The Business Divorce Law Report
Dispute Related to Repurchase of Shares Under Buy-Sell Agreement Subject to Agreement to Arbitrate
Agreements to arbitrate are frequently added to buy-sell agreements and other corporate governance contracts. These agreements will be enforceable in nearly all circumstances and the parties should be certain that arbitration – rather than litigation in court – is what they really want.
In a recent appeal from a court order refusing to enforce an agreement to arbitrate after the parties had already been in litigation for two years, the Appellate Division of Superior Court rejected arguments that the arbitration clause was narrowly drawn. Gatta v. Gatta, Docket No. A-3161-11T (App. Div. October 26, 2012). Because the subject matter of the dispute was also the subject matter of the contract, the agreement to arbitrate was enforceable notwithstanding the delay in asserting the right.
Shareholder Seeks to Enforce Arbitration Right
The appeal was brought by Defendant Joseph Gatta from the trial court’s denial of an application to compel arbitration under a shareholders agreement. Gatta and the company, Joseph Gatta & Sons, Inc., were sued by Gatta’s brother, Anthony Gatta, one of four shareholders in the business. Anthony sued after he was fired and the company did not respond to his demands to purchase his interest.
The shareholders of Gatta & Sons executed a shareholders agreement in February 1996 that restricted the right of shareholders to sell their shares of the Corporation. Under the terms of the agreement the corporation and the other shareholders had a right of first refusal at the price of any “bonafide” offer. The agreement also contained a “deemed offer” provision that gave the corporation the right to purchase in the event that one of the shareholders tried to sell their shares or if they could be forced to sell their shares. Deemed offer included:
There is instituted by or against a shareholder any other form of legal proceeding or process by which any of the Shares of such Shareholder may be sold either voluntarily or involuntarily, by operation of law or otherwise [.]
The agreement also contained an arbitration clause that provided:
All claims, demands, disputes, controversies, differences or misunderstandings between or among the parties hereto or any other persons bound hereby arising out of or by virtue of this agreement shall be submitted to and determined by arbitration.
New Jersey Corporations Act Statutory Rights
The plaintiff initially filed suit under N.J.S.A. 14 A:5-28(4) in September 2009 to secure access to corporation to the books and records of the business. He later amended his complaint to assert claims as an oppressed minority shareholder and as a derivative plaintiff on behalf of the company in August 2010, N.J.S.A.14A:12-7(c). In January 2012, defendants moved to compel arbitration and the trial court found that the dispute did not fall within the scope of the arbitration agreement.
The Plaintiff argued that the language “arising out of or by virtue of this Agreement” was much narrower than other cases that have broadly construed arbitration agreements. In those cases the agreement to arbitrate covered disputes “arising out of or relating to,” which the plaintiff claimed was much broader. The Appellate Division reversed, rejecting the plaintiff’s argument.
We find that even under the more restrictive “arising out of” language of the Agreement, the arbitration provision applies to plaintiff’s claim. The purpose of the Agreement was to control and restrict the ability of shareholders to sell or dispose of their shares. Because plaintiff’s clear intent in bringing his action was to compel the sale of his corporate shares, this action “arose under” the agreement.
The enforcement of the agreement to arbitrate is not much of a surprise. Established public policy favors arbitration over litigation and there is a presumption in favor of arbitration. The delay of two years in seeking to enforce the arbitration agreement is something that should raise some concerns to litigants.
Often plaintiffs will bring cases in suit despite an agreement to arbitrate figuring that only if the defendants complain they will honor the agreement. What these plaintiffs are not contemplating is that the litigation could reach a very advance stage – there are actually some decisions that enforce agreements to arbitrate after trial – and that a great deal of time and money could be spent unnecessarily. It’s an expensive risk to take.
As always, we welcome questions and comments.