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Musto v. The Titan Corporation

A-5107-02T5 (N.J. Super. App. Div. 2004) (Unpublished)

CORPORATIONS; SHAREHOLDERS; OPPRESSION—An improperly ousted shareholder is entitled to an award for the fair values of the shares being surrendered plus whatever amounts may be awarded such as compensation, in money or in kind, for a death benefit that would have been available absent the ouster.

A one-third shareholder brought a claim against his company and the other shareholders. He claimed that the other shareholders waged a campaign of “oppression” against him, leading to his ouster as an officer, director, and employee of the company. For that reason, he filed an “oppression” action pursuant to N.J.S.A. 14A:12-7. After a bench trial, the lower court agreed that the company had oppressed the shareholder and ordered his reinstatement as an officer and director. It also awarded compensatory damages and ordered the other two shareholders to sell their shares in the company to him. On appeal, the Appellate Division agreed with the lower court’s factual determination that the shareholder had been oppressed, but reversed the judgment. It ruled that the proper remedy should have been for the offenders to buy out the shareholder.

The lower court, as well as the Appellate Division, found that a death benefit compensation clause, giving a deceased shareholder’s family deferred compensation, survived the aggrieved shareholder’s termination as a shareholder. Each court rejected the company’s argument that the death benefit did not survive the ouster. The Court believed that the corporation overlooked the fact that if the ousted shareholder was precluded from continuing to be associated with the corporation, he would not be able to realize the benefit of the insurance provision. In the view of each court, the value attributable to past services could not be separated from whatever value was intended to be given to potential future service. Furthermore, N.J.S.A. 14A:12-7(8)(f) provides that in circumstances governing oppression suits, “selling shareholders shall no longer have any rights as shareholders ... except the right to receive the fair value of their shares plus whatever other amounts as may be awarded” (emphasis added). The Court found nothing in this statute prohibiting the award of the continuing death benefit.

The Court was puzzled that the lower court had entered an order stating that the shareholders’ agreement was declared null, void, and non-binding upon the parties, while, at the same time the lower court also held that the agreement’s death benefit compensation clause had survived. The Appellate Division found this to be illogical. That is why it relied on N.J.S.A. 14A:12-7(8)(f), which provides that a selling shareholder has the right to “whatever other amounts as may be awarded.” The Court regarded the deferred compensation benefits as part of such “other amounts.” Therefore, even though the shareholder’s agreement was held by the lower court to be “terminated,” the shareholder was still entitled to the continuing death benefits.

The oppressed shareholder moved for an order to require the other shareholders to personally assume the deferred compensation benefits obligation. The lower court, without prejudice, denied this application as not ripe because the company had ceased to operate when it had been acquired by another company. It felt that any such application to the Court should have waited until the new company indicated that it will or will not honor the obligation. The Appellate Division, however, pointed out that a succeeding corporation assumes the liabilities of the absorbed corporation. On that basis, it reversed the order dismissing the shareholder’s complaint and remanded the matter for further proceedings.

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