[Shareholder Oppression] Proof of Shareholder Status
Eric Fryar
Jardine v. McVey, 276 Neb. 1023, 759 N.W.2d 690 (Jan. 9, 2009).
The Supreme Court of Nebraska has addressed the sometimes difficult question of proving shareholder status in a closely-held corporation. Many times small corporations operate informally and by verbal agreement. Frequently the "corporate book" is purchased when the company is set up and is never opened again. Consequently, once a dispute among the owners arises, there may be a real question of whether the person claiming to be an oppressed shareholder is really a shareholder at all. Sometimes, a controlling shareholder will try to take advantage of the shareholders' failure to use the stock ledger or failure to actually issue shares by falsely denying the plaintiff's share ownership.
The Jardine v. McVey case arose out of a divorce settlement, the plaintiff and his former wife. During the marriage, the plaintiff had worked at one of three family-owned corporations controlled by his wife's father. During the marriage, the father made a gift of a substantial block of shares in the three corporations to his daughter. Later, during the divorce, the plaintiff claimed that the shares were marital property and demanded half. The parties settled without resolving the ownership issue, but with the plaintiff being paid about $350,000 for any interest that he claimed in the stock. Plaintiff negotiated the settlement price directly with the father-in-law and the president of the three corporations, and plaintiff had specifically asked his father-in-law whether the companies were trying to be sold, and the father-in-law answered that they were not.
In fact, the companies had received serious offers from two potential buyers at that time and were engaged in discussions of a potential sale. About eight months after the divorce was final, the corporations were sold to a third buyer for a sum substantially in excess of the value on which the plaintiff's settlement was based. The plaintiff sued the directors of the three corporations for breach of fiduciary duties in failing to disclose the on-going sales talks, and plaintiff sued his former father-in-law for fraud. The trial court granted summary judgment in favor of the defendants. The Supreme Court affirmed.
In the Supreme Court's analysis, the issue of fiduciary duties rested solely on the question of whether the plaintiff had been a shareholder at the time of the divorce. The court held that the officers and directors owe fiduciary duties both to the corporation and to the shareholders. The defendants maintained that the plaintiff was not a shareholder because the stock in which he claimed an interest had been issued solely to his former wife, that the certificates were solely in her name, and that the stock register did not record any ownership by the plaintiff. The court agreed with the plaintiff that the fact that his name was not on the stock register and the fact that he had not been issued a stock certificate did not preclude his being a shareholder. However, in the absence of such conclusive proof, the plaintiff must have evidence of "some sort of subscription or contract, express or implied, …, whereby the person obtains the right to (1) hold stock or, upon some condition, demand stock; and (2) exercise the rights of a stockholder." The court cited its earlier opinion in Evans v. Engelhardt, 246 Neb. 323, 518 N.W.2d 648 (1994), in which the court had held that the plaintiff was a shareholder despite the absence of a stock certificate or stock ledger entry because the other shareholders had acknowledged his share ownership for years by making distributions based on his percentage of ownership, reflecting him as an owner on company tax returns and on the plaintiff's K-1, and giving him notice of shareholder meetings. The plaintiff in Jardine had no evidence of this sort. The court noted that the stock had been a gift and therefore was not marital property, and nothing done by the corporation or the other shareholders acknowledged plaintiff's share ownership. Plaintiff never signed a stock transfer agreement; he never signed the shareholders' buy-sell agreement; he never received or endorsed a dividend check; he never served as an officer or director; he never attended any shareholders' meetings; he never voted any of his shares, participated in any elections, or served as a proxy for the corporations. Against this, the plaintiff argued "(1) He received payment for the stock in the divorce proceeding; (2) [the wife] obtained the stock during their marriage; (3) during the divorce negotiations with [the father] and [president of the corporation], they 'acknowledged' [plaintiff's] one-half ownership in the stock; (4) [the president's] statement that if [plaintiff] had not worked for the corporations, [the wife] may not have received the stock when she did; and (5) when the corporations were sold, all shareholders were either employees or former employees of the corporations except [the wife]." The court held that this evidence was not sufficient to raise an issue of genuine fact as to whether plaintiff had been a shareholder.
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Posted By Eric Fryar to Shareholder Oppression at 2/21/2009 01:15:00 PM