ROMAN TUTUNIKOV and VIKTOR ZURAKHINSKY, individually and as Shareholders of MARKOV PROCESSES, INC., and MIKSOFT, INC., and as Members of MARKOV PROCESSES INTERNATIONAL, L.L.C., Plaintiffs-Respondents/ Cross-Appellants,
MICHAEL MARKOV, MIKHAIL KVITCHKO, MARKOV PROCESSES, INC., MIKSOFT, INC., MARKOV PROCESSES INTERNATIONAL, L.L.C., a New Jersey Limited Liability Company, MARKOV PROCESSES INTERNATIONAL, L.L.C., a Delaware Limited Liability Company, and MPI JAPAN, INC., Defendants-Appellants/ Cross-Respondents.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued October 23, 2012
On appeal from the Superior Court of New Jersey, Chancery Division, Union County, Docket No. C-0116-05.
Lawrence S. Lustberg argued the cause for appellants/cross-respondents (Gibbons, P.C. and Samuel Goldman & Associates, attorneys; Mara E. Zazzali-Hogan and Jonathan S. Liss, on the brief).
David G. White and Adam B. Schwartz argued the cause for respondents/cross-appellants (Pashman Stein, attorneys; Mr. White, Mr. Schwartz and Janie Byalik, on the brief).
Before Judges Messano, Ostrer and Kennedy.
Following a bench trial, judgment was entered against Michael Markov; Mikhail Kvitchko; Markov Processes, Inc. (Processes); Miksoft, Inc. (Miksoft); Markov Processes International, L.L.C. (MPI), a New Jersey limited liability company; Markov Processes International, L.L.C. (MPI-Delaware), a Delaware limited liability company; and MPI, Japan, Inc. (MPI-Japan) (collectively defendants), in favor of plaintiffs Roman Tutunikov and Viktor Zurakhinsky, in the amounts of $891, 979 and $668, 985, respectively, including pre-judgment interest. The judge also awarded attorney fees and costs of $1, 685, 374.
Defendants appeal, arguing that the judge erred: 1) by finding plaintiffs were oppressed shareholders under the Business Corporation Act, N.J.S.A. 14A:1-1 to 16-4 (the BCA); and 2) by extending remedies available in the BCA to plaintiffs' claims under the Limited Liability Company Act, N.J.S.A. 42:2B-1 to -70 (the LLCA), because the BCA does not apply to limited liability companies (LLCs). Defendants also argue that the judge erred in determining the "fair value" of plaintiffs' interests in the defendant business entities, and, therefore, his award was too high. Lastly, defendants raise arguments about the scope of the judgment and denial of their application for a payment plan.
Plaintiffs cross-appeal. They contend the judge erred by undervaluing their interests, and, therefore, his award was too low.
We have considered the arguments raised in light of the record and applicable legal standards. We affirm in part, reverse in part and remand for entry of judgment consistent with this opinion.
On August 2, 2005, plaintiffs filed their complaint naming Markov, Kvitchko, Processes, Miksoft and MPI as defendants. Plaintiffs specifically brought the action "as oppressed shareholders" under the BCA and LLCA, and alleged in three counts that: 1) defendants had violated N.J.S.A. 14A:12-7; 2) breached fiduciary and contractual obligations to plaintiffs "as managing members [of MPI] and acted unfairly and oppressively"; and 3) otherwise misappropriated their intellectual property. Before defendants answered, plaintiffs moved to enjoin an anticipated transaction between MPI and Sage Capital Growth, Inc. (Sage), that would have infused capital through MPI's merger with MPI-Delaware, a Delaware limited liability company in which Sage would have an equity interest (the Sage transaction).
On November 23, 2005, the parties entered into a consent order whereby MPI agreed temporarily to refrain from completing its merger with MPI-Delaware. On February 2, 2006, the court declined to enjoin further the Sage Transaction and ordered mediation, which proved unsuccessful.
Plaintiffs subsequently amended their complaint to include MPI-Delaware and MPI-Japan, alleged to be a "wholly[-]owned subsidiary of [MPI], " as defendants. The amended complaint added two counts that sought to set aside the Sage transaction and requested an accounting of MPI-Japan's assets.
Defendants subsequently moved for summary judgment. On June 11, 2008, the judge entered an order denying the motion as to the first two counts of the amended complaint, i.e., claims brought under the BCA and LLCA. He granted the balance of defendants' motion, dismissing plaintiffs' claim for misappropriation of intellectual property, their demand to set aside the Sage transaction, and any claim against MPI-Japan, noting, as to the last, there was "no factual support." The case proceeded to trial.
Markov was a mathematician who came to the United States from the former Soviet Union in May 1989. In 1990, he formed a consulting firm, Processes, and began designing financial software for Balch, Hardy, Scheinman & Winston (Balch Hardy), a financial trading firm. In 1991, Markov hired Kvitchko, a Soviet computer scientist. In 1994, Kvitchko formed Miksoft to develop some of his own products, and he and Markov became equal partners in Miksoft and Processes ("the Corporations"). When Balch Hardy filed for bankruptcy in 1994, Steven Hardy, one of its principals, formed a new company and purchased the rights to Style Advisor, software Markov and Kvitchko designed. Kvitchko and Markov continued to provide consulting services through Processes.
In 1995, Tutunikov, who was working for Dow Jones as a full-time consultant, approached Markov and formed a business relationship whereby Processes would bill Dow Jones for Tutunikov's services, and payments would pass through Processes to Tutunikov. That same year, Hardy terminated the consulting arrangement with Markov and Kvitchko, leading them to initiate development of a new and improved product, Stylus. In May 1996, both plaintiffs began to work with Markov and Kvitchko on Stylus. The parties disputed the exact nature and significance of plaintiffs' contribution to the program.
In December 1996, plaintiffs, Markov and Kvitchko decided to formalize their business relationships, circulating numerous drafts of proposed operating agreements. On December 8, 1996, a draft agreement was presented at a meeting attended by the four men. It was, however, never executed.
This "Final Draft" anticipated the formation of a "prospective new company, " described the anticipated distribution of "equity shares" in that company and set salaries for the four men. Under the Final Draft, Markov's and
Kvitchko's combined equity share was 76%, and they were to be full-time employees compensated at $100, 000 per year; Tutunikov was to receive a 15% equity share and also be a full-time employee with the same yearly compensation; Zurakhinsky was to receive a 9% equity share, be a part-time employee and receive $50, 000 per year in compensation. The agreement also included a vesting schedule whereby each person's "shares" would vest over a period of three years: 66% on January 1, 1997; 85% by January 1, 1998; and 100% by January 1, 1999.
On February 8, 1997, the four men executed two resolutions, one for processes and one for Miksoft, reflecting the result of meetings held in January 1997. The resolutions provided the "stock ownership" in each corporation was: Markov -- 37%; Kvitchko -- 37%; Tutunikov -- 15%; and Zurakhinsky -- 9%. The remaining 2% of the shares were not addressed in the resolutions.
At trial, there was conflicting testimony regarding the difference in share allocation between the Final Draft and the resolutions. Markov believed the resolutions contained a typographical error and should have stated that he and Kvitchko each owned 38% of the shares. Plaintiffs both testified that the allocation in the Final Draft was in error, and the resolutions correctly stated the individual defendants' equity interests.
The vesting schedule was meant to encourage the four men to remain with the Corporations for at least two years after the resolutions were signed. Nevertheless, Tutunikov found another position and left the Corporations in March 1997. Tutunikov acknowledged that all of his fifteen shares had not yet vested when he left, and he wrote Markov indicating he was returning five shares.
Zurakhinsky left the Corporations in December 1997, when only 7.5% of his shares had vested. He began to work as a consultant for another company, Commercial Risk, a client of the Corporations. Markov and Kvitchko agreed to permit him to bill for his consulting services through the Corporations.
Although a limitation on salaries was discussed among the four, they never signed an agreement to that effect. At trial, plaintiffs contended there was a $100, 000 salary cap; Markov acknowledged that partner salaries were capped at $100, 000, but there was never a limitation on bonuses or total compensation. Plaintiffs produced John F. Doyle, initially a commissioned salesperson for Processes, as a witness. Doyle testified that he was told executive salaries were capped at $100, 000.
On December 21, 2000, defendants filed a certificate of formation for MPI. In testimony, plaintiffs denied any knowledge of the filing. On January 1, 2001, Doyle became a shareholder in Processes.
A series of e-mails in evidence reflected the parties' understanding regarding share distribution. In an e-mail dated October 18, 2001, to Steven Foreht, an attorney who filed MPI's certificate of formation, Markov acknowledged that he and Kvitchko each had 37% of the shares, Tutunikov had 10% and Zurakhinsky had 7%. He noted that left 7% of the shares "unvested, " and he understood these "[went] back to the company." Markov further explained that since Doyle now had 2%, "the unvested pool is 5%."
On October 31, 2001, Markov informed Kvitchko, Tutunikov and Zurakhinsky by e-mail that, after Doyle had been given a 2% equity stake in MPI, there remained 4.5% "in the company treasury." Markov wrote, "This portion of unvested shares . . . stays with the company, i.e., belongs to all shareholders proportiona[te]ly."
However, Miksoft's 1998, 1999, 2000 and 2001 corporate tax returns showed that Markov and Kvitchko each had 41.25% of the shares. On November 15, 2001, the four men unanimously executed corporate resolutions merging Processes with Miksoft in anticipation of forming a "single corporation" in New Jersey. On December 31, 2002, Miksoft filed a certificate of dissolution executed by plaintiffs and the individual defendants.
Meanwhile, a proposed operating argument for MPI dated January 1, 2002, named the four men and Doyle as members. The agreement set forth the relative member contributions in dollar amounts, with Markov and Kvitchko each contributing $24, 140.32, Tutunikov contributing $6150.40, Zurakhinsky contributing $4612.80, and Doyle contributing $2460.16. The Agreement expressly replaced all prior agreements; provided that most matters would be decided by a majority of voting shares, except for the addition of new members or dissolution of the LLC, which required a two-thirds majority; provided that all losses and profits would be allocated to members in accordance with their shares; named Markov and Kvitchko as managers; and required the managers to inform the other members of the internal affairs of the LLC.
Plaintiffs did not sign the Agreement. Zurakhinsky was concerned that the agreement created "two classes of shares, so that [the individual defendants] would have . . . more rights tha[n] [he and Tutunikov] would have." He also testified that he did not sign the operating agreement because it would supersede all prior agreements. Tutunikov, dissatisfied with the creation of "two class[es] of shares" and the lack of control over management compensation, also never signed the Agreement.
Markov conceded in testimony that the 4.5 treasury shares that had been unallocated in the Corporations eventually were divided between himself and Kvitchko. MPI's tax return for 2002 listed Kvitchko and Markov as each owning 39.25% of MPI, Tutunikov owning 10%, Zurakhinsky owning 7.5% and Doyle owning 4%.
On December 19, 2003, Markov sent an e-mail to Doyle, Tutunikov, Zurakhinsky, and Kvitchko stating that MPI revenues for the year were $2.2 million, including an $80, 000 profit, and salaries for Markov and Kvitchko would be raised to "market value" of $200, 000 each. The same e-mail noted that Doyle was receiving $136, 000 in "trailing commissions" even though he had already left the company, and that Zurakhinsky was receiving $135, 000 for consulting services to Commercial Risk.
Doyle acknowledged the email during cross-examination, and stated that he believed Markov and Kvitchko had the authority to raise their compensation because they owned nearly 80% of the company. When Zurakhinsky received Markov's email, he responded by first indicating, "Congratulations with a good year!" He then wrote: "I think that 100% increase of management compensation, however justifiable, should be at least discussed among partners prior to decision."
In a May 2004 conference call, plaintiffs expressed concern with the salary increases for Markov and Kvitchko since they (plaintiffs) were not receiving distributions; they requested a buyout of their interests. In June, Markov offered to buy out plaintiffs' interests for $10, 000 per share, but plaintiffs refused. Markov conceded that the amount he offered was not related to the value of the company, which he believed to be $1 million, but rather to what Markov believed the company could pay. Plaintiffs believed the company was worth $10 million, and wanted $1.8 million for their shares.
On November 3, 2004, Sage tendered a preliminary written "Outline for . . . Proposed Investment in MPI." Markov did not inform Tutunikov and Zurakhinsky about the Sage transaction negotiations at the time.
However, in December 2004, MPI's attorney advised plaintiffs' attorney of "preliminary discussions with a party that ha[d] indicated a willingness to provide financing to [MPI] at a valuation that would indicate . . . an offer to buy out [plaintiffs'] interests for $500, 000 would be extremely reasonable." MPI's counsel wrote:
You informed me that your clients wanted strongly to be bought out, and I indicated MPI's willingness to discuss such a buyout at a reasonable price, but not at anything approaching the $1.8 million which you stated that your clients were asking. I also informed you that MPI had no objection to your clients remaining as members and that if your clients believed so strongly in the value of the company maybe they should stay.
Apparently, to the extent any negotiations continued, they did not bear fruit because, in August 2005, plaintiffs' counsel served MPI's ...