Christopher G. Rein v. ESS Group, Inc.
184 A.3d 695
R.I.2018Background
- Rein was a minority shareholder and senior executive at ESS (Delaware corporation) and owned 5,000 shares; Natale/the Natale trust were majority holders.
- Rein alleged Natale excluded him from bonus information, refused access to corporate books and records, and produced minutes purporting to show a December 11, 2014 shareholder meeting that Rein says was not held under the BCA/bylaws.
- Rein requested inspection of ESS books and records, was refused, then was terminated on May 27, 2015; Rein claims termination was retaliation for whistleblowing about unlawful corporate conduct.
- Rein filed a Delaware derivative action that was dismissed, then sued in Rhode Island Superior Court alleging: (1) violation of the Rhode Island Whistleblowers’ Protection Act (WPA); and (2) violation of Rhode Island’s Business Corporation Act (BCA) by denying inspection and misconduct at the shareholder meeting.
- Defendants moved to dismiss under Rule 12(b)(6), arguing (a) ESS is a Delaware (foreign) corporation so Rhode Island cannot regulate its internal affairs (BCA claim fails), and (b) Rein failed to identify a cognizable law violated for his WPA claim.
- The Superior Court dismissed both counts; the Rhode Island Supreme Court affirmed dismissal of the BCA claim but reversed dismissal of the WPA claim and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rhode Island BCA claims apply to ESS, a Delaware corporation | Rein: § 7-1.2-1402 subjects foreign corporations doing business in RI to same duties as domestic corps; §§ 701 and 1502 therefore apply | Defs: Internal affairs doctrine bars RI regulation of a foreign corporation’s internal affairs; BCA definitions exclude foreign corporations | Held: Affirmed dismissal — alleged violations (shareholder meeting procedures and books/records inspection) are internal affairs Rhode Island may not regulate; BCA provisions at issue apply to domestic corporations only |
| Whether Rein sufficiently pleaded a WPA retaliation claim | Rein: He reasonably believed defendants violated the BCA (and/or committed common-law fraud in meeting minutes); he complained and was terminated for whistleblowing | Defs: Rein failed to identify a specific law violated; Delaware law governs ESS internal affairs, so no reasonable belief of RI-law violation | Held: Reversed dismissal — complaint adequately alleges Rein reasonably believed a RI law was violated, complained, and was terminated; factfinder may determine reasonableness of belief |
| Whether a reasonable belief of a law’s violation is required under the WPA | Rein: WPA requires only that employee knows or reasonably believes a violation has occurred or is about to occur | Defs: Argue Rein knew Delaware law governed, undermining any reasonable belief RI law was violated | Held: Court accepts statutory "reasonable belief" standard — Rein’s factual allegations could support a reasonable belief, so claim survives dismissal |
| Whether prior Delaware suit forecloses Rein’s reasonable-belief claim | Defs: Rein’s Delaware filing shows he knew Delaware law governed and thus lacked reasonable belief in RI-law violation | Rein: Filing in Delaware post-termination does not negate his contemporaneous belief; reasonableness is a factual issue | Held: Delaware filing does not conclusively defeat the WPA claim at pleading stage; remand for factfinder |
Key Cases Cited
- VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005) (describes the internal affairs doctrine and scope of matters governed by state of incorporation)
- Sagarra Inversiones, S.L. v. Cementos Portland Valderrivas, S.A., 34 A.3d 1074 (Del. 2011) (defines “internal affairs” as matters among corporation, officers, directors, and shareholders)
- Goddard v. APG Security-RI, LLC, 134 A.3d 173 (R.I. 2016) (standard of review for Rule 12(b)(6) motions in Rhode Island)
- Ho-Rath v. Rhode Island Hospital, 115 A.3d 938 (R.I. 2015) (pleading standards and review principles cited for dismissal analysis)
- CTS Corporation v. Dynamics Corporation of America, 481 U.S. 69 (1987) (recognizes the internal affairs doctrine at the federal level)