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

Classic Coffee Concepts v. Anderson, 2008 NCBC 1 (N.C. Super. Ct. January 31, 2008)(Diaz)

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

North Carolina law applied to the procedure for approval of a settlement of a derivative action involving a Delaware corporation.

The Court found that it was required to "balance (1) any legitimate corporate claims as brought forward in the derivative shareholder suit against (2) the corporation’s best interests . . . . Factors to be considered in this . . . process include: costs to the corporation of litigating the suit (including attorneys’ fees, out-of-pocket expenses related to the litigation, time spent by corporate personnel preparing for and participating in litigation, and indemnification) and the benefits to the corporation in continuing the suit."

The Court found that the settlement was reasonable after considering the relevant circumstances, and that notice to the shareholders of the defendant, a publicly traded company, was not required.

Full Opinion

Plaintiffs sold their stock in Citizens Savings Bank, and the stock increased in value significantly after Citizens merged with BB&T. Plaintiffs claimed that the various buyers of the stock had been unjustly enriched. The court granted summary judgment, because the buyer had no knowledge of the merger transaction and because Plaintiffs had already recovered a significant settlement from a bank officer who misled them as to the status of merger negotiations.

Full Opinion

This case involved the Business Court’s review of the disciplinary procedures of a voluntary membership organization (the Asheboro-Randolph Realtors Association). The Court found that some procedural due process was necessary before a member could be expelled (relying on precedent of the North Carolina Court of Appeals), and determined that plaintiff had been given fundamental due process, that the decision of the Association was substantively rational, and that plaintiff had no evidence that the members of the Association had engaged in a conspiracy.

Full Opinion 

 

The Business Court was formed in 1995.  Judge Ben F. Tennille was the first Judge of the Court, appointed by the Chief Justice of the North Carolina Supreme Court in 1996.  That appointment was pursuant to Rule 2.2 of the North Carolina General Rules of Practice, which provides that the Chief Justice may "designate one or more superior court judges as special judges to hear and decide complex business cases. . . ."  

Rule 2.2 contains commentary on the reasons behind the formation of the Business Court, which was a recommendation of the North Carolina Commission on Business Laws and the Economy.  The Commision noted the lead of Delaware’s Chancery Court in the area of specialized courts hearing matters involving corporate law:

many national corporations incorporate in the state of Delaware because of that state’s Chancery Court which provides a high level of judicial expertise on corporate law issues. It also observed the desirability of a state having a substantial body of corporate law that provides predictability for business decision making. Also, it is essential that corporations litigating complex business issues receive timely and well reasoned written decisions from an expert judge.

Over the last 12 years, the Business Court has issued nearly 150 "published" opinions (those given an official "NCBC" citation) and numerous unpublished decisions on significant legal issues affecting consumers, shareholders, and businesses operating in North Carolina.

If you are interested in the history of the Court, this article published in the Journal of the North Carolina Banking Institute is excellent.  And if you are delving into that subject, it is worthwhile to read the Report issued by the North Carolina Chief Justice’s Commission on the Future of the North Carolina Business Court.  The Commission recommended an expansion of the Court, which led to the addition of Judge Albert Diaz and Judge John Jolly to the Court.  An article about the recent expansion of the Court written by Ben Norman, a Brooks Pierce lawyer who clerked for Judge Tennille, is here.

Judge Tennille reported to the North Carolina Legislature on the first several years of the Court, from 1996-2000, in a detailed report.  Another report, for 2000-2001 is here.  The most recent report, for 2006-2008 is here. 

Continue Reading History Of The North Carolina Business Court

A case cannot be filed directly in the Business Court. It must be designated to the Court either by the Plaintiff, at the time of the filing of the Complaint, or by the Defendant, within 30 days of the receipt of the Complaint. Such a motion will be denied if it is untimely, as happened in this case.  The procedure is similar to removal to federal court based on diversity jurisdiction, and is set out in Section 7A-45.4 of the North Carolina General Statutes.

That statutue, as recently amended, describes seven categories of cases that qualify to be designated as “mandatory complex business cases.”  They are:

(1) The law governing corporations, except charitable and religious organizations qualified under G.S. 55A-1-40(4) on the grounds of religious purpose, partnerships, limited liability companies, and limited liability partnerships, including issues concerning governance, involuntary dissolution of a corporation, mergers and acquisitions, breach of duty of directors, election or removal of directors, enforcement or interpretation of shareholder agreements, and derivative actions.

(2) Securities law, including proxy disputes and tender offer disputes.

(3) Antitrust law, except claims based solely on unfair competition under G.S. 75-1.1.

(4) State trademark or unfair competition law, except claims based solely on unfair competition under G.S. 75-1.1.

(5) Intellectual property law, including software licensing disputes.

(6) The Internet, electronic commerce, and biotechnology.

(7) Tax law, when the dispute has been the subject of a contested tax case for which judicial review is requested under G.S. 105-241.16 or the dispute is a civil action under G.S. 105-241.17.

 

Continue Reading Jurisdiction Of The Business Court

Judge Ben F. Tennille, the Chief Judge of the Court, sits in Greensboro, North Carolina, in chambers located inside the Elon University Law School.  A bio and a profile of Judge Tennille are here.  This is an article written by Judge Tennille about the use of mediation in the Business Court. 

Judge Albert Diaz sits in Charlotte, North Carolina, where his chambers are in the Mecklenburg County Courthouse.  One bio for Judge Diaz is here, and here is another one. Here is an article about the new Business Court courtroom in the Mecklenburg County Courthouse.

The third Judge of the Court is Judge John Jolly, who sits in Raleigh, North Carolina.  Judge Jolly’s bio is here.