Muellenberg v. Bikon Corp.

Supreme Court of New Jersey · Corporations

CorporationsClose corporationsShareholder oppressionBuyout remediesclose corporationminority shareholdershareholder oppressionreasonable expectations

Facts

Bikon Corp. was a closely held New Jersey corporation owned equally by Muellenberg, Burg, and Passerini, with Burg serving for about ten years as the on-site general manager who handled day-to-day operations. After disputes over management and control, Muellenberg and Passerini, acting together as the majority, used a January 20, 1993 meeting to declare a large dividend, restrict bank withdrawals, require board approval for suppliers and purchases, and intended to remove Burg as director, general manager, and employee. The trial court found these actions began a freeze-out of Burg and amounted to oppression. Burg was willing and able to buy out the others and had been the shareholder most actively involved in operating the company.

Issue

Whether N.J.S.A. 14A:12-7(1)(c) and 14A:12-7(8) permit a court, in a close corporation oppression case, to order majority shareholders to sell their shares to a minority shareholder. Also, whether the conduct of Muellenberg and Passerini toward Burg constituted oppression justifying that remedy.

Rule

In a close corporation, oppression under N.J.S.A. 14A:12-7(1)(c) is measured primarily by whether controlling shareholders have frustrated the minority shareholder's reasonable expectations, such as continued managerial participation and employment, while recognizing that mere disagreement or discord is insufficient. Under N.J.S.A. 14A:12-7(8), once a triggering event exists, a court may in its discretion order the sale of shares held by any shareholder to another shareholder, including ordering majority shareholders to sell to a minority shareholder, if doing so is fair and equitable to all parties under all the circumstances.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Ortiz owns 30% of Harbor Forge Systems, a 3-shareholder New Jersey manufacturing company in Newark. For nine years, all shareholders understood that Lena would run daily operations and draw her livelihood from the business, but the other two shareholders now vote to remove her as manager, bar her from company accounts, and announce plans to terminate her employment while keeping her capital invested in the firm.

If Lena petitions for relief under New Jersey's close-corporation oppression statute, what is the strongest argument that oppression has occurred?

Explanation. The majority opinion measures oppression in a close corporation primarily by whether those in control have frustrated the minority shareholder's reasonable expectations concerning employment, management participation, and role in the enterprise. Here, Lena's long-standing managerial role and dependence on the business for income support such expectations. The case also stresses that majority rule alone is not oppression, and that oppression is not limited to classic self-dealing categories like excessive compensation or waste. (Derived from Muellenberg v. Bikon Corp. (n.d.).)