50% Shareholder Didn't Owe Fiduciary Duty To His 50% Co-Shareholder

more+
less-

This week's decision from the Business Court in Maurer v. Maurer, 2013 NCBC 44 is a continuation of the litigation between Jill Maurer and the company owned by her and her husband, which was the subject of three Business Court opinions in 2005 and 2006, in 2005 NCBC 1, 2005 NCBC 4, and 2006 NCBC 1. And that case even went to trial, yielding a $1.6 million verdict for Mrs. Maurer against Slickedit's then CEO. A portion of that verdict was set aside by Judge Tennille in 2006 NCBC 1.

After all that previous litigation, what could be left to fight about? Well, the Maurers had gotten divorced during the earlier litigation, and each departed the marriage with a 50% ownership interest in Slickedit. Business lawyers know that a 50/50 split is a recipe for disagreement and disaster, and the situation in which the ex-spouses found themselves was no exception. 

Mrs. Maurer sued her ex-husband in March 2013, who had by then become the company's CEO and only director. She alleged that he had excluded her from any knowledge of or participation in corporate affairs, notwithstanding her 50% ownership. There was a "consistent deadlock" between the Maurers, and Mrs. Maurer said that her ex-husband's conduct was in violation of his fiduciary duty owed to her individually and that she therefore had a direct claim against him.

Mrs. Maurer needed to show a fiduciary duty owed to her because in the absence of such a "special" duty the general rule is that "shareholders lack standing to bring individual causes of action to enforce actions accruing to the corporation." Op. ¶21. Those types of claims must be pursued on a derivative basis, on behalf of the corporation.

Judge Gale dismissed the fiduciary duty claim, ruling that there is no fiduciary duty "in favor of one fifty percent owner against the other fifty percent owner who has effective control." Op. ¶24. In the absence of a direct claim against her ex, all Mrs. Maurer had was a derivative claim, on behalf of the corporation, against Mr. Maurer.

What was the reasoning behind this ruling? Fifty percent shareholders have options that may not be available to shareholders with a smaller interest. The Court said that a less than fifty percent shareholder might face

insurmountable hurdles because of the procedural requirements for derivative actions which can be manipulated by a controlling majority. A fifty percent owner, with the ability to impose an impasse, is not in the same precarious position. An equal owner, unlike a minority owner, can automatically create a deadlock on any matter requiring a shareholder vote, and the existence of such a deadlock may afford greater access to judicial dissolution and a limit on the control of the other shareholder. See N.C. Gen. Stat. § 55-14-30.

Op. ¶26.

Judge Gale recognized that the allegations of the derivative claim were "admittedly thin," but let the "liberal standards of Rule 12(b)(6)" dictate the outcome. Op. ¶37. He said that "[d]erivative litigation should not be the forum for claims that are, in essence, really domestic disputes." Op. ¶37.

Congratulations to my colleagues Walt Tippett, Jennifer Van Zant and Eric David, who represented the Defendant.

 

Topics:  Board of Directors, Derivative Suit, Divorce, Fiduciary Duty, Shareholders

Published In: Business Organization Updates, Business Torts Updates, Civil Procedure Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Brooks Pierce | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »