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Stefanelli v. DFG Staffing Consultants, Inc.

A-4906-01T3 (N.J. Super. App. Div. 2004) (Unpublished)

CORPORATIONS; SHAREHOLDERS—Absent an agreement to the contrary, where remaining shareholders force out another shareholder-employee without evidence of mismanagement, fraud or illegality on their part, they have no obligation to buy out the shareholder-employee’s shares.

Three individuals were one-third stockholders and employees of a staffing company. Two had created the company and invested the necessary capital. The third came in after the company was created and contributed no capital. After early success, the company began to fail. The original two shareholders felt this was partially due to the actions of the third, so they met with him and gave him a number of instructions respecting his future performance. Then, when they believed that he violated those instructions, his employment was terminated pursuant to the two-thirds majority rule provision in their stockholder’s agreement. He did not tender his shares. About a month later, he joined a direct competitor to manage and develop its own competing business.

The other two shareholders commenced an action against the third, seeking damages for an alleged breach of the former employee’s non-competition and confidentiality agreement. In response, the discharged shareholder commenced an action in the Chancery Division claiming that he was an oppressed stockholder pursuant to N.J.S.A. 14A:12-7(1)(c). Even though he never turned over his shares in accordance with the buy-out provisions of the stockholders’ agreement, he was seeking a statutory remedy. After the consolidation of the two actions, both complaints were dismissed.

The stockholders’ agreement had an extensive restrictive covenant barring competition with the company directly or indirectly for the two-year period following termination. It also required each party to maintain the confidentiality of the company’s proprietary information and trade secrets, including information about to its customers. There was no question that the third shareholder engaged in direct competition with the old company and solicited its customers. Nonetheless, the lower court found that the customers’ identities were neither protectible proprietary information nor trade secrets. Specifically, it held that information about companies needing temporary workers is readily available to the public, as was information about available workers. Consequently, such basic information did not constitute privileged details.

Because these findings were supported by substantial evidence, the Appellate Division deferred to the lower court’s holding. It also held that soliciting the company’s customers after termination did not violate the trade secret-confidential information covenant. Therefore, the noncompetition agreement was inapplicable to this situation. An employer must demonstrate that it has a legitimate interest which requires protection through such an agreement, and matters of general knowledge within an industry, as was the case here, do not provide that legitimate interest.

With respect the oppressed minority stockholder claims, the Appellate Division first noted that a minority stockholder in a close corporation is entitled to relief if those in control have acted fraudulently or illegally, mismanaged the corporation, abused their authority, or have acted oppressively or unfairly toward the minority shareholder. Here, the claim was that upon being fired, the other two stockholders were required to place a value on the third shareholder’s shares and buy them from him. The Court found no legal basis for that proposition. Although the third shareholder had the right under the stockholders’ agreement to tender his shares to the other two, he chose not to do so. Nothing in the record showed that such a tender would have been futile. Nothing showed that the other two would not have been able to pay fair value for the stock. Therefore, absent any proof of mismanagement, fraud or illegality, the Court saw no reason why, having terminated the third stockholder-employee as a matter of good faith exercise of business judgment, the remaining two stockholders had the obligation to place a value upon, and buy, the shares of the third stockholder.

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