No Shareholder Oppression in Refusal to Buy Minority Interests

Businesswoman lifting heavy elephant

Holding a family business together gets more difficult as time passes, as this recent opinion
24824-staff_meetingfrom the Appellate Division demonstrates.  A rift between the family members still working for, and in control of H. Schultz & Sons, resulted in the minority members who stopped receiving dividends while the company was trying to remake itself from a retailer to a distributor.

No Shareholder Oppression in Exercise of Majority’s Business Judgment

The failure to pay dividends and a refusal to use the assets of the business to buy out the non-employee shareholders, however, in itself is the type of conduct that rises to shareholder oppression.

The group of minority shareholders who claimed that the corporation’s refusal to purchase their interests was shareholder oppression failed to establish a viable claim under New Jersey’s Oppressed Shareholders Act, says the Appellate Division

Affirming the trial court’s opinion in Goret v. H. Schultz & Sons, Inc., Docket No. A-4281-10T1 (App. Div. Sept. 10, 2013), the Appellate Division affirmed the holding that the refusal to repurchase minority interests no longer receiving dividends was an appropriate exercise of the business judgment rule.


Business Judgment Rule Applied

The case is noteworthy in that it reiterates the wide discretion of the officers of a corporation to exercise their business judgment without risk of being second guessed by minority shareholders or the courts.  On the other hand, the Court found that in failing to disclose an offer to purchase real estate owned by the company to the shareholders, or even other officers, one of the officers had breached his fiduciary duties to the corporation.

The case involved a once-thriving business, Prince Range, which fell victim to competition large discount retailers.  The company liquidated its retail business and re-tooled as wholesale distributor to its former competitors, including department stores and home goods retailers.  As competition became more intense, profits fell and the company ended a long history of regular, substantial dividend payments to its shareholders.

The minority shareholders, who had never worked for the business, ultimately demanded the repurchase of their shares, which the majority rejected, or the liquidation of the business.  After several years of meetings, the minority brought suit alleging shareholder oppression and related claims.  They also sought the appointment of a receiver.

The minority shareholders claimed that the company had some $4 million in cash reserves and that one of the defendant officers had also wrongfully failed to disclose an offer of $7.4 million to buy the building in Union, New Jersey, where the business maintained its warehouse and offices.

The trial court rejected, and the appellate division affirmed, the contention that the majority had engaged in oppressive conduct that would entitle a forced purchase of the minority shares. The Court noted that the company, by effectively retooling its operations, “has been able to thus far survive one of the worst financial crises in history.”  The buyout would have required outside financing and was “a permissible exercise of business judgment that should not be disturbed.”

Similarly, the trial court had rejected claims that the majority wrongfully continued to pay their own salaries while withholding dividends.

The fact that defendants have continued to draw their salary during the period when plaintiffs have received no financial benefit does not call for a departure from the business judgment rule.   There is inadequate proof that defendants’ compensation was so unreasonably high, even consider the plaintiffs’ reasonable expectation of dividends as to be unfair and oppressive to the minority.

The Court also held that the minority had been adequately informed because shareholder meetings had been convened on several occasions at the minority’s request.  The one exception, the Court held, was the failure to disclose the purchase offer for the company’s warehouse.

Defendant Robert Schultz said he had rejected the offer because the company needed the building and had failed to disclose its existence because was still in a very preliminary stage.  The trial testimony revealed, however, that he had also failed to inform the other officers of the company and the trial court found, and the appellate court affirmed, that his failure to do so was a breach of fiduciary duty.

The trial court had entered an order requiring the plaintiffs to provide information and documentation concerning investments, potential acquisitions and major business decisions until such time as the business again became profitable and dividends resumed.  While the Appellate Division affirmed the lower court opinion in all respects, it struck the provision that would eliminate the disclosure obligations in the future.  Those obligations, according to the appellate court, do not depend on the payment of dividends.

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