Sinha v. Central Jersey Child Care, Inc.

A-6362-96T5 (N.J. Super. App. Div. 1999) (Unpublished)
  • Opinion Date: July 12, 1999

CORPORATIONS; SHAREHOLDERS; OPPRESSION—A court may require the oppressed shareholder to sell its interest to the oppressor where to do so would preserve the value of a business.

One individual applied for, and obtained, a franchise to operate a child care center. A corporation was formed and a second individual invested as a 49% minority stockholder. Eventually, friction developed between the parties over excluding the minority stockholder from participating in decisions about the corporation’s management and precluding the minority stockholder’s presence at the company’s facilities. When the majority stockholder attempted to merge the company into a personal corporation, the minority stockholder filed suit to have the court order the majority stockholder to sell its interest in the corporation to the minority stockholder. The lower court, with the Appellate Division’s approval, ordered the contrary. It ordered that the minority stockholder sell its interest to the majority stockholder. In doing so, the lower court found that “[n]othing could be clearer than the defendants’ interest to squeeze plaintiffs out of the management of this child care center. Indeed, defendants admitted that that was what they had in mind; that was their design.” On the other hand, the lower court concluded that the minority stockholder failed to fulfill the its own role in the child care center as manager and director. In sum, the lower court concluded that “both sides have managed to frustrate the reasonable expectations of the other.”

In denying the minority stockholder’s request to purchase the majority interest and ordering exactly the opposite, the lower court pointed out that although the majority stockholder’s attempt to squeeze the stockholder out of a management position was purposeful and intentional, it was not malicious. It was done out of frustration and in an effort to achieve a smooth functioning child care center. In this way, it differed from the normal oppression case. Second, the right of a minority owner to purchase the interest of a majority owner is rarely afforded by the courts. The majority stockholder demonstrated an ability to operate the business effectively and successfully. The minority stockholder did not demonstrate such a capability. The idea to create the child care center was that of the majority stockholder. This was a franchise and if the franchise agreement which had been issued to the majority stockholder were lost, the center would lose the benefit of its association with a franchisor. Further, the majority stockholder operated a nearby child care center and planned to operate others. To the lower court, this was a major benefit to the successful operation of the center. The lower court, with the approval of the Appellate Division, ruled that the equities were to be balanced in favor of maintaining the continuity of the business and thus, given the other factors stated by the Court, it was equitable to require the minority stockholder to sell its stake in the company.