The Business Court’s Opinion last week in Coleman v. Coleman, 2015 NCBC 110, provides useful guidance on how to properly plead a Meiselman claim, and proper procedure to follow before making a derivative claim.
Plaintiff in the Coleman case made both a Meiselman claim and a derivative claim. As you will guess from the case name, this was a family dispute in which all of the parties were "related, either through blood or through marriage." Op. ¶3. Plaintiff was a shareholder and President of two family-owned corporations, one of which owns Asheville Mall. He had been removed from his position by his co-shareholder family members despite what he said was a shared expectation that he would remain the President as long as he was "capable and willing to serve." Op. ¶11.
Plaintiff couched his first claim as one for "Breach of Fiduciary Duty — Meiselman Action. If you aren’t familiar with a "Meiselman action," the North Carolina doctrine — decided iby the NC Supreme Court in the case of Meiselman v. Meiselman in 1983 — protects a shareholder in a closely held corporation from "the frustration of his reasonable expectations as a shareholder" (Op. ¶19). That can include things like like continued employment with the corporation or actions affecting share ownership. The shareholder must show that his "reasonable expectations" were known to or assumed by the other persons involved with the corporation.
Don’t Expect Conclusory Allegations To Get You Past A Motion To Dismiss
The Plaintiff before the Court hadn’t pleaded his Meiselman claim adequately. Judge Bledsoe said that:
Plaintiff has not pleaded sufficient facts to show his expectations were reasonable or concurred in by Defendants. Plaintiff has advanced only conclusory allegations that Defendants knew of and frustrated his substantial and reasonable expectation of continuing to serve as President of the Corporations.
Plaintiff also hadn”t pled his claim with enough detail to get past the presumption afforded the corporation by the business judgment rule. The business judgment rule creates a "a strong substantive presumption that [a] director’s judgment will not be judicially second-guessed unless it cannot be attributed to a rational business purpose." Op. ¶31.
Plaintiff said he had been replaced as President by a person who did "not have the requisite expertise or experience to properly manage the Corporations." Op. ¶32 The Judge said that "[t]his conclusory statement, standing alone, is insufficient to demonstrate that the board’s actions were outside the realm of the business judgment rule." Op. ¶32.
Don”t Ask For Relief Which The Court Doesn’t Have The Power To Grant
Another reason that the Meiselman claim was dismissed was because the relief that the Plaintiff sought (his reinstatement as President) could not be granted by the Court.
Judge Bledsoe observed that here was a significant change "between the statutory framework in which North Carolina courts analyzed Meiselman and the framework in existence today." Op. ¶24. Years ago, a trial judge had the power per the now repealed G.S. §55-125.1 to cancel, alter, or enjoin "any resolution or other act of the corporation or to direct or prohibit "any act of the corporation or of shareholders, directors, officers or other persons party to the action."
As the law stands now, "courts are limited in the exercise of their ‘discretionary equitable jurisdiction to order involuntary dissolution, or, alternatively, a mandatory buyout for the protection of the minority shareholders in closely held corporations.’" Op. ¶24. Reinstatement? Not available.
The Dismissal Of The Meiselman Claim Was Without Prejudice
The Court allowed the Plaintiff to amend his Meiselman claim "in a manner consistent with Rule 8’s requirements and prevailing case law.
A Demand on The Corporation Is Essential Before Filing A Derivative Action
A demand on the corporation to take action is an essential prerequisite to the filing of a derivative action. G.S. §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."
A Plaintiff must wait ninety days after the demand before starting a derivative action. The 90 day period is waived only if the corporation rejects the demand before the 90 days have run, or if irreparable injury would result to the corporation if the potential plaintiff is forced to wait. N.C. Gen. Stat. §55-7-42.
This Plaintiff didn’t wait the 90 days, contending that the corporations had rejected his demand via a voicemail.
What Constitutes The Rejection Of A Demand
Plaintiff had made his demand in a letter which he sent to the other directors and shareholders of the corporations. The attorney who Plaintiff said was counsel for the "Majority Shareholders and Majority Directors" (Op. ¶27 & n.3) left Plaintiff the voicemail rejecting the demand.
That phone call was not sufficient to avoid the 90 day waiting period because there was no allegation that this attorney had the authority to bind the corporation. Op. ¶29. That ruling was consistent with a decision from the Business Court last year, in which Judge Gale held that:
any response adequate to constitute a corporate rejection that excuses the further running of the ninety day waiting period must be made by those with the authority to act on behalf of the corporation.
Make Sure To Verify Your Derivative Action Complaint
Rule 23(b) of the NC Rules of Civil procedure says that all complaints initiating a derivative action must be verified under oath.
This Plaintiff had not verified his complaint, so his lawsuit was dismissed without prejudice.
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If you are thinking that this Plaintiff stands in pretty good shape even after the grant of the Defendants’ Motion to Dismiss because he has the right to refile his claims, you are mostly right. But given that the lawsuit was filed in August of last year, Mr. Coleman will be starting all over again, nearly a year and a half later, following the dismissal.