Articles Posted in Breach of Fiduciary Duty

A Delaware Chancery Court judge recently rendered a post-trial verdict in the In re Tesla Motors Stockholder Litigation in which he found in favor of co-founder and CEO of Tesla Motors, Elon Musk, on claims that Musk breached his fiduciary duties, was unjustly enriched, and created corporate waste in connection with Tesla’s 2016 acquisition of the SolarCity Corporation.

This high-profile, high-stakes lawsuit stemmed from alleged conflicts of interest created by Musk’s leadership and ownership of both companies during the 2016 acquisition. At the time of the merger, Musk was SolarCity’s largest stockholder and chaired its board of directors. At the same time, he owned 22% of Tesla stock and served as CEO and a director of Tesla. When the potential acquisition of SolarCity came up, Tesla’s board elected not to form a special committee of independent directors to negotiate the transaction. It did, however, condition approval of the acquisition on the “affirmative vote of a majority of the minority of Tesla’s disinterested stockholders” and recused Musk from certain Board discussions regarding the acquisition.

Despite these protections, the plaintiff shareholders alleged that Musk, as Tesla’s controlling shareholder, exerted his influence over Tesla’s board to approve the acquisition at an unfair price, following a highly flawed process, in order to bail out his (and other family members’) foundering investment in SolarCity. Plaintiffs named both Musk and members of Tesla’s board as defendants and sought damages as well as equitable remedies. Before trial, all defendants except Musk settled with plaintiffs, leaving only the claims against Musk proceeding to an 11-day trial over July and August 2021. Continue reading ›

The Texas Supreme Court dealt a fatal blow to Brazilian state-run petroleum company Petrobras’s breach of fiduciary duty claims against former joint venture partner Belgian Transcor Astra Group S.A. The Texas high court ruled that an $820 million settlement agreement between the two oil and gas companies precluded Petrobras from asserting breach of fiduciary duty claims accusing Astra of bribing certain high-ranking Petrobras employees.

In 2006, Petrobras and Astra formed an ill-fated joint venture of Pasadena Refining System Inc. The joint venture between the two multi-national oil companies soon began to unravel. After the parties found themselves embroiled in several disputes, they initiated an arbitration to break up the partnership which resulted in a 2009 arbitration award requiring Astra to sell its 50% interest to Petrobras for $640 million.

Astra alleged that pursuant to the arbitration award it turned over its interest in the Texas refining company, but Petrobras never paid the $640 million purchase price for that interest. A series of lawsuits ensued leading to Astra obtaining judgments against Petrobras totaling more than $750 million with more than $400 million more in pending claims when the parties agreed to a global settlement. Under the 2012 settlement agreement Petrobras agreed to pay Astra $820 million in exchange for a release by each party of all claims against the other party.

By 2016, the peace between the companies ended when Petrobras initiated two separate legal proceedings against Astra. First, Petrobras filed a lawsuit against Astra and several of its employees, asserting that they breached fiduciary duties owed to Petrobras by offering bribes to certain Petrobras officials and failing to disclose the offers during the parties’ settlement negotiations. Petrobras also asserted derivative claims for declaratory judgment, conspiracy, aiding and abetting, unjust enrichment, and exemplary damages and attorney’s fees, and sought to invalidate the 2012 settlement agreement and render it unenforceable. Simultaneously, Petrobras initiated arbitration proceedings to invalidate the 2006 stock-purchase agreement due to the bribes Astra allegedly paid to Petrobras officials in connection with that agreement. Continue reading ›

An Illinois appeals court recently held that the plaintiffs in a commercial litigation lawsuit could not sustain claims for fraud, breach of fiduciary duty, conversion, and tortious interference with contract because the claims were untimely. The Court also affirmed dismissal of the plaintiffs’ claims for respondeat superior liability, prejudgment interest and attorney’s fees on the basis that the substantive underlying claims were untimely or had been released by the plaintiffs.

The appeal stemmed from a November 2016 lawsuit filed by Edward Shrock, a minority owner of the company Baby Supermall, LLC, against the company’s bank and the bank’s vice president for allegedly aiding the company’s majority owner, Robert Meier, in using the company as his “personal piggy bank” and misappropriating millions of dollars from the company during a decade-long scheme. According to Schrock’s complaint the company was eventually driven to insolvency as a result of Meier’s scheme.

The 2016 lawsuit followed on the heels of another lawsuit Schrock filed against Meier in 2009, which alleged nearly the same underlying facts as alleged in the 2016 lawsuit against the bank. In the 2009 suit, Schrock won an injunction enjoining Meier and his family from taking payments from the company under certain “profit-sharing” plans Meier had drafted and entered with the company. Following entry of the injunction in the 2009 case, Schrock won an approximately $11 million jury verdict against Meier, which Schrock later released in 2018 even though the judgment had only been partially satisfied. Continue reading ›

The Illinois Supreme Court ruled recently that an energy company could not sustain a claim for stolen corporate opportunities against two of its former business developers. In doing so the Court overturned a ruling by the appellate court which had revived the stolen corporate opportunity claim. The ruling, which many consider to be a bombshell in stolen corporate opportunity jurisprudence, was not without its detractors with three justices dissenting from the majority’s decision.

The plaintiff, Indeck Energy Services, is a privately held Buffalo Grove company that develops, owns, and operates independent power plants. Indeck’s lawsuit targets two former Indeck employees, Christopher M. DePodesta and Karl G. Dahlstrom, whom the energy company alleged secretly operated their own company while employed by Indeck and in doing so secured certain opportunities for themselves in breach of their fiduciary duties to Indeck.

Indeck hired DePodesta in 2010 as its vice president of business development and Dahlstrom in 2011 as its director of business development. The two were brought in to help Indeck scout out and secure new opportunities to develop natural gas powered plants within a region of Texas known as the Electrical Reliability Council of Texas.

Dalhstrom founded Halyard Energy Ventures, LLC (HEV) in late 2010. DePodesta became a member of HEV in 2011. HEV is a consulting, management, and administration firm that develops electrical power generation projects. Following DePodesta and Dalhstrom’s departure from Indeck, the two allegedly negotiated a deal for HEV to partner with a private equity fund to develop, construct, and operate electrical power generation plants. Continue reading ›

An Illinois Appellate Court recently revived a breach of fiduciary duty and shareholder oppression lawsuit filed by minority shareholders against the president, director, and majority shareholder of a lumber company. The suit accused the majority shareholder of diverting nearly a million dollars from the lumber company to a separate company owned by the majority shareholder’s son. The trial court dismissed several of the minority shareholders’ claims and ruled in favor of the majority shareholder following a trial on the breach of fiduciary duty claims. In a blow to the majority shareholder, the Second District appeals court reversed the trial court finding that the majority shareholder did breach his fiduciary duties to the company and engaged in shareholder oppression.

The case provides practitioners and shareholders a useful primer on pleading and evidence requirements for successfully asserting breach of fiduciary duty and shareholder oppression claims against a corporate officer. It also sheds light on the contours and limits of a key legal doctrine implicated in such claims: the business judgment rule doctrine.

The case, Roberts v. Zimmerman, involved four separate but related lumber companies:  Our Wood Loft, Inc. (OWL), Outstanding, 3 Corp. Lumber Company, and Lake City Hardwood. The plaintiffs in the case were minority shareholders who collectively owned one-third of OWL, with the defendant, Stefan Zimmerman, owning the other two-thirds of the company. Zimmerman’s son, Thomas, owned Lake City.

The plaintiffs’ complaint alleged that Zimmerman initially sought to have his son buy shares in OWL but the minority shareholders refused. Instead, the plaintiffs agreed to allow Thomas to work as a manager at OWL. While working at OWL, Thomas started Lake City. Shortly thereafter, Lake City began purchasing lumber and re-selling it to OWL at a profit. The complaint alleged that Zimmerman did not reveal the relationship between OWL and Lake City and that Thomas owned Lake City until several years after OWL started buying lumber from Lake City. Continue reading ›

WeWork’s meteoric rise in popularity and its unceremonious descent back to earth have kept WeWork in the news over the past few years. WeWork’s decision to sue two of its largest shareholders last year seemed no less newsworthy. In a recent development in this ongoing litigation, a Delaware Court of Chancery decision granted the defendants’ motion to dismiss WeWork’s breach of fiduciary duty claims, finding the allegations insufficient to establish a controlling shareholder relationship and the claims to be duplicative of the breach of contract claim.

WeWork was founded in 2010 as a commercial real estate company offering co-working office space with modern designs and state-of-the-art technology. WeWork enjoyed an astronomical initial valuation and was well-funded by some of the biggest names in venture capital. In 2019, WeWork began filings for an IPO. However, after a barrage of negative press involving revelations of WeWork’s shaky financials and its CEO’s erratic behavior, WeWork’s value tanked and its IPO was ultimately scrapped.

Following WeWork’s failed IPO, WeWork’s board formed a two-person special committee which negotiated a rescue funding package with Softbank, one of WeWork’s biggest and most significant investors, and the Vision Fund, a $100 billion venture capital fund that Softbank runs. According to the Complaint, under its agreements with WeWork, Softbank agreed to buy up to $3 billion worth of shares in WeWork and offer billions more in lending, which would have provided needed capital to WeWork while giving Softbank majority control of the company.

After the outbreak of COVID-19 and the rise of work from home, Softbank allegedly rethought its decision to invest in a company whose product is office space. Upon learning that Softbank was considering backing out of its agreements, WeWork filed suit against Softbank accusing it of breaching those agreements as well as breaching its fiduciary duties to WeWork shareholders. In its Complaint, WeWork alleges that Softbank is the company’s controlling shareholder and as such owed certain fiduciary duties to WeWork’s other shareholders. Softbank allegedly breached these fiduciary duties, when it “repeatedly used its influence over the Company [WeWork] to limit the Company’s options and force it into favorable outcomes for SoftBank, to the detriment of the Company’s minority stockholders.” Continue reading ›

A company that provided administrative and payroll services was acquired by a bank under a stock purchase agreement. The agreement provided for the escrow of $2 million dollars, that was to be released to the sellers after a period of time had passed after the sale. Several months after the sale, a former employee came forward to reveal potentially fraudulent practices on the part of the administrative company. After an investigation by an outside law firm, the bank demanded indemnification from the sellers, but the sellers refused. The bank then sued in an attempt to recover money it had paid out to settle claims with the company’s clients. The district court determined that the indemnification claim was made too long after the bank first learned about the potential issues, but the appellate court found that undisputed facts did not show this to be the case and determined that the district court erred in granting summary judgment.

The Damian Services Corporation provides various administrative and payroll services to independent temporary staffing companies. The baseline level of service that Damian provides is short-term payroll funding to pay the temp agencies’ employees. Damian also offers other services to clients who pay more. Although Damian contracted with its temp agency clients, it invoiced the end-user companies that hired the temporary workers. The end-user employers would then pay Damian, which would, in turn, send the payments to the temp agencies after taking its cut as a fee for its services.

Damian encouraged its client staffing agencies to obtain prompt payment by providing discounts or levying fees depending on how long it took for the end-user employers to pay. These discounts and fees were negotiated independently with each staffing firm. In 2009, Damian changed its invoicing practices in such a way that made it much more difficult for staffing firms to receive discounts for prompt payment and more likely to be levied with fines. Continue reading ›

A disgruntled investor sued the organization that regulates registrations for certain securities brokers after he lost his investment. The investor argued that the securities broker had a history of misconduct dating back more than 30 years and should have had his membership revoked under the organization’s bylaws. The investor claimed that because the organization violated its own bylaws, it was liable for the actions of the securities broker. The district court determined that the organization did not violate the bylaws because the conduct of the broker had not led to the expulsion of an associated organization, only a voluntary withdrawal. The appellate panel agreed and affirmed the decision of the district court.

The Commodities Futures Trading Commission promotes the integrity of the U.S. derivatives markets through regulation via the Commodity Exchange Act. Congress authorized the CFTC to establish futures associations with authority to regulate the practices of its Members. Since 1981, there has been a single CFTC-approved registered futures association under the CEA, the National Futures Association. The NFA is charged with processing registrations for futures commission merchants, swap dealers, commodity pool operators, commodity trading advisors, introducing brokers, retail foreign exchange dealers, and relevant associated persons.

One requirement enforced by the NFA is Bylaw 301(a)(ii)(D), which prohibits a person from becoming or remaining a member if they were, by their conduct while associated with another member, a cause of any suspension, expulsion, or order. Between 1983 and 2015, Thomas Heneghan was an associated person of fourteen different NFA-Member firms. Dennis Troyer, an investor in financial products since the 1990s, invested hundreds of thousands of dollars in financial derivatives through NFA Members and their associates.

Although Troyer chronicled history of misconduct by Heneghan, dating as far back as 1985, the first interaction between Troyer and Heneghan was not until October 2008 when Troyer invested more than $160,000 between October 2008 and March 2011 under Heneghan’s advisement. In 2009, Heneghan came under the scrutiny of the NFA. This scrutiny continued for several years as Heneghan changed affiliation across several NFA member firms. Heneghan was eventually barred from NFA membership, associate membership, and from acting as the principal of an NFA member in 2016. Continue reading ›

After the plaintiff purchased an economic interest in an LLC at a UCC sale, she brought claims for breach of fiduciary duty and breach of good faith and fair dealing against the manager of the LLC. The plaintiff alleged that she was entitled to inspect the books and financial documents of the LLC under the membership agreement, and that the LLC had not properly distributed her share of the profits of the sale of its sole asset. The trial court rejected the plaintiff’s arguments, finding that she had only an economic interest, and not a membership interest, in the LLC. The appellate court affirmed, finding that the plaintiff lacked the standing to bring her claims as she was not a member of the LLC under the LLC Act or the amended operating agreement

CFC is an Illinois limited liability corporation created to manage, convert, and sell an apartment complex in Grayslake. The original members of CFC executed an operating agreement which provided that each member’s ownership interest depended on their capital contributions. The Stanley A. Smagala Revocable Trust contributed $3,465,000 and owned 45%, the McGlynn Trust and Grayslake Investments each contributed $1,925,000 and each owned 25%, and John R. Kelly contributed $385,000 and owned a 5% interest.

Smagala was the manager of CFC and had full authority to direct, manage, and control the business of CFC and also to employ accountants, legal counsel, managing agents, and other experts to perform services for CFC. At the end of 2006, the members signed an amended agreement changing their interests from a capital contribution interest to an “economic interest” in the company’s profits and losses.

To fund its $1,925,000 contribution, Grayslake Investments had borrowed $1,500,000 from Founders Bank. Founders Bank filed a UCC-1 to secure its interest in CFC. In July 2009, the Illinois Department of Financial and Professional Regulation of Banking closed Founders Bank, and the Federal Deposit Insurance Company was named receiver. Some assets, including the loan made to Grayslake and its security interest, were sold to Private Bank. Private Bank then renewed its UCC-1 and the note matured in January 2010. Grayslake was unable to refinance or repay the balance of the note, and Private Bank began foreclosure proceedings. Continue reading ›

A business made loans to the son of its founder and never required the loans to be repaid. The business later attempted to write off the loans as bad debts or as ordinary and necessary business expenses. The IRS pursued the business, seeking $92 million in back taxes. The company petitioned the tax court, but after a trial the court upheld the agency’s determination, finding that the debts could not be written off because the company and the founder’s son lacked a bonafide creditor-debtor relationship. The company appealed and the appellate panel affirmed, finding that the company routinely deferred payment or renewed promissory notes without any receipt of payments and that it did not expect to be repaid unless various other events occurred. The panel determined that the company had not shown that it presented sufficient existence of a bonafide relationship to the tax court and it, therefore, affirmed the decision of the lower court.

Ron Van Den Heuvel’s father founded VHC in 1985 to provide services to the paper manufacturing industry. Ron and his four brothers all worked for VHC or its subsidiaries in some capacity, but Ron found particular success. Ron started at two of VHC’s subsidiaries, directed a number of its other companies, and launched his own companies separate from VHC. Between 1997 and 2013, VHC advanced $111 million to Ron and his companies. The payments fulfilled several purposes, including paying debts owed by both Ron and his companies. Ron and his companies would come to owe VHC $132 million, with interest, by 2013, but would only repay $39 million.

In 2004, VHC began writing off its payments to Ron as “bad debts,” ultimately writing off $95 million by 2013. After an audit, the IRS issued a notice of deficiency to VHC rejecting $92 million of the write-offs. VHC petitioned the tax court, and after a ten-day bench trial, the tax court upheld the agency’s deficiency finding. The court determined that Ron’s debts could not be written off because VHC and Ron lacked a bonafide debtor-creditor relationship. VHC then appealed. Continue reading ›

Contact Information