Flexible Products Co. v. Ervast

• Decision Date: 13 March 2007
• Docket Number: No. A06A2395.,A06A2395.
• Citation: 643 S.E.2d 560,284 Ga. App. 178
• Parties: FLEXIBLE PRODUCTS COMPANY et al. v. ERVAST.
• Court: Georgia Court of Appeals

284 Ga. App. 178

643 S.E.2d 560

FLEXIBLE PRODUCTS COMPANY et al. v. ERVAST.

No. A06A2395.

Court of Appeals of Georgia.

March 13, 2007.

Alston & Bird, Patrick D. DiCarlo, Atlanta, for appellants.

Hill, Kertscher & Wharton, Douglas R. Kertscher, Atlanta, for appellee.

MILLER, Judge.

This case arose after Roger Ervast resigned from the Flexible Products Company ("Flexible" or the "Company") and elected to sell back to the Company the shares of Company stock he had acquired through the Company's Employee Stock Ownership Plan ("ESOP") and Long-Term Incentive Plan (the "Incentive Plan"). At that time, Flexible was engaged in merger negotiations with Dow Chemical Company ("Dow"). Ervast brought suit against Flexible and two of its officers, Randy Peterson and Doug Cruickshank, for breach of fiduciary duty, negligence, and OCGA § 13-6-11 attorney fees. Ervast claimed that they had a fiduciary duty to tell him, as a minority shareholder, of the potential merger prior to the sale of his stock and sought damages for the difference between his stock's pre- and post-merger values. Following a jury trial, the trial court entered judgment on the jury's verdict in favor of Ervast and against Flexible, Peterson, and Cruickshank in the amount of $2,729,691.

Flexible appeals, contending that the trial court erred in giving the jury conflicting instructions; erred in admitting the testimony of Ervast's "materiality" expert; and erred in denying its motion for a directed verdict. Finding that the trial court gave conflicting jury instructions regarding whether corporate officers and directors could rely upon the advice of counsel as a defense to liability, we must reverse. Since Flexible's remaining claims of error present issues which may arise upon a retrial of the case, should it occur, we also address such claims in the interest of judicial economy.

Viewed in the light most favorable to the jury's verdict, the record shows that Flexible employed Ervast, a chemical engineer, as the director of its research and development department. As a participant in Flexible's ESOP and Incentive Plan, Ervast accumulated more than 3,000 shares of Flexible's common stock. On October 4, 1999, Ervast tendered his resignation to Flexible, and sold the foregoing shares in the Company at the pre-merger price per share. On October 11, 1999, Ervast received his ESOP payout from Flexible and sold his stock back to Flexible under the Incentive Plan.

In September 1999, Dow contacted Flexible and expressed an interest in buying the Company. Representatives of both companies met that month to discuss the potential acquisition, and on October 1, 1999, the companies entered into a confidentiality agreement in which Dow agreed to make an offer to purchase Flexible. On October 7, 1999, Dow's senior vice president notified Flexible that an offer to purchase Flexible was pending. On October 26, 1999, Dow telephonically offered a price that Flexible was willing to consider, and, on November 10, 1999, Flexible and Dow executed a letter of intent in which they agreed upon a purchase price. In February 2000, the merger was consummated.

Prior to his sale of Flexible stock, no one told Ervast of the existence of the merger negotiations. After the merger was effective, Flexible determined that merger negotiations had become "material" on October 26, 1999, because it was on that date that Dow proposed the merger price which Flexible's board of directors considered. As a result, Flexible paid all shareholders who sold their shares after that date the higher merger price per share.

1. Flexible contends that the trial court erred in giving conflicting jury charges as to the advice of counsel defense. We agree.

The trial court correctly charged the jury that corporate directors and officers are entitled to reasonably rely on the opinions of counsel in carrying out their duties, absent knowledge in the director or officer as to the matter in issue which would make such reliance unwarranted. OCGA §§ 14-2-830; 14-2-842. In this case the trial judge, subsequent to the original instruction, further instructed the jury under OCGA § 15-19-17 that "a defendant is not relieved from ... liability for damages and penalties imposed by law on the ground that [defendants] acted under the advice of counsel. Rather, defendant is entitled to redress from ... counsel for unskillful advice."

At best, the foregoing instructions were contradictory and confusing—on the one hand telling jurors that corporate directors and officers were protected from liability upon the advice of counsel, yet, on the other, instructing them that as "defendants" they were not. "`A charge containing two distinct propositions conflicting the one with the other is calculated to leave the jury in such a confused condition of mind that [it] can not render an intelligible verdict, and requires the grant of a new trial.' [Cits.]" Dent v. Mem. Hosp. of Adel, 270 Ga. 316, 317, 509 S.E.2d 908 (1998). The jury cannot be expected to select one part of a charge to the exclusion of another, nor to decide between conflicts in the charge or determine whether one part cures a previous error, without having its attention specially called thereto and being instructed accordingly. Morrison v. Dickey, 119 Ga. 698(2), 46 S.E. 863 (1904).

Here, the trial court's charges as to the advice of counsel were in unreconciled conflict and confused as to liability. Ideally, such charges would have explained (i) that liability for actions based on the advice of counsel is generally foreclosed pursuant to OCGA § 15-19-17, and (ii) that an exception to the general rule existed for corporate directors and officers subject to certain conditions under OCGA §§ 14-2-830 and 14-2-842. Instead, the trial court first charged the exception to the rule that is generally available to corporate directors and officers in carrying out their duties. Separately, and after giving several unrelated instructions, the trial court then charged the general rule foreclosing relief from liability upon the advice of counsel for damages and penalties imposed by law.

The trial court's charges failed to address the relationship between the general rule and the exception for corporate directors and officers. No curative charge was given, and we are unable to say that this conflict was harmless in the circumstances of this case. See Johnson v. State, 148 Ga.App. 702, 704(2), 252 S.E.2d 205 (1979); State Hwy. Dept. v. Hilliard, 112 Ga.App. 498, 499(1), 145 S.E.2d 824 (1965); Baxter v. State Hwy. Dept., 108 Ga.App. 324, 132 S.E.2d 863 (1963). That the jury charge was in conflict and confusion as to liability upon the advice of counsel, the grant of a new trial is required.

2. Although our holding in Division 1 is dispositive of this case, as a matter of judicial

economy, we address the following issues as likely to recur upon retrial:

(a) Flexible contends that the trial court erred in admitting the testimony of Ervast's expert materiality witness, arguing that what is a material failure to disclose information presents a mixed question of law and fact as to which opinion evidence is inadmissible. We agree.

Ervast's expert testified that "materiality" triggering the duty to disclose¹ occurred on October 1. Such testimony, as a conclusion constituting a mixture of law and fact taking the ultimate issue away from the factfinder, was not admissible as opinion evidence. See Rios v. Norsworthy, 266 Ga.App. 469, 472(2), 597 S.E.2d 421 (2004) (affidavit mixing law and fact as to negligence inadmissible opinion evidence).

(b) Flexible contends that the trial court erred in denying its motion for a directed verdict. We disagree.

A directed verdict is not authorized unless the evidence and all reasonable deductions therefrom demand a certain verdict. OCGA § 9-11-50[.] And, where a directed verdict was denied and the jury has made a certain ruling, the evidence is to be construed in favor of the...