Articles Posted in Shareholder Disputes

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When two sisters, minority shareholders and directors of a moving company, were denied access to corporate books, the trial court erred in finding that, as corporate directors, they had absolute access to corporate records. Rather, they had presumptive access and the corporation was required to demonstrate that request for documents was made for the improper purpose.

Barbara Munroe-Diamond, Sally Sharkey, James P. Munroe, and Michael F. Munroe are siblings and the shareholders and directors of the Pickens-Kane Moving and Storage Company. In the winter of 2013, the board of directors hired Ft. Dearborn Partners, Inc. to provide a fair market value for the company’s stock. The next summer, a valuation of $3158 per share for controlling share and $1522 per share for minority shares was issued. Controlling shares of the company were entirely owned by James and Michael Munroe, while Barbara and Sally owned minority shares.

The board of directors unanimously authorized the company to redeem minority shares for $1522 per share. In early 2015, following negotiation, the company paid $1600 per share for minority shares. Every minority shareholder except Barbara and Sally redeemed their stock. Both sit on the board of directors. In July 2016, Barbara and Sally made a demand upon the company to make available for inspection and copying any and all documents pertaining to the corporate minutes, stock certificates, lists of assets and liabilities, and other business records. James and Michael refused to comply with the request, arguing that Barbara and Sally gave no purpose for their request or how their request related to their duties as directors.

After negotiations for the records failed, the sisters filed a mandamus action in Illinois court seeking to compel production of the records. The circuit court entered an interim order requiring the brothers to allow access to the books, finding that the sisters, as directors, had an absolute and unqualified right to examine the books and records of the corporation. The brothers then appealed. Continue reading ›

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Walking the tightrope of business ethics and practice becomes more and more under scrutiny in a climate where minorities are divided.  Business owners want to maximize potential, please customers and, let’s face it, the money does matter! Have a business and then be implicated with being racist will come into play in affect image negatively.  That’s where allegations of a racist slur have hit the founder of Papa Johns. He came under fire for criticizing the National Football League’s leadership when it came to the anthem “take-a-knee” protests by players. Comments made have come to haunt him in such a way to put him in trouble and, eventually, have led to suit.  In the suit filed, company documents are to be inspected due to the company’s treatment of him since the publication of a rumor.  He says they are false.

The incident surrounds a conference call made and use of the N-word when it came to Colonel Sanders and KFC.  Papa Johns was a sponsor of the National Football League and the context of the conversation came about when national anthem protests were being discussed. In asking him to resign from the company, he feels ousted without proper investigation into the matter. This has, in turn, lead to a “breach of fiduciary duties” in cutting him off from the company.  All marketing materials and commercials, including logos have been edited to remove his name or image as well.  It is likely that all materials that he is entitled to will be brought into the lawsuit.  He feels he will be exonerated. Continue reading ›

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In one of our previous blog posts, we looked into what Facebook was doing with the data of millions of users and profiting from it.  The CEO of Facebook, Mark Zuckerburg, was subject to scrutiny in his testimony and angered both users and shareholders. Since the Cambridge Analytica scandal, Facebook has also been accused of meddling in the elections by having a Mercer backed political data firm collect information as well.

Zuckerberg later confessed that he made mistakes and that did not know how to handle a large company. This has led to the undermining of public confidence in him, including that of the shareholders.  So now a possibility of removal from a chairman position and being replaced as an independent executive is talk that is being touted.  A dual structure system of shares allows for the usurpation of power.  Too much power in his hands is now deemed unacceptable.  Activists are also calling for his removal.  The Investment company has gone so far as to file a proposal to oust him. The main changes that are most likely include the creation of a role division between a chairman and CEO.  That leads to a greater check on the power that he holds which is more than 60 percent of a voting share. A dual role weakens management of the board and is what currently is in place. This is one of the reasons cited as being a contributing factor in the mishandling of the Facebook controversies.

Separating a chair and a CEO also reduces conflict.  Shareholders are unable to check the founder’s power because he owns 60 percent of the company and occupies the two highest positions. As it stands, Facebook stock is of two types and the ones that Zuckerberg owns have 10 times a greater voting power. “When you open yourself up to more opinions, more independent voices, you’re more likely to make better decisions. It’s more likely that someone with independent governance would have spoken up about some of these things,” Illinois State Treasurer Michael Frerichs, who has $35 million invested in Facebook, told Business Insider. Continue reading ›

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Although most board members of publicly traded companies are paid an annual salary, plus a bonus based on performance (usually in the form of company stock), being on the board of a company or organization tends to be a part-time job and most members have day jobs in addition to their position on the board.

But because board members bear a fiduciary responsibility to look after the financial interests of the company’s investors, they have to be very careful where they get the rest of their income. Accept some money or do a favor for someone from the wrong company, and you raise suspicions that you might have a conflict of interests.

Alan Kahn, an investor in United Flexible, Inc., an aerospace parts manufacturer and an affiliate of Arlington Capital Partners, filed a lawsuit in Delaware against two of Kreisler Manufacturing Corp.’s board members for allegedly conducting a merger in bad faith. According to the lawsuit, the two board members, Edward Stern and his brother Michael, received side deals from Arlington just before the board decided to drop its asking price for the company.

The lawsuit further alleges board members deliberately failed to disclose important information from shareholders regarding the merger. As evidence, Kahn’s complaint points to the fact that the board members refused to make copies of the merger agreement, requiring instead that all shareholders who wanted any information about the details about the agreement needed to be willing to fly to Philadelphia to see a physical copy of the contract. Continue reading ›

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Despite stepping down as CEO of Uber, the ride-sharing start-up he founded, Trevor Kalanick’s troubles are far from over. On top of allegations that the company mistreats its drivers, discriminates against and sexually harasses women at work, and stole trade secrets from another ride-sharing service, Kalanick is now being sued by Benchmark, one of Uber’s investors.

In 2016, Kalanick proposed an amendment to Uber’s charter, giving him the right to nominate three new directors to the start-up’s eight-member board. At the time, Kalanick got Benchmark to approve the amendment, but Benchmark is now saying Kalanick deliberately misrepresented key information regarding the company and the amendment, and is now asking for the amendment to be voided.

Six years ago, Benchmark invested in what was then a tiny ride-sharing start-up, called Uber. It bought a 20% stake in the company, which has since grown to be worth billions of dollars. Kalanick and Gurley (and, by extension, Uber and Benchmark) remained close for years until Kalanick and Uber started getting hit by one scandal after another. At that point, Gurley began to put some distance between himself and Kalanick, finally joining other investors to push Kalanick out as CEO of the company.

Although he was forced to give up his seat on the board when he stepped down as CEO, Kalanick immediately reappointed himself to one of the board seats he controls as a result of the amendment he had added last year, and he still holds a 10% stake in the company. It’s not as much as Benchmark’s 13% stake, but it’s enough to make life at Uber difficult for anyone who opposes Kalanick – something he has allegedly set out to do. Continue reading ›

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Stock options exercised by railroad employees are a form of monetary compensation taxable to the employer and employee under the Railroad Retirement Tax Act, according to the Seventh Circuit Court of Appeals (Wisconsin Central Ltd., et al. v. United States, No. 16‐3300 (7th Cir. 2017)).

In 1996, three Midwestern railroad subsidiaries of the Canadian National Railway Company began including stock options in their employees’ compensation plans. In its appeal from a district court ruling, the railway argued that income from the exercise of stock options that a railroad gives its employees is not a form of “money remuneration” to them and is therefore not taxable to the railway under the Act, which defines “compensation” as “any form of money remuneration paid to an individual for services rendered as an employee… .”

The Railroad Retirement Tax Act of 1937 is the railroad industry’s version of the Social Security Act; it imposes a payroll tax on both employer and employee to pay for pensions and other benefits.

The question before the Seventh Circuit was whether the tax should be levied on the value of stock options exercised by employees when the market price reaches a certain level. The Internal Revenue Service argued that it should, and in a 2-1 decision, the court agreed.

Writing for the majority, Judge Richard Posner stated: “Stock has so well‐defined a monetary value in our society that there is no significant economic difference between receiving a $1,000 salary bonus and a share or shares of stock having a market value of $1,000.” Continue reading ›

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Shareholders are not philanthropists. They are investors who expect to see a return on the money they put into a company. Because companies have a vested interest in attracting shareholders, laws have been put in place to make sure they act fairly and honestly when communicating with their shareholders about the state of the company. This generally means requiring companies to reveal the state of their finances, market value, any legal issues they may be having that could affect their profits, etc.

Before handing over large sums of money to the control of another, it makes sense that shareholders would want to make sure their money is in safe hands. If it turns out the shareholders were deceived or lied to, filing a lawsuit against the company for fraud and/or breach of fiduciary duties is common. Unfortunately, thanks to a new ruling by the Delaware Supreme Court, shareholders have a new reason to hesitate before taking their grievances to the courts. Continue reading ›

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Super Lawyers named Chicago and Oak Brook business trial attorneys Patrick Austermuehle and Andrew Murphy Super Lawyers/Rising Stars in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. DiTommaso Lubin’s Oak Brook and Chicago business litigation lawyers have over a quarter of a century of experience in litigating complex class action, consumer rights, and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.

Peter S. Lubin
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An Illinois federal court granted a motion to dismiss in a putative shareholder derivative class action, having already denied the plaintiff’s application for a temporary restraining order (TRO). Noble v. AAR Corp., et al, No. 12 C 7973, memorandum and order (E.D. Ill., Apr. 3, 2013). The plaintiff asserted causes of action for various alleged breaches of fiduciary duty on behalf of the corporation, but the court found that the lawsuit was a direct action, primarily for the plaintiff’s benefit as a shareholder, rather than a derivative one.

The dispute related to a recommendation by the Board of Directors to the shareholders of AAR Corporation, a publicly-traded company, regarding an executive compensation plan. The Board made a unanimous proposal regarding the corporation’s “say on pay” plan, which allowed the shareholders to vote on executive pay as required by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), 15 U.S.C. § 78n-1. In a seventy-page proxy statement, the Board asked the shareholders to approve an advisory resolution regarding executive compensation at the corporation’s annual shareholder meeting, which was scheduled for October 10, 2012.

The plaintiff filed suit against the corporation and individual Board members, alleging that the Proxy Statement failed to disclose various details about what the Board considered before making its proposal. Noble, memorandum at 5. He claimed that the individual defendants breached their fiduciary duties of good faith, care, and loyalty to the shareholders, and that the corporation aided and abetted these breaches. Id. at 5-6. The defendants removed the case to federal court on October 4, 2012. The following day, the plaintiff filed a motion for a TRO, asking the court to stop the shareholder vote. The court held a hearing on October 9 and denied the motion. On October 10, the shareholders approved the Board’s proposal, with seventy-seven percent of the shares voting in favor. Id. at 1-2.

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Two shareholders and former officers of a closely-held New Jersey company, DAG Entertainment, Inc., sued two fellow shareholders, the company, and a new company formed by the defendant shareholders in U.S. District Court. The suit, Egersheim, et al v. Gaud, et al, alleged eighteen causes of action related to alleged usurpation of corporate opportunities. The defendants moved for summary judgment as to fifteen of the eighteen causes of action, and the district court ruled that those causes of action amounted to a single cause of action under the Corporate Opportunity Doctrine. The court granted summary judgment on the fifteen causes of action, allowing three causes to proceed.

Plaintiff Kathleen Egersheim owned a three percent shareholder interest in DAG and was its former Vice President and Assistant Secretary. Plaintiff Christopher Woods owned 22.5% interest and was the former Creative Director. Defendants Luis Anthonio Gaud and Philip DiBartolo owned or controlled most of the remaining stock of the company. According to the plaintiffs, DAG began exploring an opportunity to partner with the media conglomerate Comcast in 2001. The plaintiffs claim they developed characters and show ideas for children’s television programming through 2004.

In 2005, the defendant shareholders allegedly began excluding the plaintiffs from meetings and decisions regarding DAG’s activities, and also allegedly created a new business entity called Remix, LLC without plaintiffs’ knowledge. Remix entered into a formal joint venture with Comcast. The defendants proposed ceasing DAG’s major business operations, according to the plaintiffs, and the defendants voted them out of their officer positions when they objected to this plan in September 2007. DAG essentially stopped operating at that point.

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