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Formoso v. Hub City Distributors, Inc.

A-6826-96T5 (N.J. Super. App. Div. 1999) (Unpublished)

CORPORATIONS; INDEMNIFICATION—A court’s right to require a shareholder to indemnify another shareholder in the context of a dissolution or buy-out claim does not bar the corporation from electing to indemnify one or more officers and directors on its own.

The shareholders of a beer distributor disagreed as to the meaning of a series of agreements affecting the rights and obligations of each shareholder upon the death of a shareholder. The dispute arose in the context of a sale of the distributor’s assets when it was necessary to determine the percentage interests of each surviving shareholder. During the course of the dispute, the corporation’s shareholders passed a resolution directing the corporation to indemnify two of the shareholders in any action by the third minority shareholder against the corporation and them. The minority shareholder’s complaint sought to set aside the sale of the company’s assets and to compel sale of the company to the complainant himself. The complainant further alleged that the board’s shareholders’ acceptance of the outside offer instead of the minority shareholder’s offer constituted oppressive, unfair, fraudulent, and illegal conduct under N.J.S. 14A:12-7(c) and breached various fiduciary and common law duties to the minority shareholder. The lower court accepted the argument of the minority shareholder that the provisions of the dissolution section of New Jersey Corporation Law overrode the general indemnification provision of that same law. In particular, the lower court judge held that N.J.S. 14A:12-7 delegates the issue of indemnification to the court in an action filed under that section and that the shareholders’ resolution was “improper.” Its holding was premised on the rule that when a conflict arises between a general and a specific statutory provision, the more specific one controls.

The Appellate Division disagreed with the lower court. Chapter 12 of the statute, although titled “dissolution,” authorizes a court-ordered “buy out,” among other equitable remedies, “[a]s an alternative to dissolution.” While it is true that, under that Chapter, a court is permitted to award counsel fees and other forms of indemnification when it finds that a party has brought an action under that section arbitrarily, vexatiously or in bad faith, the Appellate Division found nothing in the two sections of the corporation statute or in its legislative history that bars a corporation from indemnifying its officers and directors under N.J.S. 14A:3-5 in the context of a dissolution or a buy out dispute. In this case, it was especially clear that just because a judge may award fees under the dissolution section in a shareholder’s action, it does not mean that a corporation cannot indemnify its officers and directors under the general indemnification section, particularly if they successfully defend an action and indemnification would otherwise be mandatory. In essence, the Court did not believe that the Legislature, by the adoption of the dissolution section of the corporate statute, sought to dramatically affect common and statutory law controlling corporate governance and indemnification by a corporation.


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