September 11, 2017
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO
P. Leibensperger, Justice
action by a minority shareholder against the majority
shareholders of a closely-held corporation, defendants move
to dismiss on the ground that all of plaintiff's claims
must be brought as a derivative action on behalf of the
corporation. The motion will be allowed, in part, and denied,
in part, as described below.
following facts are taken from the First Amended Complaint
(" FAC" ).
Joseph O'Donnell, is the holder of 400 shares of Davidson
Hubeny Brands, Inc. (" DH Brands" ), a
Massachusetts corporation. O'Donnell's shares
constitute 5% of the issued and outstanding shares of DH
Bert B, Davidson and Jeremiah S. Hubeny, each own 2,800
shares of DH Brands. The 2,800 shares constitute 35% of the
issued and outstanding shares of DH Brands. Davidson is the
president of DH Brands and Hubeny is the treasurer and
secretary of the company. Davidson and Hubeny are both
directors of DH Brands. At relevant times, until November
2014, Davidson and Hubeny were the only directors, On a date
" shortly after" November 21, 2014, a third
director was elected.
Brands is a closely-held corporation formed in 1988. In
addition to the 70% of shares owned collectively by Davidson
and Hubeny, approximately seven other individuals, including
O'Donnell, own or owned shares. It is alleged that
Davidson and Hubeny as majority shareholders, directors and
officers of DH Brands control the management, direction and
operations of the company. There is no ready market for the
shares of DH Brands.
Brands' financial statement for the fiscal year ended
June 30, 2014 described " related party
transactions." The financial statement disclosed that DH
Brands paid management services costs of over $1.7 million
and commissions of over $1.8 million to a company owned by
the two majority stockholders. O'Donnell avers that while
he had received " limited disclosure" of payments
by DH Brands for management service costs and commissions to
a marketing and management company owned by Davidson and
Hubeny, he received no details of the transactions or
explanation of why the costs were being incurred.
September 2014, Davidson and Hubeny offered to purchase the
shares of non-active shareholders, including the shares owned
by O'Donnell. The offer calculated a purchase price based
on the income and cash flow of the company discounted by the
lack of marketability of the minority shares and the lack of
control of the business by the minority shareholders.
O'Donnell alleges that the offer did not disclose that
the company's expenses were vastly overstated because
Davidson and Hubeny had been diverting the profits of the
company by paying fees and commissions to another company
owned solely by Davidson and Hubeny. The diversion of profits
also allegedly caused DH Brands to be unable to pay dividends
responded to the September 2014 offer by letter dated July
15, 2015. O'Donnell requested additional information from
the company, particularly concerning the related party
transactions, in order to evaluate the offer. In response,
Davidson, Hubeny and the company withdrew the offer.
O'Donnell contends that the withdrawal of the offer was a
" punitive" response to his request for
continued to seek financial information from DH Brands but
was denied satisfactory responses by Davidson and Hubeny.
Based on the limited information that he has received,
O'Donnell asserts that Davidson and Hubeny diverted
millions of dollars to their solely owned company, defendant
Davidson Hubeny Companies, Inc. (" DH Companies" ),
that should belong to DH Brands and its shareholders.
asserts claims in three counts. Count I is a claim of breach
of fiduciary duty by Davidson and Hubeny. O'Donnell
alleges that the diversion of commissions and management
services fees from DH Brands to DH Companies is unnecessary
and constitutes an appropriation of a corporate opportunity
belonging to DH Brands. With respect to the September 2014
offer to purchase O'Donnell's shares, O'Donnell
claims that Davidson and Hubeny utilized financial
information reflecting the effect to DH Brands of the
unlawful diversion to calculate an artificially low offer
price. Finally, O'Donnell complains that the offer was
withdrawn as a punitive measure because he asked questions
regarding the financial transactions.
II of the FAC alleges that Davidson and Hubeny supplied
O'Donnell with false information in an effort to induce
him to sell his shares. Count III of the FAC alleges that DH
Companies aided and ...