Business Owner Rights
When a Shareholder Dispute Goes Off the Rails
Published Date: July 22, 2022
New Jersey shareholder disputes take many forms, and are often fodder for colorful opinions from the Courts. A new opinion from the New Jersey Supreme Court in a long-standing shareholder dispute, Sipko v. Koger, provides some concrete lessons on how not to handle such a dispute. It also shows that digging in and fighting hard may not be the best long-term strategy.
Sipko is a case between a father and two sons that dates back over a decade. The father established a series of companies and gifted ownership to his two, twin sons. One of the sons had a falling out with the father and brother, and relinquished his ownership, only to turn around and sue claiming that he was an oppressed shareholder. Then the case went off the rails.
The father and brother of the plaintiff appear, from the decision, to have done everything in their case to denude the assets of the companies in question; transfer contracts to a different entity; and to otherwise make life miserable for the plaintiff-brother-son. The saga ended with the defendant-brother serving a commitment in jail for refusing to honor a court ruling, and the father fleeing the jurisdiction to avoid paying a multi-million dollar judgment.
While there have been multiple opinions from the Courts in the Sipko matter, the new opinion from the New Jersey Supreme Court offers some helpful information.
First, the Court affirmed the concept that our trial courts are “courts of equity” with the power to fashion remedies in cases like this and to find a way to make the plaintiff whole. Where the defendant shareholders take action to render the corporation less valuable or even worthless by diverting contracts to another entity, the Court is empowered to order a buyout of the plaintiff’s share interest at the date of the complaint or some other fair date of the Court’s choosing.
Also of interest is the Court’s holding that a “marketability discount” is within the discretion of the trial court to impose, when valuing the shares in question. A marketability discount is a discount used in determining the buyout value which takes into consideration the “decreased worth of shares of stock in a closely held corporation, for which there is no readily available market.” In Sipko, the Court appears to have been convinced by the alleged chicanery of the defendants to rule that a discount was not appropriate. The opinion provides quite clearly that whether and when to give a discount is within the discretion of the trial judge.
We are available to help guide you in matters such as these to avoid long and protracted litigation and to position you as best as possible to achieve a fair and quick result. Please call me with any questions about this blog or with other shareholder issues.