May v. Coffey

• Decision Date: 14 April 2009
• Docket Number: No. 17936.,17936.
• Citation: 967 A.2d 495,291 Conn. 106
• Court: Connecticut Supreme Court
• Parties: Jonathan MAY et al. v. William COFFEY et al.

967 A.2d 495

291 Conn. 106

Jonathan MAY et al. v. William COFFEY et al.

No. 17936.

Supreme Court of Connecticut.

Argued September 18, 2008.

Decided April 14, 2009.

David R. Schaefer, with whom were Sean M. Fisher and, on the brief, Brian P. Daniels, New Haven, for the appellants (plaintiffs).

Aaron S. Bayer, Hartford, with whom were Howard O. Godnick, pro hac vice, New York City, and Robert G. Huelin, Hartford, and, on the brief, Gregory A. Kasper, pro hac vice, New York City, and John F. Conway, Wallingford, for the appellees (defendants).

ROGERS, C.J., and NORCOTT, KATZ, ZARELLA and SCHALLER, Js.

SCHALLER, J.

The plaintiffs, Jonathan May and Carolyn May,¹ appeal² from the judgment of the trial court dismissing their complaint against the defendants, who collectively own a majority of the shares of stock in Latex Foam International Holdings, Inc. (company).³ The plaintiffs, who own a minority share of the company, claim that the trial court improperly concluded that they lacked standing to bring their causes of action because their complaint alleged an injury to the company rather than to the plaintiffs as individual shareholders. We affirm the judgment of the trial court.

Because we review the trial court's decision to grant a motion to dismiss, we "take the facts to be those alleged in the complaint, including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." (Internal quotation marks omitted.) DaimlerChrysler Corp. v. Law, 284 Conn. 701, 711, 937 A.2d 675 (2007). "[A] motion to dismiss admits all facts well pleaded and invokes any record that accompanies the motion, including supporting affidavits that contain undisputed facts.... If a resolution of a disputed fact is necessary to determine the existence of standing when raised by a motion to dismiss, a hearing may be held in which evidence is taken." (Citation omitted.) Golodner v. Women's Center of Southeastern Connecticut, Inc., 281 Conn. 819, 826, 917 A.2d 959 (2007).

After the trial court held an evidentiary hearing on January 23, 2007, it issued a memorandum of decision detailing the following undisputed facts. The company is a closely held Connecticut corporation that manufactures latex foam products. From January 1, 1993, until his employment was terminated in January, 2001, May worked for the company as its executive vice president and chief operating officer. Prior to his termination, the company loaned May money to purchase shares of the company's stock.⁴

On June 4, 1999, the defendant Pouschine Cook Capital Partners, LP (Pouschine Cook) purchased 48,000 shares of the company's stock in exchange for $5 million and a senior subordinated note in the amount of $3.5 million. The note was due in June, 2005.

On May 14, 2001, a fire damaged the company's manufacturing plant and corporate offices. Subsequently, the company's board of directors decided to build a new facility with proceeds from an insurance policy on the company's assets. The new facility was opened on May 14, 2002. That same year, the company paid the balance due on the $3.5 million note to Pouschine Cook.

In October, 2002, the company's board of directors determined that the company needed to raise capital in order to continue its operations. On December 13, 2002, the company's shareholders approved an increase in the company's outstanding shares. To that end, the company undertook a multiphase stock offering to raise $3.5 million, the same amount that the company had repaid to Pouschine Cook earlier in 2002, through the sale of 424,242 new shares of stock. Under the initial phase, existing shareholders were offered 1.970844 shares of stock for each share they currently held.⁵ During the second phase, shareholders who had purchased shares during the initial phase were given the opportunity to purchase any remaining shares. The defendants represented that the offering price of $8.25 per share was based upon a valuation performed in September, 2002. For purposes of the motion to dismiss only, the parties stipulated that the offering price of $8.25 was unreasonably low.

The stock purchases under this two phase offering resulted in a change in the proportion of ownership among the shareholders. The most notable result was that Pouschine Cook became the majority shareholder, and other defendants; see footnote 3 of this opinion; lost their majority status. The plaintiffs chose not to participate in the offering, which, for purposes of the motion to dismiss only, the parties stipulated was not unreasonable. As a result, their percentage ownership of the outstanding stock was reduced from 1.79 percent to 0.6 percent.

The plaintiffs initiated the present action in a two count complaint against the defendants. The plaintiffs allege that the defendants, acting in concert as a shareholder majority, set the offering price of the shares too low, resulting in the dilution of the plaintiffs' percentage ownership of the company. They claim that, as a result of the unreasonably low offering price, the defendants breached their fiduciary duty to the plaintiffs and have been unjustly enriched by their actions at the expense of the plaintiffs.

The defendants filed a motion to dismiss both counts of the complaint. In their motion to dismiss, the defendants claimed, inter alia, that the plaintiffs lack standing to bring this action in their individual capacity as shareholders because their complaint alleges an injury caused to the company, which, the defendants argue, requires the plaintiffs to assert the rights of the company in a shareholder derivative suit. Following a hearing, the court agreed with the defendants and granted the motion to dismiss for lack of subject matter jurisdiction because the plaintiffs had not asserted a shareholder derivative cause of action. This appeal followed.

On appeal, the plaintiffs challenge the trial court's conclusion that they lacked individual standing to bring their claims against the defendants. Specifically, the plaintiffs claim that the majority shareholders sustained no injury as a result of the unreasonably low offering price because of their participation in the stock offering. They argue that, by participating in the offering, the majority shareholders benefited from the unreasonably low offering price at the sole expense of the minority shareholders, including the plaintiffs. Therefore, the plaintiffs argue, the company was not injured because the harm did not diffuse proportionately among all of its shareholders. In the alternative, the plaintiffs claim that because the company is a closely held corporation, they may assert a direct cause of action notwithstanding the fact that the company suffered an injury from the unreasonably priced stock offering. We reject both of the plaintiffs' claims and address each in turn.

Before addressing the plaintiffs' claims, we set forth our standard of review. "Standing is the legal right to set judicial machinery in motion. One cannot rightfully invoke the jurisdiction of the court unless he [or she] has, in an individual or representative capacity, some real interest in the cause of action, or a legal or equitable right, title or interest in the subject matter of the controversy.... When standing is put in issue, the question is whether the person whose standing is challenged is a proper party to request an adjudication of the issue.... Standing requires no more than a colorable claim of injury; a [party] ordinarily establishes ... standing by allegations of injury. Similarly, standing exists to attempt to vindicate arguably protected interests....

"Standing is established by showing that the party claiming it is authorized by statute to bring suit or is classically aggrieved.... The fundamental test for determining aggrievement encompasses a well-settled twofold determination: first, the party claiming aggrievement must successfully demonstrate a specific, personal and legal interest in [the subject matter of the challenged action], as distinguished from a general interest, such as is the concern of all members of the community as a whole. Second, the party claiming aggrievement must successfully establish that this specific personal and legal interest has been specially and injuriously affected by the [challenged action].... Aggrievement is established if there is a possibility, as distinguished from a certainty, that some legally protected interest ... has been adversely affected."

(Internal quotation marks omitted.) Smith v. Snyder, 267 Conn. 456, 460-61, 839 A.2d 589 (2004).

"The issue of standing implicates subject matter jurisdiction and is therefore a basis for granting a motion to dismiss. Practice Book § 10-31(a). [I]t is the burden of the party who seeks the exercise of jurisdiction in his favor ... clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute.... Because a determination regarding the trial court's subject matter jurisdiction raises a question of law, our review is plenary."⁶ (Internal quotation marks omitted.) McWeeny v. Hartford, 287 Conn. 56, 63-64, 946 A.2d 862 (2008).

I

The plaintiffs first claim that the unreasonably priced stock offering injured them directly and resulted in no harm to the majority shareholders or to the company as a whole. They claim, therefore, that they have individual standing to bring directly their breach of fiduciary duty and unjust enrichment claims against the defendants. We disagree.

To determine whether the plaintiffs have standing as individuals to sustain their claims against the defendants, we begin with a brief overview of the nature of a shareholder derivative action. "A shareholder's derivative suit is an equitable action by the corporation as the real party in interest with a stockholder as a nominal plaintiff representing the corporation. ... It is designed to facilitate holding wrongdoing directors and majority...