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Muellenberg v. Bikon Corp.

January 18, 1996

RALPH MUELLENBERG AND BIKON-TECHNIK, G.M.B.H., PLAINTIFFS-RESPONDENTS,
v.
BIKON CORPORATION, DEFENDANT, AND KURT W. BURG, DEFENDANT-APPELLANT, AND ADDA FINANZIARIA, S.R.L. AND DARIO PASSERINI, DEFENDANTS-RESPONDENTS.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 277 N.J. Super. 67 (1994).

The opinion of the Court was delivered by O'hern, J. Chief Justice Wilentz and Justices Handler, Pollock, Garibaldi, Stein and Coleman join in Justice O'HERN's opinion.

The opinion of the court was delivered by: O'hern

This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

RALPH MUELLENBERG, ET AL. V. BIKON CORPORATION, ET AL. (A-17-95)

Argued September 27, 1995 -- Decided January 18, 1996

O'HERN, J., writing for a unanimous Court.

The issue on appeal is whether a court has the authority to order majority shareholders to sell their shares to a minority shareholder whose rights have been oppressed by the majority.

Pursuant to N.J.S.A. 14A:12-7(1)(c) of the New Jersey Corporation Business Act (CBA), a court can grant relief such as dissolution or a stock buy-out when controlling shareholders have acted fraudulently or illegally, mismanaged the corporation, abused their authority as officers or directors, or have acted oppressively or unfairly toward a minority shareholder. N.J.S.A. 14A:12-7(8) permits a minority shareholder to petition a court to order a buy-out of the majority upon a triggering event such as shareholder oppression.

Ralph Muellenberg held eighty patents worldwide in the field of locking devices used generally in the building of machines. In 1972, Muellenberg founded Bikon-Technik GmbH (BTG) in Germany to promote the products he invented. BTG owns the trademarks BIKON, DOBIKON, and BIKON-Technik. Adda Finanziaria, S.R.L. (Adda) is an Italian holding company owned by Dario Passerini, general manager and a shareholder in Tecnomeccanica, S.N.S.di Sacchi & C. (TM). In 1979, BTG entered into an agreement with TM, which was owned equally by Muellenberg and Adda, to manufacture Bikon products since BTG does not manufacture the locking devices itself. Kurt Burg, a mechanical engineer, came to the United States in 1976 from Germany and was employed by a competitor of BTG.

Sometime in 1980, Muellenberg and Burg discussed the formation of a U.S. company to promote and sell Bikon products in the U.S. and Canada. In June of 1982, Bikon Corporation (BNJ) was incorporated in New Jersey. Under the Stockholder's Agreement, Muellenberg, Burg and Passerini were the initial directors and officers of the company. The parties executed license and distribution agreements, which, among other things, gave BNJ the right to produce and distribute products developed in accordance with Muellenberg's patents and gave BNJ the license to use the trademarks BIKON, DOBIKON, and the trade name BIKON-Technik in exchange for a specified fee.

Muellenberg, Burg, and Passerini subscribed for one hundred shares of BNJ stock for $30,000 each. Muellenberg invested cash, Burg's subscription was provided in exchange for his knowledge of the trade, and Passerini's subscription was credited against merchandise to be manufactured by TM for sale by BNJ. According to Muellenberg, he made it clear to Burg before BNJ was formed that he, Muellenberg, would be in control of the company and would be its president, that Burg would be general manager and that Passerini would be treasurer. Business operations began in Burg's River Vale, New Jersey home. In June 1984, Burg and his wife bought a house with an out-building in Monroe, New York, and moved the business there. BNJ paid rent to the Burgs for the office space in River Vale and Monroe. As general manager and the only officer on site on a regular basis, Burg handled the day-to-day business of BNJ.

Although the business prospered, disputes arose between Burg and Muellenberg concerning certain business operations. Claiming that the corporation was deadlocked, Muellenberg instituted proceedings in the Chancery Division seeking dissolution of the corporation and other relief. Burg counterclaimed, seeking to confirm that Passerini was not a shareholder and to compel Muellenberg to sell his stock to Burg.

A meeting of the shareholders and directors was called for January 20, 1993, which only Burg failed to attend. At that meeting, Muellenberg and Passerini voted to declare a dividend of $180,000, to retain an outside accountant to determine the accrued royalties, to require the signatures of Burg and Muellenberg or Muellenberg alone for future bank withdrawals, and to require Board approval for the selection of suppliers and purchases over $1,000. Muellenberg and Passerini dismissed their court action, except for their application to purchase Burg's stock, which was tried over several days.

The Chancery court found that Passerini was a stockholder, having paid for his stock in the transfer of goods. The court then sought to determine whether: 1) under N.J.S.A. 14A:12-7, Burg had proven a triggering event that would authorize a buy-out of shares or dissolution; and 2) if a triggering event had occurred, should a sale of stock be directed and, if so, from whom to whom. The court found that at the January 20, 1993 shareholder's meeting, the majority shareholders, Muellenberg and Passerini, had begun efforts to freeze out Burg and intended to vote Burg out as a director and terminate him as general manager. The trial court concluded that the conduct of the majority shareholders amounted to oppression, and that the only fair and equitable remedy was a stock buy-out by Burg of the interests of Muellenberg and Passerini. Thereafter, the parties agreed on the value of the stock and Burg paid $235,000 each to Muellenberg and Passerini and changed the name of the company to B-Loc Corporation.

On appeal, the Appellate Division reversed and remanded that portion of the trial court's judgment ordering the sale of the majority's shares to Burg and terminating Muellenberg and Passerini as corporate officers and directors. According to the Appellate Division, the Chancery Division's finding that the facts satisfied the oppression and unfairness standards of N.J.S.A. 14A:12-7(1)(c) was premature and, therefore, erroneous as a matter of law. The Appellate Division reasoned that the trial court should have given the parties an opportunity to operate under their newly adopted governing structure before declaring an impasse.

The Supreme Court granted Burg's petition for certification and stayed the effect of the Appellate Division decision.

HELD: The provisions of the New Jersey Corporation Business Act, N.J.S.A. 14A:12-7(1)(c) and 14A:12-7(8), do, in rare circumstances, authorize a buy-out of the shareholders of a close corporation representing the majority of corporate ownership by the minority shareholders whose rights have been oppressed by that majority.

1. Shareholders in a close corporation are typically involved in the management and operation of the company. Because majority shareholders have the power to control the manner in which the corporation is run, a minority shareholder in a close corporation becomes vulnerable when disputes develop. The minority shareholder can neither profitably leave nor safely stay with the corporation, thus enabling controlling shareholders to exploit minority shareholders and defeat their reasonable expectations. (pp. 10-14)

2. In determining whether a course of conduct has oppressed a minority shareholder in violation of the CBA, courts should examine the parties' understanding in respect of their roles in corporate affairs. Oppressive conduct includes that which frustrates the reasonable expectations of the minority shareholder. Shareholders in close corporations may have expectations that differ substantially from those of the shareholders in public corporations and courts must be flexible in their treatment of section 14A:12-7(1)(c) cases because of their fact-sensitive nature. Minority shareholders' expectations, however, must be balanced against the corporation's ability to exercise its business judgment and run its business efficiently. (pp. 14-17)

3. In addition to the security of long-term employment and financial return, reasonable expectations include a voice in the operation and management of the business and in the formulation of plans for future development. It is reasonable to conclude that Burg's fair expectations were that he would hold an important position in BNJ's management. Although it cannot be considered oppression when controlling shareholders seek to rein in management and control the affairs of their corporation, the expectations of Muellenberg and Passerini that they might exercise majority power conflicted with Burg's expectations. In other circumstances, the solution proposed by the Appellate Division might have resolved the impasse. However, the events that followed the Appellate Division's decision confirm that the trial court had a better sense of the internal dynamics and could foreshadow Burg's inevitable ouster from BNJ. Burg's ouster would not have been a fair accommodation of the reasonable expectations of all shareholders. (pp. 17-19)

4. The record evidences not only Burg's ability to buy-out the majority shareholders, but his significant input in and connection with BNJ. Therefore, while a minority buy-out is an uncommon remedy, it is the appropriate one here. The trial court acted within its discretion in ordering Muellenberg and Passerini to sell their shares in BNJ to Burg. This remedy is authorized under N.J.S.A. 14A:12-7(8) and is consistent with decisions holding that courts are not limited to statutory remedies but can rely on a wide variety of equitable remedies as well. (pp. 19-22)

Judgment of the Appellate Division is REVERSED and the judgment of the Chancery Division is REINSTATED. It is left to the trial court the resolution of any unresolved issues attendant to the buy-out.

CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, GARIBALDI, STEIN and COLEMAN join in ...


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