Forced Out Minority Shareholder Gets Past Motion to Dismiss

A minority shareholder who said he was forced to resign as an officer and director of the company got past a Motion to Dismiss challenging his claims for breach of fiduciary duty, breach of the duty of good faith and fair dealing, conspiracy, and punitive damages in the Business Court's opinion last Friday in Oakeson v. TBM Consulting Group, Inc.

Plaintiff had been TBM's Vice President of Global Consulting, a board member, and owned a 13.5% interest in the company. He was party to both a Shareholders Agreement and an Employment Agreement. The latter agreement had a five year term, running through 2009, and specified that Plaintiff could only be terminated for defined "cause."

The Plaintiff alleged that Sharma, the majority shareholder of TBM, began demanding, insistently, that Plaintiff resign. Plaintiff refused to do so. Sharma told Plaintiff that he and the other defendants had the votes to remove Plaintiff as an officer and director of the company, and that they were "resolute in [their] decision to remove [him]." He told Plaintiff that he shouldn't bother to attend the board meeting at which the vote would be taken.

Plaintiff gave in and resigned as a director, but not as an officer and employee. Sharma then continued his pressure on Plaintiff to obtain a full resignation, to which Plaintiff finally agreed. Plaintiff then filed suit against the company raising a variety of claims resulting from his ouster.

Breach of Fiduciary Duty: Judge Jolly, denying the motion as to the claim for breach of fiduciary duty, said that "our courts long have recognized that a controlling shareholder owes a fiduciary duty to minority shareholders not to misuse his management power to promote his personal interests." Op. ¶44. The opinion has a brief history of appellate cases recognizing the duty of the majority to the minority, beginning with White v. Kincaid, 149 N.C. 415 (1908), and continuing through Gaines v. Long Manufacturing Co., 234 N.C. 331 (1951) and Freese v. Smith, 110 N.C. App. 28 (1993).

Breach of Covenant Of Good Faith and Fair Dealing: Defendants argued that a tort action which arises from a breach of contract couldn't be maintained. Judge Jolly disagreed, and said "the allegations go beyond a pure and simple contract claim. Rather, they raise implications of the respective fiduciary duties, if any, between shareholders in a closely-held corporate setting, and of possible civil conspiracy." Op. ¶40.

Civil Conspiracy: In response to the motion to dismiss the conspiracy claim, the Court recognized that "North Carolina does not recognize an independent cause of action for civil conspiracy," Op. ¶48, but Judge Jolly went on to say that "where there exists a separate but underlying claim for unlawful conduct, a plaintiff also may state a claim for civil conspiracy by alleging that two or more persons came together in agreement to carry out the unlawful conduct complained of in the separate cause of action, and that injury to the plaintiff proximately resulted from the agreement." Op. ¶48. The Complaint, said the Court, "alleges that the Defendant shareholders agreed upon a combined course of various actions designed to force Plaintiff out of TBM in all his corporate capacities, one of those actions resulting in beach of Plaintiff's Employment Agreement." Op. ¶49.

Punitive Damages: The claim for punitive damages also survived the Motion to Dismiss. Judge Jolly ruled that "when a breach of contract claim reflects potential fraud or deceit, or other aggravated or malicious behavior, a claim for punitive damages may lie." Op. ¶52. He said also that "the North Carolina courts will recognize a claim for punitive damages arising from a breach of fiduciary duty when it is coupled with the requisite aggravating factors." Op. ¶53.

The opinion is premised on the liberal pleading standard of the U.S. Supreme Court's decision in Conley v. Gibson. The Conley standard has been rejected by the Supreme Court, but remains the law of North Carolina based on a recent North Carolina Court of Appeals opinion.

Brief in Support of Motion to Dismiss

Brief in Opposition to Motion to Dismiss

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