On appeal from Superior Court of New Jersey, Chancery Division, Middlesex County.
Michels and Baime. The opinion of the court was delivered by Baime, J.A.D.
[260 NJSuper Page 435] In this appeal and cross-appeal, the parties challenge various aspects of a judgment entered by the Chancery Division, ordering defendant High Tech Elevator Industries, Inc. (High Tech) to purchase the stock of its minority shareholder Peter G. Bostock at a price of $109,518. The Chancery Division determined the value of the stock in accordance with a formula provided in a buy-out clause contained in a shareholders' agreement which had been entered into by Bostock and Kenneth R. Rice, the majority stockholder. In valuing the stock, the Chancery Division Judge rejected portions of an appraisal prepared by a court appointed expert mutually agreed upon by the parties. In the principal appeal, Bostock contends that he was not afforded a reasonable opportunity to present evidence supporting the value of the stock set by the independent appraiser. He also contends that the Judge erred in her Conclusion regarding the sale price of the stock. In the cross-appeal, High Tech and Rice contend the Judge lacked the authority to force them to purchase Bostock's shares. They further assert that the Judge improperly refashioned the valuation formula contained
in the shareholders' agreement. We find no basis to disturb the Chancery Division's judgment.
High Tech was founded by Rice in 1985. Bostock began rendering advice and assistance to Rice shortly after the corporation was formed. In June 1988, Bostock and Rice executed a shareholders' agreement which spelled out the rights of the parties. Bostock was permitted to purchase 45% of the shares of the corporation for $675, while Rice retained the remaining 55% of the stock.
The agreement defined three events which would trigger the sale or purchase of the shareholders' stock. Under Articles 4 and 5, the corporation or the remaining shareholder was obliged to purchase the stock of the other upon his death or disability. In contrast to these mandatory sale and purchase provisions, Article 3 governed "friendly" and voluntary acquisitions of a stockholder's shares. This provision gave the corporation the first option to buy all or part of the shares and, if the corporation refused, then gave the remaining shareholder the right to buy all unpurchased shares.
The purchase price was to be determined by the provisions of Article 6 and the procedures for purchase by those of Article 7. Article 6 provided that the shareholders would execute a certificate of value on a periodic basis to determine share price. In the event that no certificate of value had been prepared prior to 18 months before the valuation date, the corporation's "regular independent accountant" would fix the value of the shares which would bind the parties. More specifically, the clause reads as follows:
If no Certificate of Value is executed prior to eighteen (18) months before the valuation date, then the value per share of Stock of the Corporation for the purposes of determining the purchase price pursuant to paragraphs 3, 4, and 5 of this Agreement shall be the last Certificate of Value price per share, plus or minus such share's proportionate part of any increase or decrease in the net worth of the Corporation measured from the end of the last fiscal year of the
Corporation immediately preceding the last executed Certificate of Value to the end of the last full fiscal year of the Corporation immediately preceding the valuation date. The increase or decrease in net worth of Corporation shall be determined by the independent accountant or firm of accountants then regularly engaged in the audit of the books of the Corporation, and in accordance with generally accepted accounting principles and, when so determined shall be binding upon all parties hereto . . . .
We need not describe the acrimonious disputes that ultimately culminated in this litigation. Suffice it to say that, although the corporation prospered, the business and personal relationship between Bostock and Rice rapidly deteriorated. Bostock was suspended from his employment after he insulted Rice's wife, who was employed by the corporation as a secretary. Rice terminated Bostock's employment when he refused to return to work after the two week suspension. Bostock then offered to sell his shares or, alternatively, to purchase Rice's stock. When Rice refused this offer, Bostock commenced this action, claiming, among other things, that Rice had acted oppressively.
In the course of the litigation, High Tech's regularly retained accountant, Peter A. McGuigan, prepared an appraisal in which he determined that the value of the company was $250,655, and that Bostock's 45% interest, taking into account his minority shareholder position, was worth $90,239. Bostock retained his own expert who reported the value of his shares at between $261,000 and $272,000.
It is important to note the parties' respective positions in the Chancery Division regarding the applicability of the buy-out clause in the shareholders' agreement. Bostock contended that the "asset/liability" formula contained in the agreement was inapplicable. He asserted that the majority had acted in an oppressive fashion under N.J.S.A. 14A:12-7(1)(c) and that the court was to determine the "fair value" of his interest in accordance with N.J.S.A. 14A:12-7(8)(a). Conversely, High Tech and Rice urged that the shareholders' agreement was fully applicable. While repeatedly noting that the buy-out provision contained in the shareholders' agreement gave the
corporation and remaining shareholder the right of first refusal, High Tech and Rice urged the court to "order Bostock to sell his shares to Rice at the price fixed by the parties themselves."
Following the close of the evidence, the Chancery Division Judge rendered an oral opinion in which she found that neither High Tech nor Rice had acted in an oppressive fashion. The Judge determined that Rice's conduct was justified by the events and that Bostock's arrogant attempt to gain control over the business was the principal cause of the dispute. While finding no statutory basis for judicial intervention under N.J.S.A. 14A:12-7(1)(a), (b), or (c), the Judge nevertheless decided to compel High Tech to purchase Bostock's minority interest. She arrived at that Conclusion for two reasons. First, the Judge determined that N.J.S.A. 14A:12-7(8) empowered the court to compel a majority shareholder to purchase the shares of a dissident minority even where no "triggering" event was found under N.J.S.A. 14A:12-7(1)(a), (b), or (c). The fact that Bostock had not proven "oppression" under N.J.S.A. 14A:12-7(1)(c) was said not to be a bar to a forced purchase of the minority's interest. Second, the Judge found the buy-out clause contained in the shareholders' agreement constituted an independent basis for ordering the purchase of Bostock's stock. In either case, whether based on the statute or on the shareholders' agreement, the Judge determined that the formula contained in Article 6 was to control in valuing Bostock's stock. However, the Judge was dissatisfied with the appraisal prepared by McGuigan because it did not include a valuation of High Tech's good will. The Judge thus appointed an expert agreed upon by all parties and directed him to prepare an appraisal utilizing the "asset/liability" approach provided by Article 6 of the shareholders' agreement.
The parties agreed upon Jeffrey Pinkham as the independent appraiser. Pinkham issued his report on October 2, 1990, valuing Bostock's shares at $193,000. Bostock then filed a motion returnable on July 26, 1991, to enter judgment based upon Pinkham's appraisal. Rice and High Tech took Pinkham's
deposition on July 19, 1991, and on the same day filed a letter-brief objecting to his valuation on the ground that it did not conform with generally accepted accounting principles. Specifically, they claimed that Pinkham used an unreasonably low 20% capitalization rate and relied upon minuscule salaries for Bostock and Rice for the years 1986 and 1987. They asserted that generally accepted appraisal procedures required the use of reasonable salaries for corporate officers in determining the value of the business entity. In support of this contention, defendants presented a certification prepared by McGuigan in which he recommended that the appraisal be discounted to reflect reasonable salaries of corporate principals rather than the amounts of compensation actually taken by Bostock and Rice. Bostock submitted no evidence supporting Pinkham's appraisal. Nor did he seek an adjournment of the return date of his motion, but instead was content to rely upon Pinkham's report.
The parties appeared before the Chancery Division Judge on July 26, 1991. In rendering her decision, the Judge emphasized that she previously told both attorneys Pinkham's appraisal was not to be considered sacrosanct. The Judge found that Pinkham had deviated from customary accounting principles by failing to utilize reasonable corporate salaries in valuing High Tech. In that respect, the Judge determined that Pinkham had not compared the actual salaries paid to Bostock and Rice in 1986 and 1987 ($5,400 and $25,210 respectively) to salaries within the industry, nor had he adjusted for their de minimus nature. The Judge observed that Pinkham reduced the actual salaries paid to Bostock and Rice in 1988 by some $53,000 because industry standards deemed $100,000 to be reasonable officer ...