A motion to dismiss shareholder claims under Michigan law. The case involved a complex set of interrelated corporations and LLCs. Plaintiffs are several trusts who are the minority shareholders in two of the parent entities and the majority shareholders in one of the corporations. The two defendants own the majority interest in the two corporations and exercise control over the remaining corporation in which the plaintiffs own a majority (the opinion does't say how this was done). The plaintiffs alleged a number of self-dealing transactions.
The court granted the defendants' motion to dismiss a common law conversion claim for misappropriation of coporate funds. The court notes that conversion requires specifically identifiable personal property and that money is generally not subject to a claim for conversion, unless the defendant has been entrusted with custody of a specific fund. Apparently, plaintiffs did not plead a simple claim for breach of fiduciary duty. The court also discusses the issue of standing given that plaintiffs' claims were for the conversion of corporate funds and that the plaintiffs did not plead a derivative claim. Plaintiffs argued that Indiana case law recognizes the right of shareholders in closely-held corporations to bring direct claims for wrongs done to the corporation, citing G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 236 (Ind.2001.)--the corporation in question was an Indiana corporation. The court rejects that argument holding that the plaintiffs must still prove that it was their property, rather than that of the corporation that was converted. This holding clearly misreads the G&N Aircraft case, in which the court had created a procedural exception in certain cases to allow a shareholder in a closely-held corporation to assert a claim belonging to the corporation directly rather than through the procedural mechanism of a derivative claim--although it is not clear that this procedural law would have applied under Michigan law, and the court had already held that the plaintiffs did not state a claim for conversion under the substantive law. Interestly, the court allowed the plaintiffs to proceed on their statutory claim for "aiding in the concealment of any stolen, embezzled, or converted property'" under Mich. Comp. Laws § 600.2919a, holding that the reach of the statute was broader than the common law cause of action for conversion.
The court denied the motion to dismiss the statutory shareholder oppression claim for "acts of the directors or those in control of the corporation that are illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder." Mich. Comp. Laws § 450.1489(1). The court held that conduct directed against subdiaries was actionable even if plaintiffs only owned shares in the parent corporation. The Michigan statute defines willfully unfair and oppressive conduct as "a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder." § 1489(3). The court relied on the Michigan Court of Appeals case of Franchino v. Franchino, 263 Mich.App. 172, 687 N.W.2d 620 (Mich. App. 2004), which interpreted Section 1489. That court had held that the statute did not protect the plaintiff's right to employment by the corporation, or to his seat on the board of directors. Id. at 628-30. The court stressed that "the Legislature amended the statute to explicitly state that minority shareholders could bring suit for oppression only for conduct that 'substantially interferes with the interests of the shareholder as a shareholder.' " Id. (citing § 1489(3)). The court further held that the focus of its inquiry should be the actions of the majority and not the reasonable expectations of the complaining shareholder. Id. at 629-30. Shareholder rights, according to the court, typically include voting at shareholder's meetings, electing directors, adopting bylaws, amending charters, examining the corporate books and receiving corporate dividends. Id. at 628 (citing 12Fletcher Cyclopedia Corporations. ch 58, § 5717, p 22 .). Based on the Franchino case, the court in this case held that plaintiffs' claim that the defendants prevented the corporations from making distributions to shareholders stated a claim for oppression, but not the plaintiiffs' claim that they were excluded from positions on the board of the corporation in which they were a majority. With respect to the claim for dividends, the court makes a rather extraordinary statement, given the traditional deference that courts show to directors on the issue of dividends: "As shareholders of FGH Capital, and assuming that the allegations in the complaint are true, Plaintiffs have a right to claim certain corporate dividends or distributions, as the complaint refers to them. Defendants as the majority shareholders owe Plaintiffs that obligation. Further, Defendants control FGH Capital, a holding company that in turn controls Trans. As such, Defendants cannot run Trans in a manner that would constitute oppression to Plaintiffs under Michigan law."
Finally, the court dismisses a claim for unjust enrichment for the defendants' charging exhorbitant management fees to one of the corporations while providing little benefit. This decision was based on the court's holding that that plaintiff's could not pursue direct claims on behalf of the corporation.
Friday, May 4, 2007
Recent Case: Hofmesiter Family Trust v. FGH Industries, LLC: Michigan Oppression Case
Wednesday, May 2, 2007
Case Analysis: Minor v. Albright: Shareholder Oppression Claim in Delaware Corporation
Minor v. Albright, No. 01 C 4493, 2001 WL 1516729 (N.D.Ill Nov. 28, 2001.).
Plaintiffs are two minority shareholders (owning 4% and 2% respectively) in a Delaware corporation doing business in Illinois. Plaintiffs claimed that defendant terminated their employment, in breach of a written employment agreement; that defendant excluded their participation in corporate decisions, including major decisions such as the sale of a plant and soliciting additional investors; and that he transferred $340,000 from the Corporation to himself and his wife. Plaintiffs brought claims for shareholder oppression, breach of the employment agreement, and derivative claims for breach of fiduciary duty. Defendant moved to dismiss for failure to state a claim. The court denied the motion.
With respect to the shareholder oppression claims, those claims were pleaded under the Illinois Business Corporations Act. The court held that Delaware law governed the shareholder claims, but also held that Delaware law recognized a cause of action for shareholder oppression, citing Litle v. Waters, 1992 W L 25758 (Del. Ch. February 11, 1992). The Court held that under Delaware law, a majority shareholder committed oppressive conduct either by (1) violating the reasonable expectations of the minority shareholders, "the spoken or unspoken understandings on which the founders of the venture rely when commencing a venture," or (2) "burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice to some of its members; more visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrust his money to a company is entitled to rely." The Court rejected the defendant's argument that plaintiffs' claims were solely related to their employment contracts, and thus found Riblet Products Corp. v. Nagy, 683 A.2d 37, 40 (Del. 1996), inapplicable. The Court noted that the plaintiffs had pleaded more than mere breach of the employment agreements, including allegations of no longer consulting with them about management decisions, including major decisions that could materially affect plaintiffs' stock interests, and attempting to coerce them into selling their shares for a nominal sum. "Freezing out minority investors who expected to be involved in management could also arguably violate fair play." The court also rejected defendants' argument that the allegations of waste and misappropriation of corporate assets should not be considered on the shareholder oppression claim. The court agreed that those claims must be brought derivatively, and noted that the plaintiffs had done so. However the court also held that such conduct could be considered on the shareholder oppression claim, citing the "special injury" exception. See Elster v. American Airlines, Inc., 100 A.2d 219, 222 (Del.Ch. 1953). The court probably misapplied the special injury rule, which allows an individual cause of action for breach of fiduciary duty where the shareholder suffers injury that is different from that suffered by the shareholders generally. The injury suffered directly as a result of the waste and misappropriation was not different in kind or degree for the plaintiffs than for any other shareholder; however, the Court was correct in holding that conduct for which a remedy may only be sought through a derivative claim, many nonetheless make up part of the factual basis of a shareholder oppression claim is that conduct was either directed at the rights of the minority shareholder were otherwise diminishes the interests of a minority shareholder and the remedy sought is not for the damages directly caused by the breach of duties to the corporation. The Court noted that "the complaint alleges that this was part of a scheme by the Albrights to freeze Minor and Ingerslew out of the Corporation. These same actions discussed above -- cutting minority shareholders out of corporate decisions and attempting to coerce an unfair buy out -- are distinct injuries." The Court held that the plaintiffs may not recover damages for termination of their employment contracts or for harm suffered to the Corporation that affects shareholders generally under the shareholder oppression counts.
