(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
Argued September 27, 1995 -- Decided January 18, 1996
O'HERN, J., writing for a unanimous Court.
The issue on appeal is whether a court has the authority to order majority shareholders to sell their
shares to a minority shareholder whose rights have been oppressed by the majority.
Pursuant to N.J.S.A. 14A:12-7(1)(c) of the New Jersey Corporation Business Act (CBA), a court can
grant relief such as dissolution or a stock buy-out when controlling shareholders have acted fraudulently or
illegally, mismanaged the corporation, abused their authority as officers or directors, or have acted
oppressively or unfairly toward a minority shareholder. N.J.S.A. 14A:12-7(8) permits a minority shareholder
to petition a court to order a buy-out of the majority upon a triggering event such as shareholder oppression.
Ralph Muellenberg held eighty patents worldwide in the field of locking devices used generally in the
building of machines. In 1972, Muellenberg founded Bikon-Technik GmbH (BTG) in Germany to promote
the products he invented. BTG owns the trademarks BIKON, DOBIKON, and BIKON-Technik.
Adda Finanziaria, S.R.L. (Adda) is an Italian holding company owned by Dario Passerini, general manager
and a shareholder in Tecnomeccanica, S.N.S. di Sacchi & C. (TM). In 1979, BTG entered into an agreement
with TM, which was owned equally by Muellenberg and Adda, to manufacture Bikon products since BTG
does not manufacture the locking devices itself. Kurt Burg, a mechanical engineer, came to the United
States in 1976 from Germany and was employed by a competitor of BTG.
Sometime in 1980, Muellenberg and Burg discussed the formation of a U.S. company to promote
and sell Bikon products in the U.S. and Canada. In June of 1982, Bikon Corporation (BNJ) was
incorporated in New Jersey. Under the Stockholder's Agreement, Muellenberg, Burg and Passerini were the
initial directors and officers of the company. The parties executed license and distribution agreements,
which, among other things, gave BNJ the right to produce and distribute products developed in accordance
with Muellenberg's patents and gave BNJ the license to use the trademarks BIKON, DOBIKON, and the
trade name BIKON-Technik in exchange for a specified fee.
Muellenberg, Burg, and Passerini subscribed for one hundred shares of BNJ stock for $30,000 each.
Muellenberg invested cash, Burg's subscription was provided in exchange for his knowledge of the trade, and
Passerini's subscription was credited against merchandise to be manufactured by TM for sale by BNJ.
According to Muellenberg, he made it clear to Burg before BNJ was formed that he, Muellenberg, would be
in control of the company and would be its president, that Burg would be general manager and that Passerini
would be treasurer. Business operations began in Burg's River Vale, New Jersey home. In June 1984, Burg
and his wife bought a house with an out-building in Monroe, New York, and moved the business there. BNJ
paid rent to the Burgs for the office space in River Vale and Monroe. As general manager and the only
officer on site on a regular basis, Burg handled the day-to-day business of BNJ.
Although the business prospered, disputes arose between Burg and Muellenberg concerning certain
business operations. Claiming that the corporation was deadlocked, Muellenberg instituted proceedings in
the Chancery Division seeking dissolution of the corporation and other relief. Burg counterclaimed, seeking
to confirm that Passerini was not a shareholder and to compel Muellenberg to sell his stock to Burg.
A meeting of the shareholders and directors was called for January 20, 1993, which only Burg failed
to attend. At that meeting, Muellenberg and Passerini voted to declare a dividend of $180,000, to retain an
outside accountant to determine the accrued royalties, to require the signatures of Burg and Muellenberg or
Muellenberg alone for future bank withdrawals, and to require Board approval for the selection of suppliers
and purchases over $1,000. Muellenberg and Passerini dismissed their court action, except for their
application to purchase Burg's stock, which was tried over several days.
The Chancery court found that Passerini was a stockholder, having paid for his stock in the transfer
of goods. The court then sought to determine whether: 1) under N.J.S.A. 14A:12-7, Burg had proven a
triggering event that would authorize a buy-out of shares or dissolution; and 2) if a triggering event had
occurred, should a sale of stock be directed and, if so, from whom to whom. The court found that at the
January 20, 1993 shareholder's meeting, the majority shareholders, Muellenberg and Passerini, had begun
efforts to freeze out Burg and intended to vote Burg out as a director and terminate him as general
manager. The trial court concluded that the conduct of the majority shareholders amounted to oppression,
and that the only fair and equitable remedy was a stock buy-out by Burg of the interests of Muellenberg and
Passerini. Thereafter, the parties agreed on the value of the stock and Burg paid $235,000 each to
Muellenberg and Passerini and changed the name of the company to B-Loc Corporation.
On appeal, the Appellate Division reversed and remanded that portion of the trial court's judgment
ordering the sale of the majority's shares to Burg and terminating Muellenberg and Passerini as corporate
officers and directors. According to the Appellate Division, the Chancery Division's finding that the facts
satisfied the oppression and unfairness standards of N.J.S.A. 14A:12-7(1)(c) was premature and, therefore,
erroneous as a matter of law. The Appellate Division reasoned that the trial court should have given the
parties an opportunity to operate under their newly adopted governing structure before declaring an impasse.
The Supreme Court granted Burg's petition for certification and stayed the effect of the Appellate
Division decision.
HELD: The provisions of the New Jersey Corporation Business Act, N.J.S.A. 14A:12-7(1)(c) and 14A:12-7(8), do, in rare circumstances, authorize a buy-out of the shareholders of a close corporation
representing the majority of corporate ownership by the minority shareholders whose rights have
been oppressed by that majority.
1. Shareholders in a close corporation are typically involved in the management and operation of the
company. Because majority shareholders have the power to control the manner in which the corporation is
run, a minority shareholder in a close corporation becomes vulnerable when disputes develop. The minority
shareholder can neither profitably leave nor safely stay with the corporation, thus enabling controlling
shareholders to exploit minority shareholders and defeat their reasonable expectations. (pp. 10-14)
2. In determining whether a course of conduct has oppressed a minority shareholder in violation of the
CBA, courts should examine the parties' understanding in respect of their roles in corporate affairs.
Oppressive conduct includes that which frustrates the reasonable expectations of the minority shareholder.
Shareholders in close corporations may have expectations that differ substantially from those of the
shareholders in public corporations and courts must be flexible in their treatment of section 14A:12-7(1)(c)
cases because of their fact-sensitive nature. Minority shareholders' expectations, however, must be balanced
against the corporation's ability to exercise its business judgment and run its business efficiently. (pp. 14-17)
3. In addition to the security of long-term employment and financial return, reasonable expectations include a voice in the operation and management of the business and in the formulation of plans for future development. It is reasonable to conclude that Burg's fair expectations were that he would hold an important position in BNJ's management. Although it cannot be considered oppression when controlling shareholders seek to rein in management and control the affairs of their corporation, the expectations of
Muellenberg and Passerini that they might exercise majority power conflicted with Burg's expectations. In
other circumstances, the solution proposed by the Appellate Division might have resolved the impasse.
However, the events that followed the Appellate Division's decision confirm that the trial court had a better
sense of the internal dynamics and could foreshadow Burg's inevitable ouster from BNJ. Burg's ouster
would not have been a fair accommodation of the reasonable expectations of all shareholders. (pp. 17-19)
4. The record evidences not only Burg's ability to buy-out the majority shareholders, but his significant input
in and connection with BNJ. Therefore, while a minority buy-out is an uncommon remedy, it is the
appropriate one here. The trial court acted within its discretion in ordering Muellenberg and Passerini to
sell their shares in BNJ to Burg. This remedy is authorized under N.J.S.A. 14A:12-7(8) and is consistent
with decisions holding that courts are not limited to statutory remedies but can rely on a wide variety of
equitable remedies as well. (pp. 19-22)
Judgment of the Appellate Division is REVERSED and the judgment of the Chancery Division is
REINSTATED. It is left to the trial court the resolution of any unresolved issues attendant to the buy-out.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, GARIBALDI, STEIN and
COLEMAN join in JUSTICE O'HERN's opinion.
SUPREME COURT OF NEW JERSEY
A-
17 September Term 1995
RALPH MUELLENBERG and
BIKON-TECHNIK, G.m.b.H.,
Plaintiffs-Respondents,
v.
BIKON CORPORATION,
Defendant,
and
KURT W. BURG,
Defendant-Appellant,
and
ADDA FINANZIARIA, S.R.L. and
DARIO PASSERINI,
Defendants-Respondents.
Argued September 27, 1995 -- Decided January 18, 1996
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
277 N.J. Super. 67 (1994).
Eugene H. Gilmartin argued the cause for
appellant (Barry G. Leveen, attorney).
Frederick A. Nicoll argued the cause for
respondents Ralph Muellenberg and
Bikon-Technik, G.m.b.H.
William F. Campbell, III, argued the cause
for respondents Adda Finanziaria, S.R.L., and
Dario Passerini (Dillon, Bitar & Luther,
attorneys).
The opinion of the Court was delivered by
O'HERN, J.
This appeal concerns a court's authority to order
shareholders representing a majority of corporate ownership to
sell their shares to a minority shareholder whose rights had been
oppressed by the majority. We find that the provisions of the
New Jersey Corporation Business Act, N.J.S.A. 14A:12-7(1)(c) and
14A:12-7(8), do, in rare circumstances, authorize a buy-out of
the majority. Because unfolding events in this case have
confirmed the judgment of the Chancery Division that the parties
would be unable to cooperate in the joint management of the
enterprise, we reinstate its judgment ordering the majority
shareholders to sell their interest to a minority shareholder.
For purposes of this appeal, we accept generally the facts set
forth in the majority shareholders' brief.
Adda Finanziaria, S.R.L. (Adda) is an Italian holding
company owned by the defendant Dario Passerini who is also the
general manager and a shareholder in another Italian company,
Tecnomeccanica S.N.S. di Sacchi & C. (TM).
Kurt Burg is a mechanical engineer who came to the United
States in 1976 from Germany and was employed here by a company
known as Ringfeder Corp., also in the clamping device business
and a competitor of BTG.
Muellenberg's goal was to establish a family of companies
related through common ownership and contract to market his
products throughout the world. This integrated ownership
structure was aimed at assuring quality and sources of supply.
By the end of 1992, worldwide sales of Bikon and Dobikon products
(collectively "Bikon Products") totaled nearly $5 million.
BTG does not manufacture locking devices itself. In 1979 BTG
entered an agreement with TM, which was owned equally by
Muellenberg and Adda (Passerini's holding company), to
manufacture Bikon products. The agreement provided, among other
things, that TM would be the exclusive manufacturer of products
for BTG in Italy, that BTG would make specified annual minimum
purchases and that BTG would have the exclusive right to sell
products manufactured by TM in various countries including the
United States (the "Cooperation Agreement"). No royalty or
license fees were due to BTG or Muellenberg under the Cooperation
Agreement with TM.
Sometime in 1980, Muellenberg and Burg began discussions
concerning Burg's possible participation in a United States
company to be formed by Muellenberg and Passerini for the
promotion and sale of Bikon products in the United States and
Canada.See footnote 1 Muellenberg had met Burg some years earlier when Burg
was a German resident.
To that end Bikon Corp. (BNJ) was incorporated in New Jersey
on June 25, 1982. A Stockholders' Agreement provided that
Muellenberg, Burg and Passerini would be the initial directors
and officers and that Muellenberg would be president. The
parties also executed a License Agreement and a Distribution
Agreement dated April 12, 1982. The License Agreement granted
BNJ the right to exploit Bikon products in the United States in
consideration of a license fee to Muellenberg, as owner of the
patents, of 5 per cent of the gross receipts of BNJ, payable
quarterly.
Pursuant to Burg's request, the Distribution Agreement gave
BNJ the right to produce and distribute products developed in
accordance with Muellenberg's patents. The Distribution
Agreement licensed BNJ to use the common law trademarks BIKON,
DOBIKON and the trade name BIKON-Technik in exchange for a fee of
2 per cent of BNJ's gross receipts. BTG also obliged itself to
offer newly developed products in the field of shaft to hub
connections to BNJ for distribution in the United States. To
ensure quality and protect valuable patent and trademark rights,
Muellenberg included in the Distribution Agreement a provision
requiring that production in the United States be in accordance
with drawings and blueprints supplied by BTG which could not be
altered without BTG's permission.
Muellenberg, Burg and Passerini subscribed for 100 shares of
BNJ stock for $30,000 each. Only Muellenberg invested cash.
Burg's subscription was provided in exchange for his knowledge of
the trade and Passerini's was credited against merchandise to be
manufactured by TM for sale by BNJ. Certificates evidencing
ownership of 100 shares of BNJ were issued to Muellenberg, Burg
and Passerini.
Muellenberg claims that prior to the formation of Bikon
Corp., he made it clear to Burg that he, Muellenberg, was to be
in control of the company and would be its president, Burg would
be general manager and Passerini would be treasurer. Business
operations commenced in Burg's River Vale, New Jersey home. In
June 1984, Burg and his wife bought a house with an out-building
in Monroe, New York and moved the business there. The out-building was renovated with offices upstairs and a warehouse on
the first floor. Eventually, BNJ expanded to a warehouse in
Monroe. BNJ always paid rent to Burg and his wife for the office
space in River Vale and Monroe ($1350/month in 1992).
Despite differences that developed between Muellenberg and
Burg, the business prospered. As General Manager and the only
officer on site on a regular basis, Burg handled the day-to-day
business of BNJ. Muellenberg claims that Burg acted as though he
had exclusive control over the business. Disputes arose about
the introduction of new products into the BNJ line, the patent
and trademark royalty fees, the rent that Burg paid to himself,
and Muellenberg's desire to see detailed reports of sales and
activities.
Muellenberg also complained that when Passerini fell behind
in production capacity, Burg went to Italy without notice to
Muellenberg and unilaterally engaged other suppliers.
Muellenberg regarded some of them as direct competitors and did
not want them to threaten his interests. He viewed introduction
into the United States of the Bikon products produced by
unlicensed manufacturers as a violation of his patent rights.
Burg countered that Passerini had encouraged him to engage the
other contractors with Muellenberg's tacit approval.
At first Passerini appeared neutral or inactive. A question
arose concerning Passerini's fulfillment of his capital
subscription. Claiming that the corporation was deadlocked,
Muellenberg instituted these proceedings in the Chancery
Division, seeking a dissolution of the corporation and other
relief. Burg counterclaimed, seeking to confirm that Passerini
was not a shareholder and to compel Muellenberg to sell his stock
to Burg.
When Passerini resumed his role, notice was given of a
meeting of the shareholders and directors to be held on January
20, 1993, to consider dissolution. On Burg's application, the
Chancery Division enjoined any action to dissolve, but not the
meeting. Muellenberg and Passerini traveled from Europe to
attend the meeting. BNJ's secretary attempted to persuade Burg
to attend either by telephone or in person. When Burg refused,
the meeting proceeded in his absence.
At that meeting, Muellenberg and Passerini voted to declare
a dividend of $180,000 ($600 per share), to retain an outside
accountant to determine accrued royalties, to require the
signatures of Burg and Muellenberg or Muellenberg alone for
future bank withdrawals, and to require Board approval for the
selection of suppliers and purchases over $1,000.See footnote 2 Muellenberg
and Passerini assumed that they had regained control of BNJ and
dismissed their court actions, except for their application to
purchase Burg's stock. The ensuing disputes were tried over
eleven days between May 10, 1993 and June 22, 1993.
At trial, the court found that Passerini was a stockholder,
having paid for his stock in the transfer of goods. The issues
it posed for decision were: (1) Had defendant Burg proven a
triggering event under N.J.S.A. 14A:12-7 authorizing a buy-out of
shares or dissolution, and (2) if a triggering event occurred,
should a sale of stock be directed and, if so, from whom to whom?
After reviewing the various claims of oppression and
mismanagement, the court found that at the January 20, 1993,
shareholders' meeting, Muellenberg and Passerini had begun
efforts to freeze out Burg. They had declared a $180,000
dividend that they should have known would deprive Bikon of
needed cash to operate and thus take away Burg's ability to
perform successfully as general manager. In addition, despite
the lack of any showing of abuse by Mr. Burg in operating the
company, they began to strip Burg of his day-to-day control as
general manager by resolving that bank account withdrawals should
be made only by plaintiff or by joint signatures of plaintiff and
defendant Burg. And, finally, the court found that the majority
directors, as "[p]laintiff's counsel acknowledged . . . in
summation," intended to vote Burg out as a director and terminate
him as general manager and employee of the company.
The trial court determined that this course of conduct
amounted to oppression. It held that the only fair and equitable
remedy under the circumstances was to have one or more of the
parties buy the stock of the others. The court concluded that
Burg should buy out the interests of Muellenberg and Passerini.
The parties agreed on the value of the stock. No stay of the
order of the Chancery Division having been obtained, Burg
tendered $235,000 each to Muellenberg and Passerini and
thereafter changed the name of the corporation to B-Loc
Corporation.
On appeal, the Appellate Division reversed and remanded the
portion of the trial court's judgment ordering the sale of the
shares of Muellenberg and Adda to Burg and terminating
Muellenberg and Passerini as corporate officers and directors.
It found that the Chancery Division's holding that the facts
satisfy the oppression and unfairness standards of N.J.S.A.
14A:12-7(1)(c) was "premature and, therefore, erroneous as a
matter of law."
It is not sufficient that Muellenberg
and Passerini "had started to freeze out"
Burg. The statutory remedies of dissolution
or buy-out, available when oppression or
unfairness has occurred, are so terminal in
the context of a corporation's life, that a
court should be loathe to reach either result
except as a last resort. See Brenner v.
Berkowitz,
134 N.J. 488, 510-15 (1993).
* * * Before ordering so extreme a remedy as
a buy-out, other less harsh remedies could
have been applied.
[Muellenberg v. Bikon Corp.,
277 N.J. Super. 67,
75-76 (App. Div. 1994) (citation omitted).]
The Appellate Division held that the trial court should have given the parties an opportunity to operate under their newly adopted governance structure before declaring an impasse. It reasoned that "there was always the possibility that the parties might, out of self-interest, find a way to resolve their differences so as to preclude a maturing `freeze out' from actually occurring, or that they might be assisted in doing so by orders of the court less extreme than dissolution or buy-out." Id. at 76. Because requiring majority shareholders to sell their interests to a minority shareholder is so contrary to our laws' majoritarian principles of corporate governance, the Appellate Division said courts should contemplate such relief only when
"extraordinary equitable considerations and unavoidable
consequences" arise.
Defendant Burg petitioned this Court for certification,
arguing that the Appellate Division incorrectly limited the scope
of N.J.S.A. 14A:12-7, improperly invoked a majoritarian principle
of corporate governance with respect to a close corporation, and
erroneously rejected the decision of the trial court. We granted
Burg's petition for certification,
142 N.J. 448 (1995), and
stayed the effect of the Appellate Division's opinion until we
had reviewed it. We now reverse and reinstate the judgment of
the Chancery Division.
aff'd,
802 F.2d 448 (3d Cir. 1986)). This inability of minority
shareholders to withdraw from the venture on their own terms
makes it easy for controlling shareholders to exploit minority
shareholders and defeat their reasonable expectations.
Traditionally, American courts were reluctant to interfere
in the internal affairs of a corporation. Meiselman, supra, 307
S.E.
2d at 559 (quoting F. O'Neal, Oppression of Minority
Shareholders §9.04, at 582 (1975)). However, "[t]he two
principal conceptual barriers to the court granting relief to
aggrieved minority shareholders..the principle of majority rule
in corporate management and the business judgment rule..actually
have only limited validity in small business corporations."
O'Neal, supra, 33 Bus. Law. at 884.
Some courts, like the Supreme Judicial Court of
Massachusetts, did recognize that shareholders' interests are
different in close corporations, and stated that those
shareholders are subject to a higher standard of duty than
shareholders and directors of publicly held corporations. In
Donahue v. Rodd Electrotype Co.,
328 N.E.2d 505 (Mass. 1975), the
Massachusetts court held that "stockholders in the close
corporation owe one another substantially the same fiduciary duty
in the operation of the enterprise that partners owe to one
another." Id. at 515 (footnote omitted). This heightened duty,
which the court labelled one of "utmost good faith and loyalty,"
was described by then Chief Judge Cardozo of the New York Court
of Appeals in Meinhard v. Salmon: "Joint adventurers, like
copartners, owe to one another, while the enterprise continues,
the duty of the finest loyalty. Many forms of conduct
permissible in a workaday world for those acting at arm's length,
are forbidden to those bound by fiduciary ties." Meinhard v.
Salmon,
164 N.E. 545, 546 (1928), quoted in Donahue, supra, 328
N.E.
2d at 516.
Historically, state corporation statutes had provided
minority shareholders with little protection against exploitation
by controlling shareholders. As Professor O'Neal explained,
"Corporation legislation, although designed primarily to meet
problems of public-issue corporations, nevertheless applied
indiscriminately to all corporations; the statutes did not
differentiate between public-issue corporations and close
corporations." O'Neal, supra, 33 Bus. Law. at 873.
Thus for years there was little or no protection that a
court could afford oppressed minority shareholders. In Brenner
v. Berkowitz, Justice Garibaldi furnished an historical overview
of the New Jersey Legislature's approach to protecting minority
shareholders. She noted that it was not until 1973 that the
legislature amended section 14A:12-7 of the Corporation Business
Act to provide a specific cause of action to protect minority
interests. The present language in 14A:12-7(1)(c) was added by
L. 1973, c. 366, § 67, effective May 1, 1974. It provides:
(1) The Superior Court, in an action
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, upon proof that
(c) In the case of a corporation having
25 or less shareholders, the directors or
those in control have acted fraudulently or
illegally, mismanaged the corporation, or
abused their authority as officers or
directors or have acted oppressively or
unfairly toward one or more minority
shareholders in their capacities as
shareholders, directors, officers, or
employees.
The legislature intended to expand the protection available to
minority shareholders "who are powerless within a corporation, as
well as powerless to leave." Brenner, supra, 134 N.J. at 506
(citing N.J.S.A. 14A:12-7 (West 1968) Comment on 1972
Amendments).
The first New Jersey case to construe section 14A:12-7(1)(c)
was Exadaktilos v. Cinnaminson Realty Co., 167 N.J. Super. 141
(Law Div. 1979), aff'd o.b.,
173 N.J. Super. 559 (App. Div.),
certif. denied,
85 N.J. 112 (1980). The court examined the
various techniques that controlling members of a close
corporation could use to freeze out minority shareholders. Id. at
153. It noted that section 14A:12-7(1)(c) had been enacted in
response to the failure of traditional principles of corporate
law, such as the business judgment rule, to curb these abuses.
Id. at 154.
In determining whether a particular course of conduct has
oppressed a minority shareholder in violation of the new
provision, courts should examine the understanding of the parties
concerning their roles in corporate affairs.
The special circumstances, arrangements and
personal relationships that frequently
underlie the formation of close corporations
generate certain expectations among the
shareholders . . . [that] 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 or in the language of the
statute, "have acted oppressively * * *
toward one or more minority shareholders."
In this Court's most recent application of section 14A:12-7(1)(c), we defined oppressive conduct to include that which
frustrates the reasonable expectations of the minority
shareholder. Brenner, supra, 134 N.J. at 506 (citing 2 F. Hodge
O'Neal & Robert B. Thompson, O'Neal's Close Corporations § 9.29
at 132 (Callaghan & Co., 3rd ed. 1988)). This approach takes
into account the fact that shareholders in close corporations may
have expectations that differ substantially from those of
shareholders in public corporations. It also requires courts to
be flexible in their treatment of section 14A:12-7(1)(c) cases
because of the fact-sensitive nature of their inquiry. Brenner,
supra, 134 N.J. at 516.
We agree with the emphasis in the Appellate Division's
opinion that minority shareholders' expectations must, however,
be balanced against the corporation's ability to exercise its
business judgment and run its business efficiently. Id. at 517.
Thus, courts should always be wary of interfering in the internal
affairs of a corporation. As we stated in Brenner:
The limited bases for statutory relief
* * * reflect an awareness that minority
shareholders know the limitations of their
power at the time they make their investment
in a close corporation. Mere disagreement or
discord between the shareholders is not
sufficient for a violation of the close
corporation statutory provision.
With these principles in mind, we turn to the facts of the
case to determine whether the conduct of Muellenberg and
Passerini reflects more than a disagreement or discord among
shareholders, but rather amounted to the oppression of Burg
within the meaning of section 14A:12-7(1)(c).
The remaining measure of oppression in the small corporation
is whether the fair expectations of the parties have been met.
When personal relations among the participants in a close
corporation break down, the "reasonable expectations" that
participants had, for example, the expectation that their
employment would be secure or that they would enjoy meaningful
participation in the management of the business, become
difficult, if not impossible, to fulfill. Meiselman, supra,
307 S.E.2d 551. A person who buys a minority interest in a close
corporation does so, not only in the hope of enjoying an increase
in the value of the shareholder's stake in the business, but for
the assurance of employment in the business in a managerial
position. In addition to the security of long-term employment
and the prospect of financial return in the form of salary, the
expectation includes a voice in the operation and management of
the business and the formulation of its plans for future
development. Ingle v. Glamore Motor Sales,
535 N.E.2d 1311, 1319
(N.Y. 1989) (Hancock, J., dissenting). In this case, it is
reasonable to conclude that Burg's fair expectations were that
should he give up his prior employment with a competitor company
and enter this small corporation, he would enjoy an important
position in the management affairs of the corporation.
It is a close question whether the actions taken by
Muellenberg and Passerini at the January 20, 1993, meeting
amounted to oppression, as Burg contends. Muellenberg and
Passerini claim that their declaration of the first dividend in
company history was "fair and reasonable" in light of the
company's favorable financial position at that time. They
dispute the trial court's conclusion that the dividend would
deprive Burg of the needed cash to operate BNJ, asserting that
sufficient assets were still available to run the company.
Muellenberg also maintains that Burg could not have reasonably
expected that he would have exclusive authority and control over
the business when BNJ's by-laws named Muellenberg president and
chief executive officer.
We agree that it cannot be considered oppression when
controlling shareholders seek to rein in management and control
the affairs of their corporation. But the expectations of
Muellenberg and Passerini that they might exercise majority power
conflicted with the expectations of Burg, and were confined by
their fiduciary duties to their co-venturer. Bostock, supra, 260
N.J. Super. at 444. The equities were close. Burg had devoted
the most productive years of his life to building up the company.
Due in large measure to Burg's efforts, North American sales of
Bikon products rose to over $2,000,000 per year. He could not
reasonably have expected that after ten years as general manager
he would be frozen out of the business. On the other hand,
Muellenberg could not reasonably have expected that he, the
founder of the enterprise, and Passerini would be ignored in the
conduct of the company's affairs.
In other circumstances, the solution proposed by the
Appellate Division might have resolved the impasse. Burg could
have learned to manage the business more as a partner than as a
sole proprietor. But the events that followed the Appellate
Division's decision have confirmed that the trial court, which
could assess the demeanor and relationship of the witnesses, had
a better sense of the internal dynamics among the shareholders
and could foreshadow Burg's inevitable ouster from Bikon's
picture. That ouster would not have been a fair accommodation of
the reasonable expectations of all shareholders.
The remaining issue was whether Burg or Muellenberg and
Passerini should survive with BNJ. In 1988, the Legislature
amended N.J.S.A. 14A:12-7(8) to permit minority shareholders to
petition a court to order a buy-out of the majority. As amended,
section 14A:12-7(8) provides that if there is a triggering event,
[u]pon motion of the corporation or any
shareholder who is a party to the proceeding,
the court may order the sale of all shares of
the corporation's stock held by any other
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 of the circumstances of the
case. (emphasis added).
The statute thus plainly allows the minority to seek a court
order for the sale of the stock of "any other shareholder." In
most situations, oppressed minority shareholders will lack the
resources to buy out the interests of controlling shareholders.
As a result, claims of oppression are typically remedied by
arranging for the corporation or the majority shareholders to buy
out the interests of the minority shareholder. In this case, the
record contained the following evidence in support of Burg: Burg
was willing and able to purchase the shares of Muellenberg and
Passerini; Burg, who owns the land on which BNJ's offices are
located, was most active in operating the company since its
inception; Burg is the only shareholder who works full-time for
BNJ and the company has been his only source of income for over
ten years; Burg was primarily responsible for developing the
company's contacts in the United States and Canada and is best
situated to maintain the existing operation; and finally, it was
Burg who sought to preserve the corporation at a time when
Muellenberg and Passerini attempted to dissolve it. See Musto v.
Vidas,
281 N.J. Super. 548 (App. Div. 1995) (reversing minority
buy-out of the majority when minority shareholder had not been
actively involved in the operation of the company for seven
years).
On the other hand, without Muellenberg there would have been
no business to divide since he had furnished all the start-up
capital and was the inventor of the special design features that
propelled the company's sales. Much of BNJ's good will may have
derived from the use of the Bikon name. It is, however, too
close a call to say that the Chancery Court erred in finding a
slight edge in favor of Burg as the surviving shareholder.
Thus, while a minority buy-out of the majority is an
uncommon remedy, it was the appropriate one here. The trial
court acted within its discretion in ordering Muellenberg and
Adda to sell their shares in BNJ to Burg. This remedy is
authorized by N.J.S.A. 14A:12-7(8) and is consistent with
decisions holding that courts are not limited to statutory
remedies, but have a wide variety of equitable remedies also
available to them. Brenner, supra, 134 N.J. at 516; Walensky v.
Jonathan Royce Int'l,
264 N.J. Super. 276, 279 (App. Div.),
certif. denied,
134 N.J. 480 (1993).
Any doubt as to which shareholder should be permitted to
invoke the buy-out remedy has been largely dissipated by
circumstances. Without resolving the factual disputes set forth
in the motions to supplement the record, it appears that since we
stayed the Appellate Division's decision, Muellenberg has
demonstrated an ability to market his products in the United
States without Burg. Muellenberg, on behalf of his solely owned
company BTG, made arrangements with a company called North
American, Inc. for it to market products under the "Bikon" name
that may compete with B-Loc. North American began soliciting
B-Loc's customers, advising them that it had been granted the
exclusive license to manufacture and distribute "Bikon" locking
devices in the United States, Canada and Mexico. In addition,
its sales catalogue is similar to the catalogue BNJ used
previously. Oral argument convinces us that there is nothing to
stand in the way of Muellenberg and Passerini continuing in the
American market without real detriment to their reasonable
expectations in forming BNJ. The trial court's solution is thus
"fair and equitable to all parties" as required by N.J.S.A.
14A:12-7(8).
As it stands, BNJ (now B-Loc) no longer can use the "Bikon"
trade name. That license was terminated by BTG prior to the
commencement of this litigation. The good will and trade name of
Bikon inures to Muellenberg's new venture, which may engage in
the sale of Bikon fasteners in the domestic U.S. market. Now
that the patent has expired on the only Bikon product to generate
significant sales in this country, B-Loc and North American are
able to compete freely with each other. Realistically, all that
plaintiffs Muellenberg and Passerini might reasonably require to
advance their undertaking would be the customer lists generated
during the period of their joint enterprise with Burg. If those
lists are not available to them now, a customer list as of the
date of the buy-out should be furnished by Burg.
Accordingly, we reverse the judgment of the Appellate
Division and reinstate the judgment of the Chancery Division. We
leave to that court the resolution of any unresolved issues
attendant to the buy-out.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, GARIBALDI, STEIN and COLEMAN join in JUSTICE O'HERN's opinion.
NO. A-17 SEPTEMBER TERM 1995
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
RALPH MUELLENBERG and
BIKON-TECHNIK, G.m.b.H.,
Plaintiffs-Respondents,
v.
BIKON CORPORATION,
Defendant,
and
KURT W. BURG,
Defendant-Appellant,
and
ADDA FINANZIARIA, S.R.L. and
DARIO PASSERINI,
Defendants-Respondents.
DECIDED January 18, 1996
Chief Justice Wilentz PRESIDING
OPINION BY Justice O'Hern
CONCURRING OPINION BY
DISSENTING OPINION BY
Footnote: 1For convenience, we sometimes use the name Passerini to denote the interests of Adda and TM and Muellenberg to denote the interests of BTG. Footnote: 2On Burg's motion, the Chancery Division enjoined the payment of the dividend and modified the requirements for approval of purchases over $1,000. The court also modified the banking arrangements.