Articles Posted in Shareholder Oppression

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Earlier this year, the governor of Delaware signed Senate bill 273 which amended various provisions of the Delaware General Corporation Law (GCL). The changes became effective August 1, 2022. Most notable among the changes was the amendment of Section 102(b)(7) of the GCL to allow corporations to exclude or limit certain officers from personal liability for breaches of their fiduciary duty of care. In order for corporations to take advantage of this change in the law, companies must include a provision in their certificate of incorporation eliminating or limiting its officers from personal liability for breaches of the duty of care.

Under Delaware corporate law, directors and officers of Delaware corporations owe the corporation and its shareholders certain fiduciary duties. One of the two chief fiduciary duties that directors and officers owe to the corporation and shareholders is called the duty of care. The duty of care requires directors and officers to exercise care and act in an informed manner when acting for the corporation and making decisions on its behalf.

Since 1986, with the addition of Section 102(b)(7) to the GCL, corporations have been authorized to eliminate or limit the personal liability of directors for monetary damages for  breaches of the duty of care. However, until passage of the amended Section 102(b)(7) this year, corporations could not do the same for its officers, even though the Delaware Supreme Court repeatedly affirmed that officers owe the same fiduciary duties as directors. Now corporations can insulate its officers as well as directors from personal liability for breaches of the duty of care.

It is important to understand the limits of this newly amended Section 102(b)(7). First, it doesn’t apply to all officers but only to those officers “deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to § 3114(b) of Title 10” which includes the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer along with anyone identified in the corporation’s SEC filing as one of the most highly compensated executive officers, or anyone who has, by agreement with the corporation, consented to be identified as an officer for the purposes of Section 3114(b) of the GCL. Continue reading ›

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As we have written about previously, shareholders in a corporation have two different types of claims they can assert, direct claims and derivative claims. Direct claims are filed by the shareholder for the benefit of the shareholder. Derivative claims are filed by a shareholder but for the benefit of the corporation itself. An Illinois appellate court recently considered the issue of whether a successful shareholder in a derivative action can obtain an award of attorney fees directly from the defendants personally, as opposed to from the common fund created by the judgment.

The parties were investors in a business known as 15th Street Blue Island, LLC (15BI). The plaintiffs made financial contributions totaling approximately $3.7 million to become members of 15BI. The plaintiffs received 47% interest in 15BI as “Class A Members.” An entity owned by defendants Jerry Karlik and Keith Giles, Kargil Blue Island, LLC (KBI), received a 53% interest in the company as a “Class B Member,” and was named as the manager of 15BI.

15BI was formed in 2006 for the purpose of developing condominiums on a vacant parking lot located in Chicago. After the economic crash of the global recession that began shortly thereafter, the original business plan was scrapped for a new one that involved developing rental residences, which was considered a more feasible plan under the economic conditions.

In 2006, another entity jointly owned by Jerry Karlik and Giles, Kargil Development Partners (KDP), entered into a contract to purchase a vacant parking lot (15BI Property) located at 15th Street and Blue Island Avenue in Chicago for $3.72 million. Pursuant to that agreement, KDP deposited an initial earnest money payment of $100,000 from 15BI accounts into an escrow account. In June 2007, Karlik signed a purchase agreement on behalf of 15BI to acquire property known as the Testa Parcel, for $6,250,000. This purchase agreement also required a $100,000 earnest money deposit from 15BI. In an unusual move for a buyer, Karlik later negotiated a $250,000 increase in the purchase price and provided for payment of a commission to yet another company that he and Giles jointly owned. 15BI later abandoned its efforts to buy the Testa Parcel, resulting in 15BI losing 70% of its earnest money deposit.

In 2008, Karlik and Giles sold a portion of KBI, which managed and owned a percentage of 15BI, to new investors, Gangas and Housakos, for approximately $750,000. Karlik testified that the law firm of Branson & Kahn invoiced 15BI and 15BI paid for its work on that sale.

Defendants stipulated that work “should not have been billed through 15B1.” Continue reading ›

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After discussions about going public, Promega Corp., a privately-held biotech company based in Wisconsin, decided instead to remain a privately held company back in 2014 and tried to buy back the stock owned by its minority shareholders and regain a controlling interest in the company. Those minority shareholders claimed the price at which Promega wanted to buy back their shares was deeply discounted, and when they tried to negotiate for a higher price point, Promega allegedly refused, which ultimately led to the massive lawsuit between the company and its minority shareholders that dragged on for about five years.

The team of attorneys arguing the case for the minority shareholders was headed by James Southwick and Alex Kaplan, two partners of the Susman Godfrey law firm in Houston, Texas. They recently announced that the lawsuit settled for $300 million, a victory to which they attribute their months of research and preparation leading up to the trial, as well as their decision to stick to one main allegation: shareholder oppression.

Other attorneys might have argued that the defendants had breached their fiduciary duty to their shareholders, or they would have alternated between making the case for shareholder oppression, arguing breach of fiduciary duty, and making the case for other allegations throughout the course of the trial. Instead, Southwick and Kaplan decided their best bet was to argue that Promega had tried to oppress its shareholders and to continue to make that case throughout the month-long bench trial. It was an unusual strategy, but one that ultimately paid off. Continue reading ›

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In a recent decision, the Delaware Court of Chancery granted a motion to dismiss filed by the defendants in response to a shareholder’s lawsuit requesting to compel the company to pay a dividend and also seeking to find that the board of directors breached their fiduciary duty of care.

The plaintiff in the case of Buckley Family Trust v. Charles Patrick McCleary, was the Buckley Family Trust. The trust was one of seven stockholders of McCleary, Inc., a privately held snack food company headquartered in South Beloit, Illinois near Rockford, and only one of two stockholders that were not family members of the Company’s founder, Eugene “Mac” McCleary. Neither of the two non-family member shareholders served on the Company’s board of directors.

Unhappy with the direction of the Company and the decisions being made by the Company’s board of directors, the Plaintiff filed a two-count complaint against the Company and the five family members who served on the Company’s board of directors. In its first count, the Trust alleged that the board of directors engaged in minority shareholder oppression by failing to declare a dividend for seven years. In its complaint, the Trust argued that the Company had the funds to pay a dividend but refused to in an effort to squeeze-out the Trust and force it to sell its shares to the defendants at a steep discount.

In its second count, the Trust sought to bring a shareholder derivative action against the board of directors for allegedly breaching their fiduciary duties when it approved certain actions and failed to act on other occasions. In particular, the Trust sought to challenge the Company’s decisions to transition away from the grocer Aldi, a key customer; to authorize building a new warehouse; and to improve the Company’s production facilities to do business with a competitor. The Trust also challenged various non-actions by the board members including their failure to authorize improvements to the Company’s existing food production facilities or to manage the Company’s tax obligations and to observe corporate formalities.

In deciding the motion to dismiss, it reviewed the requirements for adequately pleading each of the Trust’s claims. With regard to the shareholder oppression claim, the Court found that the Trust failed to demonstrate that the board member’s actions were part of a squeeze-out scheme. For one, the Court pointed to the fact that the decision affected the Trust and the members of the board equally as they were all holders of common stock and would share equally on a pro rata basis any dividend paid by the Company. The Court also pointed to the fact that the “steep discount” referenced by the Trust in the Complaint was a contractually agreed to “discount of thirty (30%) percent applicable to all non-voting shares for lack of marketability and control” found in the Common Stock Purchase and Restriction Agreement to which the shareholders were a party. Consequently, the Court dismissed the claim concluding that the lack of dividend was not an abuse of discretion and that there was no evidence of self-interest.

In turning to the second claim, the Court noted that the Trust did not make a pre-suit demand on the board members before filing the derivative action on behalf of the Company. Consequently, the Court was required to analyze whether failing to make such a demand was excused under the demand futility exception to the demand requirement, which excuses the failure to make such a demand if it would have been futile to do so. The Trust argued that a demand would have been futile because the board members faced significant likelihood of personal liability under any such suit brought by the Company, a recognized exception to the demand requirement.

The Court reviewed various board meeting minutes and other documents presented by the parties to determine if the board members sought to properly educate themselves before making decisions or whether they acted with reckless indifference or without the bounds of reason, which would open them up to a substantial risk of personal liability. The Court determined that this evidence did not establish that the board acted recklessly or outside the ordinary bounds of reason. As such, the Court concluded that the Trust failed to demonstrate that making a demand on the board before filing the lawsuit would have been futile, and dismissed the Trust’s derivative claim.

The Court’s full opinion can be found here. Continue reading ›

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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 ›

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Leprino Foods Co. is the largest manufacturer of mozzarella cheese in the world and is solely responsible for making all the mozzarella that goes on top of Domino’s, Papa John’s, and Pizza Hut’s pizzas. It’s worth billions of dollars, but it’s also a family business.

It was founded in Denver, Colorado in the 1950s by Michael and Susie Leprino. The couple had five children, including Michael Jr. and James. James went into the family business as soon as he had graduated from high school, and while Michael Jr. was involved in the business, he also had his own career in banking and real estate.

James and his daughters, Terry Leprino and Gina Vecchiarelli, together own 75% of the company’s stock.

Michael Jr. died in August of 2018 and his daughters, Nancy, Mary, and Laura Leprino, together own the remaining 25% of the stock in the company. In July, Nancy and Mary sued their uncle and cousins in Denver District Court for allegedly managing the company in a way that provided the greatest financial reward for them, while ignoring the financial interests of the minority shareholders.

The lawsuit alleges James and his daughters tend to align their votes so the outcome always provides them with the greatest financial benefits, but allegedly leaves Nancy and Mary out in the cold. Nancy and Mary also allege they have been unable to obtain financial records to which they are legally entitled as shareholders of the company. Continue reading ›

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LVMH Moët Hennessy-Louis Vuitton SE was scheduled to acquire Tiffany & Co. no later than August 24th, 2020, but the merger came to a halt when LVMH failed to even apply for antitrust clearance.

Antitrust laws exist to avoid monopolies. If two major companies merge to form one company, there’s a fear that the existence of a huge corporation, which now owns the market shares of both companies involved, might dominate the industry, thereby making it difficult, or even impossible for any other company to compete with them. Since healthy competition promotes innovation and helps drive down prices, it’s necessary for a healthy economy.

As a result, when two major corporations merge to form one company, they have to file for antitrust clearance with the authorities in the markets in which they operate, meaning the authorities look at the market share of the two companies and agree that the merger would not create a monopoly. But according to a recent lawsuit filed by Tiffany, LVMH has not only failed to acquire the antitrust clearance by the agreed-upon date but has failed to even file for antitrust clearance.

The terms of the merger allowed for an extension to November 24th, 2020 if antitrust clearance had not been obtained by August 24th, but the fact that LVMH still has yet to even file for antitrust clearance in two of the three relevant markets raises doubts about whether they’re taking this merger seriously. Tiffany has responded by filing a lawsuit in the Court of Chancery of the State of Delaware.

The lawsuit is asking the court to provide an order that LVMH must abide by the terms of the acquisition, which had been agreed upon by both companies.

Even before the lawsuit was filed the acquisition had been having problems. LVMH had claimed that Tiffany had suffered a Material Adverse Effect (MAE) as a result of the COVID-19 pandemic, and had tried to buy shares of Tiffany at a lower price per share than the price they had agreed upon in the terms of the contract. Continue reading ›

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We often hear people talk about private companies going public, but it’s not as often that it goes the other way around – from a public company to a private one. There’s a lot of paperwork involved either way, but unless you have a plan for repaying your investors, going from public to private also means you are denying your shareholders (especially minority shareholders) the stake in the company for which they have already paid.

The National Company Law Appellate Tribunal (NCLAT) said as much in a recent ruling in which it decided against allowing Tata Sons, the holding company of Tata Group, to convert itself from a public company to a private one. Although the Registrar of Companies had approved the transition, the NCLAT said that approval went against Section 14 of the Companies Act of 2013. The NCLAT also pointed out that the move, made by the directors and majority shareholders of the software conglomerate, would be oppressive towards the company’s minority shareholders.

The NCLAT also reinstated Cyrus Mistry as the company’s executive chairman. He had previously been fired back in October of 2016 due to a supposed lack of performance, but the NCLAT ruled that his firing had been illegal.

Mistry’s family owns an 18.4% stake in Tata Sons, making them a minority shareholder of the conglomerate, and Mistry’s legal troubles with Tata Sons began in 2016 with accusations of mismanagement and oppressing minority shareholders – charges that eventually led to Mistry getting ousted as executive chairman. Continue reading ›

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Investing is supposed to be a long-term strategy to build wealth, but expecting shareholders to wait more than 60 years before they can get a fair return on their investment is far beyond what any investor would consider reasonable.

That was allegedly the case for the minority shareholders of Promega Corp., the biotechnology company based in Fitchburg, Wisconsin. According to a lawsuit filed by shareholders back in 2016, Bill Linton, Promega’s founder and CEO, allegedly used manipulative and bullying tactics to become a majority shareholder of the company. His actions allegedly left the minority shareholders with no hope of getting a decent return on their investments before 2078 at the earliest.

Circuit Judge Valerie Bailey-Rihn, who has been hearing the case, has said that she was leaning towards the plaintiffs and agreeing that they had been oppressed by Linton’s actions. Now the only two things left to determine are 1) how to punish Promega and provide restitution for the minority shareholders who were allegedly oppressed by Linton’s actions; and 2) how to determine the price of the stocks for which the minority shareholders are allegedly owed compensation. Continue reading ›

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Back in January of 2012, the City of Westland Police and Fire Retirement System filed a class-action lawsuit against MetLife Inc. They alleged that the insurance company used data from the Social Security Administration’s “Death Master File” (DMF) to determine when to stop paying annuities to deceased policyholders, but allegedly did not use the same database to determine when to pay out life insurance policies or the Retained Asset Account, although it could have easily done so.

The insurance company also allegedly failed to include data from the DMF regarding its pending payouts in its quarterly reports to its shareholders, thereby underreporting to its investors the amount of money it would have to pay out to policyholders and overestimating its quarterly profits. This withholding of information made MetLife’s investors think the company had less money in outgoing payouts than it actually had, which allegedly resulted in MetLife maintaining stock prices that were artificially high – as soon as the information was made public, the insurance company’s stock prices allegedly dropped and the plaintiffs of the lawsuit allege they suffered financial damages.

Despite the fact that regulators had looked into the insurance company’s alleged misuse (or at least misreporting) of the data contained in the DMF, MetLife also allegedly failed to disclose to its shareholders the fact that regulators were investigating the insurance company’s misuse of the DMF. Continue reading ›

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