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O'Donnell v. Davidson

Superior Court of Massachusetts, Suffolk

September 8, 2017

Joseph O'Donnell
v.
Bert B. Davidson, Jr. et al

          Filed September 11, 2017

          MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS

          Edward P. Leibensperger, Justice

         In this 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.

         BACKGROUND

         The following facts are taken from the First Amended Complaint (" FAC" ).

         Plaintiff, 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 Brands.

         Defendants, 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.

         DH 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.

         DH 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.

         In 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 to shareholders.

         O'Donnell 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 information.

         O'Donnell 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.

         The FAC 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.

         Count 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 ...


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