The opinion of the court was delivered by: Garibaldi, J.
On certification to the Superior Court, Appellate Division, whose opinion is reported at 313 N.J. Super. 7 (1998).
This appeal arises out of an acrimonious relationship that developed between two former friends and close business associates, Emanuel Balsamides, Sr. (Balsamides) and Leonard M. Perle (Perle). The two men were each fifty percent shareholders of Protameen Chemicals, Inc. (Protameen or the Company), a corporation that supplies chemicals to the cosmetics industry. Following a series of spiteful and abusive actions by Perle, Balsamides petitioned the court for dissolution of the corporation, pursuant to N.J.S.A. 14A:12-7, the "Oppressed Shareholder Statute." The court ordered Perle to sell his shares in Protameen to Balsamides.
The primary issue in this appeal is whether in this judicially ordered buy-out the trial court should have applied a "marketability discount" to determine the "fair value" of Perle's shares. *fn1 We also determine whether the Appellate Division exceeded its scope of review by remanding the case to the trial court for reconsideration of its valuation of Perle's interest in Protameen.
Perle and Balsamides went into business together more than twenty- five years before this suit was filed. Because of their complementary areas of expertise, they were the ideal team. Balsamides, using the contacts he had made over the years as a purchasing agent for Revlon Corporation, became Protameen's "outside man," to build the company's sales base. Perle, with his background in chemistry, became the company's "inside man," responsible for the technical and administrative sides of the business. In addition to sales management, Balsamides was responsible for advertising, marketing and insurance; Perle provided technical support for staff and customers, and handled purchasing and office management.
The partners worked hard, and Protameen became a very successful business. By mid-1995, the company's gross sales exceeded $19 million. Protameen employed more than a dozen people and used seven warehouses. *fn2 Perle and Balsamides each had an annual income between $1 million and $1.5 million.
The trouble began in the late 1980s, when each man brought two sons into the business. *fn3 Apparently, they expected that the sons eventually would assume ownership and management of the Company. Balsamides's sons, and Perle's oldest son Adam, started working for the company in 1987. Daniel Perle joined them in 1989. Balsamides's sons started in sales and were paid very well. They received commissions, expense accounts, and company cars, as did other Protameen salesmen. At Perle's insistence, his sons started in administrative and office management positions, his area of expertise. Nevertheless, Perle believed his sons should receive the same compensation as Balsamides's sons. The hostilities were spurred by that issue.
Eventually, both of Perle's sons were moved into sales. Adam began in 1990, and Daniel a short time prior to this litigation. By that time, however, it was too late. The feuding already had begun and encompassed both the sons and their fathers. Conditions at Protameen deteriorated to the point where both sides compared the judicial separation they sought to a "divorce," and one described the blood feud in which they were engaged as a "reenactment of the Hatfields and the McCoys."
In June, 1995, Balsamides sought relief as an oppressed minority shareholder under N.J.S.A. 14A:12-7. He filed a Verified Complaint, and Order to Show Cause with Temporary Restraints, against Perle, Perle's sons, and Protameen, Manlen, and Relco for immediate and permanent injunctive relief, for the appointment of a fiscal agent to operate the three corporations, and for the dissolution of the corporations. On July 20, 1995, the trial court entered a preliminary injunction and ordered that: all parties were to have equal access to business and computer records and to the corporation's premises; *fn4 business decisions were not to be made without the concurrence of both Balsamides and Perle; and Perle was to provide Balsamides, weekly, with a complete list of all new accounts and new orders, and the names of the salesmen to whom that new business had been given.
The trial court initially refused to appoint a provisional director. It changed that decision after physical violence broke out on Protameen's premises between two employees who had taken opposite sides in the dispute. The following day the trial court appointed a provisional director and ordered that a security guard be assigned to the premises to enable the continued operation of the business, and to prevent employees from being attacked physically.
On July 31, 1995, defendants filed an Answer to plaintiffs' Complaint, denying the allegations, and a Counterclaim seeking the sale of Protameen to a third party. The trial court directed Balsamides to cooperate with Perle in finding a third-party purchaser for the company.
Between November 1995 and February 1996, the trial court held a nineteen-day trial. The primary witnesses were Balsamides and his sons, Perle, and the parties' respective experts. Balsamides and his sons testified about the offenses they claimed Perle and his sons had committed. Perle, in turn, testified about alleged wrongful acts he claimed the Balsamideses committed against him and his family.
At the end of plaintiffs' case, upon defendants' motion, the court dismissed the claims against Adam and Daniel Perle. The court also dismissed Manny Jr. and Thomas Balsamides' claims against Leonard Perle. At the end of defendants' case, the court dismissed defendants' counterclaims for damages. Thus, the only claims remaining at the end of trial were Balsamides' claims against Perle for breach of fiduciary duty, for which he sought dissolution of their companies, compensatory damages, punitive damages, attorneys' fees and litigation costs and Balsamides' sons' claims regarding Relco.
The trial court found that Balsamides was an oppressed shareholder under N.J.S.A. 14A:12-7 and was entitled to buy-out Perle's interest in Protameen and Manlen for $1,960,500. *fn5 Although recognizing that the "Balsamides group [was not] entirely blameless in this entire controversy," the court found that any wrongdoing by that group was not intentional in nature and was not injurious to the company's business. The court concluded that Perle, on the otherhand, had "conducted himself in his vendetta against Balsamides in a way that was harmful to the business of Protameen, and [he] displayed little or no regard for the welfare of his own company and the interests of his partner."
The witnesses' credibility and their demeanor were central to the court's Conclusions. The court observed that Perle's "demeanor on the witness stand . . . told a story louder and more clearly than any of the words spoken during the course of this trial. His quest for equality for his sons and his resentment completely blinded him to the practical implications of what he was doing."
Although noting that Perle had committed some trivial transgressions and engaged in unilateral decisionmaking that harmed the company, the court expressly stated that its decision to order a buy-out was not based on those factors. Specifically, the court deemed trivial Perle's antiquated inventory system, his lack of quality control, his attempts to sell his interest to a third party, and his efforts to bolster Adam Perle's efforts in Florida (except where those efforts were in violation of the B.F. Goodrich distribution agreement). Numerous other actions by Perle, on the otherhand, were not trivial and constituted a breach of his fiduciary responsibility as a co-equal shareholder, amounting to shareholder oppression. Specifically, the court concluded that the following acts by Perle constituted oppression:
"Perle's purposeful refusal or delay in providing technical information required for plaintiffs' customers; his refusal to provide product samples when requested by plaintiffs' customers; his refusal to stock inventory that he knew plaintiffs' customers would be ordering; his assent to his son Adam's sale of carbopol in Florida in violation of Protameen's distribution agreement with B.F. Goodrich, a major customer of the Company; his denial of plaintiffs' access to the company's computer system; and his disparaging treatment of plaintiffs in front of Protameen's personnel and his condoning of similar actions by his sons. The court found that Perle intended those actions to embarrass plaintiff and harm plaintiff's relationship with his customers." Balsamides v. Perle, 313 N.J. Super. 7, 14 (App. Div. 1998).
The court considered the alternatives to a forced buy-out. It rejected the idea of dissolving the corporation and selling its assets, concluding that the Company was worth significantly more as a going concern. Although Robert Pettus had offered to purchase the Company for $7.5 million in November of 1996, the court found the offer too speculative and tentative to be given any credence. The court further found that sale of Protameen on the open market would be no less speculative and uncertain. Even if the court "first attempt[ed] to preserve the integrity of the corporation by appointing a provisional director, . . . the corporation would have to be sold or have one partner buy out the other." Balsamides, supra, 313 N.J. Super. at 14.
After considering all the alternatives, the court concluded:
"It is my judgment that Leonard Perle should be required to sell his interests in Protameen to Emanuel Balsamides. That is the remedy that I consider to be the fair, just, and equitable remedy in these circumstances. The buy-out of one co-owner by the other seems to me to present the greatest possibilities of resolving this matter in the near future, of maximizing the benefit to both parties, and in preserving Protameen and its business to the greatest extent possible. . . ."
The court based its decision on the belief that Perle was more at fault; that the Company's dynamic growth primarily resulted from Balsamides's skill and connections; and that most members of the cosmetic industry viewed Balsamides as the "face" of Protameen.
In calculating the "fair value" of Perle's shares, the court concluded that the "methodology and process" proposed by plaintiffs' expert, Thomas J. Hoberman, was more reliable and his evaluation more credible than that of defendants' expert, Robert E. Ott.
Using an "excess earnings" method of valuation, Hoberman determined that Protameen had a value of $4,176,400, after applying a thirty-five percent marketability discount. Ott, using a combination of "market" and "income" approaches, valued the company at $8,000,000. He did not apply a marketability discount, concluding it was inappropriate because the court was directing the stock buy-out.
The court specifically rejected Ott's analysis, stating:
"Mr. Ott's reasoning was that when the court provides the market by ordering a buy-out, there need be no concern for marketability and no discount for marketability. I disagree with Mr. Ott completely in that approach. The exercise of evaluation is not directed to determine the value of Protameen in light of a court ordered buy-out. It is to determine the intrinsic value of the business. Its value does not change simply because the court happens in this case to direct a buy-out. The investigation by the two experts should have been an investigation to determine the value, the proper value, the market value of Protameen at the time they were using."
The court also declined to enforce the three-year restrictive covenant contained in the 1978 Stockholders' Agreement. Instead, the court imposed a one-year, geographically unlimited, non-competition restrictive covenant on Perle. No non-competition restrictions were placed on Perle's sons.
When the decision was rendered, Balsamides became the equitable owner of Protameen and Manlen. Balsamides was ordered to pay approximately $1.96 million for Perle's interest in Protameen and Manlen, after adjusting for the negative value of Manlen *fn6 . Perle continued receiving his share of profits and salary until completion of the sale. The court enjoined Perle from entering Protameen's premises except to remove his belongings with Balsamides's permission and accompanied by Balsamides's representative.
The court denied plaintiffs compensatory damages, finding their proof inadequate. It also did not award plaintiffs' counsel fees or explain its reason for declining to award fees, even though plaintiffs' had requested counsel fees in their complaint. The court reserved judgment on punitive damages against Perle.
Shortly thereafter, the court issued a supplemental decision, in which it detailed a payment schedule for the purchase by Balsamides of Perle's interest in the businesses. It issued another supplemental decision on May 15, 1996, in which it assessed punitive damages against Perle in the amount of $75,000. Perle (without his sons) filed a Notice of Appeal, seeking reversal of the trial court's decision on the grounds that it erred in valuing Perle's share of Protameen and in assessing punitive damages. Balsamides cross-appealed on the basis that he should have been awarded counsel fees and that the one-year restrictive covenant was too short and should have been extended for the full three years contemplated by the Stockholders' Agreement.
The Appellate Division affirmed the buy-out order as being consistent with N.J.S.A. 14A:12-7(1)(c). It also affirmed the terms of the restrictive covenant imposed on Perle, and the punitive damages assessed against him. Balsamides, supra, 313 N.J. Super. at 29-33. The panel specifically disagreed with the trial court's application of a marketability discount and remanded the valuation question, as well as determination of counsel fees.
While acknowledging the limited scope of appellate review, id. at 13, and the deference generally due a trial court's acceptance or rejection of an expert's valuation opinion, id. at 19, the Appellate Division nonetheless rejected certain aspects of the trial court's valuation of Protameen. The panel concluded that the trial court erred in completely rejecting Ott's valuation method and accepting Hoberman's, particularly where the method accepted, the "excess earnings" method, was disfavored by the Internal Revenue Service. Id. at 21-22, 23. It remanded for the trial court to reconsider its acceptance of the eleven percent rate of return on net tangible assets and the thirty percent capitalization rate that plaintiffs' expert had used in his valuation. Specifically, the Appellate Division questioned the "six factors" Hoberman had used to justify the capitalization rate. Id. at 23-24. It also instructed the trial court to reconsider whether allowing Perle's sons to compete freely with Protameen would have an appreciable effect on the Company's value, thereby affecting the capitalization rate. Id. at 25-26.
The most important disagreement, however, concerned the trial court's use of a thirty-five percent marketability discount in valuing Perle's stock. The Appellate Division did not dispute the usefulness of the marketability discount as a general rule. However, it disagreed ...