The Supreme Court of Kings County (Kings County is also known as Brooklyn) recently heard the Matter of Celauro v. 4C Foods Corporation – a very complicated and unusual case involving many of the real-world issues often at play in cases at bar. In essence though, this contentious dispute between members of a family-owned small business over highly technical matters of corporate law could be resolved by some basic principles regarding contract damages.
Background of the Case
The plaintiff is a part-owner of a family business known as 4C Food Corp, which happens to be the defendant. Family businesses are often, as in this case, closely held which means that the controlling ownership remains within the family. Shares are generally not sold nor traded because they are vital for keeping control - contrast this with a major corporation which has its shares for sale at major stock exchanges.
In a small corporation, the relative balance of share control, perhaps down to even a few shares, can mean absolute control over the business. For whatever reason the Celauro family underwent a struggle for control of the business, possibly because one of the shareholders was on her deathbed.
The majority owners attempted to pass what is known as a stock split. Under this scheme, each existing share becomes transformed via corporate announcement into a certain greater number of new shares. 4C foods attempted a 4-for-1 stock split. The plaintiff alleged this would dilute the minority shareholder’s control.
The corporation also attempted to pass another measure restricting transfer of shares. This measure was complicated and really, for our purposes, unimportant except to note that when plaintiff’s aunt passed away, it would have forced the company to buy-back some of the shares being passed on to plaintiff. Plaintiff alleged that this too, based on prior disputes and proceedings, violated his rights in various ways and made many allegations including breach of fiduciary duty and breach of covenants of fair dealing and good faith.
Analysis: Stock Split
Plaintiff’s argument regarding the 4-for-1 stock split was odd. A stock split, by definition, does not affect the percent ownership shares of the stockholders. It is difficult to imagine how it could adversely affect the minority shareholders like the plaintiff and the relative who wished to leave her shares to plaintiff.
Analysis: Fiduciary Duty
The plaintiff made an allegation with which the court agreed: that for the majority shareholders to institute a restriction on transfer of minority owners’ shares would actually be a breach of fiduciary duty and various covenants of good faith. Under accepted legal policies and principles, courts frown upon restrictions on the transfer of property, whether it be real estate, or, as in this case, shares of stock in a company.
Fiduciary duty is an article or two in itself, but for our purposes it is a heightened duty one person or corporation owes to another, and its principles are basically contractual or impliedly contractual in nature, with a good deal of precedent and commentary.
Disposition: Why Damages matter
The court observed that plaintiff had not alleged any actual damages. Remember that contract law is the law of economics – and mostly concerned with economic positions pre- and post- contract. Thus, plaintiff’s claims actually failed. He couldn’t explain how the 4-for-1 stock split would actually harm him. And he couldn’t actually sue for breach of fiduciary duty because the corporation hadn’t actually acted yet. Remember that the corporation was attempting to pass these measures to give itself the power to undertake certain actions such as the transfer restriction. But, significantly, it hadn’t yet exercised those powers, so no actual economic harm had yet occurred to the plaintiff.
Anyone undertaking the effort to read the actual text of the opinion of this case will quickly understand how important it is to have experienced counsel when dealing with contentious corporate disputes that involve voting control and the interrelated duties present. Contract and breach of contract theories, as in here play a vital role. Please do not hesitate to contact our office for a consultation.