This week, Judge Jolly permitted a 50% shareholder to pursue derivative and individual claims against her co-shareholder. He found that the plaintiff had satisfied the demand requirement of G.S. sec. 55-7-42, and that she fit an exception to the general rule that a shareholder cannot pursue an individual cause of action for the diminution or destruction of the value of her stock.
The decision came in LeCann v. Cobham, a long running bitter dispute between dentists who operated a number of entities providing dental care. LeCann said that Cobham had diverted funds from a practice in which they shared ownership to another dental practice operated solely by Cobham.
G.S. sec 55-7-42 says that a shareholder "may not commence a derivative proceeding" without having made a written demand "upon the corporation to take suitable action." In discussing the adequacy of LeCann’s demand, Judge Jolly quoted Russell Robinson, who says that no specific form of demand is required by the statute:
except to require that it be in writing; but to serve its purpose it should set forth the facts of share ownership and describe the redress demanded with enough particularity to allow the corporation either to correct the problem, if any, without a lawsuit or to bring its own direct action.
ROBINSON ON NORTH CAROLINA CORPORATION LAW, § 17.03 (7th ed. 2009).
There is no appellate North Carolina authority evaluating the sufficiency of a demand. The form of the LeCann written "demand" was several emails from LeCann to Cobham telling her to quit taking corporate funds for her own benefit and to return what had been taken. You can read one of the emails here. The Court said that these demands were "clear and particular enough to put Defendant Cobham reasonably on notice as to the substance of Plaintiff’s objections."
Now, why did LeCann have the right to sue Cobham on an individual basis, especially in light of the NC Supreme Court’s opinion in Barger v. McCoy Hillard & Parks, 346 N.C. 650 (1997), where it held:
that shareholders cannot pursue individual causes of action against third parties for wrongs or injuries to the corporation that result in the diminution or destruction of the value of their stock.
Id. at 658. Those types of claims affect all shareholders equally, and belong to the corporation.
LeCann said that she could pursue her claims on an individual because Cobham owed her a "special duty," a recognized exception to the Barger rule, as she was the only other shareholder in the companies. Judge Jolly remarked that Cobham had asserted herself in her Answer that LeCann owed her a "duty of care, good faith, loyalty, fair dealing, full disclosure, [and] avoidance of self dealing." He said given that each party claimed the other party owed her a fiduciary duty of care, that there was a genuine issue of material fact precluding a dismissal of LeCann’s claims. He also equated the co-equal shareholders to partners, who certainly owe a fiduciary duty to one another.