Brief Fact Summary. Isador Katzowitz, (Appellant), instituted a declaratory judgment action to establish his right to a proportional interest in the assets of Sulburn Holding Corp. Appellant appeals the Appellate Court decision affirming the District Court judgment in favor of Jacob Sidler and Max Lasker, (Appellees).
Synopsis of Rule of Law. When the issuing price is shown to be markedly below book value in a close corporation and when the remaining shareholders-directors benefit from the issuance, a case for judicial relief has been established. In that instance the corporation’s directors must show that the issuing price falls within some range that can be justified on the basis of valid business reasons.
Issue. Whether under all the circumstances, the additional offering of securities should be condemned.
Held. Yes. The additional offering of securities should be condemned because the directors have not established a valid business reason for issuing at that price.
Discussion. Here the difference in selling price and book value of the stock was calculated to force Appellant into investing additional sums. Appellees did not offer a valid business justification for the disparity in price and were the sole beneficiaries from it. The price was a tactic to make the failure to invest costly. Since the stipulation entitled Appellant to the same compensation as Appellees the disparity in equity interest caused by their purchase did not affect stockholder income form Sulburn and therefore Appellant may not have been aware of the effect of the stock issuance on his interest in the corporation until dissolution. By permitting Appellees to recover their additional investment before the remaining assets of Sulburn are distributed, all the stockholders will be treated equally. Therefore, Appellant should receive his share of the assets of Sulburn less the amount invested by Appellees for their purchase of stock.