Wednesday, November 30, 2016

Boudreaux v. MICROS Systems, Inc. (Ct. of Special Appeals, Unreported)

Filed: August 19, 2016

Opinion by: Judge Wright, Jr.

Holding:  The mere statement of the existence of an offer, which is in excess of an accepted offer in a strategic transaction, is not sufficient to constitute a breach of a fiduciary duty to maximize value when the offer is subject to variability and is in close proximity to the price per share in the accepted offer.

Facts:  Target, a Maryland corporation, discussed a strategic transaction with three companies at various points over several months – Party A, Party B and the acquirer.  Target declined Party A’s proposal, which demonstrated an interest in acquiring target’s common stock for $58.00 per share.  On May 22, 2014, Party B entered into a non-disclosure agreement with target.  After three meetings of target’s board of directors on June 2, 2014, June 4, 2014 and June 5, 2014, target entered into exclusive negotiations with the acquirer.  During the exclusive negotiations, Bloomberg published a news article speculating that target and acquirer were nearing a possible transaction.  The price of target’s common stock rose from $57.71 on June 16, 2014 to $66.33 on June 17, 2014.  Also on June 17, 2014, Party B contacted target noting the Bloomberg article and expressed further interest in a potential transaction.  Party B later submitted a non-binding indication of interest to acquire target in an all-cash transaction at a price range of $67.00 to $70.00 per share, subject to a number of assumptions and contingencies.

Target was acquired by acquirer in a $5.3 billion all-cash tender offer, at a purchase price of $68.00 per share, followed by a short-form merger.  Certain stockholders filed complaints against target and its board of directors alleging the price and the process used to negotiate that price were unfair, breach of fiduciary duties, including value maximization duties, and aiding and abetting such breaches.  The circuit court granted defendant’s motion to dismiss.

Analysis:  When parties assert that the selling price of a company is inadequate, courts require a “showing of lack of diligence, failure to exercise judgment, lack of good faith or the existence of such conflicting interests…as to raise doubts of the ability of the trustee to live up to the duty of loyalty he owes to the beneficiaries.”  Madden v. Mercantile (27 Md. App. 17 (1975)).  Maryland courts have recognized that fair value is a variable sum, dependent on a multitude of factors.  “A price of [the stock] cannot be determined unreasonable ‘unless falsified by something more tangible than the unverified book value of the corporation, especially when those in control, with their intimate knowledge of the present and prospective affairs of the corporation, were willing to part with that control and sell their stock at the price offered.’”

Plaintiffs pled that there was a tentative offer from Party B that, at best, proposed $70.00 per share.  The Court provided:  “[s]tating that an offer of such nature existed is not nearly sufficient to constitute breach of fiduciary duty, especially considering its variability and proximity” to the agreed price per share.  The Court noted that several statements made by the plaintiffs subverted the stated $70.00 per share price and therefore made it speculative.  The Court further noted that plaintiffs could not point to a deal protection device that prevented another company from bidding and stated that, therefore, the target did not favor the acquirer.  The Court dismissed the breach of duties claim. 

The requirements for stating a claim for aiding and abetting a breach of a fiduciary duty are (1) existence of a fiduciary relationship, (2) breach of a duty owed by the fiduciary to the beneficiary and (3) harm resulting from the breach.  Underlying tortious activity must exist for the aider and abettor to be held liable.  Plaintiffs argued that the termination fees and non-solicit provision constituted an aiding and abetting claim “strong enough to withstand a motion to dismiss.”  The Court dismissed the claim because it failed the second prong of the test.

The opinion is available in PDF

This is an unreported opinion.  See Md. Rule 1-104.

Tuesday, November 8, 2016

Rullan v. Goden (U.S.D.C.)

Filed: March 24, 2016

Opinion by: Catherine C. Blake, District Judge

Holdings:  (1) Personal jurisdiction over an out-of-state entity can be shown when a related entity transacts business in Maryland and the out-of-state entity does not maintain separate books and records, accounting procedures and directors’ meetings from the related entity.  

(2) Maryland may be considered an out-of-state entity’s principal place of business if that entity lists a Maryland address on its tax forms and stores business records primarily at its Maryland location.

(3) When the sole shareholders and directors of business entities sign an agreement that addressed the ownership of those entities, the entities are bound by that agreement.

(4) An oral employment contract that lasts for one year is not enforceable under Florida law if it is not reduced to writing and signed by the party against whom it is sought to be enforced.  When a contract contemplates a one-year employment relationship, performance is not deemed complete when a superseding agreement is formed within that one-year period. 

(5) A contract is not void as contrary to public policy unless its illegality is clear and certain.

(6) Under West Virginia law, a contract may be enforceable when the language of an agreement indicates that the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  The formalization of the agreement is not a condition precedent to the agreement unless the parties expressly indicate as much.

(7) Judicial dissolution may be proper when there is illegal, oppressive or fraudulent action by majority shareholders with respect to minority shareholders.  Under Maryland law, conduct is oppressive when it substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the enterprise. 

(8) Financial accounting is an available remedy when shareholder oppression is present. 

Facts:  Daughter and Father were each 50% owners of Company 1, based in West Virginia, and Company 2, based in Maryland, which owned and managed a West Virginia summer camp (the “Camp”).  As Father contemplated leaving the summer camp business, he and Daughter wanted to add a European partner to help Daughter run the Camp.  Father and Daughter believed that Plaintiff, a Spanish national, could help with the Camp’s revenue by recruiting European children from wealthy families.  Plaintiff had attended the Camp as a camper and a counselor for about 20 years.

On December 7, 2010, Father, Daughter and Plaintiff met in Florida to discuss Plaintiff’s possible involvement with the camp.  They discussed the Camp’s debt, liabilities and size, but Father and Daughter did not correct Plaintiff when he presented inaccurate figures.  According to Plaintiff, the parties agreed that Plaintiff would work for $72,000 annually to recruit European campers, and if this worked out well, Father would sell Plaintiff his 50% share of the Camp.  Daughter could also make Plaintiff her full partner at any time during this first year.  Father, on the other hand, insists that he told Plaintiff that he would need to work successfully with Daughter for one year before he would sell his interest to Plaintiff.  The meeting minutes indicated that Plaintiff would work as an employee for at least one year, after which there would be an evaluation and an opportunity for Plaintiff to obtain shares of the company “if everything goes well.”  However, in the course of working with the Camp, Daughter soon began referring to Plaintiff as her “partner.”  In January 2011, Plaintiff and Daughter formed a new business entity, Company 3, to recruit more campers from Europe.

In January 2011, Father executed a promissory note naming him and Company 2 as jointly responsible for a $350,000 loan that had apparently been made to him in 2009 and which he had not disclosed to Plaintiff.  Plaintiff was also unaware of other issues, such as lawsuits against the Camp, Father and Daughter’s commingling of personal and Camp funds, and the true acreage of the Camp.
To secure a visa for Plaintiff to work in the United States, Plaintiff and Daughter were each advised to contribute $55,000 to Company 3.  Plaintiff invested $55,000 of his personal funds in Company 3, but Daughter contributed nothing.  Still, Plaintiff and Daughter each received half Company 3's stock shares.  Daughter also transferred the $55,000 Plaintiff had invested in Company 3 to Company 2, explaining to Plaintiff that the money was being borrowed for Camp expenses.  Daughter told Plaintiff that the $55,000 would be credited toward Plaintiff’s eventual purchase of the Camp from Father.

During the summer of 2011, Plaintiff worked at the Camp.  Father and Daughter were displeased with Plaintiff’s work.  Plaintiff also learned for the first time that two different companies, Company 1 and Company 2 owned the Camp, and that the Camp struggled to pay its bills on time.

Plaintiff, Father and Daughter met in June 2011 to discuss committing the partnership agreement between Plaintiff and Daughter to writing.  Father and Daughter continued to refer to Plaintiff as Daughter’s “full partner in the Camp” and assured Plaintiff that the Camp was doing well financially, though they did not disclose the extent of the Camp’s liabilities or cash-flow related challenges.  In August 2011, Daughter asked Plaintiff to lend $50,000 to the Camp to cover a cash-flow shortage.  Plaintiff did so, thereby depleting his life savings.
In late August 2011, the three met again to discuss various issues concerning the partnership.  They drafted and all signed a document called Partnership Stock Agreement (“PSA”) at that time.  Nevertheless, Father subsequently contended that this was a letter of intent contemplating a formal agreement in the future, and that he still needed to evaluate Plaintiff’s involvement, particularly given that the one-year vetting period had not been completed and he was not happy with Plaintiff’s performance during the summer.
The August 24, 2011 PSA included several terms.  Plaintiff was to pay $50,000 per year for ten years to purchase 50% stock in Company 1 and Company 2.  $50,000 of the %55,000 that Plaintiff invested in Company 3 was to be credited toward his stock purchase.  The PSA provided other terms, such as agreement as to the manner in which to invest profits and limits on expenditures requiring consent from the other partner.  The PSA's final term stated that “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made.”  No stock certificates or other legal documents were executed at that time, but when Plaintiff encountered other legal troubles, Daughter faxed documentation of Plaintiff’s investment and part ownership in the Camp from the Camp’s Maryland office. 

Plaintiff’s relationship with Father and Daughter deteriorated in late 2011.  Plaintiff learned that the Camp’s appraised value was $2.9 million instead of the $6 million he was led to believe it was worth.  Daughter prevented Plaintiff from having input on the business plan and accessing the financial records.  Plaintiff also learned that Father and Daughter used Camp funds to pay for their personal expenses and commingled funds.  Nevertheless, Daughter asked Plaintiff to contribute more money and bring in more campers.  Meanwhile, Father’s wife had died, allowing him to become more actively involved in the Camp’s affairs both with respect to his time and access to additional capital.  Father expressed disappointment with Plaintiff’s work and inability to assume more of the debt, and eventually banned him from being present or involved in the Camp.  Plaintiff sued Father, Daughter, Company 1, Company 2 and Company 3 (collectively, “Defendants”), alleging breach of contract and other causes of action.  Defendants moved to dismiss, which the court treated as a motion for summary judgment, and Plaintiff filed a cross-motion for summary judgment. 

Analysis:  Company 1, which was organized and ostensibly based in West Virginia, moved to dismiss, arguing lack of personal jurisdiction in Maryland.  Maryland’s Code, Courts and Judicial Proceedings § 6-103(b)(1) provides that a court may exercise jurisdiction over a defendant “who directly or by an agent . . . [t]ransacts any business or performs any character of work or service in the State.”  By showing that Daughter faxed Plaintiff documents indicating his stock ownership from the Maryland office and conducted certain meetings and operations there, Plaintiff made a prima facie showing of personal jurisdiction.  Moreover, although generally the contacts of one entity are not imputed to its affiliate, an exception is found when the affiliates fail to maintain separate books and records, accounting procedures and directors’ meetings.  Because there was significant overlap between the books and records of Company 1 and Company 2, a Maryland company, it was not unreasonable to impute Company 2’s Maryland contacts to Company 1.  Finally, the exercise of jurisdiction was “constitutionally reasonable” because it wasn’t “so gravely difficult and inconvenient as to place the defendant at a severe disadvantage in comparison to his opponent.”  CFA Inst. V. Inst. of Chartered Fin. Analysts of India, 551 F.3d 285, 296 (4th Cir. 2009).  For example, Daughter, a half-owner and officer of Company 1 was a resident of Maryland, and Company 1 had retained the same lawyers as the other defendants.  In fact, because Company 1’s tax forms listed a Maryland address, and the business records were stored in the Maryland office except when Camp was in session during the summer, the evidence supported a finding that Company 1’s principal place of business was in Maryland. 

The court addressed four of the Defendants’ arguments relating to breach of contract.  First, Company 1 and Company 2 argued that they were not bound by the PSA because Father and Daughter signed as individuals, not on behalf of the companies.  Second, Defendants argued that the statute of frauds barred enforcement of the December 2010 employment agreement.  Third, they argued that the employment agreement was illegal or against public policy.  Fourth, they argued that the alleged agreement contained conditions precedent and therefore was not binding.

The court summarily dismissed the first argument by saying that because the subject of the PSA was the ownership of Company 1 and Company 2, and because Father and Daughter were the only two shareholders of both companies, it was clear that Father and Daughter signed on behalf of Company 1 and Company 2.

The court agreed with the second argument concerning the statute of frauds by interpreting Florida law.  The oral employment agreement arose from a meeting of Plaintiff, Father and Daughter in Florida, so Florida’s statute of frauds applied.  Florida law requires that any agreement that cannot be fully performed within one year of creation to be reduced to writing and signed.  The statute of frauds barred enforcement of the December 2010 employment agreement, which completed Plaintiff’s employment for one year beginning in January 2011.  Moreover, the court rejected Plaintiff’s argument that the employment agreement had been fully performed in light of the August 2011 PSA, because Daughter had effectively made him a partner.  Because Plaintiff’s own complaint referred to the oral agreement as “an oral agreement that was to last one year,” the court granted summary judgment for Defendants on the breach of contract claim. 

The court rejected the third argument regarding terms contrary to public policy.  First, the court observed that contracts should not be held unenforceable for public policy grounds unless their illegality is clear and certain.  The court found no merit in Defendants’ argument that it would have been illegal for a partnership to replace a corporation, as Plaintiff could have been both a partner and a shareholder in Company 1 and Company 2.  The court also rejected Defendants’ argument that the contract was unenforceable because a “nonresident alien” may not own stock in an S corporation pursuant to 26 U.S.C. § 1361(b)(1)(C).  A nonresident alien’s purchase of stock in an S corporation is not illegal, but rather it causes the entity to lose its tax status as an S corporation.  Finally, the court rejected Defendants’ argument that the PSA was illegal and unenforceable because Plaintiff’s E-2 visa authorized him to work in the United States for Company 3, not Company 2 or Company 1.  This argument failed because the PSA did not call for Plaintiff to work in the United States, but rather he was to work in Europe recruiting campers, and the agreement did not call for the violation of the terms of his visa. 

As for the conditions precedent argument, the court found that summary judgment was improper on that ground.  Because the PSA was written and signed in West Virginia, the court applied West Virginia law on the existence of a contract.  The court noted that nothing on the face of the PSA indicated that it was a letter of intent and not a contract.  Moreover, even if the PSA were construed as a “preliminary agreement,” it would still be enforceable.  Under West Virginia law, there are two types of binding preliminary agreements, called Type I and Type II.  Type I is a complete agreement in which the parties fully intend to be bound, but they contemplate a more elaborate formalization of the agreement.  See Burbach v. Broad Co. of Delaware v. Elkins Radio Corp., 278 F.3d 401, 407 (4th Cir. 2002).  By contrast, Type II agreements do not fully commit the parties to the ultimate contractual objective, but they commit the parties to negotiate the open terms in good faith within an agreed-upon framework.  See id. at 408.  The court found that the PSA was a Type I preliminary agreement, as its language, “[a]fter this agreement, a due diligence of the company and the additional legal papers required for the transaction will be made,” states that the agreement only needed to be formalized.  Because the parties did not express their intent for the formalization to be a condition precedent, the court would not construe it as such. 

Summary judgment was denied with respect to Plaintiff’s shareholder oppression claims.  The claim against Company 1 arose under West Virginia law, and the claim against Company 2 arose under Maryland law.  Both states’ laws allow for the dissolution of a corporation when the directors or controlling parties act in a manner that is illegal, oppressive or fraudulent.  The court observed that majority shareholders of a corporation have a fiduciary duty to the minority shareholders, which requires the former to exercise good faith and fair dealing toward the latter.  In West Virginia, when a majority shareholder acts to “freeze or squeeze out” a minority shareholder from deriving any benefit of his investment without a legitimate business purpose, oppressive conduct may be found.  In Maryland, oppression is conduct that “substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise.”  Bontempo v. Lare, 119 A.3d 791, 804 (Md. 2015).  The court rejected Defendants’ argument that Plaintiff was not a shareholder of Company 1 or Company 2, because Daughter provided Plaintiff with documentation that he had contributed capital and was a 10% shareholder of both companies.  Summary judgment on this claim was therefore improper. 

The court further observed that both West Virginia and Maryland law provide for accounting as a form of relief against shareholder oppression.  Because there was evidence that Plaintiff was a shareholder of Company 1 and Company 2, summary judgment on the accounting claim was denied. 

The full opinion is available in PDF.