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Niu v. Pangram Corp.

A-3350-03T5 (N.J. Super. App. Div. 2004) (Unpublished)

CORPORATIONS; SHAREHOLDERS; AGREEMENTS—Parties can agree to terminate their shareholder agreement without following the requirements for amendments to that agreement and once the shareholder agreement is terminated, its dispute arbitration provision becomes inapplicable.

Five individuals formed a corporation. They executed a Shareholders Agreement that restricted their right to sell their shares to persons outside the corporation, set the price for purchase of shares under a variety of anticipated circumstances, and provided that the Agreement would terminate if all shares were held by one shareholder. The Agreement also required that all disputes arising out of the Agreement were to be submitted to arbitration. It further provided that it could only be amended unanimously. A restrictive covenant section of the Agreement, unlike the others, survived termination of the Agreement.

The relationships among the shareholders soon deteriorated. They agreed that four of them would resign and sell their shares to the corporation. Apparently, to accomplish this objective, the partners agreed to amend the Shareholders Agreement. Each of the four withdrawing shareholders then signed a separate amended agreement, each of which was substantially the same as any other. Each provided that the corporation would redeem all of their shares and the shareholder would be paid over a period of three years. Thus, only one sole shareholder remained.

The sole shareholder later concluded that he had made a poor bargain and refused to honor the amended agreements. The other shareholders then sued. In response, the remaining shareholder contended that, under the Shareholders Agreement, the dispute should have been submitted to arbitration. The sole shareholder also claimed that the amended agreements were invalid because all five shareholders did not sign a single document.

The lower court held that the amended agreements represented valid contracts, agreed to by all of the parties. However, contrary to their title as “amended agreements,” the lower court held that they were not intended as amendments to the original Agreement in the sense intended by the Shareholder Agreement. Rather, the lower court held that each was an agreement to terminate the original Shareholder Agreement by placing all shares of stock in the hands of a single shareholder. Since the Shareholder Agreement had terminated, the lower court reasoned that the arbitration clause was no longer applicable. Therefore, the departing shareholders were entitled to their respective payments.

The Appellate Division affirmed, holding that the primary purpose of the amended agreement was to terminate the original Shareholder Agreement, not to amend it. The Court agreed with the lower court that the shareholders had met and agreed to the terms of the amended agreements, even though all five did not sign each one. According to the Court, the requirement that all five shareholders sign a single amendment was satisfied because each signed a similar amendment, tailored to each shareholder’s investment. Furthermore, the Court held that the Shareholder Agreement terminated when only one shareholder remained. And, upon termination of the Agreement, the arbitration clause was no longer enforceable.

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