The North Carolina Court of Appeals recently addressed a claim asserting a shareholder’s right to a judicial dissolution of a business corporation in Brady v. Van Vlaanderen, 2018 WL 3977437 (N.C. Ct. App. August 21. 2018).

In Brady, the plaintiff was a shareholder in a family business, United Tool & Stamping Company of North Carolina, Inc. (“United Tool”). At the time the plaintiff’s claims arose, and after giving effect to a conversion of nonvoting stock to voting common stock, all of the voting common stock of United Tool was divided among the plaintiff, her siblings and her in-laws, and the plaintiff held a one-third interest in this voting stock, which regularly paid substantial dividends over the years.

The plaintiff had also served, from time to time over several years, as an employee of United Tool. As an employee, the plaintiff received a salary and benefits. She began work in 2001 but stopped working in 2005 when her husband became an employee. She was rehired in 2007 but thereafter experienced medical issues and thus did not work regularly. Subsequently Plaintiff’s husband was terminated as an employee, at which point the plaintiff’s salary was increased. For a time, the plaintiff became more involved in United Tool’s business and affairs, and she was told that her salary and benefits were dependent on her work as an employee.

In May of 2012, the plaintiff requested access to corporate records. Thereafter in a meeting with the board the plaintiff and her counsel inquired into the plaintiff’s employment status and salary. The plaintiff’s employment was terminated following that meeting. The plaintiff filed suit (seeking judicial dissolution of United Tool). The case was designated as a complex business case later that year, and in July 2016, the Business Court granted summary judgment in favor of the defendants. The plaintiff appealed to the Court of Appeals. (Note that the designation of the case as a complex business case pre-dated certain 2014 statutory amendments providing for direct appeals of such cases to the Supreme Court.)

The basis for the plaintiff’s appeal was her argument that the Business Court failed to honor the “plain English” meaning of N.C.G.S. § 55-14-30(2), which prescribes the grounds for judicial dissolution in a proceeding by a shareholder. The plaintiff’s claim was essentially based on clause (ii) of that section, which provides for judicial dissolution where “liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder.” The plaintiff also argued that the Business Court’s consideration of equitable factors beyond the interests of the shareholders was erroneous.

The type of action brought by the plaintiff is generally referred to as a “Meiselman claim,” so named after the landmark case of Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983). That case held generally that in order to obtain a decree of judicial dissolution, a plaintiff must establish (1) that she had one or more reasonable expectations that are known by the other shareholders, (2) the frustration of those expectations, (3) that such frustration was without the fault of the plaintiff and (4) the plaintiff is entitled to some form of equitable relief under all of the circumstances. Id. The “reasonable expectation” at issue in Brady was the plaintiff’s expectation that she would receive a salary and benefits regardless of whether she performed services as employee of United Tool.[1]

The Court assumed without deciding that this expectation was reasonable, but went on to uphold the Business Court’s conclusion that the equitable remedy of judicial dissolution was not justified in this instance. Citing Meiselman, the Court emphasized that the plaintiff is not entitled to dissolution “at the expense of the corporation and without regard to the rights and interests of the other shareholders.” Furthermore, there was nothing in the record indicating that the plaintiff was not free to sell her shares to a third party, and finally, the defendants had allowed the plaintiff to make disclosures of company information to potential purchasers. In short, judicial dissolution was not “reasonably necessary” under the circumstances.

In weighing and balancing the various equities in making its decision, the Business Court had considered the possible effects of dissolution on United Tool’s employees. The plaintiff argued that under Meiselman, the analysis should focus exclusively on the interests of the shareholders. The Court noted that there is little clear appellate authority on this issue. But after citing several other examples of equitable balancing of third party interests in similar Business Court cases, as well as law review commentary regarding the law in other jurisdictions–all of which supported the defendants’ position on the issue–the Court stated that it was not necessary to establish a rule in this regard, since as a fundamental matter the plaintiff had failed to persuade the Court that the Business Court had abused its discretion in declining to issue a decree of dissolution.

[1] Which is good work, if you can get it. It’s worth noting that in Meiselman, one of the plaintiff’s principal contentions was that as a shareholder in a close corporation, he was entitled to continued employment.

December 13, 2018/by Business