McLaughlin v. Schenck
| Decision Date | 02 October 2009 |
| Docket Number | No. 20070688.,20070688. |
| Parties | Samuel R. McLAUGHLIN and John Does 1-10, Plaintiffs and Appellants, v. Greg SCHENCK, Estate of Boyd Schenck, Anna Schenck, Cookietree, Inc., a Utah corporation, Harold Rosemann, and Gayle Schenck, Defendants and Appellees. |
| Court | Utah Supreme Court |
Lincoln W. Hobbs, Margaret H. Olson, Salt Lake City, for plaintiffs.
Matthew M. Durham, Justin B. Palmer, George M. Haley, Richard D. Flint, Salt Lake City, for defendants.
INTRODUCTION
¶ 1 In a public corporation, directors and officers owe the corporation and the shareholders collectively a duty to act in good faith and in the best interest of the corporation. In a partnership, each partner owes each of the other partners individually a duty to act with the utmost good faith. The appellant in this case, Samuel R. McLaughlin, a minority shareholder in a closely held corporation, asks this court to impose on shareholders in such corporations a duty to individual shareholders similar to the duty owed in a partnership. McLaughlin also asks us to reverse the district court's holding that waivers of a provision of this closely held corporation's shareholder agreement were valid, and reverse its order denying amendments to McLaughlin's complaint. We hold that the appellee Greg Schenck, as a close corporation shareholder, owed McLaughlin individually a duty to act in the utmost good faith, but that he did not violate this duty because his actions did not thwart McLaughlin's reasonable expectations. Additionally, we hold that waivers executed by the board and the shareholders of the corporation were contaminated by a conflict of interest, and we therefore remand for a determination of whether the waivers were fair. Finally, we hold that the district court did not abuse its discretion in denying McLaughlin's motion to amend by finding that the amendment would be futile.
¶ 2 Because the trial court dismissed this case on summary judgment, "we review the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party," in this case, McLaughlin. GLFP, Ltd. v. CL Mgmt., Ltd., 2007 UT App 131, ¶ 5, 163 P.3d 636.
¶ 3 Cookietree, Inc. is a privately held Utah corporation that produces and retails baked goods. The company was formed in 1981, with Greg Schenck and his father, Boyd Schenck, among the original shareholders. Greg Schenck was named president at the corporation's founding. He currently holds the same position. In 1992, Greg Schenck recruited Sam McLaughlin to work as the operations leader for Cookietree. McLaughlin's previous experience at Pillsbury and Quaker Oats made him a valuable employee, and he was quickly promoted to vice president of operations and then chief operating officer and vice president of operations. As he invested more of his career in Cookietree, McLaughlin also invested his personal finances in the corporation by slowly purchasing increasing amounts of shares in the corporation.
¶ 4 As part of his agreement to join Cookietree as an employee, McLaughlin and the company agreed to certain terms, which were memorialized in an employment agreement. This agreement guaranteed McLaughlin a minimum salary that was supplemented with a bonus formula. It also provided him with the option of acquiring up to 200,000 shares of common stock in the company. Importantly, under the agreement, McLaughlin was an at-will employee. Thus, either party could terminate the employment relationship at any time so long as six-months notice was given.
¶ 5 In 1993, Cookietree and McLaughlin entered into an Incentive Stock Option Agreement that allowed McLaughlin to purchase an additional 200,000 shares of the company's common stock. This agreement also required McLaughlin to agree to a 1991 Shareholder Agreement. The 1991 Shareholder Agreement limited the ability of shareholders to sell, assign, or pledge their common stock. Under the agreement, selling shareholders had to first offer their shares, by written notice, to the corporation. If Cookietree did not elect to purchase any or all of the shares, the secretary of Cookietree was required to provide written notice to all shareholders identifying the number of shares available for purchase. Each shareholder was then entitled to purchase a portion of the shares equal to his or her ownership percentage of the outstanding common stock. If, at the close of the applicable option periods, not all available shares had been purchased, the selling shareholder could then sell the shares elsewhere. The agreement also provided that written consent from either the board of directors or the owners of at least two-thirds of the shares (excluding the shares owned by the selling shareholder) could waive the agreement's restrictions on share transfers. The 1991 Shareholder Agreement was replaced in 1999 with a new shareholder agreement, which contained the same terms.
¶ 6 In 1998, the majority shareholder of Cookietree, Boyd Schenck, passed away. Just before his death he transferred 818,000 shares to Greg Schenck.1 Following this transfer Greg Schenck owned around 49 percent of Cookietree, with Boyd Schenck retaining around ten percent (545,200) of the company's shares. After Boyd's death, Boyd's wife, Anna,2 sold Greg Schenck 545,200 shares, making Greg Schenck the majority shareholder, with about sixty-five percent of the company's stock. This transfer was not recorded in Cookietree's minutes or written records, and a right of first refusal was not provided to the corporation or the other shareholders. Stock certificates were nonetheless issued. At the time this transfer was made, it violated the 1991 Shareholder Agreement.
¶ 7 In 2003, Greg Schenck indicated that he was interested in selling Cookietree. McLaughlin wanted to purchase the company and sent a letter of intent, which conveyed this interest to Cookietree and its president, Greg Schenck. McLaughlin, however, was never able to raise the full amount of the purchase price. During this period, Greg Schenck began discussions with another cookie company, Otis Spunkmeyer, which was interested as a strategic buyer in purchasing Cookietree.
¶ 8 At this point, the relationship between McLaughlin and Greg Schenck, which previously had been not only professional but also personal and social, began to deteriorate. McLaughlin would not agree to various terms of the Otis Spunkmeyer transaction, including consent to a noncompete agreement. About this same time, McLaughlin learned of the prior stock transfer between Anna Schenck and Greg Schenck. During the discussions with Otis Spunkmeyer, McLaughlin insisted on his right of first refusal for any sold and transferred stock. McLaughlin was thereafter excluded from executive meetings. McLaughlin alleges that after he asserted his right to a bonus on the asset sale of Cookietree to Otis Spunkmeyer, Greg Schenck and Otis Spunkmeyer officers negotiated to instead structure the sale as a stock sale. McLaughlin continued to demand his right of first refusal and requested documentation regarding Anna Schenck's stock sale to Greg Schenck.
¶ 9 On August 4, 2004, Harold Rosemann, board member and chief financial officer for Cookietree, instructed Kim McLaughlin, McLaughlin's wife and also an employee of Cookietree, to tell McLaughlin to withdraw his claims or "there's going to be some organizational changes around here." On August 17, 2004, as a shareholder, McLaughlin made an additional request for information regarding the Schenck stock transaction. That same day Greg Schenck confronted McLaughlin and fired him. His notice of termination indicated that it was without cause. Pursuant to McLaughlin's employment agreement, the termination date was not effective for six months. Thus, McLaughlin continued to receive his salary and bonuses for six months, although this compensation was paid at his original contract rate rather than his current salary and bonus rate. McLaughlin was immediately relieved of all duties, blocked from company email, and excluded from the corporate premises. When McLaughlin refused to leave, police escorted him from the property. After McLaughlin's termination, Cookietree contacted McLaughlin's lawyer and indicated that "everything [was] negotiable; [they] were looking for a global resolution." Following his termination McLaughlin continued to receive dividends from his Cookietree holdings. This income, along with his wife's stock dividends, comprised half of their family's income. Kim McLaughlin continued to work at Cookietree for some time after McLaughlin's termination.
¶ 10 In November 2004, McLaughlin sued Cookietree and Greg Schenck for breach of contract and breach of fiduciary duty based on Greg Schenck's stock acquisition. In March 2005, McLaughlin filed another suit against Cookietree and Greg Schenck for breach of contract and breach of fiduciary duty based on McLaughlin's termination. McLaughlin also filed a derivative action. All three cases were then consolidated in the district court. The district court referred McLaughlin's claims relating to his employment contract to arbitration. McLaughlin was awarded damages for Cookietree's breach of an implied duty of good faith and fair dealing for paying the 1992 contract salary rate for McLaughlin's severance pay rather than his most recent salary and bonus rate. The arbitrator dismissed all other contract claims and deferred to the district court to resolve the breach of fiduciary duty claim relating to the termination.
¶ 11 In May 2005 during an unnoticed meeting, Cookietree's board of directors— Greg Schenck; his wife, Gayle Schenck; and Harold Rosemann—ratified the 1999 stock transaction by waiving the corporation's right of refusal. Around the same time, Greg Schenck contacted Jerry Smekal, a Cookietree shareholder, and requested that he also sign a consent and waiver ratifying the 1999 transaction. Smekal, who held 529,000...
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