You might remember the derivative action filed against the board of directors of Duke Energy Corporation stemming from its 2012 merger with Progress Energy.  It received a lot of publicity.  The merger was concluded long ago, but there’s finally been a ruling from the Business Court dismissing the derivative action.  It’s Krieger v. Johnson, 2014 NCBC 13.

The lawsuit challenged the severance payment due to Progress’ former CEO, Bill Johnson, following the merger.  Johnson was set to be the CEO of the combined entity following the merger, but he…

Continue Reading Business Court Dismisses Derivative Action Against Duke Energy

If you are a derivative action plaintiff, and you make a demand on an LLC to take action which is then considered and rejected, may you still pursue your claims?  Judge Murphy answered that question, and others relating to derivative actions under Delaware law in this week’s opinion in  Scott v. Lackey, 2012 NCBC 58.

By the way, the reason that I am writing today about Delaware law, instead of North Carolina law, is that the entities involved in the Scott case were formed in Delaware, so Judge Murphy…

Continue Reading Delaware Law On Derivative Actions And Fiduciary Duties

It’s hard to call a client and have to tell her that the case you filed for her was dismissed. But it must be even harder to tell a client that she now has to pay the defendant for his legal fees in winning the dismissal. And think how much worse that would be if the defendant were her ex-husband.  And it’s even worse if it’s Thanksgiving!

That hasn’t happened to me (at least not yet), and I hope it hasn’t happened to you, but it is the phone call that the lawyers representing Jane Sutton in Sutton v. Sutton, 2011 NCBC 43 probably had to make after Judge Jolly’s ruling in her case on the Tuesday before Thanksgiving.

Jane Sutton became a shareholder in her husband’s business, Sutton’s Tree Service, Inc. during their marriage. She filed a derivative action against her ex-husband on behalf of the corporation for conversion, breach of fiduciary duty and the “improper filing of income tax returns.” Op. ¶1.

There were two fatal flaws in this turkey of a lawsuit which led to its dismissal. The first was that there had been no demand on the corporation to take the action against Mr. Sutton. Section 55-7-42 makes a demand a precondition to the filing of a derivative action. It says:

No shareholder may commence a derivative proceeding until:

(1)        A written demand has been made upon the corporation to take suitable action; and

2)        90 days have expired from the date the demand was made unless, prior to the expiration of the 90 days, the shareholder was notified that the corporation rejected the demand, or unless irreparable injury to the corporation would result by waiting for the expiration of the 90‑day period.

There’s also a statutory requirement that the person filing the derivative action must have been “a shareholder of the corporation at the time of the act or omission complained of….” N.C. Gen Stat. §55-7-41(1). He or she must also be able to “[f]airly and adequately represent[] the interests of the corporation in enforcing the right of the corporation.” Id. At 55-7-41(2).

The second fatal flaw was that in addition to not making a demand, Mrs. Sutton hadn’t been a shareholder of the corporation since her divorce from Mr. Sutton, which was undoubtedly before the alleged misconduct had taken place. There had been a Consent Judgment by which Mrs. Sutton had “surrendered to Defendant any and all interest she had in the Corporation.” Op. ¶11.

Judge Jolly said that her lack of ownership was established as a matter of res judicata and collateral estoppel, since the “Consent Judgment constitutes a valid, final judgment determining the respective rights of Plaintiff and Defendant regarding ownership of the Corporation.” She therefore had no standing to maintain the suit, and Judge Jolly ordered that it be dismissed,

So what about the fees, you are wondering. The statute on fees in derivative actions says that “On termination of the derivative proceeding, the court may:. . .  Order the plaintiff to pay any defendant’s reasonable expenses, including attorneys’ fees, incurred in defending the proceeding if it finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose.” N.C. Gen. Stat. 55-7-46(2).

Continue Reading Expensive Lesson From The Business Court For Derivative Action Plaintiff Whose Case Was Dismissed

This week, Judge Jolly permitted a 50% shareholder to pursue derivative and individual claims against her co-shareholder. He found that the plaintiff had satisfied the demand requirement of G.S. sec. 55-7-42, and that she fit an exception to the general rule that a shareholder cannot pursue an individual cause of action for the diminution or destruction of the value of her stock.

The decision came in LeCann v. Cobham, a long running bitter dispute between dentists who operated a number of entities providing dental care.  LeCann said that Cobham…

Continue Reading Dentist’s Emails Satisfied Demand Requirement For Derivative Action

In one of his final actions as a Business Court Judge, Judge Tennille threw down the gauntlet for lawyers representing class action plaintiffs who are seeking approval of settlements.  Last week in Ward v. Lance, Inc., Judge Tennille condemned what he called "stinky fees," which he said "just smell bad and have no economic justification."

Stinky fees, from Judge Tennille’s observation, are paid because "[w]e have come to the point in this country that whenever a merger is announced, some lawyer with a client holding a small number of…

Continue Reading Business Court Condemns “Stinky Fees” Paid To Lawyers Suing Over Merger Transactions

If you are bringing or defending a derivative action in North Carolina, you may have to look to the law of another state to determine whether a pre-filing demand on the board of directors to pursue the claim is a prerequisite and whether there are any exceptions to the need for a demand.  The law depends on the corporation’s state of incorporation.  In a case decided by the North Carolina Business Court on Friday, Smith v. Raymond, 2010 NCBC 18, the application of Delaware law resulted in the…

Continue Reading Why North Carolina Business Litigators Need To Know About Delaware Law