BUSINESS FORMATION & SALES BLOG

Do corporations with business operations in New Jersey that were incorporated in other states have the right to avail themselves of the protections of the New Jersey Oppressed Shareholder Statute, N.J.S.A. 14A:12-7(1) (c) (“Shareholder Oppression Law”)?

The Shareholder Oppression Law provides a remedy for shareholders of a closed corporation that feel that the majority shareholder(s) took action that oppressed them. Of course, any business decision might have unintended consequences to the minority shareholders, and that is the nature of running a business. Therefore, in order to obtain relief under the Shareholder Oppression Law, the minority shareholder generally has to show that

“In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers,  or employees.”

Id.

Under prevailing New Jersey case law, a corporation that has little or no connection to New Jersey generally cannot avail itself of the Shareholder Oppression Law. Krzastek v. Global Resource Indus. and Power, Inc., 2008 WL 4161662 (N.J. Super. Ct. App. Div. Sept. 11, 2008).

Some of the factors the Court will consider are:

• Whether the operating agreement or shareholders agreement had a New Jersey choice of law section;
• Whether either of those agreements had a choice of New Jersey jurisdiction section; and
• Where the entity conducts its business;

Hopkins v. Duckett, 2012 N.J. Super. LEXIS 93 (N.J. Super. Ct. App. Div. Jan. 17, 2012)

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

Courts have traditionally interpreted a wide-ranging jurisdiction for the New York Franchise Sales Act (“NYSFA”). New York-based franchisors that offer and sell franchises anywhere in the world from their New York offices are required to comply with the statute’s provisions. N.Y. Gen. Bus. Law § 683. However, that scope could be getting smaller.

A recent case held that the NYFSA did not apply to an out of state franchisee. JM Vidal, Inc. v. Texdis USA Inc., 746 F.Supp.2d. 599 (S.D.N.Y. 2011).  In that case, the plaintiff, franchisee JM Vidal (“JMV”), purchased and operated an MNG by Mango (“Mango”) franchise store in Bellevue, Washington. After the retail store failed, JMV sued the defendant, franchisor Texdis USA (“Texdis”), under the NYFSA as well as the relevant Washington state statute, claiming they had violated the pertinent Franchise Agreement. JMV asserted six claims under each state’s statute, including claims that Texdis offered to sell a franchise without having registered the offer with the state; fraudulently misrepresented the likely sales of JMV’s prospective franchise; and breached its duty of dealing with JMV in good faith.

Among other defenses, Texdis argued that JMV’s claims under the NYSFA should fail because the New York statute did not apply to the sale of the franchise. The United States District Court for the Southern District of New York considered the language of the statute and determined that it only applied when a person offered to sell or sells a franchise in the state of New York. N.Y. Gen. Bus. Law § 683(1). An offer or sale is made in New York when:

1) an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state; or

 2) the offer either originated from this state or is directed by the offeror to this state and received at the place to which it is directed. An offer to sell is accepted in this state when acceptance is communicated to the offeror from this state.

Id. at § 681(12).

The Court determined that there was no evidence suggesting that the offer or sale of the Mango franchise occurred anywhere other than Washington. More importantly, the Court found that no part of the transaction between JMV and the Mango franchise occurred in New York. Thus, the Court held that NYSFA was not applicable since a New York statute “cannot have any effect whatsoever on the nationwide marketing of franchises if the franchisor elects to conduct his activities outside of this State and with non-residents.” Id. at 617 (citing Mon-Shore Mgmt., Inc. v. Family Media, Inc., 584 F.Supp. 186, 191 (S.D.N.Y. 1984).

JMV’s lone argument for the application of the NYSFA was that the Franchise Agreement contained a choice-of-law provision that stated it would be “interpreted and construed under the laws of the State of New York.” Id. JMV argued that because the Agreement stated that it would take effect upon “execution by [Texdis],” which has its principal place of business in New York, the Agreement must have been signed in New York and thus should have been “deemed” to have been made in New York. Id. The Court rejected this argument, holding that to accept such an argument would allow the NYSFA to apply to every instance when the franchisor is a New York corporation. “But the NYSFA could easily have said as much, and it conspicuously does not,” the Court stated. Id.  “Instead, only the franchisee’s domicile matters for purposes of determining whether the statute applies.” Id. The Court granted Texdis summary judgment on all of the NYSFA claims.

The Court’s decision is slightly surprising. An article by David Kaufmann, former New York special deputy attorney general, in the October 25, 2011 edition of the “New York Law Journal” said the Court’s decision “appears to conflict with both the express language of the New York Franchise Act itself and with the constitutional precedent…advanced in the Mon-Shore decision.” Kaufmann, who wrote the NYSFA while serving as special deputy attorney general, said “the state of incorporation of a franchisor is entirely irrelevant to New York Franchise Act coverage.” It will be interesting to see if the other courts interpret the statute in a manner similar to the JM Vidal Court.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

What constitutes improper solicitation of a customer of a former employer? That was the question before the New York Court of Appeals in a 2011 case. Bessemer Trust Co., N.A. v. Branin, 2011 NY Slip Op 3307 (2011).        

The plaintiff, Bessemer Trust Company (“Bessemer”), was a privately owned wealth management advisory firm. The defendant, Francis Branin (“Branin”), was an employee of Brundage, Story & Rose, LLC (“Brundage”) until the firm was acquired by Bessemer in 2000. The sale of Brundage to Bessemer included the sale of the firm’s assets, including client accounts and related good will. Good will is the benefit of a business having a good reputation under its name.

Following the acquisition, Branin worked for Bessemer. Between November 2001 and June 2002, he met with the C.E.O. of the wealth management firm, Stein Roe Investment Counsel LLC (“Stein”), to discuss possible employment opportunities. Branin resigned from Bessemer on July 12, 2002; received an offer from Stein ten days later; and began his employment as a senior vice president of Stein on July 29, 2002.

While at Stein, Branin helped devise a strategy to enable the company to acquire clients he worked for at Bessemer. Though he did not contact any of his former clients directly, Branin did participate in at least two in-person meetings with a major client. He also responded to his former clients’ inquiries. After several of the clients moved their business from Bessemer to Stein, Bessemer sued Branin. The company alleged that Branin had breached his duty of loyalty to Bessemer by improperly soliciting his former clients to join him at Stein, thereby impairing the good will that Branin had sold to Bessemer in connection with Bessemer’s acquisition of Brundage.

After a bench trial on the question of liability, the United States District Court for the Northern District of New York granted Bessmer’s motion for summary judgment. The case was appealed to the United States Court of Appeals for the Second Circuit on the issue of damages.

Under New York law, an employee has a “duty to refrain from soliciting former customers, which arises upon the sale of the ‘good will’ of an established business.” Mohawk Maintenance Co. v. Kessler, 52 N.Y.2d 276, 283 (N.Y. 1981). The Bessemer Court held that a “seller’s ‘implied covenant’ not to solicit his former customers is a ‘permanent one that is not subject to divestiture upon the passage of a reasonable period of time.’” Bessemer at 6. However, the Court determined that an employee may accept the business of his former clients if they choose to follow him to a new employer.

Additionally, “[t]here is no hard and fast rule in determining whether a seller of ‘good will’ has improperly solicited his former clients,” and the Court declined to create one in this case. Id. at 7. The Court did note several factors that can be considered to determine whether improper solicitation has occurred, including:

• Whether, following the sale of a business and its good will, a seller initiated contact with his former customers or clients;
• How much bad faith the seller demonstrated when initiating contact with his former clients; and
• How much the seller’s conduct actually lead to the former clients moving their business to the seller’s new company.

Id.

The Court concluded that “while a seller may not contact his former clients directly, he may ‘in response to inquiries’ made on a former client’s own initiative, answer factual questions.” Id. at 8. Additionally, if a client requests more information, “a seller may assist his new employer in the ‘active development…of a plan’ to respond to that client’s inquiries. Should that plan result in a meeting with a client, a seller’s ‘largely passive’ role at such meeting does not constitute improper solicitation in violation of the ‘implied covenant.’” Id.

The Court’s decision provides a guideline for how those who have sold their good will can conduct business relations with former clients. Its decision to not develop a strict rule regarding what is and is not improper solicitation continues to leave this area of the law only partially undeveloped. However, to avoid being found guilty of improper solicitation, sellers should avoid initiating business-related contact with former clients and should act in good faith in order to not be perceived as recruiting the clients to their new company.

Comments/Questions: gdn@gdnlaw.com

© 2012 Nissenbaum Law Group, LLC

In Allen v. V&A Brothers, Inc, A-30 SEPT.TERM 2010, 2011 WL 2637270 (N.J. July 7, 2011), the Court considered whether an individual could have personal liability for a violation of the the Consumer Fraud Act (“CFA”) by his company. In that case, the Allens hired V&A Brothers to build a pool and later discovered the workmanship was defective.  Id. In response, the Allens filed several claims against the vendor. One alleged a violation of the CFA for failure to execute a written contract.

The reason that failure was significant was that the CFA requires “[a]ll home improvement contracts for a purchase price in excess of $500.00, and all changes in the terms and conditions thereof [to] be in writing.” N.J.S.A. 13:45A-16.2.  In Allen, there was no written contract at all.  Id.  Due to the failure to satisfy this requirement of the CFA, the New Jersey Supreme Court unanimously affirmed the lower court’s ruling and held that a corporation’s principal officers as well as their employees may be held personally liable under the CFA. Id. As a result, the corporate officers were liable for $390,000 in CFA damages, so long as the individual played a part in breaking the rules. Therefore, generally speaking, principals, who are the policy-setters for an organization, carry a greater exposure to personal liability than do employees.

In light of this decision, individuals associated with an entity that violates the CFA may be held liable even though the CFA claim is based only on a rule violation (such as a failure to provide a written contract) rather than actual fraud.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

A recent case offers guidance to New York employers concerning their ability to restrict former employees from attempting to take away the employer’s customers.

In that case, a former employee of USI Insurance Services, LLC (“USI”) signed an employment agreement that included a provision restricting the employee’s ability to solicit the business of former clients for 24 months following the termination of the agreement.  USI Insurance Services LLC v. Miner, No. 10 Civ. 8162, 2011 WL 2848139 (S.D.N.Y. July 7, 2011). Yet just days after the the employee, Jeffrey Miner, left the company and triggered the termination of the employment agreement, he mass e-mailed USI’s current customers in an attempt to solicit business.  In this case, the U.S. Federal District Court for the Southern District of New York Court concluded that Miner’s actions constituted solicitation as a matter of law and granted partial summary judgment to USI on this issue. Id. at 13. Miner’s mass e-mail to USI’s current customers was a clear attempt to solicit business in violation of the employer’s contractual rights. Therefore, it was prohibited conduct.

In New York, non-solicitation covenants – also known as restrictive covenants – are provisions in an agreement that restrict others from actively engaging in certain business development activities (i.e. soliciting an employer’s customers). A non-solicitation covenant may restrict a former employee from contacting his employer’s customers by way of mailings, e-mails, personal calls or through other means that would constitute solicitation.  Id. at 11. According to the Court, non-solicitation covenants are enforceable if they are:

a) necessary to prevent disclosure of trade secrets or confidential information, or
b) where an employee’s services are unique or extraordinary.

Id.

Additionally, the covenants cannot impose undue hardship on the employee or be injurious to the public. Id. at 14 [quoting IBM Corp. v. Visentin, No. 11 Civ. 399, 2011 WL 672025, 8 (S.D.N.Y. Feb. 16, 2011)].

However, a non-solicitation covenant alone may not be enough to restrict a former employee from taking customers. In an unrelated case, the New York Court of Appeals noted that “‘absent an express or restrictive covenant not to compete,’ advertising to the general public . . . [would] not be considered solicitation, so long as such advertisements are not specifically aimed at the seller’s former clients.” Id. at 12 [quoting Bessemer Trust Co. v. Branin, 2011 WL 1583932, 5 (N.Y. Ct. of Appeals Apr. 28, 2011]. Accordingly, a former employee can continue to compete in the same industry.  Id.  Also, a customer can contact his former employee for the purposes of obtaining factual information and such interaction would also be permissible “so long as the response .  .  . [does] not go beyond the specific information sought.”  Id.

This is a significant decision for companies that are including non-solicitation covenants in their employment agreements. The Court’s decision gives an indication of what type of covenant would be reasonable to be enforced.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC

Employers should take notice of the poster that small New Jersey employers are required to display as mandated in the New Jersey Conscientious Employee Protection Act (CEPA).

Under the CEPA, employers with ten or more employees must distribute notice of the CEPA law once a year to their employees. Employers should post the most recent whistleblower poster in an area that is visible and accessible for employees.

New Jersey’s Department of Labor and Workforce Development requires employers to display several posters for employees to be able to read and review. The posters range from information on wage and hour law, child labor law and family leave insurance. CEPA, also known as the “Whistleblower Act,” was designed to provide broad protections against employer retaliation for employees acting within the public interest and blow the whistle on illegal or unethical activity committed by their employers or co-employees.

CEPA states that New Jersey law prohibits an employer from taking any retaliatory action against an employee because the employee:

a) Discloses or threatens to disclose to a supervisor or public body conduct that the employee believes violates a law, rule or regulation promulgated pursuant to law;
b) Provides information to or testifies before public bodies regarding such conduct;
c) Objects or refuses to participate in an activity, policy or practice the employee reasonably believes violates a law, rule, regulation or public policy, or is fraudulent or criminal. 

As a result of the requirement, all employers with ten or more employees should immediately acquire and post the newest whistleblower poster in an area that is visible and accessible to employees. Additionally, employers should provide employees with an annual notice, either via e-mail or in some handwritten form. It is also advisable to have employees complete acknowledgement forms to provide proof the employee has read and understood the notice it has received.

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC