Stephenson v. Drever

• Decision Date: 15 December 1997
• Docket Number: No. S057635,S057635
• Citation: 947 P.2d 1301,16 Cal.4th 1167,69 Cal.Rptr.2d 764
• Parties: , 947 P.2d 1301, 135 Lab.Cas. P 58,386, 21 Employee Benefits Cas. 2480, 97 Cal. Daily Op. Serv. 9369, 97 Daily Journal D.A.R. 15,085 Allen W. STEPHENSON, Plaintiff and Appellant, v. Maxwell Bruce DREVER et al., Defendants and Respondents
• Court: California Supreme Court

Page 764

69 Cal.Rptr.2d 764

16 Cal.4th 1167, 947 P.2d 1301, 135 Lab.Cas. P 58,386,

21 Employee Benefits Cas. 2480,

97 Cal. Daily Op. Serv. 9369,

97 Daily Journal D.A.R. 15,085

Allen W. STEPHENSON, Plaintiff and Appellant, v. Maxwell Bruce DREVER et al., Defendants and Respondents.

No. S057635.

Supreme Court of California

Dec. 15, 1997.

Howard, Rice, Nemerovski, Canady, Falk & Rabkin, Denis T. Rice and Chong S. Park, San Francisco, for Plaintiff and Appellant.

Morrison & Foerster, James J. Brosnahan, Jennifer H. Small, Barry R. Himmelstein and Mark W. Danis, San Francisco, for Defendants and Respondents.

MOSK, Justice.

In this case a "buy-sell agreement" gives a closely held corporation the right and obligation to repurchase the shares of a minority shareholder-employee on termination of his employment, but is silent as to his shareholder rights during the postemployment period necessary to determine the value of his shares pursuant to the agreement. The narrow issue before us is whether the agreement nevertheless implies on its face an intention by the parties to deny the minority shareholder those rights during that period. As will appear, we conclude that it does not, and therefore reverse the judgment of the Court of Appeal affirming the judgment of dismissal in this action brought by the minority shareholder. Because the Court of Appeal did not reach an alternate ground on which the judgment was challenged, we will direct the court to address that ground.

FACTS ¹

Plaintiff Allen W. Stephenson was employed by Drever Partners, Inc. (hereafter Drever Partners), a closely held corporation, in 1980, and became its chief financial officer in 1983. On December 15, 1990, a contract entitled "Stock Purchase Agreement" (hereafter the contract) was signed by Drever Partners, by its majority shareholder, Maxwell Bruce Drever (hereafter Drever), and by plaintiff. The contract recited that in recognition of the value of plaintiff's services and as an incentive for him to remain in its employ, Drever Partners agreed to sell plaintiff 500 shares of its common stock at par value. It provided that "In the event of the termination of Stephenson's employment for any reason whatsoever, including his retirement or death, then, on or before ninety (90) days after the date of such termination, Drever Partners shall have the right and obligation to repurchase all of the Shares" that it agreed to sell to plaintiff. It further provided that after September 15, 1991, the repurchase price of the shares would be "the fair market value thereof"; that if the parties could not agree on the fair market value, it would be fixed by an independent appraiser; and if the parties could not agree on the selection of such an appraiser, each party would appoint one appraiser and those two would appoint a third whose appraisal would be binding.

Drever Partners sold the 500 shares to plaintiff pursuant to the contract. The shares amounted to 11 percent of the outstanding common stock of the corporation; Drever owned the remaining 89 percent himself.

On May 16, 1994, Drever and plaintiff entered into an agreement (hereafter the 1994 agreement) providing that plaintiff's employment by Drever Partners would terminate as of July 1, 1994, and that for purposes of the stock repurchase provision of the contract plaintiff's shares would be valued as of May 1, 1994. ² The parties were unable to agree on the fair market value of plaintiff's shares, and a dispute over the appraisal process ensued. Because of that dispute the fair market value of plaintiff's shares has not yet been determined, Drever Partners has not yet repurchased those shares, and plaintiff remains their record owner.

On May 8, 1995, plaintiff filed the present action against Drever and two other persons (hereafter collectively defendants) in their capacities as officers and directors of Drever Partners. The complaint alleged that Drever controls Drever Partners by virtue of his position as chairman of its board of directors and his ownership of the 89 percent of its stock that plaintiff does not own. The complaint further alleged that since May 16, 1994, defendants caused Drever Partners to pay excessive compensation to Drever, used corporate assets of Drever Partners to satisfy personal judgments against Drever, and manipulated corporate accounts to falsely reflect a pay-down of certain debts owed by Drever to the corporation; that the effect of the foregoing payments was to make undeclared distributions to Drever's majority shares without any corresponding distributions to plaintiff's minority shares; and that the purposes of such payments were to render Drever Partners unable to make distributions to plaintiff's minority shares, to undermine the fair market value of those shares, and to impair the corporation's power to repurchase those shares pursuant to the contract.

The complaint also alleged that Drever used his control of Drever Partners to deny plaintiff information on the financial condition of the corporation, to avoid holding the required annual shareholders' meeting, and to manipulate elections to the board of directors and reduce the size of the board so as to ensure that plaintiff did not become a director and thereby obtain the financial information he had been denied.

On the basis of these allegations the complaint charged that Drever breached the fiduciary duty that he owed as a director and as controlling shareholder to treat plaintiff, as the minority shareholder, fairly and in good faith and in a manner that benefits all shareholders proportionately. The complaint prayed for compensatory and punitive damages.

Defendants demurred on two principal grounds. First, they contended that they owed no fiduciary duty to plaintiff at any of the times alleged in the complaint because his status as a shareholder assertedly terminated as of May 1, 1994, the valuation date of the shares he had agreed to resell to Drever Partners upon leaving its employ.

Second, defendants contended the action was derivative in nature and (1) plaintiff lacked standing to sue derivatively because his shareholder status terminated on May 1, 1994, (2) even if plaintiff retained his shareholder status after that date he failed to allege the conditions precedent to a derivative action, and (3) plaintiff failed to join the corporation, which is an indispensable party in a derivative action, as a defendant.

The trial court sustained the demurrer on the first ground, without leave to amend. Relying on a group of out-of-state cases that we discuss below, the court ruled as a matter of law that on the face of the contract defendants' fiduciary duty to plaintiff by reason of his status as a shareholder ceased as of May 1, 1994, and after that date plaintiff's rights were contractual only and his relationship to Drever Partners was as a creditor, not as a shareholder.

The court also recited: "As a further reason to sustain the demurrer, the Court finds Defendants' arguments relating to the issue of derivative action quite persuasive." Like the Court of Appeal, we construe this recital as a formal ruling sustaining the demurrer on defendants' second ground as well.

The court then dismissed the complaint with prejudice.

The Court of Appeal affirmed the judgment of dismissal on the first ground of the demurrer, and for that reason declared it unnecessary to reach the second ground. We granted review.

The contract in issue is of the type commonly known as a buy-sell agreement. ³ A buy-sell agreement is a contract by which the stockholders of a closely held corporation (or a statutory "close corporation", see Corp.Code, § 158) seek to maintain control over the ownership and management of their business by restricting the transfer of its shares. The typical buy-sell agreement provides for the mandatory or optional repurchase of a stockholder's shares by the corporation or by the other stockholders upon the occurrence of a certain event; the most common of the events that can trigger the repurchase are the stockholder's death or, if he is also an employee, his retirement or the voluntary or involuntary termination of his employment. (See generally, Business Buy-Sell Agreements (Cont. Ed. Bar 1997) ch. 3, p. 121 (hereafter Buy-Sell Agreements); 1 Ballantine & Sterling, Cal. Corporation Laws (4th ed.1997) § 63, p. 4-68 (hereafter Ballantine); Friedman, Cal. Practice Guide: Corporations 1 (The Rutter Group 1997) p 3:187 et seq., p. 3-39 et seq.) The typical buy-sell agreement also specifies the method to be used to determine the repurchase price of the shares, selecting from such options as an agreed price with periodic revisions, a formula price based on book value or capitalization of earnings, or third party appraisal or arbitration. (Buy-Sell Agreements, supra, ch. 5, p. 269.) Although the agreement often serves multiple purposes, its principal objective is to permit the original owners of the corporation to retain control over the identity of their business associates; a secondary purpose is to protect the investment of the departing (or the estate of the departed) shareholder by facilitating the valuation and sale of an interest that might otherwise have no ready market. (1 Ballantine, supra, § 63.02, p. 4-69.)

Despite its specialized nature and purposes a buy-sell agreement remains a contract, and is therefore subject to the rules governing the validity, interpretation, and enforcement of contracts laid down by statute and case law. When we inquire what kind of contract a buy-sell agreement is, we see that in essence it is an executory contract to buy and sell personal property--specifically, shares of corporate stock owned by an employee--if and when a particular event occurs, i.e., the termination of his employment. Plaintiff invokes the general rule that "Upon an executory agreement to buy and sell personal property, title does not pass to the buyer until delivery is made to him...