Gay v. Gay's Super Markets, Inc.

• Decision Date: 13 August 1975
• Citation: 343 A.2d 577
• Parties: Lawrence E. GAY v. GAY'S SUPER MARKETS, INC., et al.
• Court: Maine Supreme Court

Page 577

343 A.2d 577

Lawrence E. GAY v. GAY'S SUPER MARKETS, INC., et al.

Supreme Judicial Court of Maine.

Aug. 13, 1975.

Paine, Lynch, Weatherbee & Kobritz by Peter M. Weatherbee, Jordan I. Kobritz, Bangor, for plaintiff.

Eaton, Peabody, Bradford & Veague by Malcolm E. Morrell, Jr., John E. McKay, Bangor, for defendants.

Before DUFRESNE, C. J., and POMEROY, WERNICK, ARCHIBALD and DELAHANTY, JJ.

DUFRESNE, Chief Justice.

On appeal. This case involves an intracorporate dispute in which the plaintiff, Lawrence E. Gay, a minority shareholder, charges the board of directors with the use of illegal tactics calculated to drive him out of the ownership structure of the business organization.

Gay's Super Markets, Inc., incorporated under Maine law, may be described as a closely held corporation. A controlling interest (51% of the common stock) is owned by Hannaford Bros. Co. (Hannaford). The plaintiff and his brother, Carroll V. Gay, own the remaining common stock in equal shares.

Hannaford is a food wholesaler and retailer. It conducts part of its retailing business through Gay's Super Markets, Inc. At the time of the corporate action of which the plaintiff complains, the defendant, Carroll V. Gay, was president, general manager and one of three members of the board of directors of Gay's Super Markets, Inc. The plaintiff, on the other hand, was the manager of the corporation's store in Machias, Maine until July 5, 1971 when he was dismissed from his employment, arbitrarily so he claims. His major complaint, however, is that the board of directors, in failing to declare a dividend for the year 1971, were not acting in good faith, but in fact were using this method as a means of forcing him to release his interest in the business. He characterizes the board's action as a clear abuse of discretion and, in his present action, seeks equitable relief in the form of a mandatory injunction which would order that a reasonable dividend be declared and paid over to the owners of the common stock of the corporation.

The defendants contend that the decision not to declare a dividend at the directors' meeting in January, 1972, was reached solely on a proper business basis, asserting the projected capital needs of the enterprise did not permit the distribution of corporate earnings at that time. They deny their action being motivated by ill-will toward the plaintiff, or for any reason connected with the plaintiff's discharge or his stock ownership.

The Superior Court (Penobscot County), after hearing without jury, ordered judgment for the defendants with costs, from which judgment the plaintiff appeals to this Court. We deny the appeal.

The issues presented were, for the most part, factual. The presiding Justice had to determine the motives of the defendant directors, two of whom testified at the call of the plaintiff. Although no specific findings of fact were made by the presiding Justice, it must be assumed that he found for the defendants upon all issues of fact necessarily involved in his ultimate decision in their favor. Jacobs v. Boomer, 1970, Me., 267 A.2d 376; Blue Rock Industries v. Raymond International, Inc., 1974, Me., 325 A.2d 66. 'Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses.' Rule 52(a), M.R.Civ.P. Moreover, findings of fact, express or implied, are not clearly erroneous if supported by credible evidence. Leighton v. Leighton, 1974, Me., 329 A.2d 164, 166; City of South Portland v. Pine State By-Products, Inc., 1973, 306 A.2d 1, 4; Ray v. Lyford, 1958, 153 Me. 408, 409, 140 A.2d 749, 750, 751. See also Strater v. Strater, 1951, 147 Me. 33, 35, 83 A.2d 130, 131.

Since the burden is on the plaintiff-appellant to establish clear error in the findings of the single Justice, we should first consider what the plaintiff had to prove at the trial level in order to determine whether he has carried his burden on appeal.

Adverting initially to the statute (13-A M.R.S.A. § 514) and the by-laws of the defendant corporation, we find that the declaration of dividends is left to the discretion of the board of directors. ¹

Such discretion is, of course, not without limitation:

'As a general rule, the officers of a corporation are the sole judges as to the propriety of declaring dividends, and the courts will not interfere with a proper exercise of their discretion . . . Yet when the right to a dividend is clear, and there are funds from which it can be properly made, a court of equity will interfere to compel the company to declare it. Directors are not allowed to use their power illegally, wantonly or oppressively.' Belfast and Moosehead Lake Railroad Co. v. City of Belfast, 1885, 77 Me. 445, 454, 1 A. 362.

See also Hazeltine v. Belfast and Moosehead Lake Railroad Co., 1887, 79 Me. 411, 10 A. 328; Spear v. Rockland-Rockport Lime Co., 1915, 113 Me. 285, 93 A. 754; New England Trust Co. v. Penobscot Chemical Fibre Co., 1946, 142 Me. 286, 50 A.2d 188; Whittemore v. Continental Mills, 1951, D.Me., 98 F.Supp. 387.

To justify judicial intervention in cases of this nature, it must, as a general proposition, be shown that the decision not to declare a dividend amounted to fraud, bad faith or an abuse of discretion on the part of the corporate officials authorized to make the determination. New England Trust Co. v. Penobscot Chemical Fibre Co., supra, 142 Me. at 290, 50 A.2d 188. See also 19 Am.Jur.2d (Corporations) § 905 at 385 and Anderson v. Bean, 1930, 272 Mass. 432, 172 N.E. 647, 652, wherein the Massachusetts Court stated:

'The general principle is that stockholders have no individual interest in the profits of a corporation until a dividend has been declared, that the accumulation of a surplus does not of itself entitle stockholders to a dividend, that the time when a dividend shall be declared and its amount rest in the sound discretion of the corporation or its authorized officers, usually the board of directors, that the action of such officers will not be disturbed if taken in good faith according to law and not in plain violation of the rights of stockholders, and that rational presumptions will be indulged in favor of the honest decision of such officers.'

The burden of demonstrating bad faith, fraud, breach of fiduciary duty or abuse of discretion on the part of the directors of a corporation rests on the party seeking judicial mandatory relief respecting the declaration of dividends. Cashman v. Petrie, 1964, 14 N.Y.2d 426, 252 N.Y.S.2d 447, 201 N.E.2d 24; Jones v. Motor Sales Co. of Johnstown, 1936, 322 Pa. 492, 185 A. 809.

Furthermore, judicial review of corporate management decisions must be viewed in the light of this other rule that 'it is not the province of the court to act as general manager of a private corporation or to assume the regulation of its internal affairs, . . ..' Bates Street Shirt Company v. Waite, 1931, 130 Me. 352, 359, 156 A. 293, 298.

If there are plausible business reasons supportive of the decision of the board of directors, and such reasons can be given credence, a Court will not interfere with a corporate board's right to make that decision. It is not our function to referee every corporate squabble or disagreement. It is our duty to redress wrongs, not to settle competitive business interests. Absent any bad faith, fraud, breach of fiduciary duty or abuse of discretion, no wrong cognizable by or correctable in the Courts has occurred.

In determining whether the evidence in the case shows the existence of bad faith or abuse of discretion, the Court must look to the totality of the circumstances surrounding the corporate policy decision in the light of the financial condition and requirements of the corporation.

'There are no infallible distinguishing earmarks of bad faith. The following facts are relevant to the issue of bad faith and are admissible in evidence: Intense hostility of the controlling faction against the minority; exclusion of the minority from employment by the corporation; high salaries, or bonuses or corporate loans made to the officers in control; the fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; the existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible. But if they are not motivating causes they do not constitute 'bad faith' as a matter of law.' Gottfried v. Gottfried, Sup.1947, 73 N.Y.S.2d 692, 695. (Emphasis added).

In short, the plaintiff had to prove to the satisfaction of the Court below that the factual circumstances which caused him to charge the board of directors with bad faith and abuse of discretion were the motivating factors behind the board's policy of no dividend in enhancement of their personal interests rather than the promotion of the corporation's welfare. Id.

While his complaint is strong on allegations of wrongdoing on the part of the board of directors in adopting such policy of no dividend, the plaintiff failed to present any evidence that the corporate decision was in fact motivated by the considerations which he attaches to the...