents demonstrated Berkowitz's attempt to squeeze her family out of active involvement in the company.
Shortly thereafter, on November l4, l987, Brenner instituted this action against the corporation and the Berkowitzes. The complaint alleged that Ruth and Howard Berkowitz as directors and officers of Arbee had mismanaged the company, abused their authority, and acted illegally, oppressively, and unfairly toward Brenner, a minority shareholder, in violation of N.J.S.A. l4A:l2-7(l)(c) by (a) failing to have the Board approve Berkowitz's annual salary; (b) denying Brenner's request to have her counsel present at the November 3, 1987, Board of Directors meeting; (c) precluding Brenner from "participating in the decision-making process and operation of Arbee"; and (d) failing "to provide Brenner with any other effective notice of the affairs of Arbee."
asserted additional acts of misconduct that had allegedly jeopardized her interest in Arbee: (a) the misapplication of a supplier's discount to acquire an account; (b) the misrepresentation of union identity for some of Arbee's non-union employees; (c) the failure to pay sales tax on cash sales to employees; (d) the failure to file W-2 and l099 forms for temporary employees who earn more than $600 in one year; and (e) the misappropriation of cash funds by Berkowitz. Plaintiff hired an accounting firm to inspect Arbee's corporate books, records, ledgers, invoices, and income statements that uncovered most of the acts of misconduct alleged in the amended complaint. Brenner alleged also that the termination of her son and daughter-in-law had been unfair.
Plaintiff sought the following relief: appointment of a custodian, an order for the sale of the Berkowitzes' stock to Brenner, an order for the purchase of plaintiff's stock by Arbee or the Berkowitzes, dissolution of Arbee, reimbursement for the fees of Brenner's attorney and expert, and such further relief as the court deemed just.
Evidence adduced at the bench trial established that at the time Arbee was formed, Brenner did not intend to participate in Arbee's management or even to work for Arbee. Brenner's role was solely director and investor.
salary of $2,000 to $3,000 to establish an Individual Retirement Account. In an arrangement acceptable to Brenner, Arbee began paying Brenner a salary of $26,000 per year in lieu of dividends. Additionally, Brenner received income distributions from real estate holdings connected to Arbee.
Under Berkowitz's management, the company has flourished. Sales have grown from $750,000 in l973 to $46 million in l989. A court-appointed expert placed Arbee's value at approximately $4.5 million as of December 3l, l989. In addition, the company has expanded its markets, going beyond New Jersey to open showrooms and warehouses in Washington, D.C. and Maryland. The company has grown from twenty-two employees in l98l to l55 employees in l989.
The Chancery Division determined that oppression was required to trigger N.J.S.A. 14A:12-7(1)(c). The court held that to demonstrate oppression, the minority shareholder must show that her reasonable expectations had been frustrated, that the majority shareholders had breached their fiduciary duty to her, or that the majority's misconduct had led to a change in the minority's position within the corporate structure. With regard to each of Brenner's allegations, the Chancery Division determined that Brenner had failed to demonstrate oppression sufficient to trigger the statute.
relief for the departure of her future daughter-in-law, Nancy McGrath, and the firing of her son Andrew from Arbee.
In l986, McGrath was Arbee's second leading salesperson and by l987 she was the top salesperson. Nonetheless, McGrath testified that Berkowitz had forced her out of the company to make room in the sales force for his daughter, who was less capable than McGrath. McGrath secured a position in another company after Berkowitz reassigned a particularly lucrative account from McGrath to his own daughter.
Berkowitz fired Brenner's son because Andrew had refused to pay $l00 in cash to a company employee for helping him do some work at his home. Apparently, the Brenners and the Berkowitzes had used employees free of charge many times in the past. Brenner's son had refused to pay the cash and instead wrote a check payable to Arbee for $225, the estimated value of the labor and the truck. Berkowitz tore up the check and insisted on the cash payment. When Brenner's son continued to refuse, Berkowitz fired him.
Although Brenner testified that it was her understanding that the company had been formed for "any member of the family, for me or for my children, to take part in, if they so desired . . .," the court found Brenner's family had no reasonable expectation of unconditional employment by the corporation. To trigger the statute, Brenner was required to show that the conditions leading to the departure of McGrath from the company and the firing of Andrew had been "targeted" to oppress her.
Because plaintiff had not shown a malicious intent, the court found that the business-judgment rule barred it from second-guessing Arbee's management decisions.
Brenner claimed that a misapplication of the Steelcase Dealership discount jeopardized her investment in Arbee.
Arbee's distribution of Steelcase products constitutes approximately seventy- to eighty-five-percent of its total sales. The Steelcase account is therefore one of Arbee's most valuable assets. Steelcase granted Arbee a discount-pricing arrangement for preferred customers, one of which was Prudential Insurance Company.
In May l985, defendants applied Prudential's eighteen percent discount to an order placed with Steelcase on behalf of the United Nations (U.N.), which was not a preferred customer. Arbee had successfully obtained the U.N. order because it included the discount. Berkowitz claimed that the U.N. order was the result of a clerical error. However, not until this suit was instituted did Arbee repay Steelcase the approximately $l8,000 discount that had been applied to the U.N. order. Nevertheless, the court determined that Steelcase's subsequent increase in Arbee's franchise to include the territories of Washington, D.C. and Baltimore tended to undermine plaintiff's claim that the improper discount had jeopardized Arbee's relationship with Steelcase.
The Chancery Division also addressed Arbee's practice of permitting its employees to purchase furniture at wholesale prices, for cash, free of sales taxes. Those sales were never recorded on the corporate books. Instead, Resnick and Berkowitz spent the funds at their discretion. After Resnick's death, Berkowitz continued the practice until l986.
Berkowitz testified that he had used the money for company expenses. Sales records (available only for 1985 and 1986) indicated that $27,000 had been collected in cash sales to employees during those two years. In April l988, five months after Brenner had filed suit, Berkowitz accounted for $l9,450 of the $27,000 and paid the balance to Arbee.
Additionally, Berkowitz paid the back unpaid sales tax on the employee cash sales. In l990, Arbee filed an amended sales tax return together with a check for approximately $2,300 to pay sales tax on employee sales for a portion of the taxable years l985 to l987.
Defendants concede that that corporate conduct was improper. The Chancery Division enjoined that practice. However, the court found that the use of unreported cash funds could not have frustrated plaintiff's reasonable expectations, because the practice had been started by her father, Resnick. Indeed, denying Brenner's motion for reconsideration, the court noted that for Brenner to challenge a "policy that was established by [her] father" was "disingenuous."
Plaintiff alleged that the failure to pay tax on temporary employees also jeopardized her interest in the company. From 1983 to 1987, Arbee issued "green checks" (i.e. checks from the general disbursement account) for temporary employees. Those checks totaled over $223,000. Berkowitz admitted that Arbee had failed to issue W-2 or l099 forms to some employees who had earned more than $600 per year during that time period. Berkowitz testified that those employees had been independent contractors and thus that Arbee did not have to file W-2 or l099 forms. Nonetheless, the practice of failing to withhold income taxes or to report those earnings ceased early in l987, before Brenner filed suit.
The Chancery Division held that the statute aims to rectify "ongoing oppression, fraud or illegality." Because all employees had been placed on the payroll at the time of suit, Brenner's sole relief was an injunction against future misconduct.
Brenner alleges that her investment was also placed at risk because Arbee was improperly assigning non-union workers to union jobs.
Berkowitz admitted that in l985 he sent non-union Arbee employees to job-sites, had them assume the names of union members, and had them work under those assumed names. That practice ended in l986, and Berkowitz contends that the unions suffered no financial losses.
Because the trial court required that the oppression, fraud, or illegality be continuing, the Chancery Division only enjoined Arbee from returning to the previous practice.
Brenner also asserted that Berkowitz was receiving a salary in excess of that authorized by his employment agreement. Berkowitz entered into an employment agreement with Arbee in November of l976 that set his annual salary at $l25,000 unless Arbee's board later determined that he should be paid a different amount. Berkowitz received two board-approved salary increases, with the result that in June l98l he was earning $350,000 per year. Starting in l983, however, he began to take salaries in excess of the approved sum. By 1989, Berkowitz reported a salary of $474,206.
Although Berkowitz testified that his compensation was clearly reflected in Arbee's financial statements and that the directors of the corporation knew of his compensation through informal discussions, plaintiff had received no official notice of the salary increases. Plaintiff produced evidence that tended to show that Berkowitz's compensation was excessive in comparison to Arbee's pre-tax profits.
Berkowitz's salary continued to grow "at the expense of the corporation and its shareholders," and without corresponding increases of dividends or other benefits to the minority shareholder, Berkowitz's salary might be grounds for "a future claim of oppression."
Finally, although the removal of plaintiff from the Board of Directors had frustrated her reasonable expectations in the corporation, the court determined that "appointing a receiver or provisional director" as permitted by the statute "would not be feasible given Arbee's consistent growth." Thus, the court ordered that plaintiff be reinstated as a Director. Although the court found that plaintiff had proven the illegal and fraudulent acts of (1) misapplication of discounts, (2) improper assumption of union identity, (3) failure to collect tax on employee sales, and (4) failure to file W-2's and 1099's on behalf of temporary employees, it nonetheless concluded that prior to trial the corporation had taken corrective action to ensure that those acts of misconduct had ceased. Relying on Balvik v. Sylvester, 411 N.W.2d 383 (N.D. 1987), the court determined that for relief to be granted a continuing course of misconduct must be shown. Thus, the court held that "since the above mentioned bases for oppression have ceased, the court [could not] award statutory relief." The court did, however, enjoin Berkowitz from engaging in future misconduct in violation of his fiduciary duties.
If you're talking about Joe's Delicatessen and they're giving away five pounds of bologna out the back door every day, that might be a substantial defalcation, it might be a gross mismanagement . . . [but] in the size of a corporation like this [it] would be de minimis, wouldn't it?
What I'm suggesting to you is, that there has to be some equation here. It seems to me it has to have something to do with the degree to which the alleged mismanagement substantially affects the minority stockholder because there's a two-way street here. The statute not only protects the minority stockholder, but I view it also as a protection, as well, perhaps not intentionally drawn, for the majority. To buy out a substantial minority interest is not an easy task, particularly today when bank financing is very difficult to come by.
So it seems to me that since the burden is traditionally on the plaintiff, anyway, and since I owe an obligation to the majority stockholders as well as the minority, it just seems all to fall into the same conclusion that it has to be substantial.
At the conclusion of the trial, the court granted Brenner an injunction against future misconduct by Arbee and ordered her reinstatement to the Board. In the absence of an appropriate motion, the court believed it had no authority to order a buy-out under the statute. The court did not award counsel fees or costs.
Plaintiff filed a motion for reconsideration. First, she asked the trial court to determine that Berkowitz's misconduct had been sufficiently substantial to qualify as "oppressive" within the meaning of the statute. Second, she requested the court to exercise its inherent authority to order a buy-out by ordering defendants to purchase Brenner's shares or by ordering the Berkowitzes to sell their shares to Brenner.
[-]sensitive aspect of all these cases.
The Appellate Division reversed the Chancery Division's judgment and remanded the case, holding that a finding of oppression is not necessary to trigger the statute if mismanagement, fraud, or illegality has been shown. Brenner v. Berkowitz, 26l N.J. Super. 63, 75 (l992). Further, even if oppression were required, oppression exists whenever a company conducts its business illegally or fraudulently. Ibid. The court concluded that proof of "fraud or illegality" establishes a per se cause of action under the statute. Id. at 75-76.
In addition, the Appellate Division disagreed with the court's holding that the statute seeks to remedy only "on-going" misconduct, and that because the misconduct had ceased in this case, plaintiff could not prevail under the statute. Id. at 77.
Based on its conclusion that plaintiff's proofs had triggered the statute, and its finding that a buy-out was a more desirable remedy than dissolution of a thriving company, the Appellate Division remanded the case to the Chancery Division to entertain a buy-out motion from either party. Id. at 81. The Appellate Division also ordered reconsideration of whether counsel fees should be awarded under N.J.S.A. 14A:12-7(10). Ibid.
We granted defendants' petition for certification, 133 N.J. 435 (l993).
A review of the statutory predecessors to N.J.S.A. 14A:12-7 aids us in interpreting the current provision. That review illustrates the Legislature's cautious approach to expanding the rights and remedies of minority shareholders.
in cases of a "'gross abuse of trust, dissention among the members of the board of directors, or the absence of a properly constituted board of directors.'" Bostock v. High Tech Elevator Indus., 260 N.J. Super. 432, 443 (App. Div. 1992) (quoting Friedus v. Kaufman, 35 N.J. Super. 60l, 6l2 (Ch. Div. l955)).
In l938 the Legislature enacted the first statute that permitted a chancery court to dissolve a deadlocked corporation. Pachman, supra, l 0 Seton Hall L. Rev. at 3l9 (citing N.J. Rev. Stat. 14:13-15 (1938)). Although the statute permitted judicial dissolution, the statute was "[n]arrowly drafted." Ibid. Dissolution was permitted only when the corporation had (l) an even number of directors who were equally divided respecting the management of the corporations and the voting shares of the corporation were equally divided, or (2) the shareholders could not agree on the election of an uneven number of directors. L.l938, c. 303, 1. In either event, dissolution was an available remedy only if one-half of the shareholders agreed. Ibid.
agreement of one-half of the directors or one-half of the shareholders. Corporation Law Revision Commission, Comment on l968 Amendments to N.J.S.A. l4A:l2-7.
Despite the new test, however, protection afforded a minority shareholder in a close corporation remained virtually non-existent. Statutory relief was available to the minority shareholder only if she joined with other shareholders to cause the deadlock necessary for judicial dissolution. The statute provided no relief to the minority shareholder if the directors or controlling shareholders unreasonably frustrated the minority shareholder's expectations.
The 1968 commission did not, however, completely ignore the plight of a minority shareholder in a close corporation. The commission recognized that one of the primary functions of corporate law was to "provide adequate protection for shareholders, including those with minority interests." Corporation Law Revision Commission, Report of June 20, 1968, reprinted in 14A N.J.S.A. IX, XI. New section 14A:12-5 provided that dissolution to protect the interests of minority shareholders would be available if the parties had contracted for that right and incorporated that agreement into the articles of incorporation or by-laws of the corporation. Id. at XVI.
close friends. Bostock, supra, 260 N.J. Super. at 444. Those persons often fail to provide for involuntary dissolution because they do not expect irreconcilable differences to arise. Moreover, foreseeing every possible scenario in which a minority shareholder would value the right to withdraw her investment at will would be difficult. Terry A. O'Neill, Self-Interest and Concern for Others in the Owner-Managed Firm, 22 Seton Hall L. Rev. 646, 659 (1992) (hereinafter O'Neill).
Before 1973, therefore, the statute provided for judicial dissolution, but only in cases of deadlock or failure to elect directors for two consecutive years. In close corporations, judicial dissolution was statutorily permitted only if the minority shareholders had reserved the right in the articles of incorporation or by-laws to dissolve the corporation.
N.J.S.A. at XXI (West Supp. 1993). The statute expanded the statutory remedies "by adding three alternative remedies to dissolution." Corporation Law Revision Commission, Comment on l972 Amendments to N.J.S.A. l4A:l2-7 (hereinafter Comment on l972 Amendments). Thus, "[t]he new statute gives the court, as well as the parties, some middle ground between the Hobson's choice of deadlock or dissolution." Pachman, supra, l 0 Seton Hall L. Rev. at 323. To ensure that minority shareholders or others suing under the statute do not abuse the statutory protections, however, the Commissioners emphasized that all the remedies were "discretionary." 14A N.J.S.A. at XXII.
At the same time that the Legislature created the statutory right of a minority shareholder to challenge actions taken within a close corporation, it also added "as a ground for action . . . misconduct or oppressive behavior by those in control of the corporation." Comment on 1972 Amendments. That provision, N.J.S.A. 14A:12-7(1)(c), is the first provision we examine.
one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.
The rules of statutory construction require us to begin our interpretative analysis by closely scrutinizing the statute's plain language. See Town of Morristown v. Woman's Club, 124 N.J. 605, 610 (1991). We begin by considering subsection (c), which creates a cause of action unique to close corporations. After determining what circumstances trigger the statute, we will direct our attention to subsection (1), which enumerates available remedies.
We note that subsection (c) applies only to corporations with twenty-five or fewer shareholders. That requirement recognizes that shareholders in close corporations need special protection because of their unique vulnerability. That special vulnerability exists for three reasons.
First, because the majority has the controlling interest, it has the power to "dictate to the minority the manner in which the corporation is run." Bostock, supra, 260 N.J. Super. at 443 Second, shareholders in close corporations frequently consist of family members or friends and once the personal relationship is destroyed, the company deteriorates. Id. at 444. Third, unlike shareholders in larger corporations, minority shareholders in a close corporation cannot readily sell their shares when they become dissatisfied with the management of the corporation. Ibid. Indeed, the discord in the corporation makes the minority stock even more difficult to sell. Ibid.
The inability to reflect dissatisfaction by withdrawing one's investment places the majority shareholder in an enhanced power position to use the minority's investment "without paying for it." Arthur D. Spratlin, Jr., Modern Remedies for Oppression in the Closely Held Corporation, 60 Miss. L.J. 405, 405 (1990) (hereinafter Spratlin). "As a consequence, a shareholder challenging the majority in a close corporation finds himself on the horns of a dilemma, he can neither profitably leave nor safely stay with the corporation. In reality, the only prospective buyer turns out to be the majority shareholder." Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984), aff'd, 802 F.2d 448 (3d Cir. l986).
By enlarging the grounds on which an action may be instituted and by eliminating as a prerequisite for the institution of that action the statutory necessity of establishing that "the corporation is unable to function normally in the best interests of its creditors and shareholders," the Legislature demonstrated its intent to increase the protection to minority shareholders who are powerless within a corporation, as well as powerless to leave. See N.J.S.A. 14A:12-7 (West 1968); Comment on 1972 Amendments.
shareholders is not sufficient for a violation of the close corporation statutory provision.
Defendants argue that fraudulent and illegal acts alone do not qualify as statutory violations unless the plaintiff also can show that such acts oppress the minority shareholder. That interpretation contradicts the plain language of the statute, which uses "or" rather than "and" in its description of the various bases for recovery. Moreover, as the Appellate Division observed, the legislative history supports a determination that the Legislature drafted the new statute in the disjunctive "to enumerate additional separate causes of action, independent of oppression"; and therefore "`illegality' and `fraud' as used in the statute are not meant to be synonymous with `oppression.'" 261 N.J. Super. at 75.
oppressive because it is not directed specifically at a minority shareholder. Nonetheless, because such fraudulent or illegal conduct would affect the corporation, and hence the shareholder's stock interest in that corporation, such conduct would be actionable under the statute, even in the absence of oppression, because the statute is written in the disjunctive.
Nor must fraudulent or illegal acts be "on-going" at the time of trial for the statute to apply. The statute's plain language provides that a cause of action exists "upon proof that . . . the directors or those in control have acted fraudulently or illegally." N.J.S.A. 14A:12-7(1)(c) (emphasis added). If the Legislature had intended that the statute apply only to continuing acts, then the use of present tense, i.e., "are acting," would have accomplished that goal. In this statute, the Legislature used a verb form connoting past conduct.
Moreover, as the Appellate Division observed, "A requirement that the fraudulent conduct must be on-going frustrates [the legislative purpose] because it allows the majority to abuse the minority as long as the abuse ceases prior to the date a decision is rendered . . ." 26l N.J. Super. at 77. Requiring that the conduct be continuing would, therefore, work a grave injustice on the minority shareholder by depriving her of a remedy when her reasonable expectations for the corporation are thwarted.
requirement that the misconduct be continuing, we need to clarify the court's findings about the amount of fraud or illegality that qualifies as a violation of the statute. The language and result of the Appellate Division's opinion might lead to the conclusion that any showing of fraud or illegality qualifies as a per se violation of the statute. See 26l N.J. Super. at 75-76. We disagree. A per se rule suggests that a court has no discretion to weigh or to consider the effect, if any, of the misconduct on the minority shareholder or her corporate investment.
targeted to the shareholder. The court has discretion to determine which factors are pertinent to its evaluation of the quality and nature of the misconduct, but certain factors apply in most cases.
Because not all violations will cause a minority shareholder ascertainable harm, a court should consider the seriousness of the violation. For example, a corporation's mere failure to abide by a single tax regulation may be insufficient to bring the circumstances within the statute. Similarly, the court should consider whether the misconduct places the minority shareholder's investment at risk. Thus, in the tax violation example, the court should weigh whether the failure to abide by a single tax regulation resulted in a fine that was substantial in relation to the corporation's net earnings, or otherwise threatened the corporation's existence or its ability to function. Focusing on the harm to the minority shareholder reflects a departure from the traditional focus, which was solely on the wrongdoing by those in control, and reflects the current trend of recognizing the special nature of close corporations. See Spratlin, supra, 60 Miss. L.J. at 411. Courts also should consider whether the misconduct thwarts the minority shareholder's reasonable expectations of his or her role in the corporation. The special nature of the close corporation requires that the court go beyond considering merely monetary harm.
underly the formation of close corporations generate certain expectations among the shareholders concerning their respective roles in corporate affairs, including management and earnings. These expectations preclude the drawing of any conclusions about the impact of a particular course of corporate conduct on a shareholder without taking into consideration the role that he is expected to play. Accordingly 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 * * *."
In determining whether a shareholder's expectations are reasonable and whether the corporation or controlling shareholders or directors unreasonably thwarted them, courts should consider even non-monetary expectations of the shareholder. Indeed, "termination of a shareholder's status as an employee is a much more common means of oppression in a close corporation than is infringement of a shareholder's status as a shareholder." 2 O'Neal's Close Corporations, supra, 9.29 at 134. Even the termination of the employment of the shareholder's children in certain situations may constitute oppressive conduct sufficient to constitute a violation under the statute.
participated in the misconduct. A court could reasonably determine that unfairness would result if a minority shareholder were permitted to seek judicial intervention after years of acquiescence or participation in the alleged misconduct. Indeed, courts have applied the equitable concept of estoppel to bar relief when a shareholder or director had or should have had knowledge of alleged misconduct but failed to act. See Francis v. United Jersey Bank, 87 N.J. 15, 31 (1981)(finding that directors are under continuing duty to keep informed about corporation); Murtland Holding Co. v. Egg Harbor Commercial Bank, 123 N.J. Eq. 117, 122 (Ch. 1938) (noting that stockholder is estopped from objecting to corporate acts performed with his knowledge and assent, and that such assent might be implied from his long silence).
If a minority shareholder has met her burden of demonstrating both misconduct and a nexus between the harm and the minority shareholder's interest in or expectations for the company, the court must then determine what remedy is appropriate to redress the harm.
(1) The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation's stock as provided below, or enter a judgment dissolving the corporation * * *.
The use of the word "may" indicates that the court has discretion in determining whether any of the enumerated remedies is appropriate to a case. See, e.g., Harvey v. Board of Chosen Freeholders, 30 N.J. 381, 391 (1959) (finding that absent legislative intent to the contrary, use of word "may" indicates that provision is permissive, not mandatory). Here, the legislative intent for this statute affirms the plain meaning of the language that the remedies are "discretionary." Comment on 1972 Amendments.
The Commission was mindful that . . . dissolution of a business is a drastic remedy to be applied with caution. In addition, the Commission recognized that there is often a public interest involved in avoiding dissolution as a remedy in the event of deadlock or internal dissension.
(9) In determining whether to enter a judgment of dissolution in an action brought under this section, the court shall take into consideration whether the corporation is operating profitably and in the best interests of its shareholders, but shall not deny entry of such a judgment solely on that ground.
The court is thus required to balance the appropriateness of dissolution as a remedy against the loss to society if the corporation is forced to liquidate. Factors to be considered in weighing the loss to society include the shareholders' loss of goodwill because the corporation is not sold as a going concern, the loss of jobs by employees, and the loss of a steady source of income by suppliers. See O'Neill, supra, 22 Seton Hall L. Rev. at 693.
Caution is needed when determining whether dissolution is appropriate, because "the statutory remedy was meant only to protect the minority, not to provide a weapon to enable it to obtain unfair advantage against the majority." Lawrence E. Mitchell, The Death of Fiduciary Duty in Close Corporations, 138 U. Pa. L. Rev. 1675, 1730 (1990); Pachman, supra, 10 Seton Hall L. Rev. at 331. The statute would become a weapon if dissolution were granted each time a minority shareholder demonstrated some misconduct by the directors or controlling shareholders that falls within the statute's requirements. Then, "[m]inority shareholders [might] use the threat of dissolution to force the majority to accede to their demands or . . . to pay sizeable sums in `settlement' * * *." Pachman, supra, 10 Seton Hall L. Rev. at 326.
shareholder who is a party to the proceeding to either the corporation or the moving shareholder or shareholders, whichever is specified in the motion, if the court determines in its discretion that such an order would be fair and equitable to all parties under all the circumstances of the case.
Previously, the statute permitted such a motion to be made only by a fifty (50") percent shareholder. Corporation Law Revision Commission, Comment on l988 Amendments to N.J.S.A. l4A:l2-7. The Appellate Division in Bostock, supra, properly held that the statute's plain language permits compulsion of the sale of a party's stock to either the moving shareholder or the corporation. 260 N.J. Super. at 445. Defendant argues, however, that the statute does not permit compelling the purchase of the minority's stock by either the majority shareholders or the corporation.
Read literally, the statute requires the prospective purchaser--either the corporation or a shareholder in the litigation--to move to compel a purchase of stock held by another shareholder. The requirement that a motion be filed appears to reflect a legislative purpose to authorize specifically only voluntary purchases. Although the Commissioners' Comment suggests that a motion by a shareholder may be sufficient to compel a purchase by the corporation, see Corporation Law Revision Commission, Comment on l988 Amendments to N.J.S.A. l4A:l2-7, we are inclined to construe the statute as authorizing specifically only voluntary purchases by either a shareholder or the corporation.
We have no doubt, however, that the enactment of N.J.S.A. l4A:l2-7 was not intended to supersede the inherent common law power of the Chancery Division to achieve equity. That the court would have the statutory power to order dissolution of a corporation, but not the lesser authority to compel the corporation to use its assets to acquire the stock of an oppressed shareholder, would make no sense. Both dissolution and a corporate purchase of a shareholder's stock involve a distribution of corporate assets. In the case of dissolution, a distribution results in the termination of the corporation's business, with its assets being proportionately distributed to the stockholders. In the case of a buy-out, the corporation may be required to distribute retained as well as prospective earnings, but the corporate enterprise survives.
dissolution. Indeed, some out-of-state cases suggest that a court-ordered buy-out is permitted solely when the facts warrant a dissolution but the court desires to avoid that drastic remedy. See Gershaw v. Ther-A-Pedic Sleep Prods., 218 N.J. Super. 350, 356 (App. Div. 1987)(citing Meiselman v. Meiselman, 307 S.E.2d 551 (N.C. 1983), and Orchard, supra, 590 F.Supp. l548).
In Gershaw, the Appellate Division denied a buy-out when the shareholder sought an order permitting inspection of corporate records and a declaratory judgment to identify the membership of the board of directors. Id. at 356. The Gershaw court based its holding partially on the fact that the plaintiff had not instituted the action under N.J.S.A. 14A:12-7(1), and therefore the buy-out provision of N.J.S.A. 14A:12-7(8) could not be activated. Id. at 355. Nonetheless, a corporation's failure to permit a shareholder to inspect corporate records could fall within N.J.S.A. 14A:12-7, but that violation alone most likely would not warrant the statutory remedies.
Although a buy-out may be preferable to dissolution, other remedies may be more appropriate to a buy-out. The statute itself states that a buy-out is warranted only when it would be "fair and equitable to all parties." N.J.S.A. 14A:12-7(8) (emphasis added). Indeed, the Commission provided that "[e]ach of these remedies is . . . not exclusive; accordingly, the court is given the flexibility necessary to handle any particular situation." Corporation Law Revision Commission, Final Report - June 15, 1972, 14A N.J.S.A. XVII, XXII (West Supp. 1993).
"are distinguished for their flexibility, their unlimited variety, their adaptability to circumstances, and the natural rules which govern their use. There is in fact no limit to their variety and application; the court of equity has the power of devising its remedy and shaping it so as to fit the changing circumstances of every case and the complex relations of all the parties."
(13) Treating a group of related corporations as a single entity for the purpose of determining appropriate relief. 2 O'Neal's Close Corporations, supra, 9.35 at 170-171; see also Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 395-96 (Or. 1973) (listing ten alternatives to dissolution for resolving minority shareholder's claims against close corporation); Spratlin, supra, 60 Miss. L.J. at 420-22.
The existence of less harsh remedies has the effect of increasing the willingness of courts to intervene and provide relief to shareholders.
With regard to N.J.S.A. 14A:12-7(1)(c), we hold that (1) the statute is written in the disjunctive and therefore a finding either of fraud or of illegality, without a finding of oppression, may be sufficient to permit a court to conclude that the statute has been violated; (2) the statute does not require that the misconduct be continuing for a violation to be established; and (3) the court must consider the quality of the misconduct to determine whether the minority shareholder has demonstrated a nexus, i.e., that the misconduct caused harm to the minority shareholder or her interest in the corporation.
We reject plaintiff's argument that any showing of illegality or fraud qualifies as a per se violation of the statute. Instead, the trial court must evaluate the quality of the misconduct or oppression to determine its seriousness. Although we encourage a review of whether the misconduct or oppression is directed at the minority shareholder, even fraudulent acts not directed specifically at the shareholder, but that place the minority shareholder's interest in that corporation at risk, may be sufficient to constitute a violation of the statute.
court has the discretion to choose the appropriate remedies. Most acts of misconduct or oppression will warrant some type of remedy, but only the most egregious cases will warrant the drastic remedies permitted by the statute. Importantly, courts are not limited to the statutory remedies, but have a wide array of equitable remedies available to them. Indeed, the statutory remedy of dissolution should be imposed only in the most egregious cases. The buy-out remedy is a preferable alternative to dissolution, but it may not be preferable to equitable remedies also available to the court. In many cases, the court will find that its equitable powers adequately balance the need to redress the statutory violation against society's interest in maintaining functioning corporations.
Cases involving N.J.S.A. 14A:12-7(1)(c) are very fact sensitive, and thus any hard and fast rules are difficult to formulate. The many possible types of relationships in close corporations compel a flexible approach to the problem. The statute intends to protect minority shareholders in the vulnerable setting of a close corporation. Because the Legislature's goal was fairness to all shareholders, however, courts must ensure that minority shareholders are not permitted to use the statute to tyrannize the majority.
granted by the Chancery Division. The record contains substantial proof that Brenner never had any expectations that she was going to manage Arbee. From the inception of the corporation, Brenner was intended to be a minority shareholder and a director. Complete control of the management of the business was given to Berkowitz. None of the isolated incidents recounted above prevented the growth of the corporation or Brenner's investment in the company. Indeed the substantial growth of the business has increased the value of Brenner's investment. Nonetheless, we approve of the Chancery Division's injunction against any future acts of misconduct.
a corporation acted oppressively. A heightened burden exists partiuclarly in the case of a relative who was not employed at the beginning of the corporate relationship. The Chancery Division properly concluded that it could not second-guess the corporation's exercise of its business-judgment.
Although the corporate founders never intended that Brenner manage Arbee, she was expected to be a director and a substantial shareholder. The Chancery Division properly reinstated Brenner as a director of Arbee. As a director, Brenner is entitled to review the books and records of the company and to participate in the major decision-making processes of Arbee. We expect that she will be a more active director than she has been in the past. Brenner does not challenge the salary and dividends returned on her investment -- perhaps because she considered the salary paid to her son an indirect economic benefit. Nevertheless, as a substantial shareholder of Arbee, she is entitled to financial benefits commensurate with her holdings. As did the Chancery Division, we caution the Berkowitzes that any increase in benefits to the majority shareholders without a corresponding benefit to Brenner may provide Brenner with a future claim under N.J.S.A. l4A:l2-7. Moreover, the occurrence of future acts of misconduct may require the court to consider other relief, including the appointment of a provisional director.
If the court determines that any party to an action brought under this section has acted arbitrarily, vexatiously, or otherwise not in good faith, it may in its discretion award reasonable expenses, including counsel fees incurred in connection with the action, to the injured party or parties.
We conclude that N.J.S.A. 14A:12-7(10) does not apply to either plaintiff or defendants.
We reverse the judgment of the Appellate Division and reinstate the judgment of the Chancery Division. No costs.
Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern, and Stein join in this opinion.

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