Ski Roundtop, Inc. on Behalf of Ski Yellowstone Inc. v. Hall

• Decision Date: 31 January 1983
• Docket Number: No. 81-222,81-222
• Citation: 658 P.2d 1071,202 Mont. 260,40 St.Rep. 74
• Parties: SKI ROUNDTOP, INC., individually and derivatively on Behalf of SKI YELLOWSTONE INC., Plaintiff and Appellant, v. John P. HALL, Frederick L. Morgenthaler and Charles R. Miller, Jr., Defendants and Respondents.
• Court: Montana Supreme Court

Page 1071

658 P.2d 1071

202 Mont. 260

SKI ROUNDTOP, INC., individually and derivatively on Behalf of SKI YELLOWSTONE INC., Plaintiff and Appellant, v. John P. HALL, Frederick L. Morgenthaler and Charles R Miller, Jr., Defendants and Respondents.

No. 81-222.

Supreme Court of Montana.

Submitted Sept. 14, 1982.

Decided Jan. 31, 1983.

Gregory O. Morgan argued, Bozeman, Albert Blakey, III argued, York, Pa., for plaintiff and appellant.

Landoe, Brown, Planalp, Kommers & Lineberger, Bozeman, J. Robert Planalp argued, Bozeman, Morrow, Sedivy, Olson & Eck, Bozeman, for defendants and respondents.

WEBER, Justice.

This case is a companion case to Naylor v. Hall (1982), Mont., 651 P.2d 1010, 39 St.Rep. 1953.

Plaintiffs, minority shareholders in Ski Yellowstone, Inc., appeal from the decision of the Eighteenth Judicial District Court for Gallatin County, denying them relief in this stockholders' derivative action arising from the alleged misconduct of several of the officers and directors of Ski Yellowstone, a Montana corporation. We affirm the District Court with one exception.

The following issues are presented to this Court by plaintiffs:

(1) Did John Hall breach a duty to minority stockholders, with respect to the "C" and "D" stock issues?

(2) After acquiring control of the corporation, did John Hall engage in a course of conduct which was oppressive to minority stockholders?

(3) After acquiring control of the corporation, was John Hall guilty of fraud and self-dealing?

(4) Was the amendment of the corporation's Articles of Incorporation, which authorized stock for the "C" and "D" issues, valid under Montana law?

(5) What relief is appropriate under all of the circumstances?

Ski Yellowstone is a Montana corporation which planned to develop a four-seasons resort in Gallatin County. It was organized in 1973 by stockholders in a Pennsylvania corporation, Ski Roundtop, Inc., which is a minority stockholder in Ski Yellowstone. The events on which this action is based occurred primarily in 1975 and 1976, during which time John Hall obtained control of Ski Yellowstone.

The original stock issue which took place in 1973 was 1,450,000 shares, $1.00 par value, which were relatively evenly distributed among twenty-one shareholders. The shares were issued at a cost of $1.00 per share, 1,050,000 shares for cash in the amount of $1,050,000, and 400,000 shares for land having a value of $400,000. With the exception of defendant John Hall and his family corporation, J.M.S. Corporation, all of the shareholders were friends and associates of Irvin S. Naylor, the head of Ski Roundtop and the primary organizer, with Hans Geier, of Ski Yellowstone. Naylor originally was in a controlling position in Ski Yellowstone as well as in Ski Roundtop.

Ski Yellowstone was low on funds by 1974. The issue of the Forest Service use permit to develop a ski area, which was essential to the success of Ski Yellowstone, had been delayed. In order to finance the expense of delay, in November, 1974, $290,000 worth of Series "A" debentures were issued. These debentures earned interest and were convertible into the common stock of Ski Yellowstone at $.20 per share. The dilution of the shares from the original $1.00 per share paid in 1973 was recognized by Naylor, but was deemed necessary to prevent bankruptcy. John Hall purchased his $5,000 pro rata preemptive share of the Series "A" debentures and also purchased by agreement an additional $42,500 worth of overage (debentures offered to but not purchased by other shareholders who were first entitled to purchase). Plaintiffs contend there was a "gentlemen's agreement" that the Series "A" debentures would not be converted into stock unless the company was sold.

By 1975 Ski Yellowstone again was short of capital and in July, 1975, $200,000 worth of Series "B" debentures were issued to the shareholders of the company. Series "B" debentures earned the same interest rate and had the same conversion privileges as Series "A" debentures.

John Hall became a director (one of ten) of Ski Yellowstone in June, 1975. During 1975 and 1976 John Hall obtained greater control of Ski Yellowstone by joining several "allies" in acquiring all unpurchased Series "A" debentures, converting those "A" debentures into stock, thereby increasing the number of Series "B" debentures he could purchase; subscribing to Series "B" debentures and converting the same into stock. The result of these activities was to create a controlling block of shares. Other shareholders also converted Series "A" and "B" debentures into common stock, with the exception of plaintiffs Naylor and Geier.

The new voting majority of stockholders reduced the number of directors from ten to seven, and elected Fred Pack as chairman of the board in place of Irvin Naylor. The corporation authorized the sale of $200,000 of Series "C" debentures with the same terms as the "A" and "B" debentures. The success of the issue required a pledge of 80 percent of the issues. The issue failed. John Hall distributed a letter to Ski Yellowstone shareholders expressing general confidence in the venture, but pointing out that expenses were likely to be higher than anticipated.

In considering the questioned stock issues, it is important to keep in mind the following findings of fact on the part of the District Court: Ski Yellowstone was formed in 1973 by Naylor and Hans Geier, both residents of Pennsylvania. Naylor had extensive experience in obtaining venture type capital for business entities and Geier had twenty years experience in the ski industry, including sixteen in upper-level management. The purpose of Ski Yellowstone was to acquire private lands and the necessary permits to use government land to develop its resort. Naylor simultaneously was chairman of the board of Ski Yellowstone and chief executive officer of Ski Roundtop, which operates ski resort areas in Pennsylvania. Initially, Naylor represented to shareholders of Ski Yellowstone that within a short time a shareholder could sell his stock for $10 a share. Ski Yellowstone purchased land and undertook a series of studies, applied for a Forest Service permit, and filed extensive environmental data in 1973. At that time, the Forest Service changed its approach and decided to process the application in the context of a larger regional study, which led to a series of delays. By 1974 it was obvious that Geier was unable to quickly obtain the Forest Service permit, and Naylor caused John Maples, a plaintiff, to be hired for the purpose of liquidating Ski Yellowstone or selling the corporation. In 1974, John Maples represented to the shareholders that the value of their stock could be as low as $.12 per share. Following the offering to the shareholders of Series "C" debentures in 1976, plaintiff Rosenmiller, also a director of Ski Roundtop and a close business associate of Naylor, advised Naylor of the conclusions of his committee that Ski Roundtop should decline to invest in Series "C" debentures because their investments should be made in Ski Roundtop's marketing area, that is the ski business in Pennsylvania, and that Ski Roundtop should not convert Series "A" and "B" to stock. Because of its insight into the thinking and actions on the part of the plaintiffs, the District Court set forth the Rosenmiller letter of May 18, 1976, to Naylor in its findings as follows:

"I have concluded my discussions with my Committee relative to the advisability of Ski Roundtop converting its Ski Yellowstone Debentures into Common Stock and subscribing to the forthcoming Series "C" Debenture issue. It is the unanimous opinion of our Committee that we should do the following:

"1) We advise that Ski Roundtop, Inc. honor its commitment under the existing Series "B" Convertible Notes subscription, calling for a payment of $4,843.60. Although this Note offers no return for one year it does provide a $.20 a share conversion feature if it is later determined that the stock is, in fact, worth that or a figure in excess of $.20 a share. Most importantly, this Debenture has been substantially collateralized by valuable real estate which has less demands placed against it due to the recent conversion of the Hall notes.

"2) It is the unanimous recommendation that we do not convert our Series "A" and Series "B" notes into common stock of Ski Yellowstone, Inc. The only rationale for doing so would be to return the control of the Company into its former hands but the likelihood of this occurring, is remote at best. It is felt by our Group that we may be in a stronger position to allow the new management to go forward and if successful, we can convert at a later date and hopefully realize a return and profit on our investment. If new management is unsuccessful, we will be able to write off the common equity portion of our investment against future earnings, developing a tax shelter which will pay for a portion of the loss incurred. We will further be in a good position to take legal action against the new management in the event they have acted not in the best interest of all shareholders.

"3) Regarding the proposed $200,000 Series "C" Debenture, we would recommend against any further investment in Ski Yellowstone, Inc. at this time. Our rationale being that our investments should be made in Ski Roundtop's marketing area, advancing that which we do best and profit from most, namely, the ski business and recreation generally here in York and Adams Counties.

"This constitutes the recommendations of Jacob A. Barnhart, Dr. Anthony Perlman and W.F.O. Rosenmiller."

As noted by the District Court, the letter points out the conclusion on the part of those making their recommendations to Naylor: not to convert stock because of the financial risk; consider conversion at a later date if the new management is successful; if new management is unsuccessful, write off against earnings as a tax shelter; take legal action in the event the new...