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Sipko v. Koger, Inc.

A-3636-08T3 (N.J. Super. App. Div. 2011) (Unpublished)

CORPORATIONS; GIFTS — Where a gift of stock is conditional on the recipient remaining with the business, if the recipient voluntarily leaves the business, the stock will be forfeited.

A father started a business that became three close corporations. The father employed a son who had an interest in all three corporations. The son sued, alleging that he had became an oppressed minority shareholder because his father and his brother disapproved of the son’s relationship with a woman. The son asserted that he resigned from the corporations as the result of physical force and intimidation.

The record indicated that the father had gifted a 1.5% ownership interest in the initial business to the son. The terms of the gift were never reduced to writing, and the father and a brother testified that the gift was conditioned on the son working in the initial business. The two successive businesses were formed to diversify product lines and the son had an ownership interest in each. The father controlled all three entities, directing the distribution of profits and salaries. The son also had an ownership interest in a family residential property for the family and in an investment property.

After the son met the woman, he moved out of the family home and requested permission to work remotely from the woman’s home in California. His father wanted him to stay in New Jersey where the businesses were based. The son worked remotely, but it began to affect his job performance because of his frequent need to commute for important meetings. Eventually, he resigned from the initial business. He married the woman several months later. After his resignation, his father and brother passed a resolution recalling the son’s shares in the initial business asserting the son had abandoned the company and violated the condition for retaining the 1.5% interest. The son disputed his relinquishment of that interest.

The lower court, after a bench trial, found that the son had quit the business entities because his father and brother refused to accept his relationship with the woman. It disbelieved the son’s testimony that he was intimidated and threatened, concluding the son was not an oppressed shareholder, and that the son had voluntarily surrendered his interests in the later two business entities, companies for no value. Although the lower court found that the father had given the son an unconditional gift of 1.5% ownership in the first corporation, it did not compel a buy-out of the interest. It left the son with his interest in the two later formed corporations. It ordered that the son be bought out from his interests in the residential properties.

The son appealed, and the Appellate Division affirmed the holding that the son was not an oppressed minority shareholder because his reasonable expectations of his role in the business had not been frustrated. The evidence showed that the son left on his own accord as he felt he could not work in the family business, effectively running from New Jersey. The Court affirmed the lower court’s further finding that a buy out of the son’s interests in the derivative companies was not warranted as he was not an oppressed minority shareholder. As a result, he was to retain his 50% interest in those companies.

The Court, however, reversed the lower court finding that the original 1.5% ownership interest gift was unconditional. It concluded there was substantial evidence that the gift was conditioned upon the son remaining with the business. The son had testified that it was assumed he would always work in the family business, and the father and brother testified that the ownership interest was premised on remaining with the companies. Thus, the Court said that once the son resigned from the original company, that condition was breached and the father was entitled to revoke the gift.

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