I can think of only three reasons why you might want to know about the Business Court’s decision in Sykes v. Health Network Solutions, 2013 NCBC 53:
If you think like me, you were thinking that the $1,000 fee for designating a case to the Business Court would be recoverable as an item of costs if you were successful in the case.
But I’m wrong. Last Thursday, in an Order in Prospect Marketing Group, Inc. v. Chasnan, Inc., Judge Jolly ruled
You’ve no doubt heard about the University of Maryland’s withdrawal from the Atlantic Coast Conference and the University’s unwillingness to pay the $50 million withdrawal fee required by the Constitution of the ACC.
This week, in Atlantic Coast Conference v. University of Maryland, the NCCOA rejected the U of M’s contention that it was
The best lines in Green v. Freeman, decided last week by the NC Supreme Court, are that "[t]he doctrine of piercing the corporate veil is not a theory of liability. Rather, it provides an avenue to pursue legal claims against corporate officers or directors who would otherwise be shielded by the corporate form."
You may remember the case of Out of the Box Developers, LLC v. Logicbit Corp. It has spawned a couple of interesting discovery decisions. One was on subpoenas to third parties, another involved nearly $40,000 in sanctions for attorneys’ fees against two of the Defendants for failing to comply with a discovery order
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If you are a partner in a limited liability partnership, or if you have clients who are, you’ll want to read Judge Gale’s opinion in Chesson v. Rives, 2013 NCBC 49, decided last week. It provides guidance on the rights of partners withdrawing from LLPs.
Chesson, one of the Plaintiffs, was a partner in
I probably enjoy reading a ruling on a motion to compel a whole lot more than the judge does in writing it. So of course I enjoyed reading Judge Murphy’s Order on a Motion to Compel yesterday in County of Catawba v. Frye Regional Medical Center. It’s actually pretty interesting. It’s got discovery issues
Last week’s Order in Gusinsky v. Flanders Corp., 2013 NCBC 46, should be required reading for lawyers thinking of suing the directors of a corporation in North Carolina over a merger transaction. It provides guidance on the duties of directors in those transactions, whether the claims are derivative or direct, and lays down some heightened pleading requirements for some of those types of claims.
You probably wouldn’t be surprised to have never heard of Flanders Corporation. Flanders, based in Washington, NC, says it is the largest United States manufacturer of air filters. It was publicly traded until its shareholders approved a sale of the company via a merger in May 2012.
That approval by the shareholders came nearly a year and a half ago, but it was only last week that the NC Business Court dismissed a shareholder class action challenging the merger. In its Order, the Court dismissed the claims by the Plaintiff (a trust) for breach of fiduciary duty and for aiding and abetting breach of fiduciary duty.
One claim of breach of fiduciary duty was an alleged failure to "maximize shareholder value" in the sale of the company, which Plaintiff claimed was a duty owed by the directors of Flanders to all shareholders. The other was an alleged failure to disclose information material to the deal.
There Is Rarely A Fiduciary Duty Owed Directly From A Corporation’s Directors To Its Shareholders
In dismissing the claim, the Business Court underscored the principle that directors virtually never owe a fiduciary duty directly to shareholders. The duty is owed to the corporation, not shareholders. Those claims therefore must be made derivatively, unless the circumstances of the "Barger rule" are met. (I’ve written about the Barger rule before).
It seems so obvious that this type of claim is derivative that you might be wondering how this class action plaintiff even argued its position. All it made was a couple of pretty anemic arguments which Judge Jolly shot down.
One was that the General Statutes contemplate fiduciary duties owed directly to shareholders. Plaintiff said that G.S. Section 55-8-30, which delineates the duties of directors, contains only one reference to a duty to the corporation and that the other duties prescribed therefore must be owed directly to shareholders.
That’s so wrong. The North Carolina Court of Appeals held last year that:
The drafters [of the Business Corporation Act] recognized that directors have a duty to act for the benefit of all shareholders of the corporation, but they intended to avoid stating a duty owed directly by the directors to the shareholders that might be construed to give shareholders a direct right of action on claims that should be asserted derivatively.
Estate of Browne v. Thompson. __ N.C. App. __, 727 S.E.2d 573, 576 (2012)(quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 14.01[2] (7th ed.) (citing Official Commentary, N.C. Gen. Stat. § 55-8-30 (1989)).
The Plaintiff also failed in its argument that it met the requirements of the "Barger rule." Plaintiff struck out on that score because the Flanders directors owed no duty to the class Plaintiff that was personal to the Plaintiff. The cases that the Plaintiff relied on were cases involving closely held corporations controlled by a majority shareholder. Judge Jolly found them not to be apposite.
Judge Jolly also ruled that a claim alleging inadequate consideration in a merger transaction was a harm to the corporation itsself, not to shareholders individually. He said that:
[t]his is so because a claim for inadequate consideration is, functionally, a claim for the diminution of the value of shares held by all Flanders shareholdrs. Without more, the ‘lost value’ of all shares of Flanders’ stock does not describe an injury peculiar and personal to Plaintiffs.
Op. Par. 32.
You can probably guess the rest of this story. If you can’t, remember that derivative claims require the prospective Plaintiff to make a demand on the corporation to pursue the claim before being allowed to file a complaint. This Plaintiff made no demand. As the Court observed, "A plaintiff’s failure to fulfill the statuory requirements for bringing a shareholder derivative action [is an] . . insurmountable bar [to recovery]." (quoting Allen v. Ferrera, 141 N.C. App. 284, 287, 546 S.E.2d 761, 764 (2000)).
So the first claim for breach of fiduciary duty for "failure to maxinize shareholder value" was dismissed.
This week’s decision from the Business Court in Maurer v. Maurer, 2013 NCBC 44 is a continuation of the litigation between Jill Maurer and the company owned by her and her husband, which was the subject of three Business Court opinions in 2005 and 2006, in 2005 NCBC 1, 2005 NCBC 4, and 2006 NCBC
How much of an ownership interest does a parent have to have in a subsidiary for the attorney-client privilege to extend to communications between the susidiary and the lawyer for the parent company?
Judge Gale pondered that question in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42, and wrote on a clean slate