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.
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Super Lawyers named Chicago and Elmhurst business litigation and fiduciary duty attorneys Peter Lubin and Patrick Austermuehle a Super Lawyer and Rising Star respectively in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago shareholder oppression lawyers have over thirty-five years of experience litigating complex class action, consumer rights, and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenants not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits in addition to disputes involving breaches of fiduciary duty. In every case, our goal is to resolve disputes as quickly and successfully as possible, helping business clients protect their investments and get back to business as usual. From offices near Wilmette and Elgin, we serve clients throughout Illinois and the Midwest.
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