Bonavita v. Corbo

300 N.J. Super. 179, 692 A.2d 119 (Ch. Div. 1996)
  • Opinion Date: November 22, 1996

CORPORATIONS; SHAREHOLDERS; OPPRESSION—A 50%, but inactive shareholder can be considered to be a minority shareholder. Even when application of the business judgment rule validates a decision to withhold dividends, that decision can be oppressive behavior justifying a court-ordered buyout.

What is the extent of protection the business judgment rule provides when application of the rule has the effect of providing substantial benefits to some shareholders and no benefits to others? Gerald Bonavita and Alan Corbo were each 50% shareholders of Corbo Jewelers, Inc., a company organized in 1946 by Bonavita, Michael Corbo, and Dominic Corbo. The company purchased Dominic Corbo’s shares when he retired 1984, agreeing to pay him $1,000,000.00 in annual installments of $50,000.00. In March, 1991, Bonavita retired but continued to receive $57,000.00 per year as salary, since a buy-out agreement could not be reached. Over the years, numerous members of Corbo’s family joined the business while none of Bonavita’s family participated. In December, 1991, Bonavita sued Corbo and Corbo Jewelers, Inc. claiming that the company was deadlocked and he was the victim of corporate oppression by virtue of Alan Corbo’s refusal to have the corporation pay dividends on the stock or buy his shares. Bonavita died before trial, and after his death Corbo informed Bonavita’s widow that since the IRS would no longer approve the “salary deductions” made to Bonavita, the salary payments would not continue. The suit continued with Bonavita’s representatives claiming the Corbo family received substantial benefits from their 50% stock ownership, such as participation in the company, while the Bonavita family received nothing for their 50% interest in the company. Corbo claimed the company was under no obligation to buy back Bonavita’s shares and the refusal to pay dividends on the shares was simply a valid application of the business judgment rule.

The Chancery Division concluded that Bonavita could be considered a minority shareholder despite owning 50% of the stock because there should be an evaluation of the control a shareholder may exert on a close corporation, not simply a tally of stock ownership. Furthermore, the policy rationale of protecting shareholders from the abusive exercise of control by the directors or officers of a corporation is more important than the amount of stock owned. The Court also found that since no dividends were paid on the stock, Bonavita’s shares were essentially worthless until Corbo decided otherwise. Even though choosing not to pay dividends is a reasonable business judgment, and Corbo therefore is not guilty of wrongful conduct, in practice the operation of the corporation benefitted only one shareholder. In short, the Court held that the focus is on the power (or lack thereof) of shareholders and on whether those in control can improperly impose their power on others in the company so as to frustrate shareholder expectations. Ceasing salary payments to Bonavita’s heirs with no alternative benefit constitutes oppression because the shareholder has no recourse but to retain stock which has essentially become worthless. Although the Court enumerated many potential remedies, they found that the only workable solution in this case was to order a compulsory buyout of Bonavita’s stock by the corporation.