Locati v. Johnson

• Jurisdiction: Oregon
• Parties: Norman C. LOCATI and R. Wayne Fields, Appellants, v. Bradley R. JOHNSON, Richard A. Elder and Univend, Inc., an Oregon corporation, Respondents. (CCV95-12356; CA A98911)
• Citation: 980 P.2d 173,160 Or.App. 63
• Court: Oregon Court of Appeals
• Decision Date: 21 April 1999

Page 173

980 P.2d 173

160 Or.App. 63

Norman C. LOCATI and R. Wayne Fields, Appellants, v.Bradley R. JOHNSON, Richard A. Elder and Univend, Inc., an Oregon corporation, Respondents.

(CCV95-12356; CA A98911)

Court of Appeals of Oregon.

Argued and Submitted Sept. 28, 1998.

Decided April 21, 1999.

James R. Cartwright, Portland, argued the cause and filed the briefs for appellants.

Scott G. Seidman, Portland, argued the cause for respondentBradley R. Johnson.With him on the brief was Tonkon Torp LLP.

No appearance by respondentRichard A. Elder.

No appearance by respondentUnivend, Inc.

Before WARREN, Presiding Judge, and EDMONDS and ARMSTRONG, Judges.

WARREN, S.J.^*

Plaintiffs are minority shareholders of defendantUnivend, Inc.They allege that defendantsBradley Johnson and Richard Elder, who together own a majority of the shares, breached their fiduciary duties as controlling shareholders when they agreed to give Crystal Lite Manufacturing, Inc., a corporation that Johnson and his wife own, a ten-year exclusive license to a patent that was Univend's only significant asset.Before the trial began, the trial court held that defendants could breach fiduciary duties to plaintiffs Johnson and Elder only if both acted from pecuniary self-interest or other improper motive.It then heard the evidence on that point and concluded that a reasonable juror could not find that Elder acted from such a motive.Plaintiffs appeal from the subsequent dismissal of the case as to both defendants.We reverse as to Johnson and affirm as to Elder.

We state the facts most favorably to plaintiffs, the nonmoving parties.Elder invented a machine that would dispense newspapers a single copy at a time.Plaintiffs joined with him to complete developing the machine and to market it when ready.All three jointly received a patent to a modification of Elder's original concept; they assigned the patent to Univend.Univend then arranged with Crystal Lite to work on the original manufacturing of the prototype machines.Johnson became interested in the machine and eventually became a shareholder in Univend.¹At the time of the events involved in this case, Johnson owned 22 percent of the company, Elder owned 37.5 percent, and plaintiffs owned 10 percent each.The owners of the remaining 20.5 percent are not parties to this case.Before August 1995, plaintiffs and Elder were the officers and directors of Univend.

Crystal Lite continued to work on building the machines after Johnson became a shareholder in Univend, and Univend fell behind in its payments for that work.In May 1995, Crystal Lite sued Univend for the $40,000 that Univend owed.Johnson intended to recover a judgment and then execute on Univend's assets, including the patent, with the result that Crystal Lite rather than Univend would own the invention.In July, as part of its answer to Crystal Lite's lawsuit, Univend filed a third-party complaint against Johnson, in which it sought to enforce an alleged agreement by which Johnson, as part of his purchase of Univend shares, would provide Univend with a $100,000 line of credit.Johnson thereafter talked with Elder, telling him that they should combine their voting power, which together was a majority of all shares, to require Univend to settle the case on Johnson's terms.Elder agreed to cooperate with Johnson.

Because there had not been an annual shareholders' meeting for over a year, Johnson and Elder called one for August 29.Before the meeting, Elder gave Johnson an irrevocable proxy authorizing Johnson to vote Elder's shares at the meeting.²Despite the proxy, Elder personally appeared and voted his shares.Johnson and Elder voted to require Univend to enter into a settlement by which Univend gave Crystal Lite a 10 year exclusive license to the patent in return for a payment of $1 for each machine sold; in return, Crystal Lite dismissed its claims against Univend.They also chose a board of directors that consisted of Johnson, Elder, and plaintiff Locati.Univend has not conducted any business since the meeting.

Plaintiffs assert that Johnson and Elder, as controlling shareholders, owed them, as minority shareholders, the fiduciary duties of loyalty, good faith, full disclosure, and fair dealing and that their actions at the annual meeting breached those duties.Before trial, the court held that, in order for plaintiffs to prove that claim, they had to show that both Johnson and Elder acted "for their own pecuniary or other improper purpose."The court concluded that it was not sufficient to show only that they acted together in a way that harmed the minority shareholders.³Because it concluded, from plaintiff's offer of proof, that there was insufficient evidence that Elder acted for any improper purpose, it dismissed the case against both defendants.⁴

Plaintiffs' arguments on appeal raise two related questions, although the parties do not always keeps them distinct.The first question is whether Johnson and Elder are controlling shareholders who owe fiduciary duties to the minority rather than two shareholders who just happened to vote the same way on a particular occasion.The second question is whether, if Johnson and Elder do owe fiduciary duties, they could breach those duties if Elder did not benefit from the breach.A subsidiary issue on the second question is whether each member of a group of controlling shareholders owes separate fiduciary duties to the minority, so that one member can breach those duties even though another does not.We first consider whether defendants constituted a controlling group that owes fiduciary duties.

We have held in a number of cases that controlling shareholders of a corporation owe fiduciary duties to the minority.Under those cases, a shareholder does not necessarily have to own a majority of the stock to be a controlling shareholder.Rather, a small group of shareholders who together own a majority and who act in concert may be controlling shareholders and thus may have fiduciary duties to shareholders who are not in the controlling group.See, e.g., Wulf v. Mackey, 135 Or.App. 655, 899 P.2d 755(1995), rev. den.322 Or. 168, 903 P.2d 886(1995);Noakes v. Schoenborn, 116 Or.App. 464, 472, 841 P.2d 682(1992).Indeed, one 50 percent owner can be a controlling shareholder with fiduciary duties to the other 50 percent owner.SeeDelaney v. Georgia-Pacific Corp., 278 Or. 305, 311, 564 P.2d 277(1977);Lee v. Mitchell, 152 Or.App. 159, 174-75, 953 P.2d 414(1998).

Our cases have generally focussed on whether controlling shareholders breached their fiduciary duties, not on what made them controlling shareholders.In deciding whether the shareholders breached their duties of loyalty, good faith, and fair dealing, we have at times suggested that one issue is whether the controlling shareholders used their control over the corporation for their own advantage.SeeNoakes, 116 Or.App. at 472, 841 P.2d 682.On the other hand, we have left open whether it is sufficient to show that it was reasonably foreseeable that a director's actions would harm the plaintiffs in their status of shareholders, without regard to whether the director personally benefitted from the actions.SeeLee, 152 Or.App. at 174, 953 P.2d 414.We have emphasized that the heart of the fiduciary duty of a director or controlling shareholder is an attitude of seeking the interest of the beneficiary rather than the personal interest of the fiduciary, seeChiles v. Robertson, 94 Or.App. 604, 619-20, 767 P.2d 903, on recons.96 Or.App. 658, 774 P.2d 500, rev. den.308 Or 592, 784 P.2d 1099(1989), which might suggest that failing to seek the interest of the minority is sufficient to show a breach of duty.

None of our previous cases decided whether proof that a shareholder will benefit from a decision is necessary to showing that the shareholder is a controlling shareholder.Whether a person is a controlling shareholder is a question that comes before, and is distinct from, what constitutes a controlling shareholder's breach of duty.To the extent that previous cases have dealt with that issue, they do not treat the shareholder's personal interest as relevant to whether the shareholder is a controlling shareholder.The closest Oregon case is Stringer v. Car Data Systems, Inc., 108 Or.App. 523, 816 P.2d 677, on recons.110 Or.App. 14, 821 P.2d 418(1991), aff'd. on other grounds314 Or. 576, 841 P.2d 1183(1992), in which two of the 36 shareholders of a corporation asserted that the 32 shareholders who voted for a merger with a different corporation were "majority shareholders," while the plaintiffs and two non-party shareholders who opposed the merger were "minority shareholders."We held that the mere fact that some shareholders voted a particular way did not mean that they were controlling shareholders with fiduciary duties towards those who voted a different way."The question is whether a given shareholder or small number of shareholders has the requisite power to dictate or dominate corporate decisions, not whether a group of small shareholders happens to have outvoted another group on a particular occasion."We also noted that "assertions of nefarious motives" did not affect that fact.108 Or.App. at 527, 816 P.2d 677.

As Stringer suggests, in order to be a controlling shareholder who owes fiduciary duties a shareholder must either be (1) an individual who owns a majority of the shares or who, for other reasons, has domination or control of the corporation or (2) a member of a small group of shareholders who collectively own a majority of shares or otherwise have that domination or control.108 Or.App. at 527, 816 P.2d 677.Nothing in Stringer suggests that a shareholder's interest or motive is relevant to determining whether the shareholder has control.

Other authorities support this conclusion.A leading treatise states that shareholders who combine for the purpose of controlling the...