STEPHENSON v. DREVER

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Court of Appeal, First District, Division 1, California.

Alan W. STEPHENSON, Plaintiff and Appellant, v. Maxwell Bruce DREVER et al., Defendants and Respondents.

No. A071884.

Decided: October 23, 1996

Denis T. Rice, Chong S. Park, Howard, Rice, Nemerovski, Canady, Falk & Rabkin, San Francisco, for Plaintiff and Appellant. James J. Brosnahan, Jennifer H. Small, Barry R. Himmelstein, Morrison & Foerster, San Francisco, for Defendants and Respondents.

 Alan W. Stephenson, employed by Drever Partners Inc. (Drever Partners), became a minority shareholder in the corporation under an agreement conferring on Drever Partners the right and obligation to repurchase Stephenson's shares upon his termination as an employee.   After leaving Drever Partners' employ, Stephenson brought an action against Maxwell Bruce Drever as the majority shareholder in Drever Partners and against Maxwell Drever, Michael Masterson and Richard Kalish as the directors and officers of Drever Partners.   Stephenson's complaint sought compensatory and punitive damages on the theory that the defendants had breached fiduciary duties owed to him by failing to make corporate distributions to him, and by taking various actions reducing corporate assets to the detriment of Stephenson as a minority shareholder.   Stephenson appeals from an order dismissing his complaint after the superior court sustained a demurrer without leave to amend.   The appeal presents an issue of first impression in this state:  whether an employee who is a minority shareholder under an agreement obligating the corporation to repurchase the shares at such time as the employee ceases working for the corporation, retains his shareholder rights after leaving the corporation's employ.   We hold that he does not.1

BACKGROUND 2

Stephenson was employed by Drever Partners from 1980 until May of 1994, serving as Drever Partners' chief financial officer since 1983.   In 1990, Stephenson entered into an agreement with Drever Partners by which the corporation, in recognition of the value of Stephenson's services and as incentive for him to remain in its employ, agreed to permit Stephenson to purchase 11 percent of Drever Partners' stock—500 shares—at $1 per share.   The stock purchase agreement further provided that in the event of termination of Stephenson's employment for any reason whatsoever, “then, on or before ninety (90) days after the date of such termination, Drever Partners shall have the right and obligation to repurchase all of the Shares” at fair market value.   In May 1994, Stephenson ceased working for Drever Partners, triggering Drever Partners' right and obligation to repurchase the stock.   A dispute arose as to how the fair market value of the stock might be determined.   That dispute was the subject of an earlier appeal, and is not now before us.   One result of that dispute, however, is that the stock has not been repurchased by Drever Partners.

Stephenson then filed the present complaint, in his capacity as minority shareholder, claiming breach of fiduciary duty by respondents.   The complaint alleged that respondents failed to insure that Stephenson was accurately informed of Drever Partners' financial condition.   It further was alleged that respondents diverted corporate assets and resources and that Stephenson was precluded from sharing in any corporate distributions.   The superior court ruled that Stephenson's rights as a shareholder ended when Stephenson left Drever Partners' employ.

DISCUSSION

I.Stephenson's Status As A Minority Shareholder, And The Rights And Duties Arising From Such Status, Ceased When He Left Drever Partners' Employ

 There is no question but that, absent an agreement to the contrary, controlling shareholders and directors of a corporation, such as respondents here, owe a fiduciary duty to minority shareholders not to use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority.  (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at pp. 108–109, 81 Cal.Rptr. 592, 460 P.2d 464;  Brown v. Allied Corrugated Box Co. (1979) 91 Cal.App.3d 477, 488, 154 Cal.Rptr. 170.)   There also is no question but that, in the absence of an agreement to the contrary, the legal owner of stock is entitled to its earnings, even if the owner has an executory agreement to transfer the stock to another.   The buyer has no right to the dividends until legal title actually passes.   (Gilfallan v. Gilfallan (1914) 168 Cal. 23, 31, 141 P. 623;  Richards v. Pacific S.W. Discount Corp. (1941) 44 Cal.App.2d 551, 555, 112 P.2d 698.)   The issue here is whether Stephenson's stock repurchase agreement is an agreement contrary to these otherwise applicable principles.

 The rules developed to protect minority shareholders are rules of inherent fairness from the view of the corporation and those interested therein.  (Jones v. H.F. Ahmanson & Co., supra, 1 Cal.3d at p. 110, 81 Cal.Rptr. 592, 460 P.2d 464.)   No California case has considered the effect of these rules on employee shareholder rights under mandatory repurchase agreements such as that at issue here.   A number of other courts have considered this issue, however, and have concluded that the fiduciary duties owed to employee shareholders by directors and majority shareholders under such agreements end when the obligation to repurchase the shares is triggered.   As noted by the court in Coleman v. Taub (3d Cir.1981) 638 F.2d 628, it can be assumed that the employer's intention in executing repurchase agreements such as the one at issue here, is to avoid the risk that a dissident, disaffected ex-employee might disrupt corporate operations.   The employee bargains for the right to be a shareholder only while remaining an employee.   He does not “bargain for the privilege of being a dissident, litigious, outside minority stockholder and the obvious purpose of the buy-back clause was undoubtedly to avoid such a situation.”  (Coleman v. Taub, supra, 638 F.2d at p. 637.)   “These provisions, which require an employee shareholder to sell back stock upon severance from corporate employment, are designed to ensure that ownership of all of the stock, especially of a close corporation, stays within the control of the remaining corporate owners-employees;  that is, those who will continue to contribute to its successes or failures (see, Kessler, Share Repurchases Under Modern Corporation Laws, 28 Fordham L.Rev. 637, 648 [1959–1960] ).”  (Gallagher v. Lambert (1989) 74 N.Y.2d 562, 549 N.Y.S.2d 945, 946, 549 N.E.2d 136, 137.)   Unlike the typical minority shareholder, therefore, whose right of participation in the corporate enterprise continues until he or she either sells his stock or is merged out for a valid business purpose, the employee shareholder under a buy-back agreement loses the right to continue to hold the corporate shares upon the event triggering the repurchase rights.  (Coleman v. Taub, supra, 638 F.2d at p. 637.)   This reasoning was followed by the court in Bevilacque v. Ford Motor Co. (1986) 125 A.D.2d 516, 509 N.Y.S.2d 595, 599:  “no fiduciary duty arises out of the shareholders' agreement where, as here, the minority shareholder has assented to a mandatory repurchase-upon-termination clause.”   It also was followed by the court in Jenkins v. Haworth (W.D.Mich.1983) 572 F.Supp. 591, 601:  “Where, as here, the minority shareholder has consented in a shareholder's agreement to mandatory repurchase of his shares upon termination from employment, there is no requirement that the majority act only for a valid business reason and on fair terms.”

Stephenson attempts to distinguish Coleman, Bevilacque and Jenkins on the grounds that the plaintiffs in those cases were not seeking distributions of assets assertedly due them as shareholders.   Thus, Stephenson contends that the principle that a corporation owes no fiduciary duty to an employee shareholder under a mandatory repurchase agreement has no effect on the right of the employee shareholder to corporate distributions until such time as his or her shares are in fact repurchased.   The principle underlying these cases, however, is that the parties have the power to agree that a shareholder loses his status as a shareholder upon some event other than actual transfer of shares to another.   Once the triggering event occurs the shareholder may be entitled to the value of his shares, but no longer is entitled to participation in the corporation.   Under a mandatory repurchase agreement, the parties agree to end the shareholder's participation in the corporation upon the occurrence of the event triggering the right and obligation to repurchase.   Respondents owe no fiduciary duty to Stephenson because he lost his status as a shareholder by leaving Drever Partners.   Once he lost his status as a shareholder he lost the right to the corporate distributions owed shareholders.   To hold otherwise would encourage employee-shareholders to initiate frivolous litigation in order to delay the repurchase of their shares.

We therefore conclude that notwithstanding his retention of legal title to Drever Partners' stock, Stephenson lost his status as a shareholder when he left Drever Partners, and by losing that status also lost any right to corporate distributions or to complain about corporate actions.

II.

The Trial Court Was Not Required To Permit Stephenson To Amend His Complaint To State A Cause of Action As A Creditor

Under Corporations Code section 316, corporate creditors are entitled to bring suit in the name of the corporation against its directors for making a distribution to its shareholders contrary to the provisions of Corporations Code section 500.   That section provides in part that shareholder distributions may be made only if the corporation's retained earnings and assets remain at specified levels after the distribution.   Stephenson contends that if he is not entitled to shareholder status with Drever Partners, it must be concluded that he is entitled to status as a creditor because Drever Partners is obligated to repurchase his shares.   He contends that as a creditor he is entitled to bring suit against respondents under Corporations Code sections 316 and 500 for making improper distributions to Maxwell Drever, and that the trial court therefore erred by sustaining the demurrer to his complaint without leave to amend.

 Stephenson concedes that he never sought to amend his complaint.   The question of whether the demurrer should have been sustained without leave to amend, however, is subject to review even in the absence of a request to amend.  (Code Civ. Proc., § 472c.)   On review, the question is whether the defect can be cured by amendment.   If so, sustaining the demurrer without leave to amend was an abuse of discretion.  (Sirott v. Latts (1992) 6 Cal.App.4th 923, 930, 8 Cal.Rptr.2d 206.)   Stephenson's belated proposed “amendment,” however, would require far more than the cure of a “defect.”   Stephenson proposes to alter the entire theory of his action.   He seeks to change his status from shareholder in the corporation to creditor of the corporation.   As a creditor, Stephenson is not entitled to maintain the action in his own name, or to seek damages payable to himself.   Rather, creditors are entitled only to bring actions in the name of the corporation in order to recover corporate assets.   The theory now asserted by Stephenson, therefore, is markedly different from the theories raised by him in his complaint.   The holding of the court in CAMSI IV v. Hunter Technology Corp. (1991) 230 Cal.App.3d 1525, 1542, 282 Cal.Rptr. 80 is apposite:  “[I]t is the trial court's discretion that is at issue;  the reviewing court may only determine, as a matter of law, whether the trial court's discretion was abused.   In our view an abuse of discretion could be found, absent an effective request for leave to amend in specified ways, only if a potentially effective amendment were both apparent and consistent with the plaintiff's theory of the case․  Absent any indication whatsoever that [the plaintiff] might wish to change theories, the trial court was by no means obliged to invite [the plaintiff] to do so.”  (Italics in original.)   It was not an abuse of discretion for the trial court to fail to divine that Stephenson might decide to abandon the entire theory of his complaint, abandoning also his request for relief personal to him, and seek relief on behalf of Drever Partners in the name of the corporation.

The order of dismissal is affirmed.

FOOTNOTES

1.   In so finding we need not and do not decide if Stephenson's action is derivative in nature and if, as respondents assert, Stephenson lacks standing to sue derivatively.  (See, generally, Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106, 108, 81 Cal.Rptr. 592, 460 P.2d 464;  Pacific Lumber Co. v. Superior Court (1990) 226 Cal.App.3d 371, 376, 276 Cal.Rptr. 425.)

2.   As permitted by Evidence Code section 452, subdivision (d), we take judicial notice of the appendix filed by Stephenson in two related appeals. (Drever Partners., Inc. v. Stephenson (Aug. 12, 1996), A071120, A071148 [nonpub. opn.].)

STEIN, Associate Justice.

STRANKMAN, P.J., and DOSSEE, J., concur.

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