Skoglund v. Brady
| Decision Date | 19 December 1995 |
| Docket Number | No. C9-95-1037,C9-95-1037 |
| Citation | 541 N.W.2d 17 |
| Court | Minnesota Court of Appeals |
| Parties | Donald E. SKOGLUND, Appellant, v. Dennis J. BRADY, Michael J. Brady, Robert Venne, Bohdan Kramarczuk, Dean Wohlhuter, Gepner & Gepner, P.A., and Instrumentation Services, Inc., Respondents. |
Syllabus by the Court
1. Judicial review of a special litigation committee's recommendation to dismiss a shareholder's derivative action is limited to determining whether the committee was independent and conducted its investigation in good faith.
2. To bring an action under Minn.Stat. § 302A.751, subd. 1, (1992) a shareholder must suffer an injury that is separate and distinct from any injury to the corporation.
James H. Kaster, Nichols, Kaster & Anderson, Minneapolis, for Donald E. Skoglund.
Fred Burstein, Dylan J. McFarland, Burstein, Hertogs, Olsen & McFarland, Minneapolis, for Dennis J. Brady, Michael J. Brady, Robert Venne, Bohdan Kramarczuk, Dean Wohlhuter, Gepner & Gepner, P.A.
Gene A. Hoff, Henretta, Cross, Ness & Dolan, Minnetonka, for Instrumentation Services, Inc.
Considered and decided by PETERSON, P.J., and KALITOWSKI and SCHUMACHER, JJ.
Donald E. Skoglund appeals from a judgment dismissing his direct and shareholder derivative claims against Instrumentation Services, Inc. (ISI) and the members of ISI's board of directors.
Respondent ISI is a closely held corporation that designs and repairs electrical instruments. The members of its board of directors are Dennis J. Brady, Michael J. Brady, Robert Venne, Bohdan Kramarczuk, and Dean Wohlhuter.
Appellant Donald Skoglund, an ISI shareholder, objected to building and equipment leases authorized by the board, promissory notes ISI issued to Dennis and Michael Brady, bonuses paid to Dennis and Michael Brady, the issuance of additional shares of ISI stock, and the sale of some of the newly issued shares to Dennis Brady in exchange for forgiveness of a debt owed to Brady. Skoglund alleged that the directors breached fiduciary duties, usurped corporate opportunities, and committed waste and fraud.
ISI's board appointed a special litigation committee of one, attorney James A. Stein, to investigate Skoglund's shareholder derivative claims. The committee retained the accounting firm of Devine, Scherzer & Brody, Ltd. to help with the investigation. Neither Stein nor the accounting firm had any prior relationship with ISI, its directors, or Skoglund.
The committee found the board did not obtain required authorization for the leases, promissory notes, or forgiveness of the debt owed to Dennis Brady as consideration for the stock purchase. But the committee found that given ISI's financial position, the building and equipment leases were reasonable, the promissory notes to Dennis and Michael Brady were in ISI's best interest, the approval of bonuses paid to Dennis and Michael Brady was not improper, and, if the stock had been issued properly, exchanging stock for the forgiveness of a debt owed to Dennis Brady would have been reasonable.
The committee determined that the corporation was not damaged by the leases, the promissory notes, or the exchange of stock for the forgiveness of debt. The only damage the committee found was the corporate waste committed by issuing additional stock at $0.85 per share, about one-half the stock's book value. But the committee recommended against pursuing the corporate waste claim because the expenses associated with the lawsuit probably already had exceeded the $54,000 in damages.
The district court dismissed Skoglund's derivative claims on grounds that a special litigation committee appointed to investigate Skoglund's allegations was independent and conducted its investigation in good faith. The district court dismissed Skoglund's direct claims on grounds that Skoglund did not allege any injury to himself that was separate and distinct from an injury to the corporation.
I. Did the district court err in dismissing Skoglund's shareholder derivative claims on grounds that the special litigation committee was independent from ISI and conducted its investigation impartially and in good faith?
II. Did the district court err in determining that Skoglund was not entitled to bring his direct claims pursuant to Minn.Stat. § 302A.751 (1992)?
On appeal from a summary judgment, this court must examine the record to determine whether any genuine issues of material fact exist and whether the district court properly applied the law. Offerdahl v. University of Minn. Hosps. & Clinics, 426 N.W.2d 425, 427 (Minn.1988). This court must view the evidence in the light most favorable to the nonmoving party. Id.
This court need not defer to the district court's decision on a legal issue. Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn.1984). Statutory construction is a question of law subject to de novo review. Meister v. Western Nat'l Mut. Ins. Co., 479 N.W.2d 372, 376 (Minn.1992).
Before 1989, Minn.Stat. § 302A.243 (1988) provided:
Unless prohibited by the articles or bylaws, the board may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the corporation to pursue a particular legal right or remedy of the corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right or remedy on behalf of the corporation. For purposes of this section, a director or other person is "disinterested" if the director or other person is not the owner of more than one percent of the outstanding shares of, or a present or former officer, employee, or agent of, the corporation or of a related corporation and has not been made or threatened to be made a party to the proceeding in question. The committee, once established, is not subject to the direction or control of, or termination by, the board. A vacancy on the committee may be filled by a majority vote of the remaining members. The good faith determinations of the committee are binding upon the corporation and its directors, officers, and shareholders. The committee terminates when it issues a written report of its determinations to the board.
This court construed section 302A.243 as precluding
courts from reviewing the merits of a recommendation to dismiss a shareholder's derivative action when that recommendation is made by a disinterested committee conducting its investigation in good faith.
Black v. NuAire, Inc., 426 N.W.2d 203, 209-10 (Minn.App.1988), review denied (Minn. Aug. 24, 1988). This court noted that the business judgment rule, which
vests responsibility for decision making in the corporation's board of directors and precludes stockholders from disrupting the board's decision through derivative actions where the board has determined a particular action is not in the corporation's best interest
had been applied to a corporation's litigation decisions by the United States Supreme Court as early as 1917. Id. at 210 (citing United Copper Sec. Co. v. Amalgamated Copper Co., 244 U.S. 261, 263-64, 37 S.Ct. 509, 510, 61 L.Ed. 1119 (1917)). The court noted that courts are "ill-equipped to evaluate business judgments while corporate directors [are] peculiarly qualified to discharge that responsibility." Id. (citing Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 926-27, 393 N.E.2d 994, 1000 (1979)).
In 1989, the legislature repealed Minn.Stat. § 302A.243. 1989 Minn.Laws ch. 172, § 11. The legislature stated:
Notwithstanding any contrary provision of Minnesota Statutes, chapter 645, the repeal of Minnesota Statutes, section 302A.243, does not imply that the legislature has accepted or rejected the substance of the repealed section but must be interpreted in the same manner as if section 302A.243 had not be [sic] enacted.
Special litigation committees are now governed under Minn.Stat. § 302A.241, subd. 1 (Supp.1993):
A resolution approved by the affirmative vote of a majority of the board may establish committees having the authority of the board in the management of the business of the corporation only to the extent provided in the resolution. Committees may include a special litigation committee consisting of one or more independent directors or other independent persons to consider legal rights or remedies of the corporation and whether those rights and remedies should be pursued. Committees other than special litigation committees * * * are subject at all times to the direction and control of the board.
Since section 302A.243 was repealed,...
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