Dudley Keene v. Brookhaven Academy, Inc. ( 2008 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 2008-CA-01381-SCT
DUDLEY KEENE, INDIVIDUALLY AND ON
BEHALF OF BROOKHAVEN ACADEMY AND
SHAREHOLDERS OF BROOKHAVEN ACADEMY
v.
BROOKHAVEN ACADEMY, INC., BROOKHAVEN
ACADEMY EDUCATIONAL FOUNDATION, INC.,
JEFF GATLIN, KEN POWELL, PHIL MCGEE,
AND DEAN SNIDER
DATE OF JUDGMENT: 07/10/2008
TRIAL JUDGE: HON. EDWARD E. PATTEN, JR.
COURT FROM WHICH APPEALED: LINCOLN COUNTY CHANCERY COURT
ATTORNEY FOR APPELLANT: DURWOOD EARNEST McGUFFEE, JR.
ATTORNEYS FOR APPELLEE: FRANK CHANDLER BREESE, III
DUDLEY F. LAMPTON
CECIL MAISON HEIDELBERG
NATURE OF THE CASE: CIVIL - CONTRACT
DISPOSITION: AFFIRMED - 03/04/2010
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
BEFORE GRAVES, P.J., DICKINSON AND CHANDLER, JJ.
CHANDLER, JUSTICE, FOR THE COURT:
¶1. This case involves whether the acts of a for-profit corporation were properly ratified
and proper procedures were followed in the formation and transfer of responsibilities to a
nonprofit organization. Dudley Keene, a shareholder in Brookhaven Academy, Inc., (the
Academy) filed suit against the Academy and Brookhaven Academy Educational
Foundation, Inc., (the Foundation) in the Chancery Court of Lincoln County, Mississippi.
Keene claimed that the Academy failed to follow corporate bylaws and its articles of
incorporation when the Academy set up and transferred the use of assets to the Foundation,
a nonprofit corporation. Keene requested a declaratory judgment and sought injunctive
relief.
¶2. The Academy and the Foundation filed an answer and affirmative defenses. They also
filed a motion to dismiss, claiming that Keene lacked standing because his claims were
derivative in nature and Keene filed in his individual capacity. The trial court granted the
motion in part and denied the motion in part. The motion to dismiss was granted with respect
to the alleged causes of action concerning the Academy’s Board of Directors (Academy
Board) which were derivative in nature. The motion to dismiss was denied as to Keene’s
causes of action in which he sought to enjoin the Academy’s and the Foundation’s corporate
acts that were outside of the corporate charter. Later, the Academy and the Foundation filed
a motion for partial summary judgment claiming without conceding that the shareholders had
ratified the Academy Board’s actions and Keene lacked standing to sue the Foundation,
pursuant to Mississippi Code Section 79-4-3.04. Keene was not a member of the Foundation
and not an authorized person to sue pursuant to the statute.
¶3. While the chancery-court case progressed, Keene filed a complaint in the Circuit
Court of Lincoln County styled: Dudley Keene on behalf of Brookhaven Academy &
Shareholders of Brookhaven Academy v. Brookhaven Academy, Inc., Brookhaven
Academy Educational Foundation Inc., Jeff Gatlin, Ken Powell, Phil McGee, and John
Does 1-11. The circuit-court complaint was derivative in nature and asserted essentially the
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same claims as the chancery-court matter. The defendants in the circuit-court case filed a
motion to dismiss, or in the alternative, to transfer to chancery court. The circuit-court
defendants argued in the motion to dismiss that Keene did not meet the demand requirements
for a derivative action pursuant to Section 79-4-42. Alternatively, the circuit-court
defendants argued that the circuit-court complaint was based on the same facts and asked for
the same basic relief as the chancery suit. Likewise, the Academy and the Foundation filed
a motion for continuance, or in the alternative, a request that the circuit-court case be
transferred to the chancery court. The circuit court denied the defendants’ motion to dismiss;
however, it granted a transfer of the circuit court case to the chancery court.1
¶4. After the circuit-court case was transferred to the chancery court, the trial court
granted all the defendants’ motions for summary judgment and dismissed the action.2 The
chancellor found that: (1) the Academy was not a special-purpose corporation; (2) the acts
by the Academy were voidable, not void; (3) the shareholders had received adequate notice
of the purpose of the December 15, 2005, shareholders’ meeting; and (4) the shareholders
properly had ratified the actions of the Academy at the meeting. Keene appeals from this
decision. This Court finds no error; therefore, the judgment of the Chancery Court of
Lincoln County is affirmed.
DISCUSSION
1
Keene filed an amended complaint on February 15, 2007, after the case was
transferred to the circuit court.
2
The trial court dismissed the Academy, the Foundation, Jeff Gatlin, Ken Powell,
Phil McGee, and Dean Snider.
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¶5. The standard of review for a grant of summary judgment is de novo. Guidant Mut.
Ins. Co. v. Indem. Ins. Co. of N. Am., 13 So. 3d 1270, 1275 (Miss. 2009). The moving party
is granted summary judgment by the trial court provided that “the pleadings, depositions,
answers to interrogatories and admissions on file, together with affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law.” Miss. R. Civ. P. 56(c). Summary judgment is granted with
abundant caution, and it must be granted where the nonmoving party “failed ‘to make a
showing sufficient to establish the existence of an element essential to that party’s case, and
on which that party will bear the burden of proof at trial.’” Mabus v. St. James Episcopal
Church, 13 So. 3d 260, 263 (Miss. 2009) (quoting Smith v. Gilmore Mem’l Hosp., Inc., 952
So. 2d 177, 180 (Miss. 2007)).
A. Ratification 3
¶6. Keene argues that the trial court erred by finding that the shareholders properly
ratified the actions of the Academy Board. Keene contends that: (1) the Foundation’s vote
of 805 of its shares in the Academy legally could not be made because the Foundation is a
subsidiary of the Academy, and (2) the shareholders were coerced into transferring their
shares in the Academy to the Foundation.
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At the reconvened December 21, 2005, meeting, the shareholders ratified the
Foundation as a solely owned 501(c)(3) nonprofit corporation, and the notice identified the
Foundation as being solely owned. However, prior to that time, the Academy, even in its
answers, had identified the Foundation as a “subsidiary.” There is no indication in the
corporate documents, including those from the Mississippi State Corporation Commission,
federal forms, or other documents, that identify the Foundation as either a solely owned
corporation or a subsidiary corporation.
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¶7. The shareholders ratified: (1) forming a solely owned subsidiary, (2) the June 2004
lease of property from the Academy to the Foundation, and (3) the transfer of educational
activities from the Academy to the Foundation. The minutes of the reconvened December
21, 2005, special meeting in lieu of the 2005 annual meeting of stockholders of the Academy
reflected the vote results, in part, as follows:
Issue 4. To ratify the Corporation’s actions, on or about November 28,
2000, in forming a solely owned 501(c)(3) non-profit
corporation, Brookhaven Academy Educational Foundation, Inc.
The minutes reflected that the total shares represented were 1,108, of which 942 voted in
favor, none voted against, and 166 abstained. This issue was ratified by the shareholders.
Issue 5. To ratify that certain lease dated June 1, 2004, entered into
between Brookhaven Academy, Inc., and Brookhaven Academy
Educational Foundation, Inc., wherein the corporation leased all
of its real property comprising Brookhaven Academy, including
the buildings, improvements and fixtures thereon, to
Brookhaven Academy Educational Foundation, Inc.
The minutes reflected that the total shares represented were 1,108, of which 942 voted in
favor, none voted against, and 166 abstained. This issue was ratified by the shareholders.
Issue 6. To ratify the actions of the Brookhaven Academy, Inc. officers,
directors and employees regarding the transfer of educational
activities, formerly conducted by Brookhaven Academy, Inc. to
Brookhaven Educational Foundation, Inc.
The minutes reflect that the total shares represented were 1,108, of which 940 voted in favor,
two voted against, and 166 abstained. This issue was ratified by the shareholders.
¶8. Mississippi courts have permitted shareholders to ratify past actions of corporations.
In Jowett v. Scruggs, 901 So. 2d 638, 644 (Miss. Ct. App. 2004), the Court of Appeals
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determined that the shareholders’ act of ratifying the actions of a corporate president
eliminated any defect in the president’s actions.
1. Subsidiary
¶9. Keene asserts that the Foundation is a subsidiary of the Academy, and under
fundamental corporate law, the Foundation cannot vote its 805 shares in the Academy, the
parent company. He cites a number of cases from other jurisdictions noting that Mississippi
has little caselaw on this issue. Keene cites Italo Petroleum Corporation of America v.
Producers Oil Corporation of America, 174 A. 276, 291 (Del. Chan. 1934), an election-of-
directors case, for his position that a wholly owned subsidiary should not be permitted to vote
its shares in favor of a parent company.
¶10. Keene cites Section 79-4-6.31 concerning a corporation’s acquisition of its own shares
which states:
(a) A corporation may acquire its own shares, and shares so acquired constitute
authorized but unissued shares.
(b) If the articles of incorporation prohibit the reissue of the acquired shares,
the number of authorized shares is reduced by the number of shares acquired.
Miss. Code Ann. §79-4-6.31 (Rev. 2009).
¶11. Keene’s argument fails for a number of reasons. First, Section 79-4-6.31 is
inapplicable to the facts in this case, as the Academy did not acquire its own shares. Here,
individual shareholders chose to transfer their stock in the Academy to the Foundation. The
Foundation did not have “shares” of its own; rather it provided memberships in the
Foundation. The Academy is not a member of the Foundation. Second, there is no allegation
that the directors of the Academy and the directors of the Foundation were the same. Third,
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the shareholders ratified the Foundation as a solely owned corporation, not a subsidiary of
the Academy. Accordingly, this issue is without merit.
2. Coercion
¶12. Keene argues that the Foundation obtained 805 Academy shares by unlawful coercion.
In his argument, Keene cites Ivanhoe Partners v. Newmont Mining Corporation, 533 A. 2d
585, 605 (Del. Chan. 1987) for the proposition that coercion amounts to a wrongful action
by a party to induce a shareholder to sell his stock for “reasons unrelated to the economic
merits of the sale” such as “a tender offer structured so as to afford shareholders no practical
choice but to tender for an unfair price.” Ivanhoe, 533 A. 2d 605. Keene argues that a
shareholder had little incentive to keep the Academy shares when that shareholder was being
coerced into paying $750 to keep the shares.
¶13. In an undated letter from the Academy Board to Academy patrons concerning 2004
school registration, the Academy notified patrons of the stock-option transfer. The letter
stated, in part:
Enclosed you will find our new registration forms and membership
information. According to the guidelines set forth, anyone who wishes to
exchange their stock certificates for membership in the new foundation may
do so at no charge. However, new families, or those currently enrolled
families who do not wish to exchange their stock for a membership, will be
required to purchase a membership at a cost of $750.00 before enrolling their
children.
Part of the registration process included an application for the Foundation. The application
stated, in part:
I understand that no membership certificate will be issued until the following
conditions are met:
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-- I pay the non-refundable and non-transferable membership fee
of $750.00, or I transfer two shares of capital stock of
Brookhaven Academy, Inc. to Brookhaven Academy
Educational Foundation, Inc.
-- I am approved as a member by the Board of Trustees of the
Foundation.
Each family had to have a minimum of two shares to enroll its child in the Academy. With
the advent of the new Foundation, the requirement to be a member in the nonprofit
corporation was to pay $750 or transfer two shares of Academy stock to the Foundation in
exchange for Foundation membership. The Foundation obtained 805 shares of transferred
Academy stock.
¶14. Keene’s argument is without merit. The school enrollment and Foundation
membership requirements provided Academy shareholders the option either to retain their
Academy stock or pay $750 for membership in the nonprofit Foundation. No shareholder
was forced to surrender his or her Academy stock. Indeed, Keene chose to retain his
Academy shares, even though he had no children in the Academy at the time. Nonetheless,
shareholders had a choice, and both Keene and the defendants are in agreement that the
Academy never reported a profit. We find that the enrollment requirements did not amount
to coercion. Shareholders had an option either to transfer two Academy shares or pay $750
for school enrollment in exchange for membership in the Foundation.
B. Type of Corporation (General Purpose or Special Purpose)
¶15. Keene argues that the trial court erred by finding that the Academy is a general-
purpose corporation. He contends that the Academy is a specific-purpose corporation set up
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for the purpose of conducting a school business. The Academy’s articles of incorporation
state, in part:
THIRD: the specific purpose or purposes for which the corporation is
organized stated in general terms are:
(1) To organize, own and operate primary schools, secondary schools and/or
colleges and other educational institutions for the education of youth.
(2) To fix the curricula for such schools, colleges and other such institutions
and the standards and qualification of admission of pupils and students and for
their retention in such schools, colleges and other such institutions and to
reject any applicant for admission or to expel any person so enrolled and
attending for any cause whatsoever.
(3) To select and employ such principals, teachers, professors, instructors and
other employees as the corporation may deem necessary and advisable and to
deny or terminate such employment at the will of the corporation.
(4) To prescribe, charge and collect such fees as the corporation may find
necessary and proper to be collected from pupils and students and to vary such
charges in any or all individual instances as may be determined by the
corporation so that it shall not be necessary for all the pupils or students in the
same grade or classes to pay the same or identical fees or tuition, but such fees
or tuition as may be charge in each case and each instance to be solely within
the discretion of the corporation.
(5) To have and to exercise all powers conferred by the laws of the State of
Mississippi upon corporations.
(6) To purchase, own, lease, hire, or otherwise acquire real and personal
property, improved and unimproved, or every kind and description, and to sell,
dispose of, lease, convey, encumber and mortgage said property, or any part
thereof. To acquire, hold, lease, manage, operate, develop, control, build,
erect, maintain for the purposes of said corporation, construct, reconstruct or
purchase, either directly or through ownership of stock in any corporation, any
lands, buildings, offices, stores, warehouses, plants, machinery, rights,
easements, privileges, franchises and licenses, and to sell, lease, hire or
otherwise dispose of lands, buildings or other property of the corporation, or
any part thereof.
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(7) To do all and everything necessary and proper for the accomplishment of
the objects herein enumerated or necessary or incidental to the benefit of the
corporation.
¶16. In reaching its decision, the trial court determined at the hearing for summary
judgment that the Academy is a general-purpose corporation. The trial court determined that
the formation of the Foundation was in line with the purpose of the Academy’s articles of
incorporation. Further, the trial court noted the language in subsection six, in particular the
language that pertained to the Academy’s ability to sell, lease, hire, and to dispose of land,
buildings, or other property belonging to the corporation.
¶17. The trial court did not err by finding that the Academy is a general-purpose
corporation. While one of the enumerated corporate purposes for the Academy is for the
organization and operation of schools, it has many others, including “(5) To have and to
exercise all powers conferred by the laws of the State of Mississippi upon corporations,” and
section six, concerning the sale, lease, acquisition and disposal of real and personal property,
among other powers. Keene cites Tallahatchie Valley Electric Power Association (TVEPA)
v. Mississippi Propane Gas Association, Inc., 812 So. 2d 912, 919 (Miss. 2002) and Blue
Cross and Blue Shield v. Protective Life Insurance Company, 527 So. 2d 125, 127-28 (Ala.
App. 1987) for authority. Decisions from other jurisdictions are merely informative and not
binding authority on this Court. Paz v. Brush Engineered Materials, Inc., 949 So. 2d 1, 7
(Miss. 2007); Cucos, Inc. v. McDaniel, 938 So. 2d 238, 241 (Miss. 2006); Griffith v. Gulf
Refining Co., 215 Miss. 15, 61 So. 2d 306, 307 (1952). “While the Court may utilize these
decisions as persuasive authority if it finds them well-reasoned, the decisions are not binding,
and this Court is at perfect liberty to disregard them.” Paz, 949 So. 2d at 7.
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¶18. Tallahatchie Valley is distinguishable from Keene’s case because it involved
compliance with statutory laws for regulating rural electric power companies. In
Tallahatchie Valley, this Court determined whether Mississippi’s Electric Power Association
Law prohibited TVEPA, a rural electrical power company, from acquiring a controlling
interest in an entity that did not provide electricity. Tallahatchie Valley, 812 So. 2d at 914-
15. See also Miss. Code. Ann. § 77-5-201 to 255 (Rev. 2009). TVEPA’s board of directors
invested in a propane gas business. Id. at 915. However, both the statutory Act and
TVEPA’s charter confined it to using electrical energy. Id. at 918. This Court found that
the Act expressed a clear legislative intent that limited a corporation under the Act to
acquisition of electrical energy. Id. This Court held that “TVEPA’s corporate purpose is
limited to and cannot exceed the powers granted by the statutory scheme pursuant to which
it was created.” Id.
¶19. Keene also cites Blue Cross for the proposition that a specific-purpose corporation
has only those powers necessary to effect its corporate purpose. Blue Cross, 527 So. 2d 127-
28. As noted above, rulings from other jurisdictions are nonbinding on the courts of
Mississippi. Paz, 949 So. 2d at 7. In Blue Cross, the corporation sought to acquire a life
insurance company and to market life insurance. Id. at 126. The Court of Appeals of
Alabama determined that Blue Cross was “purely a statutory creature” whose powers were
derived from the Alabama Code. Id. The Alabama court also determined that Blue Cross
was a specific-purpose corporation limited to maintaining a health-care service plan, and
marketing life insurance was prohibited. Id. at 128. Like Tallahatchie Valley, Blue Cross
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is distinguishable from Keene’s case because it was governed by specific statutes created for
regulating a specific industry. Accordingly, this issue is without merit.
C. Void or Voidable Acts
¶20. Keene argues that the trial court erred by finding that the acts of the Academy Board
were voidable and not void. He contends that the Academy Board’s actions were ultra vires
or outside of its corporate powers. Most of Keene’s argument is based on his position that
the Academy is a special-purpose corporation and, as such, was prohibited from: (1) forming
the Foundation; (2) becoming a “holding company” in essence; and (3) transferring Academy
assets via a lease to the Foundation.
¶21. This Court has held that the term “‘ultra vires’ has been used to refer to acts which the
corporation’s charter does not authorize.” Bryant Constr. Co. v. Cook Constr. Co., Inc., 518
So. 2d 625, 629 (Miss. 1988). Ultra vires also signifies an act that exceeds the powers of the
corporation as defined by law. Id. In Burnett’s Lumber & Supply Co., Inc. v. Commercial
Credit Corporation, 211 Miss. 53, 59, 51 So. 2d 54, 57 (1951), this Court held that “[a]n act
of a corporation relating to the subjects within its powers though it should exceed those
powers is not void.” This Court further held that “[i]t is true that the act of a corporation
entirely foreign to the purposes for which it was created is void from want of power.” Id.
¶22. Keene’s underlying contention that the Academy Board’s actions were ultra vires in
nature and, thus void and not voidable, hinges on his position that the Academy is a special-
purpose corporation. As addressed in Issue B, the trial court did not err by finding that the
Academy was a general-purpose corporation based on the enumerated corporate purposes
contained in the articles of incorporation. The articles of incorporation, as previously
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mentioned, also conferred on the Academy the powers to lease and hold real and personal
property. Additionally, section five and seven of the articles of incorporation generally
provided that the Academy had “all powers conferred by the” corporate laws of Mississippi,
and “[t]o do all and everything necessary and proper for the accomplishment of the objects
herein enumerated.” Therefore, Keene’s contention that Academy Board’s actions were ultra
vires in nature in forming the Foundation, being a “holding company,” and in transferring
assets via a lease, are without merit, because the actions were within the confines of the
power conferred on the Academy. Additionally, the shareholders ratified the actions of the
Academy Board in forming the nonprofit Foundation, transferring the educational activities,
and entering into a lease with the Foundation. Indeed, in his deposition, Keene stated that
he had no problem with the formation of the nonprofit corporation to obtain tax-exempt
status; he objected only to not having a vote on the issue. Further, Keene chose not to attend
or vote at the meeting which ratified the Academy Board’s actions. The trial court did not
err in finding that the Academy was a general-purpose corporation. Consequently, none of
the Academy Board’s actions were ultra vires in nature, and this issue is without merit.
D. Notice
¶23. Keene argues that the trial court erred by finding that the shareholders had adequate
notice for the December 2005 special shareholders meeting. He therefore argues that
because the notice was not adequate, the ratification vote was ineffective due to the failure
to inform the shareholders fully on the issues.
¶24. The Academy gave the shareholders notice of a December 2005 special meeting in
lieu of an annual stockholders meeting. The notice provided the location, time, date, and
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purpose of the shareholders meeting. See Miss. Code Ann. § 79-4-7.05(a) and (c) (Rev.
2009). Some of the enumerated reasons or purposes for the meeting were as follows:
D. To ratify the Corporation’s actions, on or about November 28, 2000, in
forming a solely owned 501(c)(3) non-profit corporation, Brookhaven
Academy Educational Foundation, Inc.
...
5. To ratify that certain lease dated June 1, 2004, entered
into between Brookhaven Academy, Inc., and
Brookhaven Academy Educational Foundation, Inc.,
wherein the Corporation leased all of its real property to
Brookhaven Academy Educational Foundation, Inc.
6. To ratify the actions of the Brookhaven Academy, Inc.’s
officers, directors and employees regarding the transfer
of educational activities, formerly conducted by
Brookhaven Academy, Inc., to Brookhaven Academy
Educational Foundation, Inc.
¶25. The notice also contained a proxy vote listing the issues to be voted at the meeting.
Mississippi Code Section 79-4-7.05 provides the notice requirements for a special
shareholder meeting. Keene argues that the shareholders were not provided adequate notice
concerning the purpose of the special meeting. In regard to the purpose of a special meeting,
Section 79-4-7.05(c) provides that “[n]otice of a special meeting must include a description
of the purpose or purposes for which the meeting is called.” Miss. Code Ann. § 79-4-7.05(c)
(Rev. 2009). We find that the trial court did not err by finding that the Academy provided
adequate notice to the shareholders. The notice, as previously discussed, provided each
shareholder more than a mere description of the purpose, pursuant to the statute. In addition,
an attached proxy vote sheet setting forth the voting issues referenced the discussion of the
issues in the December 15, 2005, minutes. Also, the wording of the issues provided
additional clarification for the shareholders. Indeed, the shareholders voted to ratify the
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formation of the Foundation, the lease, and the transfer of educational activities. Further, the
Academy complied with the notice requirements pursuant to Section 79-4-7.05. Therefore,
this issue is without merit.
CONCLUSION
¶26. For the above reasons, the judgment of the Lincoln County Chancery Court is
affirmed.
¶27. AFFIRMED.
WALLER, C.J., CARLSON AND GRAVES, P.JJ., DICKINSON, RANDOLPH,
LAMAR, KITCHENS AND PIERCE, JJ., CONCUR.
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