No Meiselman Claim for the Not-So-Closely-Held Business

For almost 30 years, minority shareholders in North Carolina have sought relief from corporate oppression via so-called Meiselman actions.  An important Business Court opinion released Tuesday discusses the limits of Meiselman claims, which will be less appropriate the larger the number of shareholders and the greater the corporate governance in operation.

In the Meiselman case itself, the Supreme Court permitted minority shareholders in closely-held corporations to seek judicial relief to enforce those shareholders' reasonable expectations, such as employment or participation in management.  Meiselman characterized closely-held corporations as "little more than 'incorporated partnerships,'" often formed due to family or friend relationships, in which the minority shareholders are not practically able to bargain for protection (or to recognize the need for protection) when the corporation is formed.  Meiselman involved seven such corporations -- all part of a family business formed by the father of the two brothers who found themselves on opposite sides of the lawsuit.

The Business Court decision confronted a different situation, and those differences determined a different outcome.  In High Point Bank & Trust Co. v. Sapona Mfg. Co., at issue were the plaintiff's rights as minority shareholder of three corporations.  Although the corporations originated as family businesses -- the youngest of which was over 75 years old -- the shareholder and employee base had expanded significantly over time.  Acme-McCrary, a hosiery manufacturer, now has 81 shareholders and 892 employees; Sapona, a yarn processor, now has 51 shareholders and 200 employees; Randolph Oil, a petroleum wholesaler and convenience store owner, now has 25 shareholders and 49 employees.  The shares of these corporations were unmarketable and functionally locked the shareholders into ownership absent some company action.  Two of the three corporations had issued tender offers to their shareholders on one or two occasions in the last 20 years.

Following the death of the individual plaintiff, the daughter and granddaughter of the companies' founders, her executor asked the three companies to redeem her shares at a market value established by an appraisal that the executor commissioned.  Each company's board of directors met and considered the request, but declined.  The executor sued under a Meiselman theory, arguing that the companies' refusal to repurchase the shares was coercive and oppressive conduct leaving a minority shareholder without rights.  The question for the Court was whether the right to have stock repurchased was an enforceable right or interest under Meiselman.  If so, the corporations' refusal to repurchase rendered that right in need of protection.

Judge Tennille began his analysis by discussing the broad Meiselman remedies and the limitations on those remedies from more recent statutory amendments.  Under the old N.C.G.S. § 55-125, a court had equitable discretion to fashion a number of remedies besides dissolution of the corporation -- remedies such as repurchase at fair value, altering corporate bylaws provisions, or prohibiting certain corporate actions.  Section 55-14-30, the modern replacement, eliminates those alternative remedies.  With liquidation as the only remedy, judicial dissolution required a "strong showing" because such a remedy conflicted with the business judgment rule and other traditional judicial deference to corporate governance. 

The Court viewed this case as significantly different from Meiselman and the Court's own 1999 decision in Royals v. Piedmont Elec. Repair Co. (which found a right of redemption for a minority shareholder) for several reasons.  First, there was no loss of ownership benefits here.  Plaintiff was not denied an opportunity to work; the trust now holding her shares continued to receive the same benefits that she enjoyed while living; no assets were diverted; no excessive salaries were paid, but regular dividends were paid to all shareholders.  The Court held that there was no mandatory right of redemption of stock in closely-held corporations.  Such a right "would place the other shareholders in close corporations at financial risk upon the death of any shareholder."

Second, there was no personal or familial antagonism of the sort experienced in Meiselman.  The plaintiff was never an employee or involved in management, and thus was not being deprived of such opportunities.  The majority of shares in the three companies were owned by non-employees.

Third, there was no controlling shareholder and the shares were diffused to a much greater extent than in Meiselman.  Each corporation observed corporate formalities.  The majority of the companies' officers were not related to the founders.  In short, these corporations were not the same as a corporation with three shareholders being run like a partnership.

The Court was not willing to create a bright-line number of shareholders that would remove a corporation from Meiselman analysis.  Nevertheless, the more diffuse the ownership of a company, the more important "the number, composition, and rights and interests of the non-complaining shareholders" become.  "Where, as here, there is no impediment to the majority of shareholders exercising their voting rights, the courts should not intervene on behalf of a minority shareholder."

Judge Tennille also held that the plaintiff had no reasonable expectation of a right of redemption.  There was no written agreement establishing such a right.  The limited activities of the corporations with a one-time tender offer and a one-time repurchase of the shares of a deceased shareholder were not sufficient to create a future right of redemption.  Most importantly, there was no evidence that any shareholder other than the plaintiff or any officer or director had any notice of or expected that plaintiff would have such a right of redemption.

The expectation also was unrealistic on two grounds:  first, that the redemption of plaintiff's minority interest would be at fair market value with no minority discount, and second, that the redemption would be personal to plaintiff.  The latter, in particular, would have created "stiff fiduciary challenges" from the other shareholders.  Although the plaintiff had some minimal evidence of oppression, "oppression is not the standard for determining rights and interests.  It is applicable only when determining the need for protection."

Meiselman likewise requires consideration of the impact of the plaintiff's claim on other shareholders.  Here, dissolution would impose stock value and tax losses on all of the other shareholders and displace hundreds of employees.

After High Point Bank & Trust, it would be an overstatement to declare Meiselman dead for corporations with more than a handful of shareholders.  Nevertheless, the larger the shareholder base and the more significant the formal corporate governance, the less likely it is that a corporation will have created unwritten "expectations" for shareholders or that the corporation will face dissolution in the name of shareholder protection.

Full Order & Opinion

 

Pro Se LLCs and Entry of Default in the Business Court

A few points to keep in mind when the world of pro se plaintiffs meets the world of closely held entities in the Business Court, courtesy of Monday's decision in Bodie Island Beach Club Ass'n, Inc. v. Wray:

  • A letter written by a physician who was served both individually and as registered agent for an LLC served as an answer for the physician only, not for the LLC.  The letter was written on the physician's personal letterhead and did not purport to answer on behalf of the LLC.
  • Even if the physician's answer were purportedly on behalf of the LLC, it would have been an invalid appearance by the LLC, which, like all corporations, may not appear pro se.
  • A physician in such circumstances was deemed to be a sophisticated investor capable of following court rules.
  • The Court may enter default on its own motion (i.e., the "or otherwise" clause of Rule 55(a)).
  • If an answer were filed, even if untimely, entry of default under Rule 55(a) would be inappropriate even when entered by the Court rather than the clerk.
  • When no answer was  filed, however, a proposed answer filed with a motion to amend does not bar entry of default.
  • Failure to respond to a summons for five months was dilatory, not mere technical error.
  • Although a plaintiff's conduct may waive its right to entry of default, no such waiver occurred when the plaintiff moved for summary judgment against the LLC within two months of failure to answer and when the LLC waited another two and a half months to submit a proposed answer.

Full Order

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Frayed Yarn: Business Court Grants Summary Judgment Against Former CEO on Severance Claims

The Business Court granted summary judgment last week to a company and dismissed claims brought by its former CEO for breach of a severance agreement, fraud, and unfair and deceptive trade practices.

In McKinnon v. CV Industries, Inc., the defendant (CVI) owned a number of subsidiaries which manufactured, among other things, high-end residential furniture (Century) and mid- to high-end jacquard fabric (Valdese Weavers).  Plaintiff was an employee of the defendant or its subsidiaries for over twenty years, including five years as CVI's president and CEO.  In 2000, Plaintiff went to work for Mastercraft, a direct competitor of Valdese Weavers.

Plaintiff and Defendant entered into a severance agreement to modify certain incentive plans and benefit agreements.  Under that agreement, Plaintiff would not qualify for certain benefits (the "shadow equity plan") until he stopped directly competing with Valdese Weavers.  In addition, those benefits would not accrue if the company's ESOP stock price on the December 31 immediately preceding Plaintiff's cessation of competition was less than the ESOP stock price on December 31, 1999.

At some point in 2001 or 2002, Plaintiff stopped working for Mastercraft and started working for another company.  The stock price at that point was below the 1999 price, which would eliminate any benefits.  Plaintiff, however, contended that he continued to compete through 2007, at the end of which the stock price would have triggered benefits.

Judge Tennille granted summary judgment on each of Plaintiff's claims.  First, on Plaintiff's damages and specific performance claims for breach of contract, the Court held that Plaintiff's post-2001 employer (Basofil) was not a competitor of CVI.  On resigning from Mastercraft, Plaintiff entered into another noncompete agreement, one that expressly permitted Plaintiff to work for a company in Basofil's field -- supporting the conclusion that Basofil was not a competitor of Mastercraft or Mastercraft's competitors, i.e. CVI.  Plaintiff likewise admitted that his noncompete agreement with Basofil would not have prevented him from working for CVI.  Thus, competition with CVI was terminated on a date on which Plaintiff was ineligible for benefits under his CVI severance agreement.

Second, the Court dismissed Plaintiff's fraud claim, holding that he showed at best an unfulfilled promise, but failed to produce evidence that CVI intended at the time it signed the severance agreement that it would never perform.  CVI's intent to perform was demonstrated by its performance under other portions of the agreement and by the fact that it carried the disputed benefits as a liability on its books until 2002.

Third, the Court dismissed Plaintiff's unfair and deceptive trade practices claim.  The Court, again enforcing the "in or affecting commerce" limitation of the reach of N.C.G.S. § 75-1.1, cited its decision in Schlieper v. Johnson that "“[m]ost disputes between employers and employees are internal to the business organization and simply do not have an effect on commerce in the way required by section 75-1.1."  In this case, "the payment (or lack thereof) of these employment benefits would not be a practice that impacts commerce or the marketplace, nor would it be part of the day-to-day activities for which CVI was organized."

Full Order and Opinion