Annotate this Case






DOCKET NO. A-4281-10T1















September 10, 2013


Argued October 15, 2012 - Decided

Before Judges Graves, Espinosa, and Guadagno.

On appeal from Superior Court of New Jersey,

Chancery Division, Essex County, Docket No.


Paul F. Carvelli argued the cause for

appellants/cross-respondents (McCusker,

Anselmi, Rosen & Carvelli, P.C., attorneys;

Mr. Carvelli, on the brief).

Matthew M. Oliver argued the cause for

respondents/cross-appellants (Lowenstein

Sandler PC, attorneys; Mr. Oliver and

Bernard J. Cooney, on the brief).


Plaintiffs Serene Goret, Jay Goret, Rosalind E. Roberts, Diane Jacobs, Irwin Jacobs, Jill D. Cohen, and Edythe Subarsky are minority shareholders of H. Schultz & Sons, Inc. (the Company), a family owned and operated close corporation. In June 2008, plaintiffs filed this action against the Company and its majority shareholders, defendants Robert S. Schultz, David Schultz, and Jerome Schultz. Plaintiffs alleged defendants "abused their authority as officers and directors of the Company and engaged in acts of oppression towards plaintiffs and otherwise treated plaintiffs unfairly." In addition, plaintiffs claimed that defendants breached their fiduciary duty to plaintiffs, and that they violated New Jersey's minority shareholder oppression statute, N.J.S.A. 14A:12-7(1)(c).

Following a bench trial, the court determined that plaintiffs were not oppressed, but found that Robert1 breached his fiduciary duty to plaintiffs by failing to inform them of an offer to purchase real estate owned by the Company for $7.4 million. On appeal, plaintiffs argue the court erred by finding that defendants did not engage in oppressive conduct. Plaintiffs also contend the court erred by only requiring the Company to provide them with information concerning major business decisions "until the company is able to resume paying dividends." In a cross-appeal, defendants argue the trial court erred in finding that Robert breached his fiduciary duty to plaintiffs. For the reasons that follow, with the exception of one modification, we affirm the judgment entered by the trial court.

The facts are relatively straightforward. In the 1920s, Hall Schultz formed Prince Range Company (Prince Range), for the retail sale of household cookware items. Hall also formed the Company for the wholesale distribution of household products and cookware. Over the years, ownership of both companies passed to Hall's four children and then to their children. The Company remains a small, family owned and operated business with approximately fifty employees. Plaintiffs are Hall's granddaughters and their spouses, who collectively own 44.1 percent of the Company's stock. The remaining shares of the Company are owned by defendants, Hall's grandsons.

At its peak, Prince Range had forty locations and approximately 130 employees. However, in the mid-1980s, profits began to decline because of increased competition from large discount retailers. Due to declining sales and sustained losses, all of the shareholders approved a liquidation plan for Prince Range in 1989. As a result of the unanimous decision, Prince Range's assets and real estate were liquidated and distributed to the shareholders.

During this same period, the Company was able to successfully develop its business as a "middleman" distributor to major retailers, such as Sears, Bradlees, Bloomingdale's, and F.W. Woolworth & Co. The parties agree that the Company's unwritten policy was to distribute annual profits to all shareholders in proportion to their ownership interest.

According to the minority shareholders who testified (Serene, Jay, and Jill), they either inherited their respective shares in the Company or received them as gifts. They have never been employed by the Company, and they never served as officers or directors. Ordinarily, minority shareholders were not consulted about business decisions, and they only received informal "updates" at family gatherings regarding the status of the Company.

Prior to 2004, none of the minority shareholders complained about their passive shareholder status. Jay explained that shareholder meetings were not necessary, because "the business had been doing well, except for a couple of bumps in the road a couple of years, and we felt there was no reason to disturb anything." Serene testified she never requested a shareholder meeting because "[w]e were very satisfied with the business. They were very successful and there was no reason to. We were very happy with them." In addition, Jill testified that shareholder meetings were not necessary because "[w]e were getting distributions and we were pleased with them and it was sort of a family history that you just take what you get and you go along with it."

Jay testified that although there was "no written guaranty there would be annual distributions," he came to expect them because "[t]hey were always there." He also testified as follows:

My expectations were that we would receive a fairly continuous flow of dividends from the Company. We had expectations that we would have a valuable property, a valuable stock to pass on either for ourselves or to pass on to our children and grandchildren. We expected that the management would act to preserve shareholder value in the Company, the management would -- in the cases where the company was not being profitable, would take actions to reduce their pay to more reasonable numbers since there could be distributions to the stockholders.


We also felt that we would never be in a position where we would have to sue the relatives to have our voices heard.


Serene testified she expected "to be treated fairly and equally like we did with them. The way we did when we handled Prince Range." Additionally, Jill testified that her expectations as a shareholder "were that the Company would be run in a manner where it would be profitable. I expected to receive a distribution in the years when it was profitable."

The parties stipulated to the following figures from the Company's financial statements:

Year Net Sales Net Income (Loss) SHAREHOLDER



2002 $19,112,847 $296,233 $478,000

2003 $18,371,355 $186,203 $296,230

2004 $16,048,488 ($ 98,806) $270,000

2005 $15,771,518 ($106,996) $ 0

2006 $17,400,235 $ 33,109 $220,000

2007 $19,062,542 $166,886 $220,000

In July 2004, Serene, Jill, and Rosalind met with Robert to discuss their growing dissatisfaction with the Company's performance, their request for increased shareholder distributions, and Edythe's need to redeem her shares of stock. However, Robert refused to redeem Edythe's stock because the Company "needed the cash to run the business." According to Serene and Jill, when Robert was asked about Edythe's stock, he said she "should go out and get a job."

As an alternative to redemption, Serene suggested $1,000,000 in distributions to the minority shareholders. She understood that the Company had $4,000,000 in cash reserves at that time. According to Serene and Jill, Robert was "very upset" by the comment, and he "picked up a glass of water" and said, "[D]o you see this glass of water? The value of your stock isn't worth the same as this glass of water." Serene testified she understood Robert to mean that their shares were worthless, and Jill understood Robert to mean that the minority shareholders were "at the mercy of management."

At trial, Robert testified he did not recall making the glass of water comment. At his deposition, he denied making the comment. The meeting ended when the minority shareholders walked out.

On October 23, 2004, a shareholders meeting was held at the Company's headquarters in Union at the request of the minority shareholders. The purpose of the meeting was to discuss the status of the Company and its plans for the future. Jay summarized the sentiments of the minority shareholders as follows: "If [management was] not willing to distribute excess assets[,] we as a group would want to be bought out to realize loaded up value." Additionally, Jay acknowledged that "the nature of retailing distribution had changed and the glory years [were] over."

David, Robert, Jerome, Jay, Serene, Rosalind, Irwin, Jill, and Alan Cohen (Jill's husband) attended the meeting. Robert reported generally about the Company's performance, including its loss of customers. He also noted that Bed, Bath & Beyond, which the Company relied on for a substantial percentage of its business, had cancelled a promotional activity that was very profitable for the Company. Therefore, Robert indicated that shareholder distributions would be reduced.

According to Jay, the minority shareholders expressed their frustration with declining distributions, and they requested that the Company either purchase their shares or that the Company be liquidated with the proceeds distributed to the shareholders. Jay testified that Jerome asked the minority shareholders "for some forbearance" to find new customers and save the business, and the minority shareholders agreed to give the Company six months.

Another shareholders meeting occurred on June 4, 2005. During the meeting, the minority shareholders expressed their concern that the Company's "formula" no longer worked because "big box stores," like Target and Walmart, did not buy from middleman distributors. In response, the majority shareholders stated they were trying to "improve the business and find new customers." All agreed to another meeting.

The last shareholders meeting occurred on March 30, 2007. Once again, the minority shareholders "asked to have their shares bought out," because they "did not feel that the Company . . . could continue to stay in business and [they] didn't want to be a part of it anymore." Nevertheless, the majority shareholders stated they "were going to stay there and try to continue to improve [the Company] and make it better."

Robert testified that the Company invested $300,000 in a Florida real estate project sometime in 2007 or 2008. He explained that he researched the investments, which involved Mark Roberts (a cousin). Robert conceded that the minority shareholders were not consulted regarding the decision, and that the investment was "outside the scope of the company's typical investment parameters." Robert testified the Company lost $175,000 because the "whole real estate market collapsed," and he apologized "for trying to make money for everybody involved."

In April 2009, a real estate broker approached the Company about the sale of its warehouse and offices located in Union Township for approximately $7,400,000 from someone who had previously made an offer to purchase the property in 2006. Plaintiffs' real estate appraisal estimated that the property was worth $7,325,000 as of June 2008. According to Robert, he immediately rejected the offer because "we were utilizing the building for operations of our business and we would have no place to go if we were to have to leave the building right away."

Robert conceded that the minority shareholders were never informed of the offer. Robert testified he did not believe that negotiations would "come to any kind of fruition," and he did not want to "give any idle promises to shareholders that [he] couldn't fulfill." Robert acknowledged he was not challenging the accuracy of plaintiffs' appraisal because the Company never did its own appraisal.

Plaintiffs filed a verified complaint on June 2, 2008, asserting shareholder oppression, breach of fiduciary duty, breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment. Plaintiffs sought dissolution of the Company and appointment of a receiver to oversee liquidation. Defendants answered, denying liability.

In August 2009, defendants moved for summary judgment. During oral argument on September 18, 2009, plaintiffs voluntarily dismissed the request for appointment of a receiver. The court granted defendants' motion with respect to the breach of contract and unjust enrichment claims, and denied the motion in all other respects.

Following the trial, the court rendered a twenty-page written decision on February 28, 2011. The court found that Robert had breached his fiduciary duty to plaintiffs, but found for defendants in all other respects. The court stated:

[T]he Stockholders Agreement does not provide the minority with a right to have their shares purchased (other than in the event of death, and then only in limited amounts), nor does it obligate the Company or the majority to purchase shares. Neither is there evidence in the record of any prior history in the Company of the redemption of a large block of stock. There were three prior instances concerning a small percentage of the stock over a period of some thirty years, done pursuant to the valuation formula set forth in the Stockholders Agreement.


. . . .


The plaintiffs have never been active in the management of business; hence, no one suggests that they have a reasonable expectation of compensation. As the owners of stock on which distributions were paid regularly up to a point in time, their reasonable expectations are that "dividends would continue to be paid on their stock if funds are reasonably available for the payment of dividends." Kelley v. Axelsson, 296 N.J. Super. 426, 429 (App. Div. 1997).


Plaintiffs urge that the family's treatment of Prince Range established a precedent or pattern to be followed here. . . .


. . . .


Putting aside the issue of hindsight, there are few parallels between Prince Range and the present situation. Jay Goret testified as to the former that he "didn't have a way to save the business." All concerned were discussing a dissolution rather than a buyout of any owner's stock. All agreed that the Company's plight was irreversible. The decision was unanimous. It furnished no template for action where, as here, the two groups of shareholders are at odds and management believes that a recent increase in net sales is a positive sign. There is no evidence before the court of any understanding or discussion about liquidating the Company if business fell off. Mr. Goret acknowledged that he never told any of the defendants when he was liquidating Prince Range that he expected the same result with H. Schultz in the future.


Whereas Prince Range supposedly could not be "saved," that is not true of H. Schultz. It is a viable going concern that has been able to thus far survive one of the worst financial crises in history. It has done so by trying to retool and adapt, by cultivating its existing customer base and aggressively marketing for new customers, and by maintaining a conservative financial posture and avoidance of significant debt. The rejection of a 44 [percent] buyout that would necessitate outside financing is viewed by the court as a permissible exercise of business judgment that should not be disturbed. See [Brenner v. Berkowitz, 134 N.J. 488, 517-18 (1993).]

The fact that defendants have continued to draw their salary during the period when plaintiffs have received no financial benefits does not call for a departure from the business judgment rule. There is inadequate proof that defendants' compensation was so unreasonably high, even considering the plaintiffs' reasonable expectation of dividends, as to be unfair and oppressive to the minority. . . .


. . . .


In addition to the distribution of profits, the court finds that plaintiffs have reasonable expectations of shareholders' meetings at which their views are heard, at least for the duration of the current "no distributions" period. The absence of regular meetings does not give rise to oppression if the company's past practices indicate that infrequent meetings were the norm. See, e.g., Exadaktilos v. Cinnaminson Realty Co., 167 N.J. Super. 141, 154-55 (Law Div. 1979), aff'd o.b., 173 N.J. Super. 559 (App. Div.), certif. denied, 85 N.J. 112 (1980). The history of both of the family businesses involved in this case is that meetings were requested and held only when profits diminished and/or dividends ceased. The evidence establishes that when the minority asked, the Company convened shareholder meetings at which one or more of the plaintiffs had the opportunity to express their views. This occurred until shortly before the start of this case. There is no indication that plaintiffs made any constructive suggestions to management; only that they reiterated the desire to be bought out at every opportunity. There is no requirement that management accept their position. Plaintiffs' reasonable expectations have been satisfied in this respect.


The most significant evidence of the breadth of Robert Schultz's control of the Company was his "on the spot" rejection of an offer of $7.4 million for the Company's real estate on Lehigh Avenue from one of the prospective buyers in 2009. . . .


The minority shareholders were not informed of the offer. Robert explained that it was only in the "talking stage" and because he did not think it would come to fruition, there was no point in getting "bogged down" in conversations about "idle promises." He had no explanation, however, for not being totally candid with his fellow officers. Jerome Schultz testified that he and David [Schultz] "thought [the offer] should be considered." Robert did not tell him that he had already declined it. Jerome thought that the offer was still open for consideration as of the time of his deposition in July 2009. He stated at trial that he thought it was a "fair" offer. At the deposition, he went so far as to call it "terrific."


The fact that Robert Schultz was not transparent, even with the other officers, is surprising. It reflects a unilateral wielding of power that is inconsistent with the duties imposed by law. . . . Here, Robert Schultz failed to disclose the true circumstances surrounding the offer not just to plaintiffs, but even to management. . . .


While these types of lapses might have been overlooked when the business was profitable and yielded returns to the shareholders, this cannot be done in the Company's current financial condition. Plaintiffs (and all majority shareholders as well) have a right to be informed and consulted before decisions are made that could impact the Company's bottom line and its viability. Anything less is a breach of fiduciary duty.


[(Fourth and fifth alterations in original).]


The scope of review of a judgment entered in a bench trial is limited. The factual findings and legal conclusions should not be disturbed unless they are "manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice." Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974).

Whether a shareholder is oppressed, as defined at N.J.S.A. 14A:12-7, is a mixed question of law and fact. Walensky v. Jonathan Royce Int'l, Inc., 264 N.J. Super. 276, 279 (App. Div.), certif. denied, 134 N.J. 480 (1993). N.J.S.A. 14A:12-7 provides in pertinent part:

(1) The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation's stock as provided below, or enter a judgment dissolving the corporation, upon proof that


. . . .


(c) In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.


The statute is "interpreted broadly to provide remedies for the distinctive problems of close corporations." Brenner, supra, 134 N.J. at 508 (internal quotations omitted). Examples of such problems include a "'majority is able to dictate to the minority the manner in which the corporation is run,'" and "a minority interest in a closed corporation is difficult to value because the shares are not publicly traded and a fair market is often not available." Bostock v. High Tech Elevator Indus., Inc., 260 N.J. Super. 432, 443 (App. Div. 1992) (quoting Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984), dismissed, 791 F.2d 920 (3d Cir. 1986)).

A finding of illegality or fraud is not required to establish oppression; rather, oppression is defined "as frustrating a shareholder's reasonable expectations." Brenner, supra, 134 N.J. at 506. To determine whether a minority shareholder's reasonable expectations have been thwarted, "a court must determine initially the understanding of the parties in this regard. Armed with this information, the court can then decide whether the controlling shareholders have acted in a fashion that is contrary to this understanding . . . ." Exadaktilos, supra, 167 N.J. Super. at 155.

"[I]n addition to demonstrating fraudulent or illegal conduct, mismanagement, or abuse of authority, or oppressive or unfair conduct, a plaintiff must also demonstrate a nexus between that misconduct and the minority shareholder or her interest in the corporation." Brenner, supra, 134 N.J. at 508. "[I]n determining the nexus between the misconduct and the harm to the shareholder, the court must consider those acts that affect or jeopardize a shareholder's stock interest as well as those acts that may be specifically targeted to the shareholder." Ibid. Certain factors that apply in most cases in deciding whether the misconduct caused harm to the minority shareholder or to his or her interest in the corporation, include "the seriousness of the violation"; "whether the misconduct places the minority shareholder's investment at risk"; "whether the misconduct thwarts the minority shareholder's reasonable expectations [including non-monetary expectations] of his or her role in the corporation"; "whether the minority shareholder was aware of the misconduct prior to filing suit but failed to act"; and "whether the minority shareholder participated in the misconduct." Id. at 508-10.

"Mere disagreement or discord between the shareholders is not sufficient for a violation of the close corporation statutory provision." Id. at 506. Indeed, "minority shareholders' expectations must . . . be balanced against the corporation's ability to exercise its business judgment and run its business efficiently." Muellenberg v. Bikon Corp., 143 N.J. 168, 179 (1996) (citing Brenner, supra, 134 N.J. at 517).

On the other hand, "freeze-out maneuvers in close corporations constitute an abuse of corporate power." Exadaktilos, supra, 167 N.J. Super. at 154. Shareholder "freeze-out" has been defined as "'a manipulative use of corporate control or inside information to eliminate minority shareholders from the enterprise, or to reduce to relative insignificance their voting power or claims on corporate earnings and assets or otherwise deprive them of corporate income or advantages to which they are entitled.'" Exadaktilos, supra, 167 N.J. Super. at 152-53 (quoting 2 O'Neal, Close Corporations 8.07 at 43 (2d ed. 1971)).

Oppression cases "are very fact-sensitive, and thus any hard and fast rules are difficult to formulate." Brenner, supra, 134 N.J. at 516. With respect to plaintiffs' claim that they were oppressed or treated unfairly, we find no basis for disturbing the trial court's determinations, which are supported by substantial credible evidence in the record.

In their cross-appeal, defendants contend the court erred by finding that Robert breached his fiduciary duty to plaintiffs by immediately rejecting the offer to purchase the Company's real estate in 2009 and not informing any of the shareholders of his unilateral rejection. The court noted that Robert's "lack of accountability" was also indicated by his decision to invest in the Florida real estate project. The court concluded that "[p]laintiffs (and all majority shareholders as well) have a right to be informed and consulted before decisions are made that could impact the Company's bottom line and viability. Anything less is a breach of fiduciary duty."

In addressing the need to protect oppressed minority shareholders in closely held corporations, the Court in Muellenberg referenced the Massachusetts Supreme Court's decision in Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505 (Mass. 1975), where that court ruled that shareholders in close corporations should be subjected to a higher standard of duty than those of a publicly held corporation, similar to the duty owed between partners or joint venturers. Muellenberg, supra, 143 N.J. at 177. The Donahue court held that shareholders in close corporations owed one another substantially the same fiduciary duty in operation of the enterprise that partners owed to one another, that of "utmost good faith and loyalty." Supra, 328 N.E.2d at 518. Here, the record supports the trial court's determination that the offer to purchase the Company's real estate in 2009 should have been disclosed to plaintiffs.

"[T]he Chancery court, as a court of equity, has the power of devising the remedy and shaping it in order to fit the circumstances of the case and the complexities involved therein." Musto v. Vidas, 281 N.J. Super. 548, 562 (App. Div. 1995), certif. denied, 143 N.J. 328 (1996). As the remedy for Robert's breach of fiduciary duty, the court ordered, among other things, that plaintiffs "shall" be provided with information and documentation concerning the Company's investments, potential acquisitions, and major business decisions on an ongoing basis until the earlier of dividend payments or written notice from plaintiffs that such information is no longer necessary.

Plaintiffs argue the court erred by conditioning the Company's disclosure obligations on its profitability. In response, defendants argue that "New Jersey law does not impose upon corporate directors the obligation to inform shareholders of every matter that comes before the board." The judgment entered by the court, however, only requires the Company to provide plaintiffs with "information and documentation" concerning its "investments, potential acquisitions, and major business decisions." Moreover, given the circumstances present in this case, we agree that the Company's disclosure obligations should not cease upon "payment of shareholder dividends to plaintiffs." Accordingly, the matter is remanded for the entry of a modified judgment without the limiting language in paragraph six, which states the Company's disclosure obligations "shall no longer be required" upon the "payment of shareholder dividends to plaintiffs."

The April 4, 2011 judgment is affirmed as modified.

1 Because several of the parties share the same surname, we will refer to them by their first names to avoid confusion.

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