Login | July 19, 2019

9th District reverses shareholder case

Legal News Reporter

Published: May 13, 2019

A Lorain County trial court erred by granting summary judgment on conspiracy and fiduciary duty claims in a dispute over control of an Avon Lake company, according to the 9th District Court of Appeals.

Hall Contracting Services, a privately-held corporation, installed and removed printing presses for newspapers throughout the United States. HCS was incorporated in 2005 with Richard Palmer, Loretta Frimel and Mike Taylor and others as shareholders.

According to court records:

In 2007, eight of HCS’s nine shareholders signed a majority shareholder agreement. The MSA placed limitations on the transferability of shares and identified rights of first and second refusal.

Appellee Robert Bowers did not sign the MSA and was not bound by any of the terms. In May 2012, Palmer, appellee Graham Hall and a third shareholder, Robert MacKenzie, were elected as directors of HCS, with Palmer selected president.

Soon after, Hall and Bowers began discussing selling shares to “kill the shareholders” agreement and take control of HCS. Bowers sold his shares to Hall in July 2012, but Hall did not disclose the transfer to HCS and the other directors and shareholders until August 2012.

The sale resulted in Hall becoming the majority shareholder of HCS and Bowers no longer being a shareholder. However, Hall continued to share confidential financial information regarding HCS with Bowers.

One month later, Hall and MacKenzie voted as a supermajority to amend the MSA to remove the restrictions on the transferability of shares – including those related to transfers between spouses – and eliminate the right of first and second refusal. That same month, Hall and MacKenzie sold their shares to Judith Bowers, Robert Bowers’ wife.

The move made Judith Bowers the majority shareholder, and after the stock transfer, she appointed her husband as the new president and CEO of HCS.

In response, Palmer filed a shareholder action on behalf of HCS against Hall and Robert and Judith Bowers. He also alleged individual claims for injunctive relief, accounting, civil conspiracy and breach of fiduciary duty.

Meanwhile, Hall, HCS and the Bowers filed their own counterclaims, cross-claims and a third-party complaint.

On appeal, Palmer argued the trial court misapplied the law in favor of the appellees by dismissing the conspiracy and breach of fiduciary duty claims after finding there was no breach of the MSA. The appellate panel agreed.

In 2012, Hall held two different roles at HCS – majority shareholder and director, so he owed two separate fiduciary duties. Palmer alleged breach of fiduciary duty based upon both roles.

Count one – a declaratory judgment claim – addressed the amendment of the MSA and Hall’s duties as a majority shareholder to the minority shareholders. Count 10 stemmed from Hall’s duties as a director to HCS and all of the shareholders.

However, 9th District Judge Lynne S. Callahan noted that only Count 10 was before the panel.

“Mr. Hall argued extensively in Count 1 that he did not breach his fiduciary duty as a majority shareholder to the minority shareholders because the amendment of the MSA was contractually permissible and did not prevent the minority shareholders from having an equal opportunity in the corporation,” Judge Callahan wrote in her majority opinion. “Mr. Hall then argued that the same arguments asserted in Count 1 applied to Count 10.

“Mr. Hall’s reliance upon his previous arguments in support of Count 10 is fatal to his summary judgment motion. … Because the fiduciary duties of a director and majority shareholder are different and owed to different parties, Mr. Hall’s summary judgment arguments in support of Count 1 were not applicable to Count 10.”

The panel concluded that Hall failed to meet his initial Dresher (75 Ohio St.3d at 292-293) burden of demonstrating the absence of genuine issues of material fact as to Palmer’s breach of fiduciary duty of a director as alleged in Count 10.

Therefore, the trial court erred in granting summary judgment in favor of Hall against Palmer on Count 10. The appellate judges also rejected Hall’s argument regarding the civil conspiracy claim on the grounds that that Palmer cannot establish the element of an injury to a person because there is a lack of evidence of damages.

Ninth District judges Jennifer Hensal and Julie Schafer concurred.

The case is cited Palmer v. Bowers, 2019-Ohio-1274.