contends that in July 1992, the Flacks indefinitely extended the 30% salary reduction over his protest. The Plaintiff further alleges that in September 1992, without proper notice of any corporate meeting and in violation of the Exeter By-Laws, the Flacks converted Exeter's debt of $ 330,000 to Diamond Manufacturing, which the Flacks owned, from non-interest bearing to interest bearing at a rate of 2 points above the prime rate.
The Plaintiff avers that the defendants conspired to misrepresent to him the date of a Board of Directors meeting to assure that he was not in attendance and that once absent from that meeting the Flacks falsely represented that Simms demanded control of Exeter due to differences in management philosophies. The minutes of the meeting have allegedly preserved these assertions. It was at this September Board of Directors meeting that Charles Flack and Harold Flack acted to approve the replacement of Simms as President. The Plaintiff contends that upon his termination, despite the provisions in the Shareholders Agreement, Charles and Harold Flack conspired and combined to offer to purchase Simms' shares at only $ .20 per share, well below the $ 1.10 per share figure set forth in the Shareholders Agreement. We will discuss the motions seriatim.
I. Motion for Appointment of Receiver Pendente Lite or Custodian
Plaintiff Simms filed a motion for the appointment of receiver pendente lite on July 8, 1993 requesting the involuntary winding up and dissolution of Exeter and the appointment of a receiver pursuant to Section 1984 of the Pennsylvania Business Corporation Law or, alternatively, the appointment of a custodian under Section 1767. (Doc.No. 4, p.1) The Plaintiff contends that Defendants conspired and combined to financially benefit themselves and their wholly-owned Diamond Corporation to the detriment of Exeter and himself. Plaintiff contends that the cumulative effect of a series of oppressive corporate actions warrants the appointment of a receiver pendente lite or a custodian.
Specifically, Plaintiff Simms points to Defendants Exeter, Charles Flack and Harold Flack's concerted effort to "squeeze out" Plaintiff Simms. First, Plaintiff avers that he was wrongfully terminated as President. Simms maintains that Charles and Harold Flack, in their capacity as officers and directors of Exeter, acted without authorization and without disclosure to financially benefit their alter ego corporation at the expense of Exeter. In addition, Plaintiff presents allegations as to the Flacks' refusal to share corporate information with him despite the fact that even after termination he remained a director-shareholder.
The Defendants filed a brief in opposition stating first that the motion for a receiver should be denied because the Plaintiff failed to comply with Local Rule 401.3, now rule 7.3 The Defendants rest that argument on the fact that no supporting documents, affidavits or transcripts of depositions, were filed within the ten days after the motion was filed.
The second responsive argument that the Defendants set forth is that the appointment of a receiver pendente lite is inappropriate where the complaint fails to state a claim for involuntary dissolution and the Plaintiffs have failed to state such a claim.
At the outset, we must point out that under the Pennsylvania Business Corporation Law, there is a distinct difference between a determination as to the appointment of a receiver pendente lite under § 1984 and a decision to appoint a custodian of a corporation under § 1767. The former is concerned with the preservation of corporate assets and the preservation of day to day business until a full hearing can be had, while the latter (although ultimately invoked for the same protection as that found in a receiver) requires a court to make a preliminary determination as to the illegal, oppressive, or fraudulent nature of the actions of the directors or those in control of the corporation toward the remaining significant but minority shareholders.
In addition, we must determine whether involuntary dissolution is reasonably necessary to protect the rights or interests of any substantial number of shareholders not limited to those complaining and whether the winding up of this business entity by liquidation is the only feasible means to protect the complaining shareholder's expectation of a fair return on his investment in the closely held corporation.
A. Receiver Pendente Lite
The decision whether to appoint a receiver is within the discretion of the Court. Stainton v. Tarantino, 637 F. Supp. 1051, 1072 (E.D.Pa. 1986) (quoting Northampton National Bank of Easton v. Piscanio, 475 Pa. 57, 63, 379 A.2d 870 (1977)). Because of the drastic effect the appointment of a receiver has on a business entity, a court should exercise its power to appoint a receiver "sparingly, with caution and circumspection, and only in an extreme case under extraordinary circumstances, or under such circumstances as demand or require summary relief." Id. 637 F. Supp. at 1072 quoting Hankin v. Hankin, 507 Pa. 603, 608, 493 A.2d 675 (1985).
Plaintiff Simms moves this Court to appoint a receiver to safeguard the assets of the corporation, and to prevent the Defendants from dissipating those assets. (Doc.No. 5 - Plaintiff's Brief In Support of Motion for Appointment of Receiver). The standard for exercising this type of an equitable remedy resembles that for a preliminary injunction.
The appointment of a receiver is a matter within the sound discretion of the court, and each case must be determined upon its own conditions and circumstances, and in exercising this right the courts should ever keep in mind that a receiver is, like an injunction, an extraordinary remedy, and ought never be made except in cases of necessity, and upon a clear and satisfactory showing that the emergency exists, in order to protect the interests of the plaintiff in the property involved. The power of appointing receivers is one which the courts have said should be sparingly exercised and with great caution. (Emphasis added).