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Temiz v. Temiz

BER-C-0385-04 (N.J. Super. Ch. Div. 2006) (Unpublished)

CORPORATIONS; SHAREHOLDERS; FIDUCIARY DUTIES—Controlling shareholders have a fiduciary duty to minority shareholders especially where the controlling shareholders will benefit from a corporate decision at the expense of the others.

Three brothers were shareholders of an electronics store. The company had three stores in New Jersey at which it was the tenant, each on real property respectively owned by one corporation and two limited liability companies in which each brother had an equal stake. A dispute arose among the brothers, and one brother tried to squeeze out the other two brothers. The one brother stopped paying salaries to the other two, and increased his own salary. While he was in control of the company, he had an appraisal conducted, at company expense, to determine the fair market value of the lease for one of the stores. The appraisal was conducted while the three brothers were discussing a buyout in which the other two brothers were to buy out his own interest in the electronics company. The three brothers were to maintain their interests in the entities that owned the real property. When the appraisal showed the fair market rental was much higher than what was being paid by the electronics store, the solitary brother did not exercise the renewal. Eventually, an agreement was reached whereby the two brothers purchased their other brother’s interest in the electronics company. The animosity between the brothers continued and the brother who had been bought out sued the other two for access to the books and records. He also alleged that the lease for the one store was never properly renewed and therefore the electronics store had to pay fair market value rent. That would have been much more than the stated renewal rent had the lease been renewed properly. He also claimed that his brothers breached their fiduciary duties to him by failing to actively try to refinance the mortgage loans on the properties.

The Court noted that controlling shareholders have a fiduciary duty to minority shareholders, as well as a duty of loyalty. It also noted that a director’s loyalty is split where the director will reap personal financial gains not shared equally by the other shareholders. With respect to the lease, the two brothers who retained ownership of the electronics store had an interest in keeping the rent as low as possible, while the “outside” brother had an interest in getting the maximum rent. In this case, however, the “outside” brother knew the market rental value before he sold his interest in the store and he failed to share it with his brothers. Had the two purchasing brothers known the market rent would be higher, they would have paid less for the one brother’s share. According to the Court, the “outside” brother had a duty of loyalty and fair dealing to his brothers, but hid the lease value of the property (and his failure to exercise the renewal option) in order to maximize his buy-out price. The Court also found that the lease renewal had been properly exercised. With respect to the “outside” brother’s claim that his two brothers breached their fiduciary duty by not seeking to refinance the mortgage loans on the real property, the Court noted that the “outside” brother did not actively seek to refinance the loans when he was in control of the properties.

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