Case Law Summaries

Gordon v. Slobodien

• Opinion Date: June 4, 2002
• Business Law
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CORPORATIONS; CERTIFICATE OF INCORPORATION —Where a certificate of incorporation allows a corporation to redeem an entire class of stock and specifies the use of book value, a corporation may do so at its option without that forced redemption alone being deemed oppression, even if the redeemed shareholder has a different subjective expectation.

A minority shareholder in a closely-held corporation sued the company and its director for oppressive conduct towards her as a minority shareholder. The company, a family business, had two shareholders who were both officers and directors. The majority shareholder determined that the continuing differences with the minority shareholder jeopardized the company and advised the minority shareholder that the company would redeem her shares. The majority shareholder removed the minority shareholder as a director and officer of the company and approved the redemption of her shares. The minority shareholder challenged the company’s right to purchase her shares, as well as the method of calculating the value of her shares. She claimed that, based on casual discussions with her father prior to his death, she expected to retain her stock for life and pass it down to her children and, that if the stock was redeemable, she did not expect it to be redeemed when the company was projecting a dramatic increase in profitability. The company and majority shareholder moved for summary judgment dismissing the complaint. The lower court granted that motion, noting that under the Oppressed Minority Shareholder statute, a court must determine whether the majority’s actions frustrated the reasonable expectations of the minority shareholder. Forced redemption was not, per se, an act of oppression because the company’s certificate of incorporation and shareholder’s agreement allowed the company to repurchase the stock at book value. The lower court rejected the minority shareholder’s claim because a shareholder’s reasonable expectations must be balanced against the company’s ability to exercise its business judgments and run its business. It reasoned that if it recognized the minority shareholder’s claim, the company would be unable to effectively run its business and would not be able to rely on its certificate of incorporation and shareholder’s agreement if their enforceability was subject to casual conversations among the shareholders or the company’s fluctuating economic prospects. Further, there were no other allegations of oppressive conduct. The minority shareholder also claimed that her shares should be repurchased based on net asset value and not book value as was required by the certificate of incorporation. The lower court rejected that claim and noted that New Jersey statute prohibits a corporation from paying a higher redemption price for its stock than the price stated in the certificate of incorporation. The value of the minority shareholder’s stock was to be calculated based on the company’s book value, as stated in the certificate of incorporation. The Appellate Division affirmed the lower court’s ruling. It noted that, in past instances where the company elected to redeem shares, the company’s book value, as determined by its accountant, was used to calculate the value of the shares.

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