McLaughlin v. Schenk

2013 UT 20, 299 P.3d 1139, 731 Utah Adv. Rep. 27, 2013 Utah LEXIS 60, 2013 WL 1384974
Utah Supreme Court·Decided April 5, 2013·No. 20111109·Published·Cited by 13 cases

Opinion

Justice PARRISH,

opinion of the Court:

INTRODUCTION

11 This case involves an appeal from an entry of summary judgment in a case that we remanded in 2009. In 1999, Greg Schenk purchased shares in Cookietree, Inc. (Cookie-tree), in violation of a 1991 Shareholder Agreement. In 2005, Cookietree's Board of Directors (Board), including Schenk, voted to waive the provisions of the 1991 Shareholder Agreement that precluded the stock purchase. Around that same time, shareholders representing nearly 90 percent of Cookie-tree's shares, again including Schenk, signed consent and waiver forms ratifying the 1991 stock purchase (collectively, the 2005 Waivers). Samuel McLaughlin, a minority shareholder, brought suit challenging the stock purchase, and the district court granted Cookietree and Schenk's motion for summary judgment. On appeal, we held that the 2005 Waivers were tainted by Schenk's participation in the votes and remanded for a determination of whether the 2005 Waivers were fair. McLaughlin v. Schenk, 2009 UT 64, 220 P.3d 146 (McLaughlin I ).

T 2 Following our remand, Cookietree took several corporate actions that it intended to have "the same purpose and effect of a fairness hearing: to resolve the nontransaction conflict of interest that tainted the 2005 Waivers" (2009 Ratifications). Specifically, in 2009, the Board voted to waive the stock transfer provisions in the 1991 Shareholder Agreement and to ratify the 2005 Waivers. And in 2010, the shareholders similarly voted to waive the stock transfer provisions and to ratify the 2005 Waivers.

T3 The district court thereafter held that McLaughlin was still entitled to a fairness hearing, notwithstanding Cookietree's at *1142 tempts to resolve the conflict of interest. But when the case was reassigned to another district court judge, the replacement judge disagreed with the determination that a fairness hearing was necessary. He ruled that the post-remand corporate actions resolved any issue concerning the conflict of interest that had tainted the 2005 Waivers and entered summary judgment in favor of Cookie-tree and Schenk,. McLaughlin appeals to this court, raising several issues for our consideration.

14 The first issue is whether the district court violated the law of the case doctrine when it ruled that it could consider options other than a fairness hearing to resolve the nontransaction conflict of interest situation. The second issue is whether the holding of McLaughlin I that shareholders in closely held corporations owe each other fiduciary duties has been superseded by statute and whether the statute is dispositive in this case. The third issue is whether the district court violated our mandate in McLaughlin I by declining to hold a fairness hearing. The final issue is whether the post-remand corporate action mooted the need for a fairness hearing, thereby mandating summary judgment in favor of Schenk and Cookietree.

BACKGROUND

T5 Cookietree is a Utah corporation that was established in 1981. McLaughlin v. Schenk, 2009 UT 64, ¶ 3, 220 P.3d 146. Schenk is the majority shareholder and President of the Board. Id. 193, 6. McLaughlin is a minority shareholder and former executive employee. Id. 113, 9.

T6 In 1999, the Estate of Boyd Schenk sold 545,200 shares of Cookietree common stock to Greg Schenk. "This transfer was not recorded in Cookietree's minutes or written records, and a right of first refusal was not provided to the corporation or the other shareholders," in violation of the 1991 Shareholder Agreement. Id.

T7 In 2004, MeLaughlin filed suit against Schenk and Cookietree, alleging that the stock transfer violated the 1991 Shareholder Agreement. In 2005, Cookietree's Board and shareholders, including Schenk, who acted in both capacities, passed the 2005 Waivers, which purported to waive the provisions of the 1991 Shareholder Agreement that precluded the stock transfer. Cookietree and Schenk then successfully moved to dispose of McLaughlin's claims on summary judgment. Id.

[ 8 McLaughlin appealed to this court. Id. Although we held that the 2005 Waivers did not violate Cookietree's corporate governance documents, we held that the 2005 Waivers "suffer[ed] from ... [al lack of probity and fair dealing." Id. 186. We reasoned that shareholders in closely held corporations owed fiduciary duties to other shareholders and extended the conflict of interest provisions of section 851 of the Utah Revised Business Corporation Act (Corporation Act), Uta Cop® §§ 16-10a-101 et seq., to "nontransaction related conflicts" of interest such as those at issue in this case. Id. 137. After concluding that Schenk's participation in both the Board waiver and the shareholder waiver was tainted by a conflict of interest, we reversed the summary judgment that had been based on these waivers. "We therefore remand[ed] for a determination of whether the [2005] [WJlaivers were fair within the meaning of Utah Code section 16-10a-851, which is a fact-intensive inquiry focusing on whether the waivers were beneficial to the corporation and the shareholders and whether they satisfied the standard of fair dealing." Id. 138.

T9 Following our remand, on December 18, 2009, all three of Cookietree's Board members met. They included Schenk, Harold Rosemann, and David Rudd. Schenk and Rosemann disqualified themselves from voting due to a conflict of interest. The one remaining Board member, Rudd, voted to ratify the 2005 Waivers and "presently waived the stock transfer provisions in the Shareholders Agreement." All three Board members then voted to ratify the actions of Rudd.

110 Rudd then authorized two proposals to be submitted to the shareholders for vote at the upcoming annual meeting on January 6, 2010. Proposal One was a present waiver of the stock transfer provisions. Proposal *1143 Two was ratification of the 2005 Waivers and Proposal One.

T 11 The 1991 Shareholder Agreement required that two-thirds of the shares, excluding those shares owned by the controlling shareholder, vote to waive the Shareholder's Agreement's restriction on share transfers. Therefore, Schenk voted on Proposal One because his vote was necessary for waiver under the Shareholder Agreement. However, because of Schenk's conflict of interest, the vote on Proposal One was tallied in two different ways: one tally including Schenk's shares other than the shares at issue in the 1999 Stock Sale; the other tally excluding all of his shares. When Schenk's shares were included in the tally, 8,168,200 shares were voted in favor of Proposal One and 400,000 shares (owned by McLaughlin and his wife) were voted against Proposal One. When Schenk's shares were excluded from the tally, 987,000 shares were voted in favor of Proposal One and 400,000 shares were voted against.

€12 Proposal Two to ratify the 2005 Shareholders Waiver was voted for by a majority of the shareholders, not including Schenk. Specifically, 987,000 shares were voted in favor of Proposal Two and 400,000 shares were voted against.

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McLaughlin v. Schenk, 2013 UT 20, 299 P.3d 1139, 731 Utah Adv. Rep. 27, 2013 Utah LEXIS 60, 2013 WL 1384974 (Utah 2013).

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