Written By: Ali Audi | October 28, 2014 | No Comments

On September 16, 2014 a Philadelphia court ruled that the majority shareholders of the recently-sold enterprise, Floorgraphics Inc. acted in their own financial interests and, as such, breached the fundamental fiduciary duties owed to the minority shareholders.

About The Case

As the case of Potok v. Rebh progressed, Philadelphia Court of Common Pleas Judge Albert J. Snite Jr. wrote in his opinion that Richard Rebh, CEO of Floorgraphics, assigned $12 million to the goodwill of the majority shareholders. Judge Snite deemed this allocation as “improper from every aspect, economically and legally.”

What makes this business law case unique is two-fold. It is one of the few cases tried in Pennsylvania that has criticized the actions of the majority shareholders as it relates to the minority’s interests. It is also only the second PA case on record to employ the “Entire Fairness Standard” to investigate allegations of a breach in fiduciary duties.

The Entire Fairness Standard

The “Entire Fairness Standard” is part of a legal framework originally established during the case of Golden Cycle, LLC v. Allan, in which specific levels of judicial review were used to determine whether an action purported to be a breach in fiduciary duties was valid. In this case, the “stringent standard of entire fairness”, or the “Entire Fairness Standard”, was implemented.

The “Entire Fairness Standard” is enacted when a fiduciary party is found to either be interested or standing on both sides of a transaction. In the case of Potok v. Rebh, Judge Snite awarded in favor of the minority shareholders because the $29.5 million from the original settlement was unfairly distributed. This was shown as evidence that the majority shareholders excluded the interests of the minority in favor of their own interests.

This verdict highlights how in some circumstances, subtle manipulation of the Business Corporation Law can result in unethical practices and unfair actions that negatively affect the minority shareholders access to benefits in a business sale.

Have questions as to how this ruling may affect practices for other businesses in PA? Let us know in the comments below.

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