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R.F. Fager owners embroiled in battle over minority shareholder rights

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In 1960, Richard Fager Sr. and Delroy Brosius created a distribution business in Lower Allen Township.

Fager Sr. would be the majority partner, owning 60 percent, and Brosius would be the minority partner in the closely held company, they agreed.

They could hardly have foreseen that, 54 years later, their sons and one of their grandsons would be taking each other to court over their roles as heirs in the Cumberland County business.

R.F. Fager Co., an S corporation under Pennsylvania law, is a leading distributor of a range of plumbing, heating, cooling, roofing, electrical and industrial hose products. R.F. Fager, also recognized as local experts in kitchen and bath work, had $50.6 million in gross sales last year, according to a lawsuit filed in July by Darwin K. Brosius, son of co-founder Delroy Brosius. Both co-founders are deceased.

In his lawsuit, which was filed in Dauphin County Common Pleas Court, Brosius names as defendants Richard F. Fager Jr. and Bryce F. Fager, the son and grandson of the other co-founder, Fager Sr.

Fager Jr., company president, holds 49 percent of the company’s voting shares; his son, Bryce, 41, company vice president and treasurer, holds 11 percent of the voting shares.

Brosius, 58, holds just over 13 percent in voting shares, and the remainder are held by other Brosius family members.

Minority vs. majority shareholders

Brosius, who says in his suit that he is a 45-year employee of the company, was fired from his job as an outside salesman in September 2013. He alleges that the Fagers, who together own 60 percent of the company, dismissed him in an attempt to cheat him out of his rightful share.

Brosius also claims that the Fagers, as majority shareholders, paid themselves unfairly inflated salaries, failed to hold legally required annual shareholders’ meetings and created spin-off companies (described in the complaint as “sham entities”) which paid them extra money without giving proper notice to shareholders.

“Majority shareholders may not use their power to exclude minority shareholders from their fair share of the benefits of the business, and may not use their majority position to defeat the reasonable expectations of minority shareholders,” Brosius said in his 35-page complaint, citing the legal issue of minority shareholder oppression.

Michael Hussey, an associate professor of business law at Widener School of Law, said that with the Fagers holding 60 percent of the shares and two of the three board positions, the law must provide some protection to minority shareholders of such closely held corporations to ensure their interests are protected.

“As a result of that, they owe what we call fiduciary duties,” Hussey continued. “They have to act loyally to each other, they have to act with a duty of due care, they have to act in good faith.”

In his suit, Brosius is asking that the court either appoint a custodian for the company or dissolve it altogether. He is also asking for reimbursement for lost compensation, benefits, legal costs and more, which comes to an amount unspecified in the suit.

Expectation of continued employment?

R.F. Fager’s attorney, Paul W. Minnich, has filed a separate lawsuit against Brosius in Cumberland County asking for a declaration that Brosius was an “at-will” employee, or one who can be fired for just cause without any expectation of continued employment. Brosius has pleaded guilty to several alcohol-related charges, court records confirm, and, Minnich said, failed to follow company policies and procedures — all violations, the company says, of its standards of conduct.

“During Brosius’ most recent period of incarceration, Brosius repeatedly represented to his brother, Darrell Brosius, that he was resigning from the Company voluntarily and Brosius asked his brother, Darrell, to communicate this to Company management,” Minnich’s lawsuit reads.

In his preliminary objections to that lawsuit, Brosius’ attorney, William Balaban, states that, on Dec. 23, 2013, an attorney for the company emailed Brosius to advise him that the company was planning to purchase his shares for $2.2 million at a shareholders’ meeting Dec. 26. The company maintained that, under a portion of its 2004 shareholders’ agreement, it can purchase a shareholder’s shares if the shareholder is fired “for any reason.”

Brosius filed an emergency motion to stop the sale, and Dauphin County Common Pleas Judge Bernard Coates granted the motion.

Minnich said that, bluntly put, Brosius was fired for a single reason: He was in jail.

“Here we simply have somebody who was terminated because he was incarcerated, and that triggered a buyout,” Minnich said. “This is simply not a minority oppression case from any perspective.”

Balaban has declined comment because the case is in litigation.

'The families have changed'

Widener’s Hussey said the law looks differently upon original shareholding owners such as Brosius as opposed to employees who earn or are awarded shares through the course of their work.

“What he’s saying is that, ‘As a shareholder, I have an expectation of employment here,’” Hussey said. “‘I’m more like a partner in a partnership than I am just an ordinary employee of a business.’ ...

“We’re at the third generation now that has been involved with the business and you see some divergence of interest there among the people that are involved,” Hussey said. “The original two, 40 years ago ... may have gotten along just great. Forty years down the line, the families have changed, the goals may have changed, the business has changed, and it’s a lot more of a struggle to keep everything together.”

No court date has been set on Brosius’ suit, according to the Dauphin County prothonotary’s office.

Company breakdown

R.F. Fager Co. was founded in 1960 by Richard F. Fager Sr. and Delroy Brosius.

A May 2004 shareholders’ agreement lists the following as shareholders: Richard F. Fager Jr., Bryce Fager, Delroy D. Brosius, Darwin K. Brosius, Harold Brosius and Darrell C. Brosius.

According to Darwin Brosius’ July 2014 court filing, here is the current shareholder breakdown:

Shareholder

Class A - voting shares

Class B - nonvoting shares

Total ownership

Richard F. Fager Jr.

49 percent

23.52 percent

24.02 percent

Bryce Fager

11 percent

36.48 percent

35.98 percent

Harold Brosius

16.67 percent

13.33 percent

13.4 percent

Darwin Brosius

6.66 percent

13.33 percent

13.2 percent

Darrell Brosius

16.67 percent

13.33 percent

13.4 percent

Totals

100 percent

100 percent

100 percent

Write to the Editorial Department at editorial@cpbj.com

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