An extreme set of circumstances demonstrates a need for prudence in settling shareholder disputes. Stabile v. Stabile involved litigation among members of several family-owned businesses, with James Stabile alleging various breaches of duties by the businesses' directors and minority shareholder oppression. The Court ordered that Stabile's shares were to be purchased at fair value. The businesses owned a large tract of land in rural Sussex County, New Jersey and settled the dispute by agreeing to convey a tract of the real property to Stabile.
The businesses owned and operated Wild West City, a western theme park, on the land in Sussex County. While the shareholder litigation was pending, Scott Harris, an actor who worked at Wild West City, was shot in the head by another actor during a staged gunfight. Another employee loaded the gun with live ammunition instead of blanks. Harris survived, but suffered a catastrophic brain injury. He was granted permission to intervene in the shareholder litigation, in order for his attorney to receive copies of court papers, but could not participate in the merits of the action.
Harris discovered that the parties reached a settlement and made an application to set aside the agreement because of his unresolved claim for damages. His life care plan estimated his costs to be $23 million, making the businesses insolvent. The trial judge denied the application, finding that the claim was tenuous in light of workman's compensation bar against personal injury lawsuits against an employer.
The Appellate Division reversed, finding that the transfer was barred under the Uniform Fraudulent Transfer Act. The Court explained that the claim was greater than the assets of the businesses and that the plaintiff corporation had reason to know that the businesses making the transfer to Stabile were insolvent.
While most shareholder disputes will not involve such an extraordinary set of circumstances as that in Stabile, the case shows the need for caution. Minority shareholders must not settle their claims before conducting at least some due diligence to ensure that no outside claims may render the company insolvent. Although it seems at first glance to be unlikely, minority shareholders are often excluded from management and unfamiliar with day-to-day operations. The minority shareholder seeing a buyout must investigate any pending lawsuits, obtain a representation from the business that there are no undisclosed claims, and ensure that liability coverage has not lapsed.
