UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-20725
JAMES P. HOLLIS,
Plaintiff-Appellee,
versus
DAN H. HILL,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Texas
November 17, 2000
Before POLITZ, JOLLY, and BARKSDALE, Circuit Judges.
POLITZ, Circuit Judge:
James P. Hollis seeks a court-ordered buy-out of his 50% interest in a Nevada
corporation. The district court found that Dan Hill, holder of the other 50% interest,
breached the fiduciary duty he owed to Hollis and ordered a buy-out of Hollis’ shares
based on the corporation’s value more than one year prior to the date of judgment. Hill
timely appeals. For the reasons assigned, we affirm in part and vacate and remand in
part.
BACKGROUND
In early 1995, Hill and Hollis jointly founded First Financial USA, Inc. (FFUSA),
a Nevada corporation which marketed first lien mortgage notes and other non-security
financial products. All of the whole mortgage notes placed by FFUSA were obtained
from and serviced by South Central Mortgage.1 Hill and Hollis also owned equal
shares of First Financial United Investments, Ltd., L.L.P. (FFUI), a Texas limited
liability partnership organized in June 1996 to sell securities products as a
broker/dealer. This action focuses on the parties’ rights and obligations respecting
FFUSA.
Hill was a 50% owner of FFUSA, was a director and served as its president, and
operated its Houston office. He testified his duties were “to set up the company, set
up all the administration, hire the personnel, set up the tracking systems, support reps,
recruit reps, and generally help in the strategizing of the company direction.” Hollis
owned the other 50% interest in FFUSA, was a director and served as its vice
1
Hill explained that FFUSA relied heavily on South Central Mortgage for two reasons. Hi ll’s
experience with South Central and his relationship with its president, Todd Etter, persuaded him that
the company could be relied upon to service the notes properly. This was particularly important in
the event that a note was defaulted. In addition, South Central was among the few firms outsourcing
the marketing of its notes. Most other mortgage companies preferred to keep the entire operation
in-house by maintaining their own sales forces. As FFUSA was strictly a marketing company, few
other firms would complement its business as well as South Central.
2
president. Hollis operated its Melbourne, Florida office, with duties including
recruiting, training and supporting representatives in their marketing efforts, seeking out
new revenue sources, and participating in management. Their wives completed the
board of directors and were employed by the firm.
From its inception through 1997, FFUSA did very well financially and paid
substantial salaries to Hill and Hollis. In early December 1997, however, Hill began
to complain that Hollis was not carrying an equal share of the firm’s work load and
made known his belief that Hollis was getting more money than he deserved. He
stopped paying Hollis’ salary. Hollis proposed several ways to resolve the dispute,
including mediation, relocating to Houston, placing a disinterested person on the board
to break the deadlock, or exchanging his interest in FFUI for Hill’s interest in FFUSA.
Hill rejected all of the proposals. In March 1998, Hill proposed to buy Hollis’ interest
in FFUSA in exchange for a ten-year, $1.5 million consultant agreement.2 When Hollis
rejected the proposal, Hill threatened to close FFUI and establish his own broker/dealer
business.
Meanwhile, Hill took FFUSA’s annuity business and, without Hollis’
knowledge, placed it into a sole proprietorship called “Dan Hill d.b.a. First Financial
2
A valuation report by Dixon & Company dated December 17, 1997, estimated the company’s
value to be between $1.3 million and $3.5 million.
3
U.S.A.” Hill explained that this move was in response to a cease and desist letter
FFUSA received from the State of Texas prohibiting it, as a corporation not licensed
in Texas, from marketing insurance products. Hill, a resident of Texas, created the sole
proprietorship so that FFUSA could continue the marketing of insurance products and
executed a contemporaneous assignment transferring all accounts of the sole
proprietorship back to FFUSA. Hill charged the corporation a fee for providing this
“service.” He later split this fee with Hollis.
Hill also stopped sending FFUSA financial reports to Hollis. On May 11, 1998,
Hollis visited the Houston office of FFUSA and FFUI and requested copies of financial
reports and other documents. Hill refused, claiming that he and the key Houston office
employees had appointments that day and that they did not have time to go over the
books with Hollis. Hollis later, through his attorney, asserted his right as a shareholder
of FFUSA and limited partner of FFUI to inspect the books and records of the two
firms. On the eve of the inspection, Hill and Hollis agreed to negotiate. Hollis testified
that the result was an agreement under which Hill would acquire Hollis’ interest in
FFUI and would draw a salary of $200,000 from FFUSA, and Hollis would draw an
annual salary of $120,000 therefrom for encouraging FFUSA’s representatives to
produce business and for supplying them with the necessary paperwork. Under the
agreement, both men retained a 50% interest in FFUSA.
4
By August 1998, the tension between Hollis and Hill resurfaced. Hill stopped
sending company reports to Hollis and unilaterally undertook a number of measures he
claims were intended to lower the firm’s costs, including reducing officer salaries by
50%. On October 16, 1998, he informed Hollis that he had decided to reduce his own
annual salary to $80,000 and would reduce Hollis’ salary to zero dollars. In a
November 1998 letter, Hill told Hollis that: “[his] position as an inactive officer
commands no salary;” phone service in the Florida office would be canceled; and the
lease for the Florida office would be terminated. Hollis was informed that he was no
longer authorized to use the company cellular phone and that FFUSA would no longer
pay the expense of his leased vehicle. Hill terminated the employment of Hollis’ wife.
Hill significantly reduced costs in the Houston office, as well. He testified that cost
cutting measures were necessary because he had received word from Etter that South
Central Mortgage would likely not be able to provide FFUSA the steady stream of
business it had in the past. He conceded, however, that he had made very little effort
to produce new lines of business for FFUSA.
Hollis filed the instant action on December 8, 1998, alleging shareholder
oppression. A few weeks later Hill terminated Hollis as vice-president and eliminated
all of his company benefits. Hollis continued as corporate secretary, board member,
and 50% shareholder. The financial condition of FFUSA worsened and, according to
5
Hill’s expert, the firm had decreased in value to $100,000 by May 11, 1999. On April
30, 1999, Hill, acting through his attorney, made an unsuccessful “capital call” on
Hollis.
The district court, applying Nevada law, concluded that Hill’s conduct was
oppressive and ordered him to buy Hollis’ shares in FFUSA. The court cited the
capital call and the firing of Hollis as the “easiest objective data” supporting the claim
of oppression, and added that the “more egregious” act of moving the annuity business
to the Hill-sole-proprietorship should not have occurred without the approval of the
board of directors. The court also suggested that Hill’s interference with the flow of
information to Hollis and his threat to start a business that competed with FFUI were
oppressive acts.3 The court ordered Hill to purchase Hollis’ shares for $667,950,
which represented the value of the corporation on February 28, 1998, the date the court
found that the oppression began. Adding attorney’s and expert’s fees, the total award
to Hollis was $792,915. This appeal followed.
ANALYSIS
3
In ruling from the bench, the district court opined that the absence of a non-compete agreement
was of no consequence and that Hill’s actions were subject to the corporate opportunity doctrine.
Any finding of the breach of duty of loyalty based on usurpation of a corporate opportunity
necessarily related to opportunities available to FFUI. Hollis has made no claims as an FFUI
shareholder and has not claimed that Hill usurped a corporate opport unity. The trial court
appropriately did not specifically find a violation of the corporate opportunity doctrine. We assume
that the district court intended this discussion to support its finding of oppression.
6
We apply Texas law in this diversity action. Texas, like most other states,
follows the “internal affairs doctrine.” That is, the internal affairs of the foreign
corporation, “including but not limited to the rights, powers, and duties of its board of
directors and shareholders and matters relating to its shares,” are governed by the laws
of the jurisdiction of incorporation.4 Nevada corporate law therefore determines the
existence and scope of duties between Hollis and Hill. “In order to determine state
law, federal courts look to final decisions of the highest court of the state. When there
is no ruling by the state’s highest court, it is the duty of the federal court to determine
as best it can, what the highest court of the state would decide.”5
Generally, in determining what a state’s highest court would hold with respect
to a particular issue, “we may consider relevant state precedent, analogous decisions,
considered dicta, scholarly works and any other reliable data.”6 In the present
situation, however, the most reliable source of assistance, namely dispositive decisions
from the Nevada courts, are non-existent. In addition, the corporate law of Nevada
gives limited guidance, and determining where the Nevada Supreme Court would look
4
TEX. BUS. CORP. ACT ANN. art. 8.02A (Vernon 1980).
5
Transcontinental Gas Pipeline Corp. v. Transportation Insur. Co., 953 F.2d 985, 988 (5th
Cir. 1992) (citations omitted).
6
McCallum v. Rosen’s Diversified, Inc., 153 F.3d 701,703 (8th Cir. 1998) (quoting Farr v.
Farm Bureau Ins. Co., 61 F.3d 677, 679 (8th Cir. 1995)).
7
for such guidance on the issues presented herein presents a challenge. We therefore
must resolve the questions posed by evaluating the available Nevada case law
addressing similar factual scenarios and by looking to other jurisdictions when
necessary.
Nearly every state statutorily permits holders of a certain percentage of corporate
shares to petition the courts for dissolution under particular enumerated circumstances.
Thirty-six states7 list the oppression of minority shareholders by controlling
shareholders as grounds for dissolution.8 Nevada does not.9 Hollis, however, has not
7
See F. HODGE O’NEAL & ROBERT B. THOMPSON, O’NEAL’S OPPRESSION OF MINORITY
SHAREHOLDERS § 7:13 (2d ed. 1985).
8
Definitions of “oppression” in this context have tended to take one of three forms. A number
of courts have defined oppression in terms of the fairness of the action taken by the majority, using
phrases such as “burdensome, harsh and wrongful conduct ... ‘a visible departure from the standards
of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a
corporation is entitled to rely.’” Id. at § 7:13, 79-80 (quoting Skierka v. Skierka Bros., Inc., 629
P.2d 214, 221 (Mont. 1981)). Other courts have made reference to the fiduciary duties existing
between majority and minority shareholders, while still others have found oppression based on the
disappointment of the minority’s reasonable expectations. O’N EAL & THOMPSON at 80.
9
The Nevada dissolution statute allows for dissolution and the appointment of a receiver upon
application of the holders of one-tenth of the company’s stock whenever:
(a) The corporation has willfully violated its charter;
(b) Its trustees or directors have been guilty of fraud or collusion or gross mismanagement in the
conduct or control of its affairs;
(c) Its trustees or directors have been guilty of misfeasance, malfeasance or nonfeasance;
(d) The corporation is unable to conduct the business or conserve its assets by reason of the act,
neglect or refusal to function of any of the directors or trustees;
(e) The assets of the corporation are in danger of waste, sacrifice or loss through attachment,
foreclosure, litigation or otherwise;
(f) The corporation has abandoned its business;
(g) The corporation has not proceeded diligently to wind up its affairs, or to distribute its assets
8
sought dissolution of FFUSA under NEV. REV. STAT. § 78.650. Instead, he contended,
and the district court found, that Hill’s actions amount to a breach of fiduciary duty
owed him and that equitable relief is therefore available.10 Before us, then, is the
question whether a duty of loyalty was breached by Hill and, if so, whether the district
court erred in granting a retroactive buy-out remedy.
A. Existence of a Fiduciary Duty
We find that a fiduciary duty existed between Hollis and Hill. The facts reveal
that they agreed to begin a business together, incorporating it under the name FFUSA.
They retained equal ownership in the corporation, and became officers and directors,
agreeing to the work obligations and salary of the other. With only two shareholders
and management responsibilities divided between them, a fiduciary relationship was
created not unlike that in a partnership.
We find this case analogous to Clark v. Lubritz11 where five doctors agreed to
join their practices to form a preferred provider organization called Nevada Preferred
in a reasonable time;
(h) The corporation has become insolvent;
(i) The corporation, although not insolvent, is for any cause not able to pay its debts or other
obligations as they mature; or
(j) The corporation is not about to resume its business with safety to the public.
NEV. REV. STAT. § 78.650 (1999).
10
Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. App. Ct. 1984).
11
944 P.2d 861 (Nev. 1997).
9
Professionals (NPP). They agreed orally that each would contribute $15,000, and that
they would share profits and losses equally. Soon after the agreement, they decided to
incorporate.12 After a dispute over NPP’s benefit plan sales, Lubritz resigned as
president and director, intending to relegate himself to “just being a stockholder.”13
Over the next four years, he continued to perform limited services for NPP and
continued to receive an equal share of the firm’s proceeds. In the fifth year, however,
the other doctors voted, unbeknownst to Lubritz, to reduce the portion of proceeds
distributed to Lubritz while increasing their distributions. When Lubritz learned that
he was receiving a lesser share of the firm’s profits, he sued. The court found for
Lubritz, both on a breach of contract theory, based on the doctors’ original oral
agreement, and for breach of fiduciary duty, based on the four shareholders’
concealment of the unequal distribution of profits.14
In Clark, despite the incorporation of NPP, the court imposed fiduciary duties
between the shareholders akin to that of a partnership. The evidence revealed that the
12
It is unclear from the opinion whether the doctors elected to incorporate as a statutory close
corporation under NEV. REV. STAT. § 78A.020. Nevada, not unlike many other states, allows
corporations held by fewer than thirty persons to select a set of special governance rules. It matters
not in our analysis of this case, however, because these rules do not alter the fiduciary duties running
between corporate participants.
13
Clark, 944 P.2d at 863.
14
Id. at 864-65.
10
doctors continued to treat each other as partners; no actual stock was issued, no annual
shareholder meetings were held, officers and directors were not actually elected, and
the bylaws were not used in operating NPP.15 In the case at bar only two shareholders
existed, and there appear to have been no shareholder meetings, election of directors,
or adherence to by-laws. Thus, the analogy to a partnership seems perhaps even
stronger here, and we see no reason why the Nevada Supreme Court would not treat
the agreement between Hollis and Hill in the same manner as the agreement in Clark.16
We find our decision buttressed by the legal authority dealing with close
corporations.17 We concede that many of Hill’s alleged “oppressive” acts, including
the diminution and eventual termination of salary, the failure to deliver financial
information, the closing of one of the company’s offices, termination of employment,
15
Id. at 863.
16
We note that both parties argue over the relevance of Hollis’ status as an “equal” rather than
“minority” shareholder. We find this distinction immaterial to the present dispute. While we
acknowledge that in Clark the plaintiff truly was a “minority” shareholder, in the sense that he owned
only 1/5 of the stock, we find this difference insignificant in light of Hill’s virtually unfettered control
of FFUSA. Further, the court in Clark never spoke of “minority” shareholder status, partially
because it treated the organization as a de facto partnership, but also because the partners who
decreased his salary clearly controlled the organization, much like Hill controlled FFUSA in the case
at bar. Furt hermore, other jurisdictions have agreed that the question of minority versus majority
should not focus on mechanical mathematical calculations, but instead, “The question is whether they
have the power to work their will on others—and whether they have done so improperly.” Bonavita
v. Corbo, 692 A.2d 119, 123 (N.J. Super. Ct. Ch. Div. 1996). See also, infra note 20.
17
FFUSA was not incorporated as a close corporation, but, as observed in footnote 12, this does
not affect our analysis in the instant action. Relevant references herein to “close corporation” also
mean “closely held” corporation.
11
and the cessation of benefits, are classic examples of acts typically shielded from
judicial scrutiny under the business judgment rule. Generally, employees who are
adversely affected by such officer and director decisions may not claim oppression by
those in control of the corporation, even if they are also shareholders of the
corporation.18 Certain actions by a director, however, receive much different treatment
when the corporation only has a few shareholders, including that director.
In the context of a closely held corporation, many classic business judgment
decisions can also have a substantial and adverse affect on the “minority’s” interest as
shareholder. Close corporations present unique opportunities for abuse because the
expectations of shareholders in closely held corporations19 are usually different from
those of shareholders in public corporations. As a leading commentator has noted:
Unlike the typical shareholder in a publicly held corporation, who may be
simply an investor or a speculator and does not desire to assume the
responsibilities of management, the shareholder in a close corporation
considers himself or herself as a co-owner of the business and wants the
privileges and powers that go with ownership. Employment by the
corporation is often the shareholder’s principal or sole source of income.
18
As one court has observed, “a ‘fiduciary’ duty to every baggage handler at United Airlines just
because the employee owns a share of stock would put employee-owned firms at such a competitive
disadvantage that they would soon collapse.” Nagy v. Riblet Products Corp., 79 F.3d 572, 577
(7th Cir. 1996).
19
Closely held corporations are characterized by a small number of stockholders, the absence of
a ready market for the corporate stock, and substantial majority stockholder participation in the
management, direction, and operation of the company. Donahue v. Rodd Electrotype Co., 328
N.E.2d 505 (Mass. 1975).
12
Providing employment may have been the principal reason why the
shareholder participated in organizing the corporation. Even if
shareholders in a close corporation anticipate an ultimate profit from the
sale of shares, they usually expect (or perhaps should expect) to receive
an immediate return in the form of salaries as officers or employees of the
corporation, rather than in the form of dividends on their stock. Earnings
of a close corporation are distributed in major part in salaries, bonuses
and retirement benefits. . . .20
In this setting, it is not difficult for a controlling stockholder to frustrate such
expectations and deny a return on investment through means that would otherwise be
legitimate.21
For this reason, a number of jurisdictions, including Massachusetts in the
landmark case Donahue v. Rodd Electrotype Co.,22 have held that the duty existing
between controlling and minority shareholders in close corporations is the same as the
duty existing between partners.23 In Donahue, the court required a majority
20
F. HODGE O’NEAL & ROBERT B. THOMPSON, 1 O’NEAL’S CLOSE CORPORATIONS § 1:08, at 31-
32 (3d ed. 1998).
21
It is not critical that Hill and Hollis each owned 50% of FFUSA and therefore neither was a
majority shareholder. A fiduciary duty exists between shareholders by virtue of the fact that one of
the shareholders has control over the corporation’s assets. Indeed, a duty has been found to run from
the minority to the majority where the minority shareholder had veto power over corporate action.
Smith v. Atlantic Properties, Inc., 422 N.E.2d 798 (Mass. App. Ct. 1981). Hill acknowledges that
he had control over FFUSA.
22
328 N.E.2d 505 (Mass. 1975).
23
The Massachusetts court borrowed this oft-quoted statement from then-Chief Judge Cardozo:
Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty
of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting
at arm’s length, are forbidden to those bound by fiduciary ties. . . . Not honesty alone, but the
13
shareholder, whose shares were purchased by the corporation, to make available to the
minority an equal opportunity to sell a ratable number of shares to the corporation at
an identical price. While Donahue’s equal opportunity principle has been rejected by
some courts,24 its recognition of special rules of fiduciary duty applicable to close
corporations has gained widespread acceptance.25
We find that because FFUSA bore all the traditional characteristics of a close
corporation, although not formally incorporated as such, the reasoning behind placing
a fiduciary duty on controlling shareholders applies to these facts. Both Hill and Hollis
began the organization in order to participate personally in its management, and made
money principally through salaries as officers. There is no evidence that either
received large dividends or sought to benefit from the sale of his interest. We thus find
close corporation jurisprudence an equally persuasive basis for imposing a fiduciary
duty on Hill and for finding that he breached that duty. Further, as noted above, in
Clark the Nevada Supreme Court applied to the doctor shareholders the fiduciary duty
punctilio of an honor the most sensitive, is then the standard of behavior.
Id. at 516 (quoting Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928)).
24
Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993); Toner v. Baltimore Envelope Co., 498 A.2d
642 (Md. 1985); Delahoussaye v. Newhard, 785 S.W.2d 609 (Mo. Ct. App. 1990).
25
See F. HODGE O’NEAL & ROBERT B. THOMPSON, 2 O’NEAL’S CLOSE CORPORATIONS § 8:15,
at 89 (3d ed. 1998).
14
applicable to partners rather than the duty of loyalty that applies to corporate actors.
Whether couched in terms of a de facto partnership or a close corporation, Clark
provides a strong indication that the Nevada Supreme Court would find fiduciary
obligations between shareholders in a corporation such as FFUSA operated by
shareholder-directors.
Hill’s contentions that no such duty existed in the present case are not
persuasive. That Nevada does not list oppression among its bases for statutory
dissolution under NEV. REV. STAT. § 78.650 does not preclude the existence of a
fiduciary duty. The dissolution statutes do not provide the exclusive remedies for
oppressed shareholders; courts have equitable powers to fashion appropriate remedies
where the majority shareholders have breached their fiduciary duty to the minority by
engaging in oppressive conduct.26 In addition, a number of states have found breaches
of fiduciary duty on bases which would not support dissolution under their statutes.27
26
Masinter v. Webco, 262 S.E.2d 433 (W.Va. 1980); Alaska Plastics, Inc. v. Coppock, 621
P.2d 270 (Alaska 1980).
27
Compare MASS. GEN. LAWS Ch. 156 B, § 99 (allowing only deadlock as grounds for
dissolution), with Zimmerman v. Bogoff, 524 N.E.2d 849 (Mass. 1988) (finding breach of fiduciary
duty based on 50% shareholder’s failure to pay debts owed to another business held by other 50%
shareholder); ME. REV. STAT. ANN. tit.13-A, § 1115 (West 1999) (allowing dissolution only upon
showing of deadlock, fraud, illegality, waste, that the corporation has abandoned its business, or the
existence of a provision in the articles of incorporation permitting dissolution under the
circumstances), with Rosenthal v. Rosenthal, 543 A.2d 348 (Me. 1988) (recognizing fiduciary duty
might exist where plaintiff alleged he was forced out of the family businesses in bad faith and that he
sold his share of those businesses at an unfairly low price); OHIO REV. CODE ANN. § 1701.91
(Anderson 2000) (allowing involuntary dissolution for deadlock only), with Crosby v. Beam, 548
15
We likewise decline Hill’s invitation to apply the law of Delaware. While
mindful of the cases cited by Hill where courts applying Nevada law have looked to
Delaware on unrelated issues of corporate law, we conclude that cases such as Clark
remain a better indication of the Nevada court’s position with respect to issues
involving close and closely held corporations. The opinions of the Delaware courts are
often influential in matters of corporate law, but no more so in Nevada than any of the
other states that have followed Donahue.28
Nor do we accept Hill’s suggestion that our analysis should reflect Nevada’s
N.E.2d 217 (Ohio 1989) (allowing direct shareholder action for damages based on breach of fiduciary
duty); GA. CODE ANN. § 14-2-940 (1999) (allowing dissolution of corporations which have not
elected to become statutory close corporations only upon showing of deadlock likely to result in
irreparable harm, fraud, illegality, or waste), with Thomas v. Dickson, 301 S.E.2d 49 (Ga. 1983)
(affirming minority shareholder’s right to bring direct action for improper squeeze out).
28
In addition, as at least one commentator has noted, it is unclear how the Delaware courts might
decide a case involving a “classic freeze out” such as this one. Robert A. Ragazzo, Toward a
Delaware Common Law of Closely Held Corporations, 77 Wash. U.L.Q. 1099 (1999). While it is
true that some of the Delaware opinions, most notably Nixon v. Blackwell, 626 A.2d 1366 (Del.
1993), contain very forceful dicta indicating that Delaware is likely not to apply heightened fiduciary
duties to participants in close corporations, the Delaware Supreme Court has yet to consider the
precise issue in this case, namely whether a controlling shareholder is liable for actions taken with the
purpose and effect of freezing out another shareholder. In Riblet Products Corp. v. Nagy, 683 A.2d
37 (Del. 1996), the Delaware Supreme Court decided, upon certified question from the Seventh
Circuit, that majority stockholders are not liable for violation of a fiduciary duty to an employee under
contract for issues involving that employment. Though observing that Delaware has not chosen to
follow Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657 (Mass. 1976), discussed infra,
the court also indicated that it might have decided the case differently if Nagy had alleged that his
termination amounted to a wrongful freeze out of his stock interest.
16
desire to provide management-friendly corporate law.29 If indeed that is Nevada’s
desire, it would not necessarily be furthered in the context of the close or closely held
corporation where disputes typically pit manager/shareholder against
manager/shareholder.30
B. Breach of Fiduciary Duty
Convinced of the existence of a fiduciary duty between shareholders in a close
corporation, we turn to the scope of that duty and examine whether Hill breached his
duty in the case at bar. As previously noted, the scope of this fiduciary duty has varied
among the jurisdictions which have adopted Donahue. One context in which the scope
has been frequently litigated has been with regard to salary and employment decisions.
Again, Nevada has not addressed this issue and we must look to the law of other
jurisdictions for guidance.
In another landmark Massachusetts case, Wilkes v. Springside Nursing Home,
29
For this proposition, Hill cites Keith P. Bishop, The Delaware of the West: Does Nevada Offer
Better Treatment for Directors?, 7 No. 3 INSIGHTS 20 (1993).
30
Both parties spoke at length during oral argument about the effect of Smith v. Gray, 250 P.
369 (Nev. 1926). We find that Smith provides little guidance on the issue presented today. While
the court noted that minority shareholders generally may bring a case in equity to challenge
oppressive conduct by majority shareholders, the case not only proves so dated as to be questionable
authority at best with respect to the current court’s position, it involved a business incorporated in
Arizona, not Nevada.
17
Inc.,31 four associates formed a corporation in 1951 for the purpose of operating a
nursing home. Each paid in $100 with the understanding that each of them would be
a director and would participate in the management of the corporation. The corporation
paid no dividends, but by 1955 each was receiving $100 per week as salary. When
relations became strained between Wilkes and one of the other investors, Wilkes
declared his intention to sell his shares. The other three board members met, eliminated
Wilkes’ salary, declined to reelect him as director, and terminated his employment with
the corporation.
The Massachusetts court reiterated that, under Donahue, shareholders in close
corporations owe each other a duty of utmost good faith and loyalty. It curtailed
Donahue’s equal opportunity rule by holding that the duty was not breached if the
majority acted pursuant to a legitimate business purpose. In order to avoid hampering
management’s effectiveness in operating the corporation, the court reasoned, such a
rule was necessary in order to preserve management’s discretion in declaring dividends,
negotiating mergers, establishing the salaries of officers, dismissing directors, and
hiring and firing of employees. The court also held that when a legitimate business
purpose exists, the minority shareholder must be given an opportunity to demonstrate
that the purpose could have been achieved through means less disruptive to its
31
353 N.E.2d 657 (Mass. 1976).
18
shareholder interests. The court found that the majority shareholders of Springside
lacked a legitimate business purpose for ousting Wilkes, and found that the duty they
owed Wilkes had been breached for several reasons. The company had a longstanding
policy that each investor would be a director in the corporation and that employment
would go hand-in-hand with stock ownership. Wilkes was one of the company’s four
founders and had invested time and capital with the expectation that he would continue
to participate in its management. Perhaps most importantly, eliminating Wilkes’ salary,
in combination with the fact that the corporation never declared a dividend, guaranteed
that he would not obtain a return on his investment. These facts led the court to infer
a design to pressure Wilkes to sell his shares at a price below their value.
That a controlling shareholder cannot, consistent with his fiduciary duty,
effectively deprive a minority shareholder of his interest as a shareholder by terminating
the latter’s employment or salary has been widely accepted. The states considering the
issue directly essentially have adopted the approach of Wilkes.32 In addition,
shareholder oppression under the dissolution statutes, which is often defined in the
same terms as the fiduciary duty between shareholders, frequently has been found
32
Nelson v. Martin, 958 S.W.2d 643 (Tenn. 1997); Wrightsel v. Ross-Co Redi-Mix, Inc., No.
1791, 1993 WL 97780 (Ohio Ct. App. Mar. 26, 1993); W & W Equip. Co., Inc., v. Mink, 568
N.E.2d 564 (Ind. Ct. App. 1991); Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. Ct. App. 1984);
Masinter v. Webco Co., 262 S.E.2d 433 (W.Va. 1980).
19
under circumstances similar to those described in Wilkes.33 The opinions make clear,
however, that shareholders do not enjoy fiduciary-rooted entitlements to their jobs.34
Such a result would clearly interfere with the doctrine of employment-at-will.35 Rather,
the courts have limited relief to instances in which the shareholder has been harmed as
a shareholder.36 The fiduciary duty in the close corporation context, as in the context
of public corporations, appropriately is viewed as a protection of the shareholder’s
investment. The precise nature of an investment in a close corporation often is not
clear, particularly when the shareholder is also an employee. It is therefore important
to distinguish investors who obtain their return on investment through benefits provided
to them as employees from employees who happen also to be investors. To that end,
courts may consider the following non-exclusive factors: whether the corporation
33
F. HODGE O’NEAL & ROBERT B. THOMPSON, O’NEAL’S OPPRESSION OF MINORITY
SHAREHOLDERS § 7:13, at 81 (2d ed. 1985). See, e.g., Notzke v. Art Gallery, Inc., 405 N.E.2d 839
(Ill. App. Ct. 1980); Exadaktilos v. Cinnaminson Realty Co., 400 A.2d 554 (N.J. Super. Ct. Law
Div. 1979).
34
See, e.g., Ingle v. Glamore Motor Sales, Inc., 535 N.E.2d 1311 (N.Y. 1989) (holding that a
minority shareholder in a close corporation did not have a fiduciary-rooted exception against at-will
discharge where the corporation repurchased his shares pursuant to a repurchase-upon-termination-
of-employment clause in a shareholders’ agreement); Gallagher v. Lambert, 549 N.E.2d 136 (N.Y.
1989) (same). Neither Gallagher nor Ingle was deprived of a return on his investment because in both
cases the company repurchased shares at a previously agreed upon price.
35
See Douglas K. Moll, Shareholder Oppression v. Employment at Will in the Close
Corporation: The Investment Model Solution, 1999 U. Ill. L. Rev. 517. Nevada follows the
employment-at-will rule. Hansen v. Harrah’s, 675 P.2d 394 (Nev. 1984).
36
Merola v. Exergen Corp. 668 N.E.2d 351 (Mass. 1996); Riblet Products Corp. v. Nagy, 683
A.2d 37 (Del. 1996).
20
typically distributes its profits in the form of salaries; whether the shareholder/employee
owns a significant percentage of the firm’s shares; whether the shareholder/employee
is a founder of the business; whether the shares were received as compensation for
services; whether the shareholder/employee expects the value of the shares to increase;
whether the shareholder/employee has made a significant capital contribution; whether
the shareholder/employee has otherwise demonstrated a reasonable expectation that the
returns from the investment will be obtained through continued employment; and
whether stock ownership is a requirement of employment. The minority’s shareholder
interest is not injured, however, if the corporation redeems shares at a fair price or a
price determined by prior contract or the shareholder is otherwise able to obtain a fair
price.
Overlaying these factors to the relevant facts at bar, we conclude that Hollis
demonstrated an injury as a shareholder. He was a founder and 50% shareholder of
FFUSA. His positions as vice president and director clearly resulted therefrom. He
had no reason to expect he would be able to sell his FFUSA shares for a higher price,
meaning that the value of his investment was tied directly to his employment. The
benefits he received from his investment were distributed in the form of salary and
certain perquisites; the firm never declared a dividend and paid no salary to its
directors. Hill totally deprived Hollis of those benefits by terminating his employment
21
and salary, closing the Florida office, and cutting him off from company benefits. As
a result, Hollis’ shares in FFUSA were rendered worthless. No offer was made by the
corporation to purchase Hollis’ shares at a fair price upon termination, and Hollis did
not have the option of selling his shares to another buyer.
C. Remedy
The district court found Hill liable for breach of his fiduciary duty and ordered
a buy-out of Hollis’s shares. The court determined that Hill began his oppressive
conduct on February 28, 1998, and thus ordered the buy-out as of that date, calculating
the value of the shares at $667,950. While we essentially agree with the district court’s
remedial approach, we conclude that its decision to backdate the buy-out to February
28 is clear error.
We again look to Nevada law, particularly Hines v. Plante, to determine the
remedies available herein. In Hines, the Nevada Supreme Court found that the
statutory language only identified an appointment of a receiver as a remedy for
shareholder actions; however, the court recognized that, “The appointment of a receiver
pendente lite is a harsh and extreme remedy which should be used sparingly and only
when the securing of ultimate justice requires it. A corollary of this rule is that if the
desired outcome may be achieved by some method other than appointing a receiver,
22
then this course should be followed.”37 This is the same reasoning that other courts
have used to allow court ordered buy-outs even in the absence of specific statutory
authority.38 We cannot say, under the circumstances of this case, that the district court’s
decision to allow such a remedy was clearly erroneous.
We do disagree, however, with the trial court’s decision to use February 1998
as the valuation date for the buy-out. Although Hollis’ relationship with Hill began to
decline significantly in February 1998, many of the actions upon which we base our
finding of oppression occurred after this date. Hollis continued to receive his agreed
upon salary until September of 1998, when it was reduced by 50%. His salary was not
reduced to zero until October of 1998. Hill’s unilateral decision to close the Florida
office, discontinue the car lease payments, and terminate phone service was not
communicated to Hollis until November of 1998. Hollis’ original complaint was filed
in the district court in December of 1998. As an equal shareholder, Hill commanded
as much authority to assert control over the corporation as did Hollis. His failure to act
on this authority until December of 1998 was his choice. The presumptive valuation
date for other states allowing buy-out remedies is the date of filing unless exceptional
37
Hines v. Plante, 661 P.2d 880, 881-82 (Nev. 1983) (internal citations omitted).
38
See, e.g., Alaska Plastics, Inc. v. Coppock, 621 P.2d 270 (Alaska 1980); Maddox v.
Norman, 669 P.2d 230 (Mont. 1983); Delaney v. Georgia-Pacific Corp., 564 P.2d 277 (Or. 1977);
and Davis v. Sheerin, 754 S.W.2d 375 (Tex. Ct. App. 1988).
23
circumstances exist which require an earlier or later date to be chosen.39 No such
circumstances exist in this case. Therefore, we conclude that the date of valuation for
the court ordered buy-out should be the date suit was filed herein. Use of this date will
take into consideration all of Hill and Hollis’ actions, inactions, and prudent and
imprudent business decisions which affected the value of the business during the
intervening period.
We therefore VACATE the calculation of the value of Hollis’ shares by the
district court and REMAND for further proceedings to determine the proper valuation
of Hollis’ shares consistent herewith. We likewise VACATE the award of attorney’s
fees and the fees of expert witnesses, and REMAND for reconsideration of those
settings in light of relevant Nevada law.40 In all other respects, the decision appealed
is AFFIRMED.
39
See Musto v. Vidas, 754 A.2d 586 (N.J. Super. Ct. App. Div. 2000); Waller v. American
Intern. Distrib. Corp., 706 A.2d 460 (Vt. 1997).
40
Exxon Corp. v. Burglin, 4 F.3d 1294, 1302 (5th Cir. 1993) (“The award of attorney’s fees is
governed by the law of the state whose substantive law is applied to the underlying claims.”); Nev.
Rev. Stat. § 18.010 (1999); Nev. Rev. Stat. §§ 18.020, 18.005 (1999).
24
E. GRADY JOLLY, Circuit Judge, dissenting:
Because I find that the cause of action and remedy
here would not be adopted by Nevada courts, I
respectfully dissent.
The question that needs to be answered in this case,
whether framed as a breach of fiduciary duty or a
statutory right, is whether Nevada recognizes a cause of
action for oppression of minority shareholders. I find
no basis to conclude that it does. The Nevada dissolution
statute, Nev. Rev. Stat. § 78.650, sets out a statutory
basis for the remedy effectively imposed here, and the
statute does not allow dissolution for the oppression of
minority stockholders. The Nevada case cited to justify
the extension of fiduciary duty to cover shareholder
oppression, Clark v. Lubritz, 944 P.2d 861 (Nev. 1997),
treated the business as a partnership because the parties
treated the corporation as a partnership. To follow Clark
here, where there is nothing in the past history or
present arrangement indicating that the parties have
treated the business as anything other than a corporation,
effectively finds that Nevada will ignore corporate
structure, when, on a case-by-case basis, equity justifies
it.
Furthermore, all indications are that Nevada attempts
to pattern its corporate law after the management-friendly
approach of Delaware,41 a state that clearly prohibits a
cause of action for oppression of minority shareholders.
See Nixon v. Blackwell, 626 A.2d 1366, 1380-81 (Del. 1993)
(finding that majority shareholders owe no special
fiduciary duties to minority shareholders); F. Hodge
O’Neal & Robert B. Thompson, O’Neal’s Oppression of
Minority Shareholders § 7.13 (2d ed. 1985). Even if
41
See Keith Paul Bishop, Battle for Control of ITT Corporation
Spotlights Nevada (and Delaware) Corporate Law: Did Nevada Law Get
Stockholders a Better Deal?, 12 Insights, January 1998, at 15
(“Nevada has worked hard to challenge Delaware’s pre-eminence as
the domicile of choice for corporations.”); Keith Paul Bishop, The
Delaware of the West: Does Nevada Offer Better Treatment for
Directors?, 7 Insights, March 1993, at 20 (“Delaware faces
aggressive competition for new corporations from the state of
Nevada which aims at being the ‘Delaware of the West.’”); Michael
J. Sullivan, Extensive Changes Made to Nevada Corporation Law
Enacted, 6 Insights, January 1992, at 27 (describing management-
friendly changes made to corporate law, and comparing Nevada law to
Delaware law).
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Nevada is not as friendly to corporate structures and
management as Delaware, there is no basis to find that
Nevada would adopt the law of Massachusetts, which seems
to be at the other end of the spectrum respecting
corporate formalities. In sum, I am convinced that, given
the general acknowledgment that Nevada is corporate
friendly, as shown through its statutory dissolution
provision and its tendency to follow Delaware law, the
cause of action and remedy here would not be recognized.
I therefore respectfully dissent.
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