When a small company breaks up, the bickering over the division of assets can be every bit as hard fought as in the nastiest divorce. And, as with a bad marriage, when the parties cannot resolve their differences, they ask a judge to decide how much each should walk away with.
But with little definitive case law, New Jersey trial judges haven't had much guidance in how to fix a monetary value on a business that is not publicly traded. Neither have lawyers been able to predict confidently how much money shareholders - particularly dissident or oppressed shareholders - might get from a corporate buyout.
Two recent state Supreme Court decisions might shine some light on this murky area. In the companion cases, Wheaton v. Smith, A-63/64-98, and Balsamides v. Protameen Chemicals, A-27-1998, [digested on July 19, at pages 88-93], the justices addressed the circumstances under which courts could impose a discount on the price that shareholders withdrawing from a close corporation would receive.
The Court reached different results in the two cases - imposing a price discount on an oppressing shareholder in Balsamides but not on dissenting shareholders in Wheaton.
But in each case, the Court held that a trial judge is obligated to consider basic principles of fairness in deciding how much money to award. "In both [Balsamides and Wheaton], we have held that the 'equities of the cases' must be considered when ascertaining 'fair value' in appraisal and oppressed shareholder actions," Justice Marie Garibaldi wrote on July 14, for the unanimous Court.
Alan Pralgever, the attorney for the winning side in Balsamides, says the rulings are logically consistent. "Both decisions effectively rewarded the party that they [the justices] thought was the innocent party and protected the one they thought was oppressed," says Pralgever, a partner with Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer & Gladstone in Roseland.
Others, however, find the cases difficult to interpret. "What they say, to some extent, is in the eyes of the beholder," says William Campbell III, a partner in Dillon, Bitar & Luther in Morristown. "Wheaton settles a question that had been unclear in New Jersey," adds Campbell, who practices corporate law. "Balsamides muddies the waters a bit."
In Balsamides, the Court held that Leonard Perle, a partner who owned half the company, should be forced to sell his half to his other partner, Emanuel Balsamides, at a discounted price.
Perle and Balsamides had worked together for more than 25 years before their relationship soured. Their business, Protameen Chemicals, which they had created from scratch, was providing each of them with an annual income of $1 million and $1.5 million by 1995.
Although the two men were once close friends, they began fighting with each other in the early 1990s; by June of 1995, the problems were so severe that Balsamides petitioned the court to declare him an oppressed shareholder and to allow him to purchase Perle's interest in the company.
The trial court found that Balsamides was an oppressed shareholder and that he was entitled to buy Perle's half of the company at a 35 percent discount. The Appellate Division agreed that Balsamides was oppressed, but ruled that a discount was not in order. Balsamides v. Perle, 313 N.J. Super. 7 (App. Div. 1998).
But the Supreme Court found that Balsamides was entitled to purchase Perle's stake in the company at a discount, to make up for the fact that he was getting a business that was not liquid. Central to Court's determination was the finding that Perle had behaved badly toward the company and Balsamides, deliberately undermining the business by refusing to stock inventory or provide product samples and by publicly embarrassing Balsamides.
"Balsamides should not bear the brunt of Protameen's illiquidity merely because he is the designated buyer," wrote the Court. "To secure a 'fair value' for Perle's stock, a marketability discount should be applied. To do otherwise would be unfair, particularly since Perle was the oppressor and Balsamides was the oppressed shareholder."
Balsamides' lawyer, Pralgever, praises the decision as "evenhanded," saying that the Court wanted to make sure that "the person who has the right to a buyout isn't financially penalized after being oppressed."
To Perle's attorney, however, the Court wrongly mingled the concepts of fault and value.
"Fair value is the pro rata interest in the full value of the company," says Robert Buckalew, a partner with Buckalew, Frizzell & Crevina in Glen Rock. "In the majority of jurisdictions, fault does not come into play," he adds.
Defeating Purpose of Statutory Remedy
In Wheaton, the Court concluded that minority shareholders who were exercising a statutory buyout option because they were unhappy with a decision of the company's board were entitled to the full value of their shares.
The majority shareholders had argued that they should be allowed to take a 25 percent "marketability discount," which means that they would pay the dissenters 25 percent less than what their shares were otherwise worth, to compensate for the fact that shares of a closely held corporation are not easily liquidated.
But the Wheaton Court adopted the American Law Institute's position and issued a precedent-setting ruling that dissenting shareholders were not required to sell their shares at a discount in the absence of "extraordinary circumstances."
Although the Appellate Division had also adopted the ALI position, that court ruled that there were "extraordinary circumstances" that justified imposing a discount in this case. Lawson Mardon Wheaton v. Smith, 315 N.J. Super. 32 (App. Div. 1998). The trial court had also ruled that there should be a discount because of the case's extraordinary circumstances.
The Supreme Court, however, rejected the notion that a family feud between dissenting and majority shareholders constituted an extraordinary circumstance. "We believe that what the trial court viewed as an 'extraordinary circumstance' is a most ordinary circumstance in cases of this sort," Garibaldi wrote.
Because the question of whether dissenting shareholders would receive a discounted price had been unresolved in New Jersey, some corporate lawyers touted the Wheaton decision as providing needed clarity, saying the upshot is that fewer cases will go to trial.
"More cases are going to settle," predicts Fred Whitmer, a partner with Pitney, Hardin, Kipp & Szuch in Florham Park, who had represented some of the minority process, the experts are usually not that far apart. Most of their valuations are going to come close to another," notes Whitmer, adding that the most contested issue - at least before this decision - was whether a court would impose a discount.
"These are recurring issues that come up in corporate litigation," adds Marc Sonnenfeld, another of the winning attorneys and a partner in the Philadelphia firm of Morgan, Lewis & Bockius.
Sonnenfeld remembers that he was at a loss the first time he met with his clients and had to advise them without knowing how much money they might get for their shares.
"I can recall so clearly the day in December 1991, when they descended on my office," says Sonnenfeld. "The rest of family had surreptitiously decided to reorganize, and they j[the dissenters] had 20 days to make what was, for them, a very important decision."
Their biggest question, says Sonnenfeld, was whether the shares would be discounted - and the only way to find out was to litigate.
The lawyer for the majority shareholders, Jesse Finkelstein of Cherry Hill's Kenney & Kearney, declines to comment. However, on July 26, he filed a motion for reconsideration in the Supreme Court. Whitmer says the Court has not yet asked him to respond.
Published in the August 2, 1999 N.J. Law Journal