On appeal from the Superior Court, Chancery Division, Atlantic County.
J.h. Coleman, Muir, Jr., and Levy. The opinion of the court was delivered by Muir, Jr., J.A.D.
[270 NJSuper Page 600] This case is a stockholder derivative action and a class action brought by minority stockholders against the president,*fn1 directors, and majority stockholders of the nominal defendant, Boardwalk Securities Corporation (BSC). In November 1987 plaintiffs filed their complaint in the Chancery Division of the Superior Court. They captioned it as a "Stockholders Derivative Action and Class Action" and alleged the officers and directors were guilty of breach of fiduciary duty, gross mismanagement, self-dealing, and fraud; and they sought various forms of relief which included compensatory damages, punitive damages, as well as removal of the directors or, in the alternative, dissolution of the corporation. After the trial court certified the case as a class action and the
requirements of R. 4:32-5 were met, the case proceeded to trial. On August 6, 1991, the trial court rendered an oral opinion that gave rise to the judgment under appeal. In its opinion, the trial court ordered:
(1) Defendant Elwood Kirkman, the president and a director of BSC, to pay
(a) to BSC $1,374,875 with prejudgment interest of $1,069,281 with the principal fund representing the total personal holding corporation taxes BSC paid from 1975 to 1990 rather than pay that amount in dividends to its investors (the trial Judge " assumed " the money paid over less counsel fees would be distributed as dividends to the class members, but the judgment does not so provide);
(b) to BSC $300,910 with prejudgment interest of $153,031 with the principal amount representing excess compensation Kirkman received as president;
(c) to plaintiffs' counsel for legal fees and expenses incurred by the corporation in connection with the suit, fees of $244,543 with $30,336 prejudgment interest;
(d) to members of the class $250,000 in punitive damages with $45,000 in counsel fees.
(2) Defendant directors, Kirkman, Hurd, Bell, Voss, and Tremble, to pay to BSC all directors' fees paid to them from 1975 through 1990 with prejudgment interest.
(3) Defendant Kirkman to give all former BSC stockholders from whom he purchased stock, during the period 1975 to date of suit, the opportunity to repurchase the stock at the price initially paid with interest at rate set for prejudgment interest by court rules or, alternatively, for Kirkman to sell the stock to BSC on the same terms if the former stockholders do not purchase the stock.
(4) Plaintiffs' counsel to be paid $405,000 in fees out of the fund created by the $1,374,875 paid to BSC.
The judgment embodied the trial court rulings except as noted.
Defendants appeal. Plaintiffs cross-appeal. We affirm in part, reverse in part, and remand for further proceedings.
BSC is a corporation formed in 1925 for the essential purpose of investment. At the times relevant, 1975 to 1990, it had 5,000 stock shares authorized with 309 shares in its treasury. Divided into voting and non-voting stock, the outstanding shares were 1,514 voting and 3,177 non-voting. Of the total outstanding, class members owned 2,127 or approximately 45%, while Kirkman
either owned, controlled, or had influence over the remaining shares of which 873 were voting stock.
From 1975 through 1988, Kirkman, or trusts under his control, acquired 393 shares of BSC stock from minority shareholders. The information of those shares is set out in the following chart:
Acquired Transferor Transferee Per Share No. Share
1975 Mrs. Syd Fryle Trust 150 54
1975 Mrs. Syd Fryle Trust 100 100
1976 Paul Burgess Mary V. 100 10
1977 Edith Dunn EFK(Kirkman) 100 11
1982 Virginia Maguinn EFK 150 1
1983 Bruce Dimon EFK 150 10
1985 Estate of Alvina EFK 210 3
1986 Annabel Davis EFK 185 9
1987 Advest Inc. Trust 275 50
1987 Advest Inc. Trust 275 50
1987 Advest Inc. Trust 275 50
1988 Enoch Smith Trust 500 15
1988 Lois Smith Trust 500 15
1988 Raymond Smith Trust 500 7
Kirkman, an attorney admitted in 1926, began his association with BSC in a legal capacity. By the late 1920's he was a director. By 1940 he also served as BSC's president. During the same periods, he was a director and officer of a bank that after time, and several mergers, became part of First Fidelity Bancorporation. He also served as Chairman of the Board of Chelsea Title Company.
To the extent relevant, BSC bylaws, as amended, provide for four members of a board of directors which must meet four times a year. The bylaws also authorize an executive committee, composed of two directors appointed by the president, to have the power to invest corporate funds, to buy and sell securities in which the corporation had invested, to loan money of the corporation,
and to incur and pay bills. The bylaws further provide that, when dividends are earned and declared to be paid, they are to be payable semi-annually on June 30th and December 31st each year but that
Before payments of any dividends or making distribution of the profits there may be set aside out of the net profits of the company such sum or sums as the directors from time to time in their absolute discretion think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the company, or for any such other purpose as the directors shall think conducive to the interest of the company.
Decisions of Kirkman, implemented by the board of directors, led to imposition of substantial federal tax payments. Although BSC paid no regular corporate income tax for the years in question, 1975 to 1990, it paid substantial personal holding company (PHC) taxes due to the nature of its income, its retention of income, and concentration of its ownership. The tax inured as the result of BSC's holding undistributed income. The tax is imposed on the undistributed income which represents the corporation's adjusted taxable income less dividends paid to shareholders. See 26 U.S.C.A. § 541; Fulman v. United States, 434 U.S. 528, 531, 98 S. Ct. 841, 844, 55 L. Ed. 2d 1, 7 (1978). A comparison of BSC income, with dividends and personal holding company tax paid for the years at issue, discloses:
Pre-Tax Dividends PHC Tax
Year Income Paid Incurred
1975 $196,011 $29,318 $83,234
1976 161,071 29,107 92,801