Macmahan Island Ass'n v. Andrews, Docket: Sag-07-54.

• Decision Date: 18 March 2008
• Docket Number: Docket: Sag-07-54.
• Parties: MacMAHAN ISLAND ASSOCIATION v. Nathalie Taft ANDREWS et al.
• Court: Maine Supreme Court

943 A.2d 592

2008 ME 52

MacMAHAN ISLAND ASSOCIATION v. Nathalie Taft ANDREWS et al.

Docket: Sag-07-54.

Supreme Judicial Court of Maine.

Argued: January 18, 2008.

Decided: March 18, 2008.

Edward A. Brown, Esq., Brown & Pols, P.A., Brunswick, ME, Edward C. Mendler, Esq. (orally), Wayland, MA, for MacMahan Island Association.

Albert G. Ayre, Esq. (orally), Portland, ME, for Nathalie Taft Andrews, Frederick L. Taft and Eleanor Taft Ethridge.

Panel: SAUFLEY, C.J., and CLIFFORD, ALEXANDER, LEVY, SILVER, MEAD, and ALEXANDER.

ALEXANDER, J.

[¶ 1] MacMahan Island Association (the Association) (formerly Sheepscot Island Company (SI)) appeals from a summary judgment by the Superior Court (Sagadahoc County, Warren, J.) determining that SI's conversion to the Association, a nonprofit organization, was invalid. The Association argues that (l) the court erred in finding its plan for nonprofit conversion (the plan) was invalid; (2) Frederick Taft, Nathalie Taft Andrews, and Eleanor Taft's (the Tafts) statutory appraisal rights provide them with the exclusive and proper remedy in this case; (3) the Tafts lack standing to contest the validity of the conversion; and (4) the conversion is protected by the business judgment rule. The Tafts cross-appeal, arguing that (1) the trial court erred in dismissing their claims of inadequate disclosure, and (2) additional shares issued by SI are void.

[¶ 2] Because the plan for nonprofit conversion did not include any provision for the reclassification of the shares of the for-profit corporation following conversion, as required by Maine law, see 13-C M.R.S. § 931(3)(B) (2007), the trial court correctly concluded that the nonprofit conversion was invalid. Accordingly, we affirm and address only that limited issue.

I. CASE HISTORY

[¶ 3] This appeal arises from a shareholder dispute that began when Sheepscot Island Company, a for-profit stock corporation, attempted to convert into a nonprofit organization called the MacMahan Island Association.

[¶ 4] SI provided services to cottage owners on MacMahan Island, which is located near the mouth of the Sheepscot River. There are forty cottages on the island. All the cottage owners are assessed certain fixed costs to support the island's common paths and roads, a yacht club building, several floats, and tennis courts. SI also receives payments for additional services provided to cottage owners. These services include storage and sewer maintenance, water, plumbing, and firewood. The Tafts are each stockholders of SI. Frederick Taft owns a cottage on the island, but Nathalie Taft Andrews and Eleanor Taft do not.

[¶ 5] Prior to 2000, SI was authorized to issue 3500 shares. Over ninety percent of the shares are owned by cottage owners or members of families of cottage owners. There are a few shareholders who are neither cottage owners nor family members of the cottage owners.

[¶ 6] In October of 2000, the shareholders of SI voted to increase the number of authorized shares by 20,000. The amendment to the SI articles of incorporation authorizing the issuance of additional shares was not completed until February 2006, after the attempted conversion to the Association occurred.

[¶ 7] In 2004, the SI Board of Directors created a committee to explore the feasibility of converting SI to a nonprofit organization, using the new name "MacMahan Island Association." In late 2004 or early 2005, the committee submitted its report to the Board. The report contained a plan for nonprofit conversion and proposed bylaws of the new association. At its April 2005 meeting, the Board voted unanimously to endorse the plan and bylaws and to present them to the shareholders.

[¶ 8] Pursuant to the plan, shareholders who do not own cottages would not have any right to share in any liquidation, sale, or other realization of the assets of the corporation. Non-cottage owners would lose any equity interest in SI's assets. All shares of SI would be deemed surrendered, but the owners of each of the forty cottages on MacMahan Island would be entitled to one cottage membership in the new Association. Pursuant to the articles of nonprofit conversion and bylaws of the Association, cottage members would have the right to receive services from the association; have access to the island's common paths and roads, the yacht club building, several floats, tennis courts; and be able to vote at meetings of the Association. Family members, household guests, and renters of cottages would have privileges to use the facilities and services of the Association, but no right to vote in the governance of the Association.

[¶ 9] The shareholders were sent the plan, the articles of conversion, and a proxy. A shareholders' meeting was held on August 6, 2005. Prior to the meeting, the Tafts delivered written notice of their intent to assert their rights of appraisal and demand payment pursuant to 13-C M.R.S. §§ 1301-1306 (2006); 13-C M.R.S. §§ 1321-1327 (2006).¹ A majority of the votes cast at the August meeting were in favor of the plan. However, there is an issue, that we do not address, regarding which shares were valid and should have been counted in the vote. The Tafts each voted against the plan.

[¶ 10] The articles of nonprofit conversion were filed with the Maine Secretary of State's Office in August 2005, stating an effective date of October 30, 2005, for the conversion from SI to the Association.

[¶ 11] In September 2005, the Tafts received notices as to payment from SI.² SI estimated that the fair value of the shares was ten dollars per share. Applied to the 3500 original shares, this suggested that the Board valued the assets of SI, including the common paths and roads, the yacht club building, several floats, and the tennis courts of this coastal island property at $35,000.

[¶ 12] The Tafts notified SI that they rejected the amount offered and would pursue their rights of appraisal. The Association filed its complaint in December 2005 for judicial determination of the fair value of shares and accrued interest pursuant to 13-C M.R.S. § 1331 (2006).³ The Tafts filed an answer and counterclaim, arguing that SI had unlawfully issued and over-issued shares, and that the plan was null and void. In March 2006, the Association filed a motion for summary...