The Pennsylvania Supreme Court has declined to hear argument in a shareholder suit in which an advertising company's corporate officers were found liable for accepting for themselves $12 million in proceeds from the company's sale, rather than distributing it.

The justices denied allowance of appeal for Fred Potok, who contested a Superior Court ruling upholding the granting of summary judgment in favor of News America Marketing on the grounds that the company had no knowledge of any breach of fiduciary duty on behalf of the individual defendants.

In a 2014 opinion in Potok v. Rebh, Philadelphia Court of Common Pleas Judge Albert J. Snite Jr. called the “self-dealing” sale of Floorgraphics Inc. “fundamentally unfair” to the company's minority shareholders.

Snite wrote the sale of Floorgraphics was part of the $29.5 million settlement of an unfair competition lawsuit against its competitor and eventual buyer, News America Marketing. Snite said Floorgraphics CEO Richard Rebh took it upon himself to determine the value of the company, assigning $13 million to the company's contracts, $12 million for the four officers' personal goodwill, and $4.5 million for the officers' noncompete agreements.

The terms of the sale also stipulated the officers would act as consultants for News America for a year at a rate of $1,000 per month, according to Snite.

Of the $12 million, defendants Rebh and executive vice president George Rebh received $4.8 million each, while chief financial officer Yves Anidjar and senior vice president Michael Devlin received $1.2 million each.

Snite said while the other valuations were proper, it was unfair for the defendants to divert $12 million for their own personal benefit.

“Allocating $12 million to the personal goodwill of the individual defendants was improper from every aspect, economically and legally,” Snite said. “Economically, the dollar values of the noncompete agreements and the consulting agreements are the correct measure of any personal goodwill.”

“Legally,” Snite continued, “obtaining personal goodwill beyond these values is not compensable in the situation at hand, and can only be described as fundamentally unfair and a breach of the individual defendants' fiduciary duty to act in such a way as to not exclude the minority from their proper share of the benefits accruing from the enterprise.”

The defendants were sued by plaintiff Potok, on behalf of Floorgraphics and its minority shareholders. In addition to asserting that money was unfairly distributed, Potok claimed the defendants did not disclose the specifics of the sale to the shareholders, according to Snite.

The defendants claimed the process was fair, because it followed the Business Corporation Law and achieved a “reasonable outcome” for the shareholders, Snite said.

However, the structure of the payment, Snite noted, was inherently unfair because “Richard Rebh's preliminary allocation, which attributed $12 million of the $29.5 million to himself and the other individual defendants as personal goodwill, was driven solely by Richard Rebh, for his own personal gain, and passively agreed to by News America.”

As for the notification of sale to the shareholders, Snite said it did not disclose that the suit against News America had been settled; did not include copies of the personal goodwill purchase and noncompete and consulting agreements; and did not explain the basis upon which the defendants were entitled to personal goodwill payments. As such, Snite said the notification was inadequate.

In determining whether the transaction as a whole was fair, Snite applied the entire fairness standard.

“Under the entire fairness test,” Snite explained, “when a party to the transaction is a fiduciary who derives personal benefit while acting in a fiduciary role, Pennsylvania law shifts the burden of proving the fairness of the transaction from the plaintiff to the self-interested fiduciary.”

The officers argued the transaction met the standard because Floorgraphics was in danger of losing its lawsuit against News America, Snite said. Potok reasserted his claim that the defendants engaged in self-dealing, excluding the shareholders from a substantial portion of the benefits.

Ultimately, Snite found that the transaction failed the fairness test because of the unilateral valuation of $12 million in personal goodwill and the $4.5 million noncompete agreement payout.

The value of the contracts was not in dispute, Snite said, but “the remaining $16.5 million was allocated only to [the] individual defendants; [Floorgraphics] was not compensated for the settlement of the lawsuit, for its corporate goodwill, or for its promise not to compete with News America. In essence, although the $29.5 million total could be considered to be a fair price, it was destroyed by allocating only $13 million to the corporation.”

Kim Watterson of Reed Smith represented News America and did not respond to a request for comment.

The plaintiff's attorney, Thomas McNamara of Indik & McNamara, declined to comment.

The Pennsylvania Supreme Court has declined to hear argument in a shareholder suit in which an advertising company's corporate officers were found liable for accepting for themselves $12 million in proceeds from the company's sale, rather than distributing it.

The justices denied allowance of appeal for Fred Potok, who contested a Superior Court ruling upholding the granting of summary judgment in favor of News America Marketing on the grounds that the company had no knowledge of any breach of fiduciary duty on behalf of the individual defendants.

In a 2014 opinion in Potok v. Rebh, Philadelphia Court of Common Pleas Judge Albert J. Snite Jr. called the “self-dealing” sale of Floorgraphics Inc. “fundamentally unfair” to the company's minority shareholders.

Snite wrote the sale of Floorgraphics was part of the $29.5 million settlement of an unfair competition lawsuit against its competitor and eventual buyer, News America Marketing. Snite said Floorgraphics CEO Richard Rebh took it upon himself to determine the value of the company, assigning $13 million to the company's contracts, $12 million for the four officers' personal goodwill, and $4.5 million for the officers' noncompete agreements.

The terms of the sale also stipulated the officers would act as consultants for News America for a year at a rate of $1,000 per month, according to Snite.

Of the $12 million, defendants Rebh and executive vice president George Rebh received $4.8 million each, while chief financial officer Yves Anidjar and senior vice president Michael Devlin received $1.2 million each.

Snite said while the other valuations were proper, it was unfair for the defendants to divert $12 million for their own personal benefit.

“Allocating $12 million to the personal goodwill of the individual defendants was improper from every aspect, economically and legally,” Snite said. “Economically, the dollar values of the noncompete agreements and the consulting agreements are the correct measure of any personal goodwill.”

“Legally,” Snite continued, “obtaining personal goodwill beyond these values is not compensable in the situation at hand, and can only be described as fundamentally unfair and a breach of the individual defendants' fiduciary duty to act in such a way as to not exclude the minority from their proper share of the benefits accruing from the enterprise.”

The defendants were sued by plaintiff Potok, on behalf of Floorgraphics and its minority shareholders. In addition to asserting that money was unfairly distributed, Potok claimed the defendants did not disclose the specifics of the sale to the shareholders, according to Snite.

The defendants claimed the process was fair, because it followed the Business Corporation Law and achieved a “reasonable outcome” for the shareholders, Snite said.

However, the structure of the payment, Snite noted, was inherently unfair because “Richard Rebh's preliminary allocation, which attributed $12 million of the $29.5 million to himself and the other individual defendants as personal goodwill, was driven solely by Richard Rebh, for his own personal gain, and passively agreed to by News America.”

As for the notification of sale to the shareholders, Snite said it did not disclose that the suit against News America had been settled; did not include copies of the personal goodwill purchase and noncompete and consulting agreements; and did not explain the basis upon which the defendants were entitled to personal goodwill payments. As such, Snite said the notification was inadequate.

In determining whether the transaction as a whole was fair, Snite applied the entire fairness standard.

“Under the entire fairness test,” Snite explained, “when a party to the transaction is a fiduciary who derives personal benefit while acting in a fiduciary role, Pennsylvania law shifts the burden of proving the fairness of the transaction from the plaintiff to the self-interested fiduciary.”

The officers argued the transaction met the standard because Floorgraphics was in danger of losing its lawsuit against News America, Snite said. Potok reasserted his claim that the defendants engaged in self-dealing, excluding the shareholders from a substantial portion of the benefits.

Ultimately, Snite found that the transaction failed the fairness test because of the unilateral valuation of $12 million in personal goodwill and the $4.5 million noncompete agreement payout.

The value of the contracts was not in dispute, Snite said, but “the remaining $16.5 million was allocated only to [the] individual defendants; [Floorgraphics] was not compensated for the settlement of the lawsuit, for its corporate goodwill, or for its promise not to compete with News America. In essence, although the $29.5 million total could be considered to be a fair price, it was destroyed by allocating only $13 million to the corporation.”

Kim Watterson of Reed Smith represented News America and did not respond to a request for comment.

The plaintiff's attorney, Thomas McNamara of Indik & McNamara, declined to comment.