Arthur J. Lesemann, J.s.c.
The opinion of the court was delivered by: Lesemann
ARTHUR J. LESEMANN, J.S.C.
Gerald Bonavita, the holder of one-half the stock of Corbo Jewelers, Inc., instituted this suit claiming that the corporation was deadlocked and that he was the victim of oppression by Alan Corbo, holder of the other 50% of the corporation's stock, who is also its president and chief executive officer. He sought relief under N.J.S.A. 14A:12-7 and also under this court's common-law power to remedy such oppression. See Brenner v. Berkowitz, 134 N.J. 488, 634 A.2d 1019 (1993). Gerald Bonavita died before trial, and the suit has been continued by his executrix and widow, Julia Bonavita.
The oppression claim is based on Alan Corbo's rejection of plaintiff's attempt to have the corporation either pay dividends or buy out the Bonavita stock interests. *fn1 With both demands rejected, plaintiff claims she is locked into a corporation which provides her with no benefit of any kind. At the same time, she says, Alan Corbo and his three sons are employed full time by the corporation, and his wife and daughter are employed part time. Thus, the Corbo half of the stock ownership receives substantial benefits--with fringe benefits, the total annual family compensation is between $300,000 and $400,000--while the Bonavita half receives nothing. *fn2
Defendants deny any obligation to buy the Bonavita stock. They also maintain that the refusal to pay dividends is merely an application of the "business judgment rule" and is amply justified by sound business reasons. There is no evidence that defendant's "no-dividend" policy is motivated by animus toward plaintiff, or by anything other than their view of what is best for the corporation. Thus, the case presents the question of the extent to which the business judgment rule will insulate a corporation's power structure from a claim of oppression when application of that rule has the effect of providing substantial benefits to some of the holders of the corporation's stock and no benefits to the others.
1. Evolution of the corporation.
Corbo Jewelers, Inc., (Corbo or the corporation) was organized in 1946 by Michael and Dominic Corbo, and Gerald Bonavita. *fn3 It began with one store in Bloomfield, New Jersey, gradually expanded to twelve stores, but later retrenched to its present seven locations.
Over the years, as the three incorporators aged, the stockholdings evolved as well. Michael Corbo, who held 50% of the original stock (with Dominic Corbo and Bonavita each holding 25%) was replaced by his three sons, Alan, Michael Jr., and Anthony. They later had difficulties among themselves, and Michael Jr. and Anthony left in 1978, with Alan Corbo ultimately succeeding to ownership of one third of the corporation's stock. In 1978, Alan was elected president, and he, Dominic Corbo, and Gerald Bonavita then continued as equal one-third shareholders until Dominic Corbo retired in 1984. At that time, the corporation purchased Dominic's stock for $1,000,000, to be paid in annual $50,000 installments of over twenty years, without interest. Undisputed testimony was that the price and payment terms were fixed by amicable, "family" Discussions based on Dominic's anticipated needs during his retirement. From that time on, Alan Corbo and Gerald Bonavita each owned 50% of the outstanding stock of the corporation.
Over the years, Alan's four children also began working in the business.
Stephen began in 1978 and has become the corporation's chief administrative officer, second in command only to his father. Alan, Jr., began in or around 1979 and functions as diamond buyer. Michael has been with the corporation since 1976. He handles jewelry repairs and special orders. Alan's daughter, Cathy Giamboi, works part time in the Corbo store in Yonkers, New York, and his wife, Stephanie, also works part time. Alan earns $57,000 per year; his three sons each earn $52,000; Cathy earns between $20,000 and $30,000 and Stephanie's earnings are apparently in the same range as Cathy's.
Until his death in late 1994, Gerald Bonavita received the same salary as Alan, even after he virtually stopped working in 1991. Upon Gerald's death, however, Alan advised his widow that the Internal Revenue Service would not approve "salary" deductions for any further such payments and thus they could not be continued. They did, in fact, cease very soon after Gerald's death.
Although Gerald Bonavita and Alan Corbo received the same salary while Bonavita was alive, they played distinctly different corporate roles. Alan filled the role of president and chief executive officer, in fact as well as title. With his son, Stephen, he ran the corporation.
Bonavita played a much more retiring role. Essentially, he ran the Bloomfield store, which was characterized at trial as a "Mom and Pop" operation. He took little, if any, role in overall corporate management, and his wife was more active and had greater knowledge about such matters than he did.
In the mid 1980's, as Gerald Bonavita aged and his health deteriorated, he told Alan Corbo that he wanted to retire and wanted to have the corporation (or Alan) purchase his stock. Some Discussions ensued, but the parties did not reach agreement on a buy out. Gradually, Bonavita reduced the time he was spending on corporate business, until he completely retired in March 1991. Julia continued working for a short time thereafter, until she too ceased all work in January 1992.
2. Corporate meetings and elections.
As is the case with many closed corporations, so long as the shareholders were in harmony, Corbo conducted its corporate affairs informally and on a family-like basis. Thus, Alan was elected President in 1978, and so far as appears, he served in that position from then on with no formal reelection.
Similarly, although the certificate of incorporation always called for three directors, the corporation has functioned with just two--Bonavita and Alan Corbo--since 1984. In October 1991, the shareholders amended the corporate by-laws to reduce the number of directors from three to two. However, they did not also amend the certificate of incorporation, which expressly provided that in the event of an inconsistency between it and the by-laws, the certificate would govern.
Other shareholder or director resolutions were drawn and signed as necessary, and corporate meetings also took place on an "as-needed" basis. There were no meetings at all through 1987, 1988, or 1989. In 1992, after this suit was started, there was a vote for directors and Bonavita and Alan Corbo each voted for himself. Thus, presumably, each was elected and continued to serve as a director. There is no indication of any vote for directors in 1993 or 1994.
3. Plaintiff's complaint: the appointment of a provisional director; and the demand for payment of a dividend.
Plaintiff's complaint was filed in December 1991. It alleges a deadlock within the meaning of N.J.S.A. 14A:12-7 and also alleges stockholder "oppression" within the meaning of that statute. Plaintiff sought interim relief, and the court, pursuant to Subsection (1) of N.J.S.A. 14A:12-7 appointed Thomas Herten, as a "provisional director" to function while the litigation proceeded.
In early 1994, Bonavita formally requested the corporation to pay a dividend of approximately $650,000 to each of the two shareholders--a total of $1,300,000. That sum represented a portion of the corporation's retained earnings on which income tax had already been paid--a point discussed further below. The request was denied, with Alan Corbo opposed to the request and the provisional director declining to join Bonavita in what he regarded as a matter of "business judgment." An attempt to have the court overrule that decision while the suit was pending was unsuccessful and thus no dividend was paid. Bonavita thereafter modified his request to propose a smaller dividend, but that, too, was denied, and Alan Corbo has remained, ever since, adamantly opposed to the payment of any substantial dividend.
Although plaintiff claims there is a corporate "deadlock," that charge is not sharply drawn, and it is not clear just what constitutes the alleged deadlock of which plaintiff complains.
N.J.S.A. 14A:12-7 contains two deadlock provisions. Subsection (1)(a) provides that the court may take remedial action upon proof that:
the shareholders of the corporation are so divided in voting power that, for a period which includes the time when two consecutive annual meetings were or should have been held, they have failed to elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors.
As noted above, the Corbo certificate of incorporation requires three directors. A by-law provision of questionable validity provides for two directors and, in fact, the corporation has functioned for many years with just two directors.
Plaintiff seems to claim that three directors are required; that the by-law amendment providing for a two-member board is invalid; and that the failure to select a three-member board evidences deadlock. The claim is not persuasive.
First, Gerald Bonavita had long acquiesced in a board composed of two directors and had voted to amend the by-laws to authorize such a board. An attempt to change that position now would raise substantial issues of waiver and estoppel.
Further, even assuming a requirement for three directors, there is no demonstration that the two shareholders could not agree on some neutral third party for the additional director's position. There is no proof of any such attempt, no proof of any meeting at which such an election was attempted or such a compromise proposed or defeated. Plaintiff seems to assume that because he and Alan Corbo have different positions on major issues, a deadlock concerning election of directors is inevitable. In fact, however, that is neither an inevitable Conclusion nor has it been proven to be a fact.
The second statutory deadlock provision is set out in subparagraph (1)(b) of N.J.S.A. 14A:12-7. It states that a court may order appropriate relief if a corporation's directors
are unable to effect action on one or more substantial matters respecting the management of the corporation's affairs.
Plaintiff claims that the rejection of her demand for payment of a dividend or a buy-out of the Bonavita stock constitutes such an inability to effect corporate action. However, rather than characterizing the refusal to accede to her demands as an inability "to effect action," it is more accurate to describe those decisions as what they really are: determinations by defendants to reject plaintiff's demands.
In short, this is not a case where a corporation is unable to act. It can act. And it did act. It acted by denying plaintiff's demands. And it is the result of that action--not an inability to act--which is the basis for plaintiff's claim that she has been left in a hopeless, "no-win" situation. Whether those actions, leading to ...