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Marsh v. Mid-Atlantic Truck Centre, Inc.

A-2258-02T3 (N.J. Super. App. Div. 2004) (Unpublished)

CORPORATIONS; SHAREHOLDER AGREEMENTS—Where a very large change in circumstance has taken place such that specific performance of that remedy in a shareholder agreement, like a remedial buy-sell provision, would result in a severe hardship, A court may refuse to enforce a remedy provided in a shareholder agreement.

A company’s franchise agreement was terminated. Following the termination, a sales manager purchased the remaining stock of the company to become its sole owner. A few years later, the company filed for bankruptcy under Chapter 11. A law firm was hired to represent the company in the proceedings, and the sales manager paid it $50,000 in legal fees. The bankruptcy trustee sold assets to pay back a $900,000 bank loan, of which the sales manager paid under $1,000 from his own funds.

Later that year, the sales manager filed an application for a new franchise. The franchisor agreed to invest $600,000 into the new company, contingent upon the sales manager putting in $300,000 of his own capital. Since he was unable to do so, he approached a former employee for assistance. That individual paid the entire $300,000 after the sales manager allegedly could not raise his $150,000 share. When the new franchise was formed, the employee received 3,000 shares of non-voting stock, and the franchisor received 6,000 shares of voting stock. Later that year, the company bought the final remaining assets from the bankruptcy trustee. “On that same date, the sales manager and the employee entered into an agreement providing after the sales manager resolved all of the original company’s financial obligations, he would “have the right to purchase shares of stock in the [new] company in an amount equal ... to those owned by [the employee] or half of what [the employee] own[ed] if the [dealership] buyout [was] not yet completed ... for ... $100.00.”

From that point on, the sales manager operated as president and as a member of the new company’s board of directors. In its first sixteen months of operation, the company lost a substantial amount of money, leading to the sales manager’s demotion. He was replaced by the employee. Then, the company began to turn a profit.

The employee claimed that during this time, he continued to ask the sales manager to pay back the $150,000, so he could afford to buy out the franchiser’s interest in the new company. The sales manager alleged that the employee never asked for the $150,000 contribution.

A few years later, the sales manager left the company to work for one of its major customers. After some failed negotiations, the two companies stopped doing business with each other. Later that year, the company was able to buy the franchiser’s 6,000 shares by utilizing cash from the business and some of the employee’s own funds. Then, three years later, the sales manager contacted the employee and told him he now wanted to exercise his option to purchase half of his shares for only $100. The employee countered that the agreement was for $100 a share. The sales manager asserted that he now had the right to exercise his option because all of the company’s obligations had been satisfied even though he admitted that the old company’s debts had not been paid from his own personal funds. The employee refused to honor the stock purchase agreement because after he purchased the remaining shares of stock from the franchisor, the company had become much more valuable.

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