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Musto v. Vidas

May 25, 1995


On appeal from the Superior Court of New Jersey, Chancery Division, Burlington County.

Approved for Publication May 25, 1995.

Before Judges Skillman, Wallace and Kleiner. The opinion of the court was delivered by Wallace, J.A.D.

The opinion of the court was delivered by: Wallace


Plaintiff William C. Musto filed his complaint in December 1990, alleging oppression and breach of fiduciary duties owed to him as the minority shareholder. The trial court concluded that defendants Vincent G. Vidas and John S. Degnan had oppressed plaintiff and ordered reinstatement of plaintiff as officer and director of Semcor, awarded compensatory damages, and required defendants to sell their shares of stock in Semcor to plaintiff. Defendants, the majority shareholders in Semcor, Inc., and the corporation, appeal. We affirm in part, reverse in part, and remand for further proceedings.


Degnan and Vidas incorporated Semcor in 1967. They financed the start up of the company from their savings. Semcor primarily sells engineering systems and management services to the government. In 1968, defendants approached plaintiff about becoming an equal partner in Semcor. Plaintiff expressed concern about the possibility he might be squeezed out in the future. According to plaintiff, defendants orally agreed that Semcor would be run by unanimous consent and entered into what plaintiff referred to as their "no two-on-one agreement."

In May 1968, plaintiff paid $3,500 to Semcor and later paid $2,500 to each of Vidas and Degnan for 100 shares of stock in Semcor. Thus, plaintiff paid $8,500 to become a one-third owner of Semcor. The bylaws were amended to provide that any decision regarding the commitment of capital stock or compensation of directors and officers was subject to unanimous approval by the board of directors. Further, any revision to this amendment had to be by an affirmative vote of ninety percent of the outstanding shares.

On October 1, 1969, the parties entered into a shareholders agreement which governed Disposition of stock in the event of death, retirement, or disability of any of the shareholders. The agreement also provided that "all matters of decision shall be by unanimous consent of the principal stockholders." The trial court later determined that this provision meant all matters of decision concerning the shareholder agreement, not all matters of decision generally.

Semcor had two divisions -- one in Moorestown and one in Washington D.C. The Moorestown division had engineering offices in Moorestown and Fort Monmouth, as well as offices in Pennsylvania and Maryland. The Washington division had offices in Washington, San Diego, Newport, Rhode Island and Virginia Beach. During the 1970s, the Moorestown division did the greater amount of business. Plaintiff was vice-president and director of that division. Vidas was vice-president and director of the Washington division, while Degnan held the title of president. By the early 1980's the Moorestown and Washington divisions were doing about the same amount of business. Vidas disliked the separate divisions because he believed the internal competition made it difficult to get cooperation in the field. As a result Vidas suggested unifying the company, but plaintiff would only agree to the idea if he were made head of the company.

According to Vidas, from the time plaintiff joined Semcor it became apparent that the three shareholder-directors had different management styles and that plaintiff had a need to be "in charge." The three shareholders had difficulty resolving issues and once issues were resolved they would often revisit them. Vidas said that Degnan often became the mediator of disputes involving plaintiff and himself.

In February 1982 the parties entered into a buy-sell agreement wherein they agreed that in the event of the death of one of the shareholders, the corporation would purchase the deceased shareholder's stock for $1,150,000. The agreement also required the corporation to purchase insurance on the life of each shareholder to fund the buy-out.

In 1983 defendants agreed to make plaintiff president because of his insistence that if one person were going to run Semcor it had to be him. Plaintiff also assumed the title of chief executive officer (CEO), Vidas was made vice-president of business operations, and Degnan's new title was vice-president of corporate planning. Plaintiff testified that he took the title of CEO because defendants told him to take any title he thought might impress customers. Plaintiff claimed that defendants told him that if he were successful in getting Semcor back on its prior growth curve, he would be given a bonus of one-quarter of the profits. Defendants denied telling plaintiff that they wanted him to be president because he would be a better spokesman for the company. They also denied that they authorized him to assume the title of CEO. Furthermore, defendants denied promising plaintiff a bonus of one-fourth of the profits if he achieved a thirty percent growth rate per year. They claimed that the issue of a bonus for plaintiff was not raised until late 1986. Consequently, plaintiff's requests for bonuses were refused by defendants.

Vidas conceded that initially plaintiff's leadership was a positive factor. After 1983, Semcor's profits and revenues increased, in large part due to an increase in defense spending. According to plaintiff, approximately a year after he assumed the position of president, Vidas began telling plaintiff that he wanted to be Semcor's president. Vidas denied that he ever demanded plaintiff's job. In any event, plaintiff vetoed any such demand under the parties' alleged unanimity agreement.

Late in 1985 or early in 1986, defendants told plaintiff that they did not want to be involved in the day-to-day operation of the business and that he should hire someone to take over their responsibilities. Vidas specifically told plaintiff that he could not tolerate working for him. As a result plaintiff hired Ed Ferraro, who eventually became the vice-president and the chief financial officer of Semcor.

Between 1984 and 1986 Semcor's revenue increased from $10,000,000 to $25,000,000, its profits increased from under $1,000,000 to $2,400,000, and its employees increased from 200 to 500. In 1986 the parties agreed on a new compensation package covering 1987 and 1988. Plaintiff would receive a $200,000 bonus conditioned, according to defendants, on plaintiff finishing the year 1987 as president. Further, it was agreed that plaintiff would receive an annual salary of $250,000, Vidas would receive $175,000 and Degnan would receive $50,000. Degnan agreed to the unequal salaries because he believed that the person who had more responsibility should be paid more.

Vidas said that by 1987 the disagreements with plaintiff were becoming quite divisive. Vidas also complained that projections of business volume did not come true and that the company took on space that it did not need. Defendants also complained that plaintiff treated them in a demeaning manner by acting as if he were "more equal" than the others and consulting them "less and less" on important business decisions. Vidas was also concerned that plaintiff had not trained potential successors to the three shareholders. Defendants were also upset about the location of their offices in the company's new headquarters. Consequently, on April 27, 1987, defendants told plaintiff that he should devote himself to operating problems and that Vidas would assume the position of CEO. Plaintiff did not agree to this course of action, but defendants proceeded with the plan without a ...

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