Kelley v. Axelsson

296 N.J. Super. 426, 687 A.2d 268 (App. Div. 1997)
  • Opinion Date: January 7, 1997

CORPORATIONS; DIRECTORS; FIDUCIARY DUTY—Directors have a duty to maintain proper accounting records. Failure to do so is unfair and oppressive to minority shareholders because it makes it impossible to determine if dividends should have been paid.

Five brothers and sisters together owned approximately 42% of the shares of the family business, but none were ever active in the company. The remaining shares were owned by a sixth sibling, who was president of the company and had been actively involved in running the business since its inception in 1960. The company paid dividends from 1983 through 1991 but had paid none since. The minority shareholders brought suit against the president and the company claiming unfair and oppressive conduct. Specifically, they alleged that the president: (a) misappropriated company opportunities for himself, (b) mismanaged corporate assets, (c) paid himself and his son, who is the general manager of the company, excessive salaries, (d) understated earnings, and (e) failed to pay dividends. The motion judge, after reviewing accountants’ reports submitted by both sides, dismissed plaintiffs claims through summary judgment, ruling that they had to show frustration of their reasonable expectations as minority shareholders. On appeal, the issue was whether the evidence submitted by plaintiffs was sufficient to allow a finder of fact to rationally infer that defendants acted oppressively or unfairly towards the minority shareholders. The Appellate Court reversed and remanded.

The Appellate Court held that since plaintiffs were never active in the company, their only expectation was that they would continue to receive dividends if funds were available. The Court also ruled that plaintiffs did not adduce enough evidence to demonstrate that the president usurped corporate assets or opportunities, or that the salary given to him and his son were excessive; therefore, plaintiffs, as minority shareholders, were not being treated unfairly or oppressed with regard to those claims. However, the Court did find that plaintiffs had put forth enough evidence to demonstrate that the company failed to maintain an adequate accounting system, and that this failure is unfair and oppressive since it makes it impractical to ascertain whether there are adequate funds for dividends to be paid out. Directors have a corporate duty to maintain proper records of corporate funds and a minority shareholders’ reasonable expectation of dividends are frustrated when the accounting system of the company effectively hides company income. The Court concluded that since a reasonable fact finder could hold that the accounting system is unfair and oppressive to minority shareholders, defendants’ summary judgment motion should have been denied.