This appeal is part of an on-going difference between Joyce D. Parker and William B. Dunaway over the remains of their father’s once unique and highly successful pharmaceutical business, Dunaway Drug Stores, Inc. (“the corporation”). The litigation began when Joyce D. Parker, as trustee of trusts for the benefit of her children and as guardian of William Sidney Parker, A. Sidney Parker, Joyce L. Parker and Day M. Parker, individually and in their capacities as shareholders of the corporation, (plaintiffs) asserted alternative direct or derivative shareholder claims against William B. Dunaway (dеfendant), alleging defendant breached fiduciary duties as chief executive officer of the corporation by furthering his own interests (at corporate expense) while structuring, negotiating and executing sale of virtually all assets of the corporation to Jack Eckerd Corporation (“Eckerd Drugs”). Specifically,, plaintiffs allege that defendant improperly allocated $300,000 plus a company car to himself in exchange for his promise not to compete with Eckerd Drugs for three years and that defendant improperly amended two corporаte leases (under which he was landlord) prior to negotiating the asset sale, thereby decreasing the perceived value of the corporation’s leasehold estates. Plaintiffs later amended their claims under the pretrial order, alleging they “inspected the books of the Corporation [after execution of the asset sale to Eckerd Drugs] and discovered that [defendant] had been involved in self-dealing and diverted other Corporate funds and opportunities to his own benefit.”
Defendant denied the material allegations of the complaint and рertinently outlined his defense (in the pretrial order) as follows: “[I] neither improperly gained from the inclusion of these terms nor breached any duty to the Corporation or its shareholders by negotiating these terms. The terms of the sale, including the terms about which the Plaintiffs now complain, were fair to the Corporation and to the Plaintiffs. Furthermore, the terms of the sale, including the terms at issue in this lawsuit, were unanimously approved by the board of directors of the Corporation, of which two of the Plaintiffs were members. . . . The Plaintiffs furthermore are barred or es-topped from asserting thеse claims by reason of the Board’s approval of the Eckerd transaction and related transactions; and by Joyce and Sidney Parker’s abstention from such vote.” The case was subsequently tried before a jury and the evidence, construed in a light
In 1943, W. H. Dunaway became the primary founder of Dunaway Family Drugs, then holding about 94 percent of the corporate stock. As the business developed into a chain of sucessful retail establishments, ownership of the corporation remained exclusively with the Dunаway family, W. H. Dunaway gifting substantially equal portions of his share of the corporation to the families of his children, Joyce D. Parker and William B. Dunaway. W. H. Dunaway gave his spouse, Lanore Dunaway, ten percent of the corporate stock and Boykin Dun-away sold his six percent share of the corporation to defendant after W. H. Dunaway died in 1987. This transaction, along with a five percent gift of corporate stock from his mother, ultimately gave defendant’s immediate family control of fifty-two percent of the corporate stock. Joyce D. Parker’s side of the family ended up with either thirty-seven or forty-two percent of the corporate stock, depending on the status of a five percent gift of corporate stock tendered by Lanore Dunaway to Joyce D. Parker after the death of W. H. Dunaway.
Although Joyce D. Parker and her spouse, A. Sidney Parker, ultimately became members of the corporation’s board of directors, neither were regularly employed by the corporation nor directly participated in its daily operations. 1 On the other hand, defendant served the corporation from early аdolescence, becoming a regularly employed registered pharmacist after he completed pharmacy school and moving on as the corporation’s president after W. H. Dunaway slowed his activities in the family business in the 1970’s. By the 1980’s, defendant dominated control of the corporation’s daily operations and strategic decisions.
In 1981, A. Sidney Parker helped defendant acquire favorable quasi-public financing for real property located in the City of Marietta. The nature of this unique financing made possible favorable lease transactions between defendant, as lessor, and the corporation, as lessee. The resulting leases were intended to cover defendant’s expenses on the leased premises, provide him with a tax shelter and bring him profits in the form of equity upon future sale of the leased premises. In return, the corporation would acquire a warehouse and retail space in the City of Marietta (“the Marietta Store”) at rates far below market value, i.e., $6,500 per month for the warehouse and $2,000 per month for the Marietta Store. However, soon after the transaction clоsed, defendant covertly increased the corporation’s rent on the warehouse to $10,000 per month, had the rent increase
After W. H. Dunaway died in 1987, the Parkers and the Dunaways began negotiating an agreement for defendant to purchase the Parker’s interest in the corporation. However, by the latter part of 1988 it became apparent to defendant that the buy-out would not go through so he covertly contacted Eckerd Drugs and proposed selling virtually all of the corporation’s assets. Eckerd Drugs was responsive and, in contemplаtion of future negotiations, defendant secretly amended the corporation’s warehouse and Marietta Store leases to terms favorable to his own interests, thereby devaluing the corporation’s leasehold estates. The lease amendments were subsequently approved by an executive committee of the corporation (to the exclusion of the Parkers), but were never presented to the corporation’s board of directors. Although the revised leases were never enforced against the corporation, they were (apparently) used in valuing the corporation during defendant’s negotiations with Eckerd Drugs.
On April 29, 1989, defendant executed an asset sale agreement with Eckerd Drugs, obligating the corporation to sell virtually all of its assets. However, Eckerd Drugs insisted upon open approval of the asset sale agreement by the corporation’s board of directors and shareholders and this requirement was made a condition to the asset sale agreement. The asset sale agreement provided that Eckerd Drugs would pay defendant $300,000 and grant him title to a company car in exchange for defendant’s promise not to compete with Eckerd Drugs for three years. The agreement further called for Eckerd Drugs and defendant to enter into a “termination agreement with respect to the lease of the Warehouse ... in exchange for the advance payment [to defendant] at Closing of one-year’s rent ($124,000.00).” Eckerd Drugs also agreed to leave defendant’s warehouse in “broom-clean condition” no later than 30 days after closing the asset sale agreement. The Marietta Store lease was renegotiated under the asset salе agreement, providing for a rent increase from approximately $24,000 per year plus a percentage of the store’s gross sales to “the minimum annual base rent payable to [defendant of] $45,747.00 for the period beginning with the date of such amendment and ending January 31, 1993 and $52,785.00 for the period beginning February 1, 1993 and ending January 31, 1999. . . .”
When the issue of the asset sale to Eckerd Drugs was brought to the floor for discussion, Joyce D. Parker agreed that sale of the corporation’s assets was necessary. However, she questioned whether the asset sale agreement with Eckerd Drugs should be approved since “there had been no definitive agreement among the shareholders as to the distribution of the proceeds of the proposed sale. ...” Defendant did not respond to this question; he simply “indicated that a lack of response did not imply that he agreed with Mr. or Mrs. Parker.” There was no further discussion and, when the measure was called for a vote, the Parkers abstained and the resolution passed with approval of the remaining seven members of the corporation’s board of directors, including at least two directors who had no financial interest in the corporation. The meeting of the board of directors then adjourned and a meeting of the corporation’s stockholders was called. When the asset sale agreement was brought to the floor for a vote, the measure was unanimously approved by defendant’s side of the family (then holding 52 percent of the vote) and disapproved by plaintiffs.
After the asset sale to Eckerd Drugs closed on June 12, 1989, plaintiffs discovered cancelled checks (amongst the corporation’s business records) payable to defendant in amounts exceeding $2,000,000. These checks were issued during the defendant’s lоng term as president of the corporation and included hundreds of thousands of dollars payable to defendant after W. H. Dunaway died in 1987. Defendant attributed (at trial) these cancelled checks to reimbursements for loans he made to the corporation and the corporation’s bookkeeper backed up this claim, broadly attributing the cancelled checks to either loans or rental payments. However, when asked why the corporation’s accounting records do not support these explanations, the corporation’s bookkeeper explained that he could not find the relevant
The jury returned a general verdict in favor of plaintiffs in the amount of $350,000 and specified that punitive damages were not a part of their award. This appeal followed the denial of defendant’s motion for judgment n.o.v. and for a new trial. Held:
1. Defendant first challenges the denial of his motions for directed verdict and for judgment n.o.v., arguing the trial court should not have allowed plaintiffs’ direct claim to proceed alternatively with their stockholder’s derivative claim since all of the corporation’s stockholders are not parties to the suit. In this vein, defendant points out that his spouse, children and possibly his mother own a substantial percentage of the corporate stock, but that they are not parties to this action.
“ ‘A pretrial order “limits the issues for trial to those not disposed of by admissions or agreements of counsel. The order, when entered, controls the subsequent course of the action unless modified at the trial to prevent manifest injustice.” OCGA § 9-11-16 (b). “ If a claim or issue is omitted from the order, it is waived.’ ”
Ga. Power Co. v. O’Bryant,
169 Ga. App. [491, 495 (
“The general rule is that a shareholder seeking to recover misappropriated corporate funds may only bring a derivative suit. The reasons underlying this general rule are that 1) it prevents a multiplicity of lawsuits by shareholders; 2) it protects corporate creditors by putting the proceeds of the recovery back in the corporation; 3) it protects the interests of all shareholders by increasing the value of their shares, instead of allowing a recovery by one shareholder to prejudice the rights of others not party to the suit; and 4) it adequately compensates the injured shareholder by increasing the value of his shares. If there exists the possibility of prejudice to other interested parties, such as creditors or other shareholders, a direct recovery should not be allowed.
Thomas v. Dickson,
In the case sub judice, defendant’s failure to place the propriety of plaintiffs’ direct claim on the table before the close of evidence leaves an unfocused evidentiary record as to the factors relevant to deciding this issue. However, evidence adduced at the five-day jury trial paints a fairly complete picture of the corporation’s current financial status and the posture of the non-party shareholders. In this vein, we observe that аll matters of corporate debt appear to have been resolved upon execution and disbursement of the asset sale agreement and that, as a result, no creditor appears to be in need of protection. Further, there was ample evidence adduced at trial for the jury to determine the amount plaintiffs would be entitled to recover for any devaluation of corporate assets (due to defendant’s wrongful acts) based on their combined percentage of corporate ownership. To this extent, we note that thе trial court fully charged the jury as to the different rights of recovery under plaintiffs’ alternative claims and instructed the jury that, should they elect to award damages under plaintiffs’ direct claim, damages are to be apportioned “according to their percentage ownership of the corporation as [the jury] finds it to be. . . .” The jury appears to have followed this directive, considered the relevant evidence and thus properly apportioned damages so as to protect the fractional interests of all stockholders of the corpоration. This conclusion is supported by observation that the jury’s $350,000 verdict was less than 37 percent (the percentage of stock defendant contends plaintiffs own) of the amount offered as proof of the corporation’s loss due to defendant’s alleged acts of corporate mismanagement and self-dealing. Finally, it is unlikely that other stockholder lawsuits will flow from the acts which form the basis of the case sub judice as the only shareholders not a party to this action are defendant’s wife and children and possibly his mother.
2
These stockholders never complаined of defendant’s actions in managing the corporation and they fully supported defendant’s resolution to sell virtually all assets of the corporation to Eckerd Drugs. Under these circumstances, we find that the jury was properly allowed to consider plaintiffs’ alternative claim for direct relief against defendant. See Wade H. Watson
2. In his second enumeration, defendant contends the trial court erred in denying his motions for directed vеrdict and for judgment n.o.v., arguing that he is insulated from liability because the asset sale agreement was approved by a majority of the corporation’s board of directors, including three members of the board of directors who had no financial stake in the transaction. This contention is without merit.
OCGA § 14-2-861 (b) (1) provides that “[a] director’s conflicting interest transaction may not. . . give rise to an award of damages or other sanctions, in an action by a shareholder or by or in the right of the corporation, on the ground of an interest in the transaction of the director ... if [the directоrs’] action respecting the transaction was at any time taken in compliance with Code Section 14-2-862.” This Code section provides (in pertinent part) that “[directors’ action respecting a [conflicting interest transaction] is effective ... if the transaction received the affirmative vote of a majority (but not less than two) of those qualified directors on the board of directors . . . who voted on the transaction after . . . required disclosure to them (to the extent the information was not known by them). . . .” OCGA § 14-2-862 (a). “ ‘Required disclosure’ means disclosure by the director who has a conflicting interest of (A) the existence and nature of his conflicting interest, and (B) all facts known to him respecting the subject matter of the transaction that an ordinarily prudent person would reasonably believe to be material to a judgment as to whether or not to proceed with the transaction.” OCGA § 14-2-860 (4). 3
Although defendant provided the Parkers with a copy of the asset sale agreement three weeks before the meeting of the board of directors, he never directly informed the Parkers or the other corporate directors of the existence, extent and nаture of his conflicting interests while acting as the corporation’s negotiator during his secret talks with Eckerd Drugs as required by OCGA § 14-2-860 (4) (A). In
3. Next, defendant contends the trial court erred in denying his motions for directed verdict and for judgment n.o.v., arguing that plaintiffs Joyce D. Parker and A. Sidney Parker, “in their capacities as members of the Board of Directors of the corporation, abstained from the Board vote on the transactions complained of, and such abstention, as a matter of law, was equivalent to their assent to those transactions.” We disagree.
“It is well-recognized that ‘shareholders in a corporation who participate in the performance of an act, or who acquiesce and ratify the same, are estopped to complain thereof. . . .’
Pickett v. Paine,
4. In his fourth enumeration, defendant challenges denial of his motions for directed verdict and for judgment n.o.v., arguing that there was “a complete failure of proof of any breach of duty or any harm to the corporation with respect to the features of the Eckerd transactions. . . .” This contention is without merit.
“When considering whether the triаl court erred by denying motions for directed verdicts and motions for judgment n.o.v., we review and resolve the evidence and any doubts or ambiguities in favor of the verdict; directed verdicts and judgments n.o.v. are not proper unless there is no conflict in the evidence as to any material issue and the evidence introduced, with all reasonable deductions therefrom demands a certain verdict.
Southern Store &c. Co. v. Maddox,
5. In his final enumeration, defendant contends the trial court erred in denying his motions for directed verdict and for judgment n.o.v., arguing that plaintiffs failed to provide a pre-suit demand to support their alternative derivative action as required by OCGA § 14-2-742; that plaintiffs failed to plead any breach of fiduciary duty outside defendant’s activities in negotiating the asset sale agreement with Eckerd Drugs and that there was no evidence that defendant breached fiduciary duties (apparently) by siphoning funds from the corporation under the guise of repayment of corporate loans. These contentions are without merit.
First, the issue of providing a pre-suit demand is moot since the jury returned a verdict on plaintiffs’ direct action. Second, a primary issue for trial asserted by plaintiffs in the pre-trial order was that defendant committed acts of corporate self-dealing and mismanagement outside the transaction involving sale of the corporate assets. Third, there was evidence that hundreds of thousands of dollars were tendered to defendant via the corporate checks with no corresponding record that these payments represented legitimate loan transactions between defendant and the corporation. This evidence was sufficient to authorize a finding that at least some of these payments were inappropriately directed to defendant. See OCGA § 24-4-22;
J. B. Hunt Transport v. Bentley,
The trial court did not err in denying defendant’s motions for directed verdict and for judgment n.o.v.
Judgment affirmed.
Notes
A. Sidney Parker is an attorney and he periodically assisted the corporation in certain matters.
There is evidence that Lanore Dunaway equally gifted her ten percent share of the corpоration to defendant and Joyce D. Parker after the death of her husband; thus, indicating that she no longer has standing to bring an action against her son for corporate mismanagement and self-dealing. Moreover, it appears that both defendant and Joyce D. Parker agreed not to involve their elderly mother in any dispute arising from their on-going rivalry. The wisdom of this mutual agreement appears to be supported by the prayerful introduction offered by Lanore Dunaway at the last meeting of the corporation’s board of directors.
Although defendant cites a repealed provision of Georgia’s Business Corporation Code (former OCGA § 14-2-155 (a)) in support of this enumeration because it was effective at the time of the transaction which forms the basis of the case sub judice, we rely on new provisions of Georgia’s Business Corporation Code since “ ‘(a) person has no vested right in statutory privileges and exemptions.’ [(Emphasis omitted.)]
Fulton Bag &c. Mills v. Williams,