Superior Court Holds Issues of Fact Preclude Summary Judgment in Dispute Over Control of Closely-Held Corporation

| Nov 14, 2013 | Firm News

In a dispute between the second wife of the patriarch of a closely-held corporation (“Corporation”) and his three sons from his first marriage, the Superior Court, applying Massachusetts law, has held that issues of fact preclude summary judgment where it is disputed what took place at a shareholders’ meeting and whether laches barred the sons’ complaint respecting an alleged stock call by the corporation.

The father (“Patriach”) purchased the business in 1988. In 1996, he divorced his first wife who was the mother of his three sons (“the Brothers”). Patriarch subsequently married a former employee of the business (“Second Wife”) and had two daughters with her (“the Daughters”). In 2007, he entered into a stockholders agreement (“the Agreement”) with the Brothers and the Corporation. The Corporation adopted a Plan of Recapitalization pursuant to which Patriarch received 997 shares of stock and each of the Brothers received 1. Patriach and all the Brothers were elected to the Board of Directors.

The Agreement provided for the transfer, purchase and call of the Corporation’s stock in various circumstances, including the death of a shareholder. It said that the purchase price would be determined by the Corporation’s independent certified public accountant.

The Corporation’s by-laws provide that by written consent a majority of the shareholders can take action without having a shareholder’s meeting. The by-laws provide for certain procedures if the shareholders act by consent including advance notice of such action.

From 2007 to 2011, the Patriarch, Second Wife and the Brothers all worked for Corporation in some capacity. Beginning in 2008, Corporation experienced losses. In 2010, it refinanced its loans with guarantees provided by Patriarch, including his personal residence, the real estate where Corporation was located, and Patriarch’s life insurance policy.

In 2010, Patriarch amended his living trust to substitute Second Wife and the Daughters as beneficiaries in place of the Brothers. He then began asking the Brothers to return their stock to the Corporation. The Brothers refused and remained on the Board.

In 2011, counsel for the Corporation send a notice of a special meeting of the shareholders on November 17, 2011, the purpose of which was to remove the Brothers as directors and to appoint Second Wife as director. The minutes of the shareholder meeting and a subsequent directors’ meeting had been prepared in advance. The minutes of the shareholders’ meeting indicated that there was a vote to remove the Brothers as Directors and a vote to appoint Second Wife as a director. There were also minutes of directors’ meeting that reflected purported votes to call the Brothers’ stock and pay them $10 per share, terminate the Agreement and elect Second Wife as vice president of the Corporation. There was no attempt by Patriarch to act by written consent as set forth in the by-laws.

The Brothers claimed there were no such votes at the Shareholders’ meeting and therefore there could not have been any such votes at a Directors’ meeting. They refused to execute paperwork to return their shares. Patriach passed away in December 2011. Two of the three Brothers filed suit in February 2012 against Patriarch’s estate, Second Wife and the Corporation. The Brothers testified at their depositions that the shareholders meeting adjourned without a vote to remove them as directors. At her deposition, Second Wife agreed that she did not vote as a director on November 17, 2011.

The parties filed cross motions for summary judgment. The parties argued whether the Brothers had been legally removed as directors at the shareholders meeting and whether the directors had subsequently recalled their shares. Defendants also argued that plaintiffs’ claim was barred by laches because the Brothers waited until February 2012 to file suit. The alleged prejudice to defendants was that Patriarch had passed away and could not testify as to what had occurred and why it had occurred.

The Superior Court held there was an issue of fact as to whether the Brothers had been removed as directors on November 17th. Since it was not known whether they had been removed, there was also an issue of fact as to whether there had been a quorum for the directors meeting after the shareholders meeting.

With respect to laches, the court noted it is an equitable defense that precludes a lawsuit when a plaintiff has negligently sat on his or her rights to the detriment of a defendant. To establish the defense, the defendant must show that plaintiff was negligent which led to an unreasonable delay and that defendant was prejudiced as a result. Whether delay was unreasonable and whether there was prejudice are issues of fact that depend on the circumstances of the case. The Court said the three month delay between the shareholders meeting on November 17, 2011 and the filing of suit was not so egregious that it could be deemed unreasonable as a matter of law. The Court denied the cross motions for summary judgment.

Jenkins v. Estate of Jeffry B. Jenkins, P.B. 12-0915, 2013 WL 5958348 (R.I.Super. Nov. 1, 2013)

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