Hogans v. Hogans Agency, Inc. (Ct. of Special Appeals)

Filed:  August 28, 2015

Holding: A corporation may require a stockholder, who is a direct competitor of the corporation, to sign a confidentiality agreement before inspection of the corporation’s books of accounts and other corporate records.

Facts:  Stockholder (the “Stockholder”) owns 37.5% of stock in an insurance and real estate brokerage company (the “Corporation”).  Stockholder also owns another real estate brokerage company that is a competitor to the Corporation.  The Stockholder asserted that his right to request an inspection of company records falls under Sections 2-512 and 2-513 of the Maryland General Corporation Law (the “MGCL”). Section 2-513 broadens the rights for stockholder's who have had at least 5% of the outstanding stock of a corporation, for at least six months. A stockholder who fits the criteria has the right to inspect the "book of accounts" of the corporation. 

The Corporation responded to the request by providing the Stockholder with copies of the Corporation’s bylaws, minutes of the proceedings of the Corporation’s stockholders, an annual statement of affairs for the prior tax year and the name, address, and shares of each of the Corporation’s stockholders. The Corporation agreed to allow for the onsite inspection and copying of the books of accounts, under the condition that the Stockholder sign a confidentiality agreement, prohibiting the Stockholder from sharing the information with a third party. The Stockholder refused and filed a pro se Complaint for Stockholder’s Right to Inspect requesting: 1) to gain immediate access to a copy of the books of account for inspection; 2) access to the Corporation’s photocopier free of charge; 3) the Corporation to pay for a complete audit of company records and 4) the Corporation to pay the Stockholder’s attorney’s fees and costs.

The trial court granted the Corporation’s motion for summary judgment ordering that a confidentiality agreement must be signed by the Stockholder in order for him to be allowed access to inspect corporate records. 

Analysis:  On appeal, the Stockholder argued the MGCL does not require that a stockholder sign a confidentiality agreement prior to inspection of a corporation’s records and that “possible competition” between a stockholder and a corporation is not sufficient to deny a stockholder his right of inspection.  The Court noted that the right of a stockholder to inspect the corporate records of a corporation is provided for under Sections 2-512 and 2-513 of the MGCL, which delineates the differences between the rights of any stockholder versus that of a stockholder who has owned more than 5% for six months.

The Court pointed to two case holdings regarding stockholder access to corporate records, that were reconciled through a treatise authored by James J. Hanks Jr.  In Weihmayer vs Bitner, 88 Md. 325 (1898), it was determined that a stockholder was entitled to an absolute right to inspect corporate records, that can be refused only through a finding that the intended use was “evil, improper of unlawful.”  In Wright v. Hebin, 111 Md. 644 (1910) the court decided it would allow for the refusal of access, if the court issued a writ of mandamus, where it decided what the proper safeguards to protect the interests of all concerned would be. Stockholders could gain access to information for “legitimate purposes.” 

Hanks agreed that a five-percent, six-month stockholder was entitled to inspect the books, for the purpose of protecting his equity investment, “but not for any other purpose, such as competing with the corporation.”  Hanks goes on to state that a corporation may take reasonable measures, such as conditioning the right to inspect corporate records upon the stockholder signing a confidentiality agreement, “to protect the corporation against disclosure and misuse of confidential documents and information.”

The Court relied upon this explanation of the rights of a stockholder to inspect, and agreed with the trial court’s “exercise of sound discretion” in requiring the Stockholder to sign a confidentiality agreement prohibiting him from sharing information with third parties.  The condition of allowing access, after a confidentiality agreement was signed, was found to be a reasonable means to prevent the Stockholder from using the inspection rights to gain information that could be used to advance his own competing business.

The full opinion is available in PDF.

Federal Insurance Co. v. Mathews Brothers, LLC, and Alban Tractor Co., Inc. (Maryland U.S.D.C.)

Filed: August 14, 2015

Opinion by: Richard D. Bennett

Holdings:

(1) The Maryland Uniform Commercial Code (UCC) applies to the manufacture of a yacht because the predominant purpose is the provision of a good with labor incidental thereto.

(2) The UCC applies to the manufacture and installation of a yacht engine and related parts because the predominant purpose is the provision of a good with labor incidental thereto.

Facts:

Original Owner contracted with Builder to manufacture a yacht (Yacht Contract).  Builder then contracted with Engine Company to install an engine on the yacht (Engine Contract).  Engine Company provided an engine to Builder, who physically placed it on the yacht.  Before delivery to Original Owner, Engine Company performed final “hook ups” and accessory installations, conducted a “PAR Test” and replaced the engine.  Then, Builder delivered the completed yacht to Original Owner.  Original Owner died and his estate sold the yacht to Second Owner, who procured insurance from Insurance Company.  Subsequently, the yacht sunk and Insurance Company paid Second Owner on the insurance contract.  Then, Insurance Company sued Builder and Engine Company.

Analysis:

The Court determined the Yacht and Engine Contracts were mixed contracts because they involved both goods and services.  The Court accordingly applied the predominant purpose test to determine whether these mixed contracts are controlled by the UCC.  The UCC applies to transactions in goods, which are “movable at the time of identification to the contract for sale.”  The predominant purpose test asks “whether (the contract’s) predominant factor, (its) thrust, (its) purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, labor incidentally involved (e.g., installation of a water heater in a bathroom).”

The Court cursorily concluded the Yacht and Engine Contracts were contracts for the sales of goods, with labor incidentally performed.  Therefore, the UCC and its four-year statute of limitations applied and the default three-year statute of limitations in the Courts and Judicial Proceedings Code did not apply.  The UCC’s statute of limitations ran from the date of tender of delivery to the Original Owner, which expired over 18 months before the filing of the action, thus Insurance Company’s claims were barred.  Builder’s and Engine Company’s Motions to Dismiss were Granted pursuant to FRCP 12(b)(6).

The full opinion is available in PDF.

Bontempo v. Lare (Md. Ct. of Appeals)

Filed: August 6, 2015

Opinion by: Robert N. McDonald

Holdings:

(1) The standard for determining whether a minority shareholder has been “oppressed” by the majority is the shareholder’s “reasonable expectations” upon obtaining an ownership interest in the company. This standard does not, however, dictate the type of equitable relief a trial court must provide, unless it is to be dissolution of the company.

(2) A breach of fiduciary duty to a corporation does not constitute fraud, absent a finding of fraud by the court. In this case, the majority shareholder’s self-dealing was a breach of his fiduciary duty, but because it did not involve deception, it did not rise to the level of fraud. The requested remedies of dissolution of the company and an award of punitive damages were therefore denied.  

Facts: See prior summary of Bontempo v. Lare (Md. Ct. Spec. App.).

Analysis:

The Court agreed with the opinions of the Circuit Court and the Court of Special Appeals on the standard for determining whether a minority shareholder has been “oppressed”: The court should look to the shareholder’s “reasonable expectations” at the time of acquiring an ownership interest in the company. If oppression has occurred, then dissolution of the company can be a remedy.

The Court of Appeals found, however, that even upon a finding of oppression, other, less punishing remedies can also be considered. In choosing a possible remedy, the court should take into account other stakeholders who may be affected, including other shareholders, managers, employees, and customers.

In this instance, Plaintiff argued that he had a reasonable expectation of future employment when he acquired a stake in the company. He said his investment, in the form of sweat equity, should trump his status as an at-will employee. The Court said a “reasonable expectation” can be used to determine whether oppression has occurred but does not dictate what form of equitable relief a court should grant. In addition, reinstating Plaintiff as an employee would not have been a viable option because he and Defendant could not reasonably have been expected to run a business together.

A provision in the shareholder agreement requires an employee to sell his stock upon termination “for cause.” Plaintiff argued that this provision effectively created an employment agreement, overriding his status as an employee at will. The Court was unpersuaded by this argument as well, noting that a buy-out requirement when a shareholder-employee is terminated for cause does not imply that the individual may be terminated only for cause.

On another mater, Plaintiff asked the Court to reconsider his allegations of fraud, which the Circuit Court had denied. He argued that Defendant’s breach of his fiduciary duty to the company constituted fraud as to the company itself and to Plaintiff as an oppressed shareholder.

The Court affirmed the lower court’s finding, noting that although Defendant’s self-dealing did constitute a breach of his fiduciary duty to the company, he made no attempt to conceal the activity. The illicit personal expenditures from the corporation’s accounts were entered into the company’s books, to which Plaintiff had full access.

Plaintiff made his allegations of fraud in connection with seeking dissolution of the company and an award of punitive damages for his benefit. As to the request for punitive damages, the Court said that they are not available as an equitable remedy and that, in any event, a finding of fraud would not support an award of punitive damages.

The full opinion is available in PDF.

Len Stoler, Inc. v. Wisner (Ct. of Special Appeals)

Filed:  May 28, 2015

Opinion by Hotten, J.

Holding:  An automobile dealer may charge and retain an electronic titling fee and not violate the Credit Grantor Closed End Credit provisions of the Commercial Law Article.

Facts:  Appellee alleged an automobile dealer violated the Maryland Closed End Credit Grantor Law (the “CLEC”) of Sections 12-1001 et. seq. of the Commercial Law Article, which “governs closed end credit transactions and regulates interest rates, charges, default and other aspects of a credit transaction,” when it collected an electronic titling fee.  The dealer argued that Section 13-601 of the Transportation Article permits an automobile dealer to collect the electronic titling fee upon issuing permanent registration plates.  The Court found the provisions of the Commercial Law Article and the Transportation Article to be in conflict with one another.  

Analysis:  The Court discussed several principles of statutory construction when the plain language of statutes renders a conflict, including (i) an analysis of the context and legislative history of both statutes, (ii) the precedence of a more recent statute over an earlier statute and (iii) the well-established principle that a more specific enactment governs a more general statute.  

The Court reviewed a prior case interpreting the CLEC and the General Assembly’s response to the case, concluding that the General Assembly’s goal was to “create certainty in credit contracts” and allow a credit grantor to opt into one particular credit transaction statute while still allowing other Maryland laws and regulations to apply.  The Court found the Transportation Article to contain more specific language because it specifically refers to the fee associated with electronic registration while the CLEC refers to “reasonable” fees.  Further, the electronic titling fee provision of the Transportation Article was enacted a decade after the CLEC.   

The Court found the electronic titling fee to be an exception to CLEC and noted the consistency of this finding with prior interpretations of the Attorney General’s office. 

The full opinion is available in PDF.