State ex rel. Elish v. Wilson, 21752

• Citation: 189 W.Va. 739,434 S.E.2d 411
• Decision Date: 22 July 1993
• Docket Number: No. 21752,21752
• Court: Supreme Court of West Virginia
• Parties: STATE of West Virginia ex rel. Herbert ELISH, Harvey L. Sperry, Warren E. Bartel, David M. Gould, James Bruhn, David L. Robertson, F. James Rechin, Richard F. Schubert, Gordon C. Hurlbert, Lawrence M. Isaacs, Irving Bluestone, Thomas R. Sturges, Jr., Thomas W. Evans, John T. Gilmore, and Weirton Steel Corporation, a Delaware Corporation, Petitioners, v. Honorable Ronald E. WILSON, Judge of the Circuit Court of Hancock County, Larry G. Godich, John L. Bird, Raymond A. Sacripanti, Sr., Sheridan Buffington, Thomas M. Rodgers, Martin A. Reitter, Jo Ann Branlett, Edward A. Godich, and Barbara J. Wilson, Respondents.

Page 411

434 S.E.2d 411

189 W.Va. 739

STATE of West Virginia ex rel. Herbert ELISH, Harvey L.

Sperry, Warren E. Bartel, David M. Gould, James Bruhn, David

L. Robertson, F. James Rechin, Richard F. Schubert, Gordon

C. Hurlbert, Lawrence M. Isaacs, Irving Bluestone, Thomas R.

Sturges, Jr., Thomas W. Evans, John T. Gilmore, and Weirton

Steel Corporation, a Delaware Corporation, Petitioners, v. Honorable Ronald E. WILSON, Judge of the Circuit Court of

Hancock County, Larry G. Godich, John L. Bird, Raymond A.

Sacripanti, Sr., Sheridan Buffington, Thomas M. Rodgers,

Martin A. Reitter, Jo Ann Branlett, Edward A. Godich, and

Barbara J. Wilson, Respondents.

No. 21752.

Supreme Court of Appeals of

West Virginia.

Submitted July 6, 1993.

Decided July 22, 1993.

Syllabus by the Court

1. "In determining whether to grant a rule to show cause in prohibition when a court is not acting in excess of its jurisdiction, this Court will look to the adequacy of other available remedies such as appeal and to the over-all economy of effort and money among litigants, lawyers and courts; however, this Court will use prohibition in this discretionary way to correct only substantial, clear-cut, legal errors plainly in contravention of a clear statutory, constitutional or common law mandate which may be resolved independently of any disputed facts and only in cases where there is a high probability that the trial will be completely reversed if the error is not corrected in advance." Syllabus point 1, Hinkle v. Black, 164 W.Va. 112, 262 S.E.2d 744 (1979).

2. The local law of the state of incorporation should be applied to determine who can bring a shareholder derivative suit.

3. The Employee Stock Ownership Plan participants are shareholders within the definition of the term found in the comments to § 303 of the Restatement (2d) of Conflicts, which states that "a shareholder is one who is recorded as such on the books of the corporation. One who is not so recorded but who has title to a share will be entitled to be recorded as a shareholder on the books of the corporation."

John H. Tinney, K. Paul Davis, Charleston, for petitioners Elish, Bartel, Evans and Gilmore.

Robert B. King, James S. Arnold, Charleston, for petitioners Sperry, Gould, Bruhn, Robertson, Rechin, Schubert, Hurlbert, Isaacs, Bluestone and Sturges.

Carl N. Frankovitch, Arthur M. Recht, Weirton, for petitioner Weirton Steel Corp.

Edward A. Zagula, William E. Watson, David E. Khorey, Robert Yahn, Weirton, for respondents.

BROTHERTON, Justice:

This case is before the Court on a motion for a writ of prohibition by the petitioners, the Board of Directors at Weirton Steel, and Weirton Steel. These parties petition the Court to prohibit the Circuit Court of Hancock County from refusing to dismiss Larry G. Godich, John L. Bird, Raymond A. Sacripanti, Sr., Sheridan Buffington, Martin A. Reitter, Jo Ann Branlett, Edward A. Godich, and Barbara J. Wilson from the shareholder derivative suit on the grounds that the respondent "exceeded his legitimate powers under W.Va.Code § 53-1-1."

The shareholder derivative suit was filed on August 6, 1992, by the respondents, plaintiffs below, active members of the Weirton Steel Employee Stock Ownership Plan (ESOP). They seek to recover damages as beneficial shareholders of Weirton Steel from the individuals listed as petitioners above because of an alleged breach of fiduciary duty. The petitioners, defendants below, are current and former officers and members of the Board of Directors of Weirton Steel. The respondents contend that the petitioners were grossly negligent in taking certain actions during the course of contracting for the construction of two reheat furnaces.

The ESOP participants of Weirton Steel contend that they brought suit because the defendants issued a purchase order to construct two new reheat furnaces at the cost of $49,065,740.00, and that they knew or should have known that Brickmont & Associates, the company hired to provide the furnaces, had a negative net worth of $1,466,105.00. They also contend that the Board should have known that Brickmont & Associates could not provide a performance bond, yet they paid the company $28,132,190.00 prior to the execution of the contract without a performance bond. Finally, they complain that at the completion of the first reheat furnace, Brickmont had been paid approximately $50,000,000.00. As a result, they contend that Weirton Steel had to pay in excess of $30,000,000.00 to complete the project.

This case was initially before Judge Craig Broadwater. However, after the circuit judges rotated, Judge Wilson became the presiding judge. On February 8, 1993, the defendants below, the members of the Board of Directors, filed a joint motion to dismiss eight of the nine plaintiffs below on the basis that they lacked standing to bring the derivative action because they were not "holders of record" of Weirton Steel shares as required under W.Va.Code § 31-1-103 (1988). ¹

On April 20, 1993, Judge Wilson denied the defendants' joint motion to dismiss. In its order and opinion dated April 20, 1993, the Hancock County Circuit Court examined the history of the Model Business Corporation Act of 1969, which was used as the basis for W.Va.Code § 31-1-1 et seq., adopted in 1974. The court found that W.Va.Code § 31-1-103, which required, in part, that a plaintiff must be a "holder of record," also required contemporaneous ownership, which "did not exclude the concept of equitable ownership." ² The court noted that the majority of jurisdictions, including Delaware, find equitable ownership is enough to bring a derivative suit. Rosenthal v. Burry Biscuit Corp., 60 A.2d 106 (Del.Ch.1948). More recently, the Delaware legislature, in Title 8, § 327, allowed equitable or beneficial owners to sue under their statute.

Similarly, Judge Wilson concluded that under the common law of West Virginia, an equitable owner of stock could maintain a derivative suit. He found that the "holder of record" requirement in W.Va.Code § 31-1-103 mandated contemporaneous ownership, which did not preclude an action by equitable owners of stock. He noted that the interests of ESOP members and registered shareholders are identical. Thus, Judge Wilson found there was no basis for a distinction. He also stated that the legislature never intended to bar ESOP employees from bringing a derivative law suit because until 1989, there were no Weirton Steel shareholders of record. Under the petitioners' interpretation of W.Va.Code § 31-1-103, no one was entitled to bring a shareholder derivative suit prior to 1989, when the company went public. Consequently, the court refused to dismiss the plaintiffs. The defendants below, now petitioners, filed this appeal from the April 20, 1993, order of the Hancock County Circuit Court.

The petitioners contend that in doing so, Judge Wilson, in effect, "rewrote the statute to permit what he considered to be equitable holders to maintain shareholder derivative actions in West Virginia." The petitioners seek a writ of prohibition from the Court in order to preclude Judge Wilson, the respondent, from refusing to dismiss the eight plaintiffs who were not holders of record of Weirton Steel stock.

All nine plaintiffs are employees of Weirton Steel and participate in Weirton Steel's employee stock ownership plan (ESOP). Under the terms of the ESOP, an account is maintained for each participating Weirton Steel employee and shares of Weirton Steel stock, which are owned of record by the ESOP trust, are allocated to each participant's account. The ESOP provides the participants with pass through voting rights through the trustee and receive dividends through the transfer agent into their accounts. The allegation that they do not have standing is based on the fact that the respondents are not actually owners of record of the stock, with the exception of the one plaintiff with preferred shares, because the stock shares are owned of record by the ESOP trust.

Thus, the issue to be addressed by this Court is whether the plaintiffs below have standing in West Virginia to initiate a shareholder derivative suit when they are participants in an employee stock ownership plan, but do not hold actual title of the stock certificates.

West Virginia Code § 53-1-1 (1981) provides that a "writ of prohibition shall lie as a matter of right in all cases of usurpation and abuse of power, when the inferior court has not jurisdiction of the subject matter in controversy, or, having such jurisdiction, it exceeds its legitimate powers." In this case, there is no question that Judge Wilson has the jurisdiction over the subject matter in controversy. The second question then, is whether, having such jurisdiction, he has exceeded his legitimate power by refusing to dismiss the plaintiffs. In cases involving writs of prohibition, we have held that:

In determining whether to grant a rule to show cause in prohibition when a court is not acting in excess of its jurisdiction, this Court will look to the adequacy of other available remedies such as appeal and to the over-all economy of effort and money among the litigants, lawyers and courts; however, this Court will use prohibition in this discretionary way to correct only substantial, clear-cut, legal errors plainly in contravention of a clear statutory, constitutional or common law mandate which may be resolved independently of any disputed facts and only in cases where there is a high probability that the trial will be completely reversed if the error is not corrected in advance.

Syl. pt. 1, Hinkle v. Black, 164 W.Va. 112, 262 S.E.2d 744 (1979).

The petitioners, of course, argue that if a writ of prohibition is not issued to prevent Judge Wilson from refusing to dismiss eight of the nine plaintiffs who were not holders of record of the stock, the case would come up on appeal and be reversed. They also contend that there is a clear positive command of statute which...