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Turner v. Cheffers

Superior Court of Massachusetts, Suffolk, Business Litigation Session

January 11, 2019

Edward S. TURNER, Individually and as a Designee of Shareholders Comprising More Than 15% of Issued and Outstanding Shares of IVES Group, Inc., a Nevada Corporation
v.
Mark L. CHEFFERS, et al.

          File Date: January 14, 2019

          MEMORANDUM OF DECISION AND ORDER ON DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT ON COUNT VI

          Janet L. Sanders Justice of the Superior Court

          Plaintiff Edward S. Turner, a minority shareholder of IVES Group, Inc. (IVES), brings this action individually and as designee of certain other minority shareholders against defendants Mark Cheffers and Christine Renda, both of whom are directors and shareholders of IVES. In an earlier decision, this Court granted partial summary judgment as to Counts III, IV and V of the Complaint. See Memorandum and Order dated December 18, 2017 (the 2017 Decision). The defendants now move for partial summary judgment as to Count VI of the Complaint, a "freeze out" claim that alleges minority shareholder oppression. Defendants contend that Nevada law (which concededly applies to this case) narrowly circumscribes minority shareholder actions and that Count VI fails as a matter of law. This Court concludes that Count VI can be asserted only to the extent permitted by Nev. Rev. Stat. 78 and IVES’ Articles of Incorporation.

          BACKGROUND

          The December 2017 Decision summarized the facts contained in the summary judgment record then before the Court, many of which have some relevance to the current motion and will not be repeated here. Of particular importance are the following additional facts, undisputed for purposes of this motion.

         IVES, originally known as Internet Virtual Expo Systems, Inc., was incorporated in the state of Nevada in March 2000 pursuant to the Private Corporations Act, Nev.Rev. Stat. (NRS) § 78.010 et seq. At no time did IVES elect to file as a close corporation under the Close Corporations Act, NRS § 78A.010 et seq. IVES would not qualify as a close corporation under that statute in any event, since that statute requires that there would have to be restrictions on the transfer of the corporation’s common stock-restrictions which do not exist with respect to IVES shares. NRS § 78A.040 and § 78A.050. On March 21, 2000, IVES filed Articles of Incorporation. Article VIII of the Articles of Incorporation states that a director or officer cannot be held personally liable for breach of fiduciary duty except for: "(i) acts or omissions which involve intentional misconduct, fraud, or a knowing violation of law, or (ii) the unlawful payment of distributions." On March 31, 2000, IVES adopted By-Laws.

          Turner was one of IVES’ founders; he held various positions in the company before his termination in June 2015. In return for his work, Turner received common stock in IVES, some of which he transferred to his wife and children. He brings this action individually as designee for his wife and children and as designee for another IVES shareholder, Joseph Keufler: together, they hold just over a 15 percent interest in IVES. Count VI alleges that the defendants froze Turner out of IVES by wrongfully removing him as a director without a corporate vote, terminating him from the company without justification and in retaliation for his efforts to implement proper governance procedures, wrongfully depriving him of certain employment-related benefits, and wrongfully refusing his requests for information. In an answer to an interrogatory, Turner elaborated on this: the defendants Cheffers and Renda drained the company’s earnings through excessive compensation, failed to declare dividends when IVES was profitable, and otherwise used corporate assets and opportunities for personal benefit.[1] For purposes of this Motion, this Court accepts these allegations as true.

          DISCUSSION

          The parties agree that Nevada law applies to the issues raised by Count VI. Plaintiff also appears to concede that Count VI is premised on common-law principles of liability. The issue before the Court is whether those common-law principles-to the extent they have been developed and recognized by Nevada courts-are supplanted by statute or at least circumscribed by them. This Court concludes that they are.

         The first question is whether IVES is indeed a close corporation. Certainly, under common-law principles, it would be regarded as such since its stockholders are few in number and occupy management positions, and there is little market for the corporate stock. See Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 585-86 (1975). The defendants argue that, rather than have a court determine what is or is not a close corporation on an ad hoc basis, Nevada enacted a statute, NRS § 78A, which allows an entity to qualify as a close corporation, but only if it complies with certain filing and other requirements. NRS § 78A.020. It is undisputed that IVES did not fulfill those requirements and thus would not qualify as a close corporation under Section 78A.

         As plaintiff points out, however, an entity in Nevada can also incorporate under the Private Corporation Statute, NRS § 78.01 et seq. (Section 78). In defining the reach of that statute, NRS § 78.015 specifically states that it applies to close corporations, "unless otherwise provided in Chapter 78A of NRS." Similarly, Section 78A states that:

The provisions of this chapter apply to all close corporations formed pursuant to NRS 78A.020. Unless otherwise provided by this chapter, the provisions of Chapter 78 of NRS are applicable to all close corporations.

NRS § 78A.010. Reading these two statutory provisions together, this Court concludes that the fact that IVES incorporated under Section 78 does not make it any less of a close corporation. Still, that it did not incorporate under Section 78A is significant: Section 78A permits shareholders to create a relationship among themselves "that would otherwise be appropriate among partners," provided that there is a written shareholder agreement which states that. NRS § 78A.070. Section 78 contains no such provision. Moreover, IVES had no written shareholder agreement regarding the relationship among shareholders. Thus, one inference that can be drawn from reading these statutes together is that, at least under Section 78, the relationship among shareholders in a close corporation is not similar to that of a partnership, since to create that relationship, the corporation would have to comply with Section 78A.

         The issue then becomes the extent to which Section 78 can be construed to limit shareholder remedies which might otherwise be available at common law. As noted, Section 78 contains no provision suggesting that the relationship among shareholders is similar to that which exists in a partnership. It does, however, contain provisions which define the fiduciary responsibility of directors and officers. They are to exercise their powers "in good faith and with a view to the interests of the corporation." NRS § 78.138.1. They are "presumed to act in good faith, on an informed basis and with a view to the interests of the corporation." NRS § 78.138.3. In exercising their powers, directors and officers they may consider certain relevant factors, including the "long-term or short-term interests of the corporation’s stockholders." NRS § 78.138.4. However, they are "not required to consider, as a dominant factor, the effect of a proposed corporate action upon any particular group or constituency having an interest in the corporation." NRS § 78.138.5. The statute also states that neither NRS § 78.138.4 nor NRS § 78.138.5 "create or authorize any causes of action against the corporation or its directors or officers." NRS § 78.138.6. Although a director’s or officer’s duties "to resist change or potential change in control of a corporation" are circumscribed by NRS § 78.139, even then, the directors and officers have the ...


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