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Kanach v. Architectural Wall Systems

HNT-C-14014-03 (N.J. Super. Ch. Div. 2004) (Unpublished)

CORPORATIONS; SHAREHOLDERS—After employment is terminated, an employee-shareholder is entitled to corporate dividends when issued, and where a shareholders agreement makes reference to a “stated value” schedule, but there is no schedule, the value of shares is to be determined by appraisal.

An employee with a twenty-seven percent shareholder interest in his employer, was fired. He sued his employer because, after being fired, he did not receive dividends, but other shareholders did. He argued that when a dividend is declared, the declared dividend becomes the individual property of the shareholder. Therefore, he claimed that because dividends had been declared and paid to all other shareholders, his rights as a shareholder were violated. He also asked the Court to appoint an appraiser to determine the fair market value of his shares. He had attempted to sell his shares back to his ex-employer, but the ex-employer had done nothing to value the shares.

In response, the ex-employer argued that its ex-employee had quit his job and was not entitled to any dividends declared after the time he quit. The employer argued that the only reason that its accountant continued to designate dividends for the ex-employee was because the accountant was just continuing prior practice, and the accountant’s actions did not constitute an admission by the employer that monies were due. The ex-employer contended that the employee was required to sell his shares back at book value because the Shareholders’ Agreement (Agreement) required shareholders to work in order to maintain an ownership interest. The Agreement also designated the company’s accountant to determine the value per share based upon book value. Thus, the ex-employer contended that an outside appraiser was unnecessary and contrary to the Agreement.

The Court held that the Agreement did not require the ex-employee to sell his shares upon termination of employment. The ex-employer only had a right of first refusal to purchase the ex-employee’s shares. Therefore, because the Court did not read the Agreement to require the employee to sell his shares and because he was willing to sell them to his ex-employer, the Court concluded that the stock should be valued as of the date of its decision and not retroactively. Furthermore, the Court held that once dividends are declared, they become the property of the shareholder. Thus, the ex-employee was entitled to all dividends declared.

The Court also pointed to a section of the Agreement providing that a Certificate of Value (Certificate) was to be used to set the stock’s value. However, no Certificate had been executed Consequently, the ex-employer’s reliance on this section for the proposition that its accountant was to adjust the value of the stock was untenable because no Certificate had ever been signed by the stockholder one cannot adjust a non-existent Certificate. Therefore, the Court held that it was appropriate to appoint an appraiser to value the ex-employee’s shares.

The Court also disagreed with the ex-employer that the shares should have been valued based upon book value. The Agreement only required that adjustments to the Certificate be made based on changes in the book value per share of common stock. This was not the same as saying that the initial share value must be its book value. “Fair value” carries with it the statutory purpose that shareholders be fairly compensated, which may or may not equate with the market’s judgment about the stock’s value. This is particularly appropriate in the close corporation setting where there is no ready market for the shares and consequently no fair market value for its shares. Therefore, the Court held that the employee should receive a proportionate share of the value of the whole corporation.

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