Skip to main content

Hartnett v. Mastrorilli

A-6054-01T2 (N.J. Super. App. Div. 2003) (Unpublished)

CORPORATIONS; SHAREHOLDERS; DERIVATIVE ACTIONS—A court has considerable discretion in determining whether a settlement proposed by a corporation’s shareholders in a derivative action proceeding will fairly, reasonably, and adequately serve the best interests of the corporation and its shareholders.

Two men founded a corporation. One then left the company. At the time of his departure, he owned thirty-four percent of the outstanding shares of the company’s 2,500 shares of stock. After his departure, the other founding shareholder appointed his family members to the board of directors. Three years later, the board authorized stock warrants and awarded them to those family members and to a few officers and employees of the company. The former shareholder asserted that the “issuance of the warrants was solely the product of self-dealing on the part of the [other founding shareholder’s] controlled board” and alleged that this action substantially diluted the value of his own shares. As a result, he filed a shareholder oppression action and amended that action to assert a derivative shareholder claim. “During the course of the litigation, [the board members who were sued] proposed all shareholders a settlement whereby a small number of the warrants would be returned.” A majority of the shareholders approved the settlement. At the time of the vote, most of the shares were owned by the board member’s family. Nonetheless, of the 382 “independent” shares voted, 347 were in favor of the settlement. The lower court judge approved the settlement and the disgruntled former shareholder appealed the lower court’s “finding that the settlement was fair and reasonable.” The Appellate Division denied the appeal. It pointed out that a court has “considerable discretion in determining whether a settlement proposal in a derivative proceeding will fairly, reasonably, and adequately serve the best interests of the corporation and its shareholders.” Fairness goes beyond mere reference to a vote total. “No one could validly argue that if a majority of shareholders took inappropriate action in diluting the stock to the detriment of a minority that they could obtain the elimination of a lawsuit seeking to vindicate the minority’s rights through a show of hand. But, by the same token, the court should not simply cast off the relevance or importance of the shareholder’s vote.” Earlier case law determined that the “concept of fairness has two basic aspects: fair dealing and fair price.” A fair dealing concerns an “obvious duty of candor” that is “owed by fiduciaries and includes a consideration of the vote of the shareholders and the information provided to the shareholders prior to the vote.” Fair price “suggests the substantive fairness of the result sought to be imposed.” Applying those principles to the facts, the Appellate Division found no reason to upset the lower court’s ruling.

66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 •