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Reliable Envelope and Graphics, Inc. v. McHugh

A-4409-02T5 (N.J. Super. App. Div. 2003) (Unpublished)

CORPORATIONS; SHAREHOLDERS—A valuation provision in a shareholder’s agreement based upon the death of a shareholder will not be extended to cover the case of a shareholder who withdraws because of a permanent disability.

A shareholder agreement provided that upon the death or withdrawal of a shareholder from the company, the shareholder was to receive certain payments. One provision stated that upon death, the amount to be received would be the greater of a figure determined by the stockholder’s share of the company’s book value or an amount equal to the total proceeds of the policies held by the company on his or her life. “Proceeds” was defined to include “the face value of the policy and any additions, dividends, or accumulations paid with the claim, less any loans and unpaid interest outstanding against the policy.” Otherwise, upon withdrawal, even by reason of a disability as was the case with the particular shareholder in this matter, a calculation of book value was to be made and the withdrawing shareholder would receive a proportionate share of that value.

The shareholder argued that “he should have received an amount equal to the total proceeds of the ‘key man’ life insurance,” which was substantial. The lower court rejected that position, reasoning that “the proceeds of the life insurance could not be used to value the shares of stock if the shareholder was still alive.” The Appellate Division explained further that the term “‘proceeds’ anticipate[d] a paid life insurance claim. Obviously, there was no paid life insurance claim” because the shareholder did not die. Therefore, permitting the stock to be valued in an amount equal to the life insurance proceeds could not have been applicable. According to the Court, “[t]he only reasonable way to interpret the Agreement when a living shareholder leaves the company is to value the shares of stock in accordance with the sixth paragraph—the book value as of the last day of the month before his employment was terminated.” The Court also pointed out that the purpose of the shareholder agreement was to protect the shareholder’s investment, not “to provide a windfall for the shareholder or his estate.” Further, the Court did not believe that using this valuation method was “unfair in the context of the total benefits that [were] available to [the withdrawing, disabled shareholder] and ultimately, his estate. [The withdrawing shareholder had] the right to receive close to one million dollars of tax-free disability insurance from [the company] over his lifetime” and had the right to buy all of the contracts of insurance on his life owned by the company.


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