MICHAEL H. MEISELMAN v. IRA S. MEISELMAN, LAWRENCE A. POSTON, PAUL EDWARD LLOYD, EASTERN FEDERAL CORPORATION, RADIO CITY BUILDING, INC., CENTER THEATRE BUILDING, INC., COLONY SHOPPING CENTER, INC., GENERAL SHOPPING CENTERS, INC., M & S SHOPPING CENTERS OF FLORIDA, INC., MARTHA WASHINGTON HOMES, INC., AND TRY-WILK REALTY COMPANY, INC.
No. 594A82
IN THE SUPREME COURT OF NORTH CAROLINA
Filed 27 September 1983
309 N.C. 279
For the foregoing reasons I dissent in part from the opinion of the majority and vote to find no error in the guilt-innocence determination phase of the defendant‘s trial. As the opinion of the majority makes it unnecessary for this Court to reach its statutory duty of proportionality review, I express no opinion as to the appropriateness of the sentence of death.
MICHAEL H. MEISELMAN v. IRA S. MEISELMAN, LAWRENCE A. POSTON, PAUL EDWARD LLOYD, EASTERN FEDERAL CORPORATION, RADIO CITY BUILDING, INC., CENTER THEATRE BUILDING, INC., COLONY SHOPPING CENTER, INC., GENERAL SHOPPING CENTERS, INC., M & S SHOPPING CENTERS OF FLORIDA, INC., MARTHA WASHINGTON HOMES, INC., AND TRY-WILK REALTY COMPANY, INC.
No. 594A82
(Filed 27 September 1983)
1. Corporations § 13- closely held corporations-standard of review for cases coming under G.S. 55-125(a)(4) and G.S. 55-125.1
In an action by a minority stockholder in a closely held corporation, the trial court misapplied the applicable law in denying plaintiff‘s claim for relief under
2. Corporations § 13- closely held corporations-summary judgment for majority stockholder improper-findings of fact failing to address “rights or interests” of minority stockholder
In an action brought by a minority stockholder in a closely held corporation where the trial court entered summary judgment for the majority stockholder, the trial court‘s findings of fact failed to address the “rights or interests” of the minority stockholder in the family corporations, and the case must be remanded to the trial court for an evidentiary hearing to resolve the issue. On remand after hearing the evidence, the trial court is to: (1) articulate the minority stockholder‘s “rights or interests” - his “reasonable expectations”
3. Corporations § 12- claim that majority stockholder usurped corporate opportunity-findings of fact by trial court insufficient on issue
In an action in which plaintiff claimed that defendant, majority stockholder, breached his fiduciary duty to the corporate defendant, in which plaintiff and the individual defendant both had interests, by usurping a corporate opportunity which belonged to them - the opportunity to buy stock of a corporation solely owned by the individual defendant - the trial court failed to focus on the appropriate issue and the findings of fact were not sufficient. When an officer or director is charged with having usurped a corporate opportunity, he or she must establish under
Justice MARTIN concurring in the result.
Chief Justice BRANCH and Justice COPELAND join in this concurring opinion.
APPEAL as a matter of right from a decision of the Court of Appeals, one judge dissenting.
This case was tried before Judge Robert D. Lewis during the 26 January 1981 Civil Session of Superior Court, MECKLENBURG County. In his memorandum of judgment, Judge Lewis denied plaintiff‘s claims for relief; plaintiff then appealed to the Court of Appeals. In an opinion written by Judge Becton with Judge Wells concurring, the Court of Appeals reversed. Meiselman v. Meiselman, 58 N.C. App. 758, 295 S.E. 2d 249 (1982). Because Judge Hill dissented in the case, defendants appeal to this Court as a matter of right under
Fleming, Robinson, Bradshaw & Hinson, P.A., by Russell M. Robinson, II, Attorney for plaintiff-appellee.
Blakeney, Alexander and Machen, by J. W. Alexander, Jr., Attorney for individual defendants; Farris, Mallard & Underwood, P.A., by Ray S. Farris and David B. Hamilton, Attorneys for corporate defendants.
In this appeal, we must determine whether Michael Meiselman, a minority shareholder with a substantial percentage of the outstanding stock in a group of family-owned close corporations, is entitled to relief under
I.
Michael Meiselman, the plaintiff and complaining minority shareholder in this action, and Ira Meiselman, one of the defendants in this actiоn, are brothers. Michael, the older of the two, was born in 1932 and has never married. Ira was born ten years later. He is married and has two children. The two men are the only surviving children of Mr. H. B. Meiselman, who immigrated to the United States from Austria in 1913. Over the years, Mr. Meiselman accumulated substantial wealth through his development of several family business enterprises. Specifically, Mr. Meiselman invested in and developed movie theaters and real estate. Several of the enterprises were merged into Eastern Federal Corporation [hereinafter referred to as Eastern Federal], a close corporation, most of the stock of which is owned by Ira and Michael. In addition, there are seven other corporations1 which,
Beginning in 1951, Mr. Meiselman started a series of inter vivos transfers of corporate stock in the various corporations which, generally speaking, he divided equally between his two sons. However, in March 1971 Mr. Meiselman transferred 83,072 shares of stock in Eastern Federal to Ira, while Michael received only 1,966 shares in the corporation. The next month Michael transferred the control of his stock in the family corporations to his father in trust, a trust Michael could revoke without his father‘s consent only if he married a Jewish woman.2
The effect, then, of these transfers of stock from Mr. Meiselman to his two sons was to give Ira, the younger son, majority shareholder status in Eastern Federal while relegating Michael, the older son, to the position of minority shareholder. In addition, Ira owns a controlling interest in all of the other family corporations except General Shopping Centers, Inc., the corporation in which he and Michael hold an equal number of shares.
Michael owns 29.82 percent of the total shares in the family corporations, although he contends that once the shares attributed to intercorporate ownership (shares the various corporations own in each other) are distributed between himself and Ira, his ownership would amount to about 43 percent of the family business. The book value of all of the corporations was $11,168,778 as of 31 December 1978. The book value of Michael‘s shares in all of the corporations using the 29.82 percent figure, was $3,330,303 as of that date.
As is true of many close corporations, the two shareholders - Michael and Ira - were employed by the family corporations. Michael began working for the family business in 1956 and Ira began nine years later in 1965. The extent of Michael‘s participation in the family corporations from 1961 until 1973 is not clear. Michael contends that he has worked continuously for the family business except for an interim of about one and one-half
In the certified letter Ira sent to Michael informing Michael that he was being fired, Ira also notified his brother that his car insurance, his hospital insurance and his life insurance policies were all being terminated. In addition, Ira asked his brother in that same letter to return his “Air Travel credit card” and “any other corporate cards you might have as any further use of them is not authorized.” Ira then sent his brother a second certified letter demanding payment within ten days to Eastern Federal of Michael‘s note of $61,500 plus interest of $2,028.66 and the balance of Michael‘s open account, $19,000. Furthermore, Lawrence A. Poston, Vice President and Treasurer of Eastern Federal stated that the effect of the letter terminating Michael‘s employment “also was to terminate Michael‘s participation in the profit-sharing trust.”
In his deposition, Ira essentially admitted that he fired his brother in response to the lawsuit Michael had brought challenging Ira‘s sole ownership of Republic Management Corporation [hereinafter referred to as Republic], the corporation with which Eastern Federal had contracted to provide management services. However, Ira indicated that Michael‘s loss of employment was only an incidental effect of his termination of the employment contract between the two corporations, a corporate decision he felt was justified in light of the threat of continuing litigation on this matter. Ira stated that “[t]he purpose and the effect of the letter [terminating Michael‘s employment] were principally to advise [Michael] that we were terminating the arrangement between Eastern Federal and Republic and, correspondingly, that it would alter, affect, or eliminate his source of compensation as applied to Republic.”
Republic was formed in 1973. As Ira stated, Republic was a “successor to two, or possibly three, previous companies of the same genre that had operated within the family framework back
According to Ira, the function of Republic “was to provide a means whereby, primarily now, administrative and primarily home office expenses utilized on behalf of all the companies, or all the individual operating units, were apportioned back to those individual operating units or operating companies.” In short, Republic was “nothing more than a tool” through which the administrative costs incurred in operating the various Meiselman business units - including over 30 theaters - were apportioned.
As noted above, Republic agreed to perform these management services as a result of a contract entered into between it and Eastern Federal. Specifically, Republic agreed to perform the management services in exchange for 5.5 percent of Eastern Federal‘s theater admissions and concession sales. Although Republic paid Michael an annual salary from 1973 until he was fired in 1979, Michael did not own any of the stock in the management corporation; Ira owned all of it. Although Republic earned profits some years while losing money in others, the net result was that it had retained earnings of over $65,000, earnings which only Ira as sole shareholder in Republic would enjoy and in which Michael claims he is entitled to share. It is this ownership to which Michael objects and upon which he bases his shareholder‘s derivative claim that Ira has breached the fiduciary duty he owes to the corporate defеndants.
We turn now to an examination of the tenor of the relationship existing between Michael and Ira. In his brief, Ira contends “[t]he Record on Appeal reflects no bitterness and hostility between Michael and Ira, other than that which Michael generated after Mr. Meiselman‘s death in an effort to secure a redistribution of his father‘s patrimony.” Further, he contends that “Michael was never denied participation in the management of the corporate defendants,” that, on the contrary, Michael “voluntarily limited his participation in their affairs.”
My brother had the majority of stock in Eastern Federal Corporation before this management contract. As to whether he had the final say in the control of Eastern Federal Corporation, that is the point. He might have been the final say, but when Republic Management started, I lost all say-so because he wouldn‘t listen to anybody.
In addition, Michael contends that, among other things, he has not been “allowed to even come up to the office and have [sic] been discouraged in getting the full details as to what they [the companies] borrow“; that Ira “will not let me walk in the office where the film buyer is and talk to him, not even [to] help“; that “theaters are being sold without my knowledge and theaters are being built without my knowledge“; and that “my brother solely and without my consent, not only develops but closes, sells, does anything he wants with all of the properties.” Finally, Michael claims that although he previously worked 60 to 70 hours a week, he has been “discouraged systematically over a number of years to where I cannot exert the time and effort that I want to.”
In examining the record, we are struck by the tone of Ira‘s comments when referring to his dealings with his brother. Indeed, many of his statements indicate that although Michael may not have been actively prevented from entering the corporate offices, his participation in the decision-making carried on within those offices was less than welcome. For example, in testifying that Michael has never been barred from the home offices of the company, Ira stated that Michael “has exercised the privilege of going there on frequent occasions, unannounced, whenever he felt like it.” (Emphasis added.) He also stated that “[w]e have never
Apparently in an attempt to further support his contention that Michael has never been excluded from participating in the management of the corporations, Ira testified that two corporate decisions were made or changed on the basis of objections Michael had lodged. In describing the abandonment of a proposed merger to which Michael had objected, Ira testified as follows:
I don‘t mean to belittle him. In one of those instances, as a sign we were not completely ignoring him, we made some changes. Specifically, I know of one single complaint and that was a proposed merger of some of these defendants [in] 1976, regarding a real estate company similar to our previous merger with Eastern Federal. Unfortunately, my timing was very poor because he was taking his first what he called his pre-test, I‘m not sure, I guess it‘s preparation for the bar exam. He did very poorly with it and it came at the same time, and he just raised cain with me.
The second corporate action to which Michael objected was Ira‘s sole ownership of the stock in Republic. Ira contends that he terminated the management contract between Republic and Eastern Federal (and in so doing fired Michael) in response to Michael‘s objections to Ira‘s sole ownership of Republic. We note, however, that in responding to Michael‘s objections, Ira terminated the employment contract between the two corporations, and, thus, Michael‘s employment, even though it was Ira‘s sole ownership of the stock in Republic and not the contract between Republic and Eastern Federal which was the source of their disagreement.
Perhaps most indicative of the tenor of the relationship between the two brothers is Ira‘s comment that “[y]es, it is my posi-
Finally, it appears the history of this litigation itself indicates a breakdown of the personal relationship between Michael and Ira. In June 1978, about two months after their father‘s death, Michael and Ira began negotiations in an effort to work out their differences. Over one year later, in August 1979, Michael filed suit. He was fired the next month. In short, this litigation and the tensions inherent in such activity have been going on for over four years now.
We turn now to the history of this litigation as it developed in the courts. In his amended complaint, Michael asked that the trial court “dissolve the Corporate Defendants under the provisions of
With respect to the derivative claim he brought asserting that Ira had breached the fiduciary duty he owes to the corporate defendants through his sole ownership of the stock in Republic, Michael asked that the “profits wrongfully diverted from the Corporate Defendants into Republic Management Corporation” be recovered.
The trial court denied both of Michael‘s claims. Michael then appealed to the Court of Appeals. In its well-written majority opinion, the Court of Appeals interpreted
In addition, the Court of Appeals also determined that the trial court erred in concluding that Ira had not breached the fiduciary duty he owes to the corporate defendants through his sole ownership of Republic. It reversed the judgment of the trial court on this derivative claim and remanded the case to the trial court “for entry of judgment on behalf of the defendant corporation against Ira, as sole owner of Republic, in the total amount of the profits accumulated to date in Republic plus interest and cost of this action.” Id.
Judge Hill dissented in this case on both issues. Therefore, defendants appeal to this Court as a matter of right under
II.
We note at the outset that the enterprises with which we are dealing are close corporations, not publicly held corporations. This distinction is crucial because the two types of corporations are functionally quite different. Indeed, the commentators all appear to agree that “[c]lose corporations are often little more than incorporated partnerships.” Comment, Oppression as a Statutory Ground for Corporate Dissolution, 1965 Duke L.J. 128, 138 (1965) [hereinafter cited as Comment, Oppression]. See also
Israels, a recognized expert in this area, succinctly defines a close corporation as a “corporate entity typically organized by an individual, or a group of individuals, seeking the recognized advantages of incorporation, limited liability, perpetual existence and easy transferability of interests-but regarding themselves basically as partners and seeking veto powers as among themselves much more akin to the partnership relation than to the statutory scheme of representative corporate government.” Israels, supra, at 778-79.
This characterization of close corporations as little more than “incorporated partnerships” rests primarily on the fact that the “relationship between the participants [in a close corporation], like that among partners, is one which requires close cooperation and a high degree of good faith and mutual respect. . . .”
Professor O‘Neal, perhaps the foremost authority on close corporations, points out that many close corporations are companies based on personal relationships that give rise to certain “reasonable expectations” on the part of those acquiring an interest in the close corporation. Those “reasonable expectations” include, for example, the parties’ expectation that they will participate in the management of the business or be employed by the company. O‘Neal, Close Corporations: Existing Legislation and Recommended Reform, 33 Bus. Law 873, 885 (1978). Other com-
Thus, when personal relations among the participants in a close corporation break down, the “reasonable expectations” the participants had, for example, an expectation that their employment would be secure, or that they would enjoy meaningful participation in the management of the business - become difficult if not impossible to fulfill. In other words, when the personal relationships among the participants break down, the majority shareholder, because of his greater voting power, is in a position to terminate the minority shareholder‘s employment and to exclude him from participation in management decisions.
Some may argue that the minority shareholder should have bargained for greater protection before agreeing to accept his minority shareholder position in a close corporation. However, the practical realities of this particular business situation oftentimes do not allow for such negotiations. In his article, Special Characteristics, Problems, and Needs of the Close Corporation, 1969 U. Ill. L.F. 1 (1969), Professor Hetherington, another recognized authority in this field, explains the situation as follows:
the circumstances under which a party takes a minority stock position in a close corporation vary widely. Many involve situations where the minority party, because of lack of awareness of the risks, or because of the weakness of his bargaining position, fails to negotiate for protection. Probably a common instance of this kind occurs where an employee or an outsider is given an opportunity to buy stock in a close corporation wholly or substantially owned by a single stockholder or a small group of associates, often a family. Typically, the controlling individual or group retains a substantial majority position. The opportunity to buy into the
business is highly valued by the recipient; his enthusiasm and weak bargaining рosition make it unlikely almost to a certainty that he will ask for - let alone insist upon - protection for his position as a minority stockholder. Purchases of stock in such situations are likely to be arranged without either party consulting a lawyer. The result is the assumption of a minority stock position without, or with only limited, appreciation of the risks involved.
Id. at 17-18 (footnote omitted).
In short, then, the “minority shareholder who acquired his shares to secure his position with the firm may have lacked sufficient bargaining power to force the majority to agree to terms which would enable him to protect his interests.” Comment, Dissolution Under the California Corporations Code, supra, at 603-04. Indeed, as one commentator notes, “close corporations are often formed by friends or family members who simply may not believe that disagreements could ever arise.” Id. Furthermore, when a minority shareholder receives his shares in a close corporation from another in the form of a gift or inheritance, as did plaintiff here, the minority shareholder never had the opportunity to negotiate for any sort of protection with respect to the “reasonable expectations” he had or hoped to enjoy in the close corporation.
Unfortunately, when dissension develops in such a situation, as Professor O‘Neal notes, “American courts traditionally have been reluctant to interfere in the internal affairs of corporations . . . .”
The right of the majority to control the enterprise achieves a meaning and has an impact in close corporations that it has in no other major form of business organization under our law. Only in the close corporation does the power to manage carry with it the de facto power to allocate the benefits of ownership arbitrarily among the shareholders and to discriminate against a minority whose investment is imprisoned in the enterprise. The essential basis of this power in the close corporation is the inability of those so excluded from the benefits of proprietorship to withdraw their investment at will. The power to withdraw one‘s capital from a publicly held corporation or from a partnership is unqualified in the sense that the participant‘s right is not dependent upon misconduct by the management or upon the occurrence of any other event. The shareholder or partner can withdraw his capital for any or no reason.
Hetherington, supra, at 21.
According to Professor O‘Neal, the “two principal conceptualistic barriers to the courts’ granting relief to aggrieved shareholders” in such a situation are: “(1) the principle of majority rule in corporate management and (2) the business judgment rule.”
Apparently without close examination, courts accord the principle of majority rule the same sanctity in corporate enterprises, including small businesses, that it enjoys in the political world. The principle of majority rule is in traditional legal thought a firmly established attribute of the corporate form. Yet not uncommonly a person, unsophisticated in business and financial matters, invests all his assets in a closely held enterprise with an expectation, often reasonable under the circumstances even in the absence of express contract, that he will be a key employee in the company and will have a voice in business decisions. Thus, when courts apply the
principle of majority rule in close corporations, they often disappoint the reasonable expectations of the participants.
Id. at 582-83.
In short, then, when the courts fail to provide a remedy for a minority shareholder whose “reasonable expectations” have been disappointed in the close corporation situation, the court, in effect, “compels a continuation of the association by legal constraint-what was once called ‘togetherness by injunction’ - a prospect which scarcely seems a desirable policy goal.” Hetherington, supra, at 29. In other words, an “insistence that the antagonistic parties resolve their differences within the corporate framework” would seem “inconsistent with the traditional hesitance of courts of equity to enforce unwelcome personal relationships.” Note, Corporations - Dissolution, supra, at 1463.
Apparently in response to these commentators’ uniform calls for reform in this area of corporate law, many state legislatures have enacted statutes giving the tribunals in their states the power to grant relief to minority shareholders under more liberal circumstances. For example, at least seven states have given their courts the authority to grant dissolution of a corporation when the acts of the directors or those in control of the corporation are “oppressive” to the shareholders.
In interpreting the term “oppressive” as used in its dissolution statute, a New York Trial Court recently held in a case of first impression that where two controlling shareholders discharged the minority shareholder as an employee and officer of the two corporations in which he had an interest, thus severely damaging the minority shareholder‘s “reasonable expectations,” their actions were deemed to be “oppressive” under New York Law. In re the Application of Topper, 107 Misc. 2d 25, 433 N.Y.S. 2d 359 (1980).
Furthermore, the Supreme Court of Illinois affirmed a Superior Court decree of dissolution where one shareholder was
Similarly, at least three states have statutes authorizing a court to grant dissolution when those in control of the corporation are guilty of treating the corporate shareholders “unfairly.”
In helping to establish this growing trend toward enactment of more liberal grounds under which dissolution will be granted to a complaining shareholder, the legislature in this State enacted in 1955
In interpreting the provision of its corporate dissolution statute which provides that such relief will be ordered where “liquidation is reasonably necessary for the protection of the rights or interests” of the shareholders, a California Appellate Court affirmed in Stumpf v. C. E. Stumpf & Sons, Inc., 47 Cal. App. 3d 230, 120 Cal. Rptr. 671 (1975), a trial court‘s conclusion that relief was appropriate when supported by the following evidence: “The hostility between the two brothers had grown so extreme that respondent severed contact with his family and was allowed no say in the operation of the business. After respondent‘s withdrawal from the business, he received no salary, dividends, or other revenue from his investment in the corporation.” Id. at 235, 120 Cal. Rptr. at 675. See also In re the Application of Topper, 433 N.Y.S. 2d at 366 (“rights and interests” of a minority shareholder in a close corporation “derive from the expectations of the parties and special circumstances that underlie the formation of close corporations“).
In short, then, it appears that these new statutory schemes which permit involuntary dissolution of corporations pursuant to actions brought by minority shareholders -- and which “virtually every state has” - “represent a concerted effort and recognition by the states that the perpetual existence of the corporate structure at common law is ill-suited to the functional realities of the
III.
[1] With this background in mind, we turn now to the primary issue in this case: whether the trial court misapplied the applicable law by concluding that relief under
The basic question at issue is what standard we should adopt to determine whether a minority shareholder is entitled to dissolution or other relief. The statutes require a standard in which all of the circumstances surrounding the parties are considered in
When a shareholder brings suit seeking relief under
Michael, as the complaining shareholder in this case, brought an action under
The superior court shall have power to liquidate the assets and business of a corporation in an action by a shareholder when it is established that:
(1) The directors are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock, so that the business can no longer be conducted to the advantage of all the shareholders; or
(2) The shareholders are deadlocked in voting power, otherwise than by virtue of special provisions or arrangements designed to create veto power among the shareholders, and for that reason have been unable at two consecutive annual meetings to elect successors to directors whose terms had expirеd; or
(3) All of the present shareholders are parties to, or are transferees or subscribers of shares with actual notice of a
written agreement, whether embodied in the charter or separate therefrom, entitling the complaining shareholder to liquidation or dissolution of the corporation at will or upon the occurrence of some event which has subsequently occurred; or (4) Liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder.
Michael alleged that he was entitled to relief under subsection (4); in effect, he is claiming that liquidation is “reasonably necessary” for the protection of his “rights or interests.” However, before it can be determined whether, in any given case, it has been “established” that liquidation is “reasonably necessary” to protect the complaining shareholder‘s “rights or interest,” the particular “rights or interests” of the complaining shareholder must be articulated. This is so because
In short, then, the “rights or interests” of a shareholder in any given case will not necessarily be the same “rights or interests” of any other shareholder. An articulation of those “rights or interests” will necessarily require a case-by-case determination based on an examination of the entire history of the participants’ relationship—an examination not only of the “expectations generated by the participants’ original business bargain,” but also of the “history of the participаnts’ relationship as expectations alter and new expectations develop over the course of the participants’ cooperative efforts in operating the business.” O‘Neal, supra, at 888. In so holding, we recognize the rule that Professor O‘Neal suggests should be applied in a corporation based on a “personal relationship“:
[A] court should give relief, dissolution or some other remedy to a minority shareholder whenever corporate managers or controlling shareholders act in a way that disappoints the minority shareholder‘s reasonable expectations, even though the acts of the managers or controlling shareholders fall within the literal scope of powers or rights granted them by the corporation act or the corporation‘s charter or bylaws.
The reasonable expectations of the shareholders, as they exist at the inception of the enterprise, and as they develop thereafter through a course of dealing concurred in by all of them, is perhaps the most reliable guide to a just solution of a dispute among shareholders, at least a dispute among shareholders in the typical close corporation. In a close corporation, the corporation‘s charter and bylaws almost never reflect the full business bargain of the participants.
After articulating the “rights or interests” of the complaining shareholder, the trial court is then to determine if liquidation is
(a) In any action filed by a shareholder to dissolve the corporation under
G.S. 55-125(a) , the court may make such order or grant such relief, other than dissolution, as in its discretion it deems appropriate, including, without limitation, an order:
- Canceling or altering any provision contained in the charter or the bylaws of the corporation; or
- Canceling, altering, or enjoining any resolution or other act of the corporation; or
- Directing or prohibiting any act of the corporation or of shareholders, directors, officers or other persons party to the action; or
- Providing for the purchase at their fair value of shares of any shareholder, either by the corporation or by other shareholders, such fair value to be determined in accordance with such procedures as the court may provide.
(b) Such relief may be granted as an alternative to a decree of dissolution, or may be granted whenever the circumstances of the case are such that relief, but not dissolution, would be appropriate. (1973, c. 496, s. 41.)
(Emphasis added.)
Thus, when an action is brought under
In sum, therefore, we hold that under
IV.
[2] We will now review the “rights or interests” each party contends Michael has in the family corporations. Michael suggests in his brief that the “rights or interests” he has as a shareholder in
Defendants argue, however, that Michael, as a shareholder, is only entitled to relief if his traditional shareholder rights have been infringed. They contend that those traditional shareholder rights include the right to notice of stockholders’ meetings, the right to vote cumulatively, the right to access to the corporate offices and to corporate financial information, and the right to compel the payment of dividends. Because these rights have not been violated, they argue, Michael is not entitled to relief. Indeed, defendants contend that the dividends distributed to Michael have been generous.5
While it may be true that a shareholder in, for example, a publicly held corporation may have “rights or interests” defined as defendants argue, a shareholder‘s rights in a closely held corporation may not necessarily be so narrowly defined. In short, we hold that the shareholder in this case—one who owns stock worth well over $3,000,000 and which accounts for a 30 to 40 percent ownership in these closely held, family-run corporations worth well over $11,000,000 and who also has been employed by the corporations, provided with fringe benefits, and, to some extent, allowed to participate in management decisions—has “rights or interests” more broadly defined than defendants contend. Put
Again, we note that
Our task at this juncture, then, is to determine, in light of each party‘s contentions and the analysis articulated above that is to be applied to suits brought under
In denying Michael‘s claim for relief, the trial court made the following findings of fact:
A. The corporate philosophy of all the defendants has remained the same under Ira S. Meiselman as it was under H. B. Meiselman, to wit, a “pay as you go” or conservative approach to business management.
B. The record is silent and there is an absence of evidence (indeed, there is no cross examination by plaintiff) direct or on cross nor any suggestion that corporate financial policy has resulted in any inequities to minority stockholder Michael H. Meiselman.
C. There is no evidence of unexplained:
- Increases of salaries of сorporate officers including Ira S. Meiselman;
- Increase in corporate reserves such as depreciation, capital improvement or any other reserve;
- Changes in dividend policy to the detriment of the minority stockholder;
- Retention of earnings (an area closely monitored by IRS) to the detriment of the minority stockholder, Michael H. Meiselman;
- Purchases of assets to obtain long term appreciation of asset values for the benefit of second-generation heirs.
D. There is no evidence of bad faith or the adoption of unduly expansive growth requiring capital outlays to the detriment of the majority or minority stockholders.
E. H. B. Meiselman did not subscribe or resort to long-term debt assumption for the purpose of financing growth projects, and this policy has remained unaltered.
F. The management of these companies has resulted in a ten-year growth from 1968 to 1978 in book value of the minority shareholder‘s equity of $2,500,000.00; such book value increased further in 1979.
G. There is a lack of evidence to support a finding of fact that personal differences between the majority and minority stockholders have in any way influenced corporate policy, financial or otherwise; and to the contrary the record indicates that objections by minority stockholder, Michael H. Meiselman, apparently motivated the corporations and the individual defendants to:
Abandon a merger; and - Terminate a management agreement between Republic Management Corporation and Eastern Federal Corporation.
H. There is no evidence to support a finding of fact that there was oppression, overreaching on the part of management, the taking of any unfair advantage of the minority stockholder by the majority stockhоlder or any other wrongful conduct on the part of the majority stockholder, Ira S. Meiselman.
I. In the absence of gross abuse or the taking of gross unfair advantage by the majority stockholder, the Court‘s exercise of discretion to require a sale would be, as a practical matter, difficult to effectuate.
- Book value is not the same as market value.
- The shares of a closely held corporation are not marketable generally.
- If the businesses are to continue, ordinarily a majority stockholder would prefer to pay a premium to avoid an uncooperative holder of the outstanding shares.
J. There is no deadlock in the management of the corporate affairs of any defendant corporation.
K. There is no evidence of the financial ability of or the appropriateness of any other individual stockholder purchasing the shares of Michael Meiselman.
We note that the findings set out above do not address or define the “rights or interests” Michael has in these close corporations. It appears that the trial court focused instead on any possible egregious wrongdoing on Ira‘s part. For example, the trial court found, in part, that there is “no evidence to support a finding of fact that there was oppression, overreaching on the part of management, the taking of any unfair advantages of the minority stockholder by the majority stockholder or any other wrongful conduct on the part of the majority stockholder, Ira S. Meiselman.” Further, the trial court found that there is an “absence of gross abuse or the taking of gross unfair advantage . . .” and that there is “no evidence of bad faith . . . to the detri-
Because the trial court‘s findings of fact failed to address the “rights or interests” Michael has in these family corporations, we must remand the case to the trial court for an evidentiary hearing to resolve this issue. On remand, after hearing the evidence, the trial court is to: (1) articulate specifically Michael‘s “rights or interests“—his “reasonable expectations“—in the corporate defendants; and (2) determine if these “rights or interests” are in need of protection, and, thus, that relief of some sort should be granted. In addition, the trial court is to prescribe the form of relief which the evidence indicates is most appropriate, should it find that relief is warranted. In remanding this case for an evidentiary hearing and new findings, we need not address the issue of whether the trial court abused its discretion in refusing to grant relief to Michael.
V.
[3] Michael also contends that Ira breached the fiduciary duty he owes as a director and officer of the corporate defendants through his sole ownership of the stock in Republic, the corporation with which Eastern Federal contracted to provide management services. Michael concedes that the trial court was correct when it found that the management contract between Republic and Eastern Federal was just and reasonable at the time it was executed. He states that he has “never complained about Republic management itself nor about the management contract.” It is only Ira‘s sole ownership of the stock in Republic to which he objects.
In order for plaintiff to succeed in this claim, he must prove that (a) he has standing as a shareholder in the corporate defendants to bring suit on this claim against Ira as a director and officer of the defendant corporations, and (b) Ira, in his role as a corporate director and officer, breached a fiduciary duty owed to the corporate defendants not to usurp a corporate opportunity of the corporate defendants.
It appears that this Court has alluded to the “corporate opportunity doctrine” in only one instance. In Brite v. Penny, 157 N.C. 110, 72 S.E. 964 (1911), this Court stated that “[t]he law would not permit him [a corporate officer] to act in any such double capacity to appropriate business for himself belonging legitimately to his corporation and to reap the profits of it. Good faith to the stockholders forb[ids] it.” Id. at 115, 72 S.E. at 966. This Court apparently hаs not addressed the doctrine of corporate opportunity since that time. Therefore, in articulating the rules which should be applied in this area of the law, we will first examine the rules other courts have adopted.
The doctrine of corporate opportunity is “a species of the duty of a fiduciary to act with undivided loyalty; it is one of the manifestations of the general rule that demands of an officer or director the utmost good faith in his relations with the corporation that he represents; in general, a corporate officer or director is under a fiduciary obligation not to divert a corporate business opportunity for his own personal gain.” Annot., 77 A.L.R. 3d 961, 965 (1977). Stated more simply, the “corporate opportunity doctrine provides that a corporate fiduciary may not appropriate to himself an opportunity that rightfully belongs to his corporation.” Note, Corporate Opportunity and Corporate Competition: A Double-Barreled Theory of Fiduciary Liability, 10 Hofstra L. Rev.
In Guth v. Loft, Inc., supra, a leading case in this area of the law, the Supreme Court of Delaware articulated the corporate opportunity doctrine as follows:
Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest. The occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale.
23 Del. Ch. at 270, 5 A. 2d at 510.
Generally speaking, there are three types of business opportunities a corporate fiduciary can attempt to take advantage of: “those entirely extraneous to the corporation‘s business, those in the same or a direct line with it, and finally, those complementary to it.” Note, Liability of Directors for Taking Corporate Opportunities, Using Corporate Facilities, or Engaging in a Competing Business, 39 Colum. L. Rev. 219, 220 (1939). The courts have formulated three tests to differentiate between an extraneous opportunity and those upon which a corporation would wish to act. See e.g., Note, Corporate Opportunity, supra, at 1196. The first test focuses on whether the corporation had an “interest or expectancy” in the opportunity. Id. at 1196-97. The second test considers
(b) No corporate transaction in which a director has an adverse interest is either void or voidable, if:
...
(3) The adversely interested party proves that the transaction was just and reasonable to the corporation at the time when entered into or approved. In the case of compensation paid or voted for services of a director as director or as officer or employee the standard of what is “just and reasonable” is what would be paid for such services at arm‘s length under competitive conditions.
In support of his contention that Ira‘s sole ownership of the stock in Republic constitutes a breach of the fiduciary duty Ira owes the corporate defendants, Michael cites Highland Cotton Mills v. Ragan Knitting Co., 194 N.C. 80, 138 S.E. 428 (1927), for the proposition that Ira‘s “liability has now been conclusively established because of the well-settled rule in North Carolina that a transaction between a corporation and its directors or officers is presumed to be invalid unless those seeking to sustain it prove that it was ‘just and reasonable.‘” This presents the question as to whether the common law rule stated in Highland Cotton Mills is a rule substantially different from that set out in
Thus, once an adversely interested party proves that the transaction at issue was “just and reasonable to the corporation at the time when entered into or approved,”
In essence, then, when an officer or director is charged with having usurped a corporate opportunity, he or she must establish under
As one commentator noted, the courts determine whether a corporate opportunity has been usurped by examining the facts of each particular case. Comment, The Corporate Opportunity Doctrine, 18 Sw. L.J. 96, 100 (1964). However, some of the “recurring circumstances” which courts continually find relevant in determining whether a corporate opportunity has been usurped include the following: 1) the ability, financial or otherwise, of the corporation to take advantage of the opportunity; 2) whether the corporation engaged in prior negotiations for the opportunity; 3) whether the corporate director or officer was made aware of the opportunity by virtue of his or her fiduciary position; 4) whether the existence of the opportunity was disclosed to the corporation; 5) whether the corporation rejected the opportunity; and 6) whether the corporate facilities were used to acquire the opportunity. Id. at 100-107.
In attempting to give substance to its fiduciary duty standard in this area, the Delaware Supreme Court set out in Guth sev-
[I]f there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation‘s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself.
23 Del. Ch. at 272-73, 5 A. 2d at 511.
In taking into account the fact that a corporate opportunity may arise not only in the same or direct line with a corporation‘s business, but also in a line complementary to it, we hold that in determining whether a corporate fiduciary had usurped a corporate opportunity—and thus that the “corporate transaction” in which he or she has entered is not “just and reasonable” to the corporation—a trial court is to approach the problem from two perspectives. It is to examine not only whether the disputed opportunity is functionally related to the corporation‘s business, but also whether the corporation has an interest or expectancy in the opportunity. In so doing, the trial court is to examine all of the facts in the particular case, including the “recurring circumstances” other courts have found relevant, in determining whether a corporate opportunity has indeed been usurped.
We turn now to the findings of fact the trial court made to support its conclusion of law that there had been “no actionable breach of fiduciary responsibility by any of the defendants.”
The trial court made the following seven findings of fact:
A. The name of Republic Management Corporation was selected by H. B. Meiselman;
B. The elder Meiselman (H. B. Meiselman) had a management corporation involved in his business dealings for a number of years prior to the chartering of Republic Management Corporation;
C. The evidence is silent as to any bad faith exercised by Ira S. Meiselman in connection with the management company, and this Court makes this finding with full knowledge that Ira S. Meiselman signed the management agreement in his capacity as chief executive officer of the defendant corporations and as President of Republic Management Corporation;
D. Republic Management Corporation has retained earnings resulting from the management contract in the approximate amount of $61,000.00 covering a period of time of some five years, which earnings reached a peak in 1974 of $57,000.00 and plunged to a loss of $11,000.00 in 1975;
E. The uncontradicted evidence shows that virtually all of the retained earnings were accumulated during the exceptionally good years of 1973 and 1974 and that the corporation has since that time suffered losses of approximately $10,000.00 for which Republic Management Corporation has not sought reimbursement;
F. The plaintiff himself received salary from Republic Management Corporation, a company in which he has no equity and for which he has provided no compensable work;
G. The management contract between Republic Management Corporation and defendant Eastern Federal Corporation was just and reasonable at the time it was executed.
The above findings do not address the issue of whether Ira usurped a corporate opportunity from the corporate defendants. Although we agree with the Court of Appeals’ determination that “[i]t does not matter that Republic was a successor to previous management companies which performed management services for the defendant corporatiоns,” Meiselman v. Meiselman, supra, 58 N.C. App. at 774, 295 S.E. 2d at 259, the identity of the shareholders who owned the successor corporations may be crucial in determining if Ira usurped a corporate opportunity with his purchase for himself of all of the stock in Republic.
We also agree with the Court of Appeals in its holding that the trial court based its conclusion that there was no actionable breach of fiduciary responsibility, in part, upon what was “in reality, a conclusion of law,” that is, that the “management con-
VI.
In sum, therefore, we hold that the order of the trial court denying plaintiff‘s claim for relief under
Modified, affirmed and remanded.
Justice MARTIN concurring in the result.
Except as herein set forth, I concur in the majority opinion. There are, however, certain aspects of the case that should be discussed that the majority does not address.
In determining whether plaintiff‘s expectations have been frustrated, the actions of all the participants, including plaintiff, must be considered. The majority fails to address this aspect of the casе. In Exadaktilos v. Cinnaminson Realty Co., 167 N.J. Super. 141, 400 A. 2d 554 (1979), aff‘d, 173 N.J. Super. 559, 414 A. 2d 994 (1980), plaintiff acquired a twenty percent interest in a corporation that operated a restaurant. He expected to learn the restaurant business and participate in management. Unfortunately, he did not get along with the other employees and stockholders and was fired for what the court viewed as “unsatisfactory performance.” In deciding plaintiff‘s claim for relief, the court considered the propriety of the actions by the controlling shareholders. The court found that the opportunity had been offered plaintiff and it was lost through no fault of the defendants. In weighing plaintiff‘s claim against the disruptive effects the grant of relief would have upon the business, the court found it appropriate to consider the actions of all parties in determining the cause of the frustration of plaintiff‘s expectations.
The approach in Exadaktilos is appropriate under the law of North Carolina. The statute itself,
This Court forecast this procedure in Dowd v. Foundry Co., 263 N.C. 101, 139 S.E. 2d 10 (1964), a case involving
The decision whether to grant the statutоry relief involves equity and the discretionary power of the court. Id. “Equity cannot permit itself to be used by a stockholder who simply wishes to get out of a bad bargain . . .” Hornstein, A Remedy for Corporate Abuse—Judicial Power to Wind Up a Corporation at the Suit of a Minority Shareholder, 40 Col. L. Rev. 220, 235 (1940). Cf. Jackson v. Nicolai-Neppach Co., 219 Or. 560, 348 P. 2d 9 (1959) (plaintiff has burden of proving equitable grounds for relief).
Another factor to be considered by the court in determining whether to grant relief is whether the minority shareholder has diligently pursued all of the other available statutory means for the protection of his rights and that after doing so “[l]iquidation [or alternative relief under
In determining whether to grant equitable relief under
The court should also consider what effect the granting of relief will have upon the corporation and other shareholders. Will it interfere with the corporation‘s ability to attract financing for its business? Will it interfere with its ability to attract additional capital? Will it require burdensome financing upon the corporation or the shareholders? Will it interfere with the rights of creditors? If a buy-out of plaintiff‘s shares is forced upon the company, it may be far from painless. If it is determined that the granting of relief will be unduly burdensome to the corporation or other shareholders, the trial court should consider this in determining whether to grant relief and, if so, whether this should affect the purchase price or value attached to plaintiff‘s shares or the method of payment. It is an equitable proceeding. Dowd v. Foundry Co., supra, 263 N.C. 101, 139 S.E. 2d 10.
Another circumstance to be considered is whether plaintiff‘s condition is a result of oppression or bad conduct by the other shareholders. Oppression for these purposes may be defined as: burdensome, harsh and wrongful conduct; a lack of fair dealing in the affairs of the company to the detriment of other shareholders; a violation of fair play on which every shareholder is entitled to rely. See, e.g., Exadaktilos, supra; White v. Perkins, 213 Va. 129, 189 S.E. 2d 315 (1972). In making this determination, the court will consider the substance of the conduct rather than its form. Polikoff v. Dole & Clark Building Corp., 37 Ill. App. 2d 29, 184 N.E. 2d 792 (1962).
Oppression in this context is close to a breach of fiduciary duty. The West Virginia Supreme Court, in a “reasonable expectations” case, analyzed oppression from the point of view of breach of a fiduciary duty. It held in substance that oppressive conduct in a close corporation is closely related to the fiduciary duty of good faith and fair dealing owed by majority stockholders to minority stockholders. Masinter v. Webco Co., 262 S.E. 2d 433 (W. Va. 1980). See also, Fox v. 7L Bar Ranch Co., 645 P. 2d 929 (Mont. 1982).
In this connection, I cannot agree that merely because plaintiff‘s expectations were not fulfilled it necessarily follows that the majority stockholders wеre guilty of oppression.
Another circumstance to be considered is the fact that most, if not all, of plaintiff‘s stock was given to him by his father. He did not contribute his own hard-earned cash to the enterprise. This could indicate that he did not assume the risk of having his investment held hostage by the majority, or it could be that one has to accept what one gets by gift—in this case, a locked-in minority interest in a family corporation.
With respect to the Republic management issue, in order for plaintiff to succeed, he must prove that (a) he has standing as an Eastern shareholder to bring suit on this claim against Ira as an Eastern director and officer, and (b) Ira in his role as an Eastern director and officer breached a fiduciary duty owed to Eastern not to usurp a corporate opportunity of Eastern. To establish the usurpation of a corporate opportunity, plaintiff must prove that: (1) the opportunity was either essential to the corporation or was one in which it had an interest or expectancy; (2) the corporation was financially able to take advantage of the opportunity itself; and (3) the party charged with usurping the opportunity did so in an official rather than an individual capacity. Upon such showing, the burden shifts to the defendant to prove the entire fairness of the transaction and that it was free from oppression, imposition and actual or constructive fraud. Thompson v. Shepherd, 203 N.C. 310, 165 S.E. 796 (1932); Schreiber v. Bryan, 396 A. 2d 512 (Del. Ch. 1978). See generally 56 Nw. U. L. Rev. 608 (1961); 16 A.L.R. 4th 784 (1982).
The foregoing are additional circumstances the trial judge should consider in determining the reasonable expectations of plaintiff and whether to grant equitable relief to plaintiff and, if so, the nature and method of such relief. They are required by the “circumstances of the case” standard of
Chief Justice BRANCH and Justice COPELAND join in this concurring opinion.
ELIZABETH M. BRADLEY )
v. )
EARL T. BRADLEY, JR. )
ORDER
No. 140P83
(Filed 1 June 1983)
DEFENDANT‘S petition for discretionary review is allowed for the limited purpose of entering the following order:
That part of the Court of Appeals’ decision affirming the award of attorney‘s fees to plaintiff is reversed on the authority of
In all other respects the Court of Appeals’ decision is affirmed.
BY ORDER OF THE COURT IN CONFERENCE, this 31st day of May, 1983.
FRYE, J.
For the Court