The Court enforced mandatory buy-sell provisions in a shareholders agreement, noting the importance of such provisions to closely held businesses, and found that adjusted book value had been properly determined. It further found that the price to be paid was not unconscionable, after discussing both procedural and substantive unconscionability. Although the fair market value of
Byers v. Carpenter, 1998 NCBC 1 (N.C. Super. Ct. Jan. 30, 1998)(Tennille)
The Court considered an award of attorneys’ fees to attorneys who had been successful in litigation over a merger. It applied factors set out by the North Carolina State Bar in determining the reasonableness of attorneys fees.
Smith v. NC Motor Speedway, 1997 NCBC 5 (N.C. Super. Ct. Nov. 12, 1997)(Tennille), aff’d, 132 N.C.App. 132, 516 S.E.2d 921, disc. rev. denied, 350 N.C. 310, 534 S.E.2d 596 (1999)
A majority shareholder has no fiduciary duty to minority shareholders to "auction off" the company or otherwise obtain the highest possible value for their interests once the majority shareholder decides to sell its controlling interest or engage in a cash out merger. The duties of a shareholder are distinct from those of a director under
Charlotte Copy Data, Inc. v. Habbal, 1997 NCBC 4 (N.C. Super. Ct. Nov. 11, 1997)(Tennille)
An agreement requiring a shareholder in a closely held corporation to sell his shares back to the corporation upon termination of his employment is valid and enforceable, as a closely held corporation is entitled to determine who will participate in its business. Book value is a typical and accepted means of determining a purchase price.
Beam v. Worldway Corp., 1997 NCBC 3 (N.C. Super. Ct. Oct. 23, 1997)(Tennille)
A shareholder exercising dissent and appraisal rights in a transaction involving a public corporation is not entitled to a trial by jury. A shareholder in a closely held corporation, however, is entitled to a trial by jury.
Reeve and Assocs., Inc. v. UCB, 1997 NCBC 2 (N.C. Super. Ct. Oct. 6, 1997)(Tennille)
A senior lienholder had no fiduciary duty to a junior lienholder. The mere fact that the senior lienholder took action to cause its debt to be paid down did not establish domination and control of the debtor’s business so as to give rise to a fiduciary duty. The senior lienholder’s efforts to collect its debt
Internet Advertising Didn’t Subject Defendants To Personal Jurisdiction In North Carolina
Burgess v. Vitola, 2008 NCBC 4 (N.C. Super. Ct. Feb. 26, 2008)(Diaz)
Plaintiff sued the defendants, thirty out-of-state dentists and lawyers, charging that they had forced advertisements for their services onto his computer. He alleged that this had been accomplished by a “bug, worm, or virus.”
Plaintiff based jurisdiction on N.C.G.S. §1-75.4(4)(a), which allows for the assertion of jurisdiction when “solicitation or services activities were carried on within this State or by or on behalf of the defendant.”
The Court didn’t agree and granted the Motion to Dismiss, holding “it makes absolutely no sense that Moving Defendants, all of whom operate law or dental practices in states far removed from North Carolina, would have any interest in soliciting [plaintiff], or any other North Carolina resident.” The defendants, via affidavits, had denied such interest, although many of them did have "passive" Internet websites.Continue Reading Internet Advertising Didn’t Subject Defendants To Personal Jurisdiction In North Carolina
E-Filing Wins The Race To The Courthouse
Signalife, Inc. v. Rubbermaid, Inc., 2008 NCBC 3 (N.C. Super. Ct. February 8, 2008)(Diaz)
Signalife sued Rubbermaid in Mecklenburg County Superior Court. The lawyers for Signalife camped out on the steps of the Mecklenburg County Courthouse and filed Signalife’s lawsuit literally one minute after the courthouse opened, at 9:01 a.m.
Rubbermaid’s lawyers, who
Sanctions For Derivative Action Plaintiff And His Lawyers
Egelhof v. Szulik, 2008 NCBC 2 (N.C. Super. Ct. Feb. 4, 2008)(Tennille)
It’s hard to imagine a more inadequate plaintiff than Egelhof to undertake the fiduciary responsibility of being a plaintiff in a derivative action against Red Hat, a publicly traded company. Egelhof was only 24 years old, and held only a few hundred dollars of Red Hat’s stock. He had become a plaintiff in response to a solicitation on the internet. As the Court described Egelhof, "[h]e had little investing experience, no experience in litigation, no prior connection with the [his] law firm, no personal knowledge of [the corporation] and its operations, and a minor criminal record."
The Court concluded that this plaintiff "lacked any credentials to act as a fiduciary for a company in multi-million dollar litigation." Noting Egelhof’s paltry stake in Red Hat, the Court held that "[w]hile the size of ownership is not determinative of standing, a potential plaintiff’s lack of a real financial stake in the litigation is a warning sign that he or she may not be willing or able to devote the time necessary to fulfill the fiduciary obligations imposed by law on a shareholder derivative plaintiff."
These factors alone would probably not have warranted sanctions, but Egelhof was completely uninvolved in his case. He relocated, more than once, and never gave his lawyers a forwarding address. He sold his stock during the course of the lawsuit, creating a significant standing issue, but never mentioned this to his lawyers. He had never even met his lawyers until the night before his deposition and had spent a total of five hours on the case by the time he was deposed.
The Court’s sanction to Egelhof was to prohibit him from being a plaintiff in a class action or derivative action in North Carolina for the next five years. The lawyers came in for an equally harsh sanction. Continue Reading Sanctions For Derivative Action Plaintiff And His Lawyers
Valuation Formula In Coffee Company’s Stockholders Agreement Enforced
Classic Coffee Concepts v. Anderson, 2008 NCBC 1 (N.C. Super. Ct. January 31, 2008)(Diaz)
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Defendant, a terminated employee, owned one third of the outstanding stock of Classic Coffee Concepts. The issue in this case was the price to be paid for the stock, which the corporation was obligated to repurchase under a Stockholders Agreement. The Agreement said that the price would be determined by looking to the fair market value of the stock as determined by an independent appraisal of the Employee Stock Ownership Plan. But no ESOP had ever been established.
A variety of conflicting appraisals were presented to the Court. Defendant would have been entitled to a multi-million recovery under two of them. The first, prepared pre-litigation to address an accounting issue involving goodwill, set the company’s "fair value" at $12,500,000. A "fair value" appraisal ignores discounts in value that are typical for closely held corporations, like those for lack of marketability and lack of control. Defendant’s shares would have been worth $4 million if this appraisal applied. A second appraisal factored in the discounts applicable to closely held corporations, and concluded that the corporation had a value of $8,390,000. If this appraisal had controlled, defendant’s shares would have been worth more than $2.7 million.
The company obtained a hypothetical appraisal for purposes of the litigation which valued the company as if the ESOP required by the Agreement was in place. The value placed on defendant’s shares under this approach was markedly lower, only $120,000. Another appraisal assuming the existence of the ESOP valued defendant’s shares at $192,000, and the last of the many appraisals before the Court valued them at zero.
After analyzing this thicket of conflicting appraisals, the Court held that it would Continue Reading Valuation Formula In Coffee Company’s Stockholders Agreement Enforced