Recent Texas Shareholder Oppression Case—Gibney v. Culver, 2008 WL 1822767 (Tex. App.--Corpus Christi 2008, no pet) (unreported).
Michael Gibney brought a shareholder derivative suit for fraud and breach of fiduciary duty against Roy Culver, Jr., Micro-Blend, Inc., Culver Interests, and Ana-Tech, Inc and an individual claim for shareholder oppression against Roy himself. Gibney secured a judgment of $250,000 from the trial court for shareholder oppression against Roy, but the trial court, through a directed verdict dismissed Gibney's derivative claims. Micro-Blend, Inc. was founded by Gibney to manufacture patented blending systems for soft drinks and was financed by Roy, who was also the majority shareholder and Chief Executive Officer.
This case provides a good illustration for how to submit a shareholder oppression claim. The difficulty in crafting a jury charge for shareholder oppression is that the cause of action itself is an equitable remedy and the finding that a pattern of oppression exists is a conclusion of law for the court. However, the factual issues from which the conclusion of oppression is based are must be submitted to the jury. Where there is no factual dispute, the court is permitted to consider evidence of instances of oppressive conduct, but where there is a factual dispute, the issue must go to the jury. Therefore, to be safe, the plaintiff's lawyer will want to submit as many highly particularized jury questions as possible to obtain finding of a large number of acts of oppression. This practice flies in the face of recent developments in Texas law favoring fewer questions and broad-form submission; however, there does not seem to be any alternative.
The Jury Charge reproduced in the Gibney opinion illustrates the practice:
Question No. 1.
Do you find from a preponderance of the evidence that Roy Culver, Jr., since November 27, 1998, maliciously or wrongfully refused to allow Michael Gibney to examine the books and records of Micro-Blend, Inc.?
Answer: Yes or No: NO
Question No. 2.
Do you find from a preponderance of the evidence that Roy Culver, Jr., since November 27, 1998, maliciously or wrongfully used his position as the Chief Executive Officer of Micro-Blend, Inc., to award excessive salaries and compensation to himself to the detriment of Michael Gibney?
Answer: Yes or No: YES
Question No. 3.
Do you find from a preponderance of the evidence that Roy Culver, Jr., since November 27, 1998, maliciously or wrongfully used his position as the Chief Executive Officer of Micro-Blend, Inc., to award excessive salaries and compensation to members of his family to the detriment of Michael Gibney?
Answer: Yes or No: YES
Question No. 4.
Do you find from a preponderance of the evidence that Roy Culver, Jr., used his position as the Chief Executive Officer of Micro-Blend, Inc., to maliciously or wrongfully direct the withholding of payment of dividends from Micro-Blend, Inc., to Michael Gibney in 1998, 1999, and 2000?
Answer: Yes or No: NO
If you have answered any one of the preceding questions "YES," answer the next question. If you have answered each of the preceding questions "NO," do not answer the next question.
Question No. 5.
What is the value of Michael Gibney's shares in Micro-Blend, Inc .?
*4 Answer in dollars and cents, if any.
From a legal standpoint, these issues somewhat misstate the elements. There is no requirement of malice for any of the recognized oppressive conduct, except suppression of dividends. The determination of the award of dividends is protected by the business judgment rule unless there is proof of malicious intent in the making of dividend decisions. However, this level of culpability is not required to prove denial of the right to inspect and excessive compensation. In fact, the burden on these issues should probably be on the defendant, not the plaintiff. The limitation of the jury questions to a period of time after November 27, 1998 was done to exclude conduct outside the four-year statute of limitations. This also was an error. The facts evidencing the pattern of oppressive conduct are not a cause of action in themselves, but the basis for the formation of an equitable remedy. The statute of limitations does not apply. If the plaintiff delayed unreasonably in seeking equitable relief from the court, the defendant might be entitled to assert the equitable defense of laches; however, that was not submitted in this case. Also a strong argument could be made that the valuation question should not be predicated on particular findings regarding oppression. The valuation does not represent damages flowing from one or more of the oppressive acts; rather it is a factual finding on which the court has discretion to base the formation of an equitable remedy. If the jury answered "No" to one or even all of the questions, it is theoretically possible for the trial court or the appellate court to still order a buy-out or impose another remedy based on acts of oppression which were not controverted in the record.
Both parties appealed in Gibney, the court of appeals upheld the trial court's directed verdicts on the derivative claims but reversed the judgment for shareholder oppression. The court's reasoning in the appellate opinion is erroneous in the extreme, and it is fortunate that it is an unpublished opinion. The trial court granted a directed verdict on derivative claims against the controlling shareholder and related entities for excessive compensation on the basis of statute of limitations. The court of appeals upheld that ruling, holding that the cause of action accrued more than four years before the claim was filed and holding that the plaintiff had not sufficiently proved the elements of fraudulent concealment. Both courts and apparently the plaintiff completely overlooked the doctrine of tolling limitations as a result of adverse domination of the board of directors.
Second, the court of appeals upheld the trial court's directed verdict on the fraud claim against third parties related to the controlling shareholder that money was fraudulently paid to these entities as salary and payroll but was in fact merely siphoning away profits. Both courts held (apparently because services were in fact rendered) that there was no demonstration of harm or damages. In all probability the plaintiff incorrectly pleaded the cause of action. This was not a fraud claim. The fact that the payments were fraudulently mislabeled is really of little import. The question was whether there was a breach of fiduciary duties because the payments were excessive or otherwise unfair to the corporation. The third parties would not be sued for fraud but for knowingly participating (aiding and abetting) a breach of fiduciary duties. Because these were self-interested transactions, the burden of proof would have been on the defendants. Damages are irrelevant in the traditional sense. The remedy for a transaction made in violation of fiduciary duties is to rescind the transaction completely—to forfeit the compensation, subject to a claim for quantum meruit that would have to be proved by the defendants.
The court of appeals also overturned the judgment for oppression on the grounds that there was insufficient evidence of excessive salaries—the only oppressive act for which Plaintiff obtained an affirmative finding. It must be conceded that this sole kind of oppressive conduct is problematic because excessive compensation is a violation of duties owed to the corporation, not to the shareholder, and there is an adequate remedy at law in the recovery of damages for breach of fiduciary duties in favor of the corporation. Excessive compensation for the controlling shareholder and members of his family or close associates certainly can be oppressive, independent of the claim of the corporation, where the excessive compensation is a form of financial manipulation either designed or with the obvious effect of denying the minority shareholder an economic return on his share ownership. The jury finding in this case does incorporate this latter concept in stating that excessive compensation was done "maliciously or wrongfully" and "to the detriment of Michael Gibney." The court of appeals ignores this aspect of the finding and instead holds the evidence insufficient to show excessive compensation in the first place. The court of appeals cites a Fifth Circuit tax decision for authority on the factors governing excessive compensation, places the burden of proof on the plaintiff, and holds that deference should be given to the decision by the board of directors decision setting salaries (apparently utilizing the business judgment rule, although not citing it). All of this is wrong. The opinion clearly demonstrates that the controlling shareholder and his family had control of the board. Therefore, the salary decisions were self-dealing transactions and are entitled to no deference whatsoever. On the contrary, such transactions are presumed to be fraudulent unless the interested parties sustain their burden of proving the fairness of the transactions to the corporation. The proper question before the court of appeals was not whether the plaintiff introduced sufficient evidence to demonstrate the excessiveness of the compensation but whether the defendants introduced sufficient evidence to demonstrate the fairness of the compensation. On the face of the opinion, the answer would seem to be "no" if the proper burden of proof had been used.