243 N.C. App. 33
N.C. Ct. App.2015Background
- Four men (Harris, Williams, Brintle, Dixon) formed Testar, Inc.; each owned 1,000 shares and signed a Stockholders’ Agreement prescribing that a shareholder-employee may be terminated for good cause (Section 4(i)) and, if terminated, must sell shares to Testar at $1.00 per share (Sections 4(c), 4(f), 4(g), 15, 20).
- Testar provides HAZMAT-related transport/testing and is subject to DOT requirements for driving records, criminal background checks, and HAZMAT training.
- Harris ran background and driving-record checks for employees (including his son Barrett), but concealed Harris’s and Barrett’s prior criminal charges and a DWI; he also affirmatively told a co-director that no employee had ever been arrested.
- Co-directors discovered the concealed records in May 2012, voted to remove Harris, and changed office locks; Harris was later terminated in October 2012. Defendants deposited $1,000 with the court for Harris’s 1,000 shares.
- Harris sued alleging wrongful termination, oppression, and other claims; defendants counterclaimed for fraud and breach of fiduciary duty. The trial court granted defendants’ summary judgment on all Harris’s claims, awarded defendants $1 nominal damages and returned the $1,000 for the shares; summary judgment resolved the counterclaims in part. Harris appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Harris was terminated and, if so, whether termination was for cause | Harris disputed that he was terminated and contended termination was wrongful | Defendants argued Harris was terminated for concealing criminal/driving records, breaching obligations critical to DOT/HAZMAT compliance | Court assumed for Harris’s benefit he was terminated but found no factual dispute that termination was for cause (concealment endangered Testar’s compliance) |
| Whether Harris breached fiduciary duty as a director by concealing records | Harris argued he did not breach fiduciary duty or that facts create a triable issue | Defendants argued directors owe duty of loyalty/disclosure and Harris intentionally concealed material facts and misrepresented no arrests | Court held Harris breached his fiduciary duty to Testar by failing to disclose material facts and by affirmative misrepresentation |
| Whether Harris’s “reasonable expectations” as a minority shareholder were frustrated and entitled him to equitable relief | Harris claimed the Stockholders’ Agreement didn’t capture all reasonable expectations and sought protection under Meiselman/OPPRESSION statutes | Defendants argued the Stockholders’ Agreement was the entire understanding and expressly set $1/share remedy on termination for cause | Court held the agreement governed; Harris had no additional reasonable expectations and was compensated $1,000 for 1,000 shares per the agreement |
Key Cases Cited
- Vail v. Vail, 233 N.C. 109 (N.C. 1951) (fiduciary duty includes duty to disclose material facts)
- Sidden v. Mailman, 150 N.C. App. 373 (N.C. Ct. App. 2002) (duty to disclose where fiduciary relationship exists)
- Meiselman v. Meiselman, 309 N.C. 279 (N.C. 1983) (elements for relief based on a complaining shareholder's reasonable expectations)
- Royals v. Piedmont Electric Repair Co., 137 N.C. App. 700 (N.C. Ct. App. 2000) (reasonable expectations must be known or assumed by other participants)
- Erthal v. May, 223 N.C. App. 373 (N.C. Ct. App. 2012) (summary judgment standard and two-part analysis)