Daniel B. Nickell v. Michael F. Shanahan, Sr. , 2014 Mo. LEXIS 199 ( 2014 )

SUPREME COURT OF MISSOURI
en banc
Daniel B. Nickell, )
)
Appellant, )
)
vs. ) No. SC93719
)
Michael F. Shanahan, Sr., et al., )
)
Respondents. )
APPEAL FROM THE CIRCUIT COURT OF THE CITY OF ST. LOUIS
The Honorable Joan L. Moriarty, Judge
Opinion issued July 29, 2014
Daniel Nickell appeals a judgment dismissing Counts I through III of his
second amended petition against Michael F. Shanahan Sr., Michael F. Shanahan
Jr., David Mattern, Thomas J. Guilfoil, Kenneth E. Lewi, Crosbie E. Saint, Earl
W. Wims, Gary C. Gerhardt, Gerald A. Potthoff, Steven L. Landmann and Mark
S. Newman (“Respondents”). 1 Nickell’s petition alleged individual claims against
the Respondents for damages resulting from alleged fraud and breach of their
fiduciary duties as corporate officers and directors. The circuit court sustained
1
This Court has jurisdiction pursuant to Mo. Const., art. 5, sec. 10.
Respondents’ motion to dismiss. This Court holds that Nickell’s claims alleged
claims that are derivative rather than individual. The judgment is affirmed. 2
Facts
The underlying suit seeks recovery of alleged damages resulting from the
merger between Engineered Support Systems Inc. (“ESSI”) and DRS
Technologies Inc. (“DRS”). ESSI merged with DRS in January 2006. All of the
Respondents were officers or directors of ESSI, except Newman, who was the
chief executive officer and chairman of DRS. Nickell alleged that he was an ESSI
shareholder and that he sold his ESSI stock when ESSI merged with DRS.
Nickell’s petition alleged that he and a purported class of ESSI
shareholders were injured because Respondents improperly diverted financial
benefits to themselves by backdating stock options, thereby decreasing the value
of ESSI for shareholders. 3 Nickell further alleged Respondents made material
misrepresentations to facilitate the merger and that the ESSI directors and officers
were motivated to sell ESSI quickly to avoid liability for backdating the stock
options. Nickell further alleged that the ESSI officers and directors agreed to
accept a reduced purchase price from DRS in exchange for DRS assuming liability
2
Because Nickell’s claims properly were dismissed on grounds that they are derivative
and not individual, it is unnecessary to consider Nickell’s arguments regarding
application of the Securities Litigation Uniform Standards Act, 15 U.S.C. section 78bb
(1998).
3
“Backdating” refers to the alteration of a stock option’s grant date to an earlier date with
a lower price to the recipient. New England Carpenters Pension Fund v. Haffner 391
S.W.3d 453, 457 n. 4 (Mo. App. 2012).
for the backdating scheme. Nickell alleges that, in exchange for personal
benefits, the ESSI directors and officers filed false and misleading registration
statements and prospectuses to induce Nickell and the purported class members to
approve the merger and sell their stock at a reduced price. Nickell maintains that
the misrepresentations both decreased the value of ESSI shares and interfered with
the ESSI shareholders’ right to cast an informed vote regarding the merger.
The petition alleges four counts. In Count I, Nickell alleged that the ESSI
officers and directors breached their fiduciary duties by accepting improper
personal benefits and failing to act in the best interests of ESSI shareholders to
obtain the highest price for ESSI shares. In Count II, Nickell alleges that Newman
aided and abetted the ESSI directors and officers in breaching their fiduciary
duties by knowingly assisting them with the merger even though he had
knowledge of the backdated stock options and false statements. In Count III,
Nickell alleges a claim of unjust enrichment against some of the ESSI directors
and officers because Nickell and the class members received less for their ESSI
stock as a result of payments received by the directors and officers in exchange for
their wrongful conduct. Finally, Count IV alleges a claim of negligent
misrepresentation against all Respondents.
Respondents filed motions to dismiss. The trial court dismissed Counts I
and III on grounds that the petition pleaded shareholder derivative claims and
failed to allege facts giving Nickell standing to sue the ESSI directors and officers
3
individually. 4 Count II, alleging that Newman was liable for aiding and abetting a
breach of fiduciary duties, was dismissed because it was based on Count I. The
trial court dismissed Count IV only as to Newman. Nickell voluntarily dismissed
Count IV against the remaining defendants. Nickell appeals the trial court’s
dismissal of Counts I through III.
Standard of Review
The trial court’s grant of a motion to dismiss is subject to de novo review.
City of Lake Saint Louis v. City of O’Fallon, 324 S.W.3d 756, 759 (Mo. banc
2010). This Court assumes that all of the plaintiff’s allegations are true and
liberally grants to the plaintiff all reasonable inferences from the alleged facts.
Lebeau v. Commissioners of Franklin County, Missouri, 422 S.W.3d 284, 288
(Mo. banc 2014). The petition is reviewed “in an almost academic manner, to
determine if the facts alleged meet the elements of a recognized cause of action, or
of a cause that might be adopted in that case.” City of Lake Saint Louis, 324
S.W.3d at 759.
The Petition Alleges a Derivative Claim
“A derivative action is a suit by the corporation conducted by the
shareholders as the corporation’s representative. The shareholder is only a
nominal plaintiff, and the corporation is the real party in interest.” Goldstein v.
4
As an alternative basis for dismissing Count I, the trial court found that Nickell
failed to state a claim upon which relief can be granted because he failed to allege
the necessary element of duty. The trial court found that officers and directors of
corporations only owe fiduciary duties to the corporation and the shareholders
collectively, not to individual shareholders.
4
Studley, 452 S.W.2d 75, 78 (Mo. 1970)(citing, Saigh ex rel. Anheuser-Busch, Inc.,
v. Busch, 396 S.W.2d 9, 16 (Mo. App. 1965); Fletcher, CYCLOPEDIA OF THE LAW
OF CORPORATIONS, Vol. 13, s 5939; 19 Am.Jur.2d Corporations 528, p. 64.
Derivative actions are aimed at vindicating injuries “to the corporation—to the
shareholders collectively—and not the shareholders individually.” Centerre Bank
of Kansas City, Nat. Ass’n v. Angle 976 S.W.2d 608, 613 (Mo. App.
1998)(quoting Dawson v. Dawson, 645 S.W.2d 120, 125 (Mo. App. 1982)).
Missouri courts hold that shareholders normally must bring a derivative
action to file suit against an officer or director. Centerre Bank, 976 S.W.2d at 613.
A derivative action is generally required even when, as here, the plaintiff alleges
that the directors or officers of a corporation have breached their fiduciary duty,
resulting in injury to the shareholders. The action is derivative, rather than direct,
because the fiduciary duty of a director or officer of a corporation “is generally
held to be between the directors and the shareholders as a whole.” Id.; citing
Dawson v. Dawson, 645 S.W.2d 120, 125 (Mo. App. 1982). In other words,
fiduciary duty obliges corporate officers and directors to act in the best interests of
all shareholders on a collective basis. “Shareholders cannot in their own right and
for their own personal use and benefit maintain an action for the recovery of
corporate funds or property improperly diverted or appropriated by the
corporation’s officers and directors.” Id.; see also Place v. P.M. Place Stores Co.,
950 S.W.2d 862, 865 (Mo. App. 1996). In that case, the “injury is to the
5
corporation -- to the shareholders collectively -- and not the shareholders
individually.” Id.
Although the general rule is that shareholder actions against corporate
officers and directors are derivative in nature, direct, individual shareholder claims
are available to redress individual wrongs. “Individual actions are permitted, and
provide the logical remedy, if the injury is to the shareholders themselves directly,
and not to the corporation.” Centerre Bank, 976 S.W.2d at 614. For example,
shareholders have been allowed to bring an individual action for claims alleging
that they were personally denied the right to inspect corporate books and records.
Dawson, 645 S.W.2d at 125-26. Similarly, claims by shareholders asserting that
they were removed from their positions as controlling shareholders have been
found to be actions that must be maintained individually. Place, 950 S.W.2d at
865-66. A common theme in these cases is that individual actions were permitted
so that individual shareholders or discrete groups of shareholders could redress
injuries unique to them rather than to the corporation as a whole. See Gray v.
Bicknell, 86 F.3d 1472, 1487 (8th Cir. 1996)(applying Missouri law and holding
that “the key element of being able to sue a corporation directly is individual
injury separate and apart from any injury the stockholder qua stockholder
sustains.”).
Nickell asserts that this Court’s opinion in Gieselmann v. Stegeman, 443
S.W.2d 127 (Mo. 1969), directly supports his argument that the claims in this case
are individual rather than derivative. In Gieselmann, the plaintiffs and defendants
6
were shareholders in a closely held corporation. The plaintiffs alleged the
defendants denied the plaintiffs’ statutory right to inspect corporate records;
fraudulently divested their shares; and issued themselves additional shares to
become majority shareholders. Id. at 130-131.
The Gieselmann court determined that the plaintiffs’ alleged an individual
claim rather than a derivative claim. Id. at 131. The court recognized the general
rule that an action based on acts relating to the capital stock as an entirety is a
corporate cause of action and cannot be sued for by a shareholder merely as an
individual. Id. at 131-132. In other words, an action that affects all shareholders
is generally derivative in nature. In contrast, shareholders may maintain an action
on an individual basis against corporate officers and directors in order to redress
wrongs that amount to a direct fraud on the shareholder. Id. at 131.
Nickell argues that his second amended petition is similar to Gieselmann
because he alleges individual harm due to the alleged decrease in value of ESSI
shares caused by Respondents’ actions. Nickell notes that Gieselmann was
premised in part on the fact that corporate shares are the individual property of the
shareholder. Nickell employs this premise to argue that allegations of decreased
share value are, by definition, an individual injury that is the proper subject of an
individual action. While it is true that the Gieselmann court stated that it was “not
necessary for the [shareholder] to sue in behalf of the corporation” for redress of
harm to his stock that affected him directly and individually, id. at 131, there are at
least two reasons why Nickell’s reliance on Gieselmann is misplaced.
7
First, Gieselmann is distinguishable because it involved the fraudulent
divestment of shares held by a discrete group of shareholders in a closely held
corporation. Unlike the plaintiff in Gieselmann, Nickell was not deprived of a
statutory right to inspect corporate records, was not divested of his shares, and his
shares were not transferred to other shareholders to deprive him of status as a
majority shareholder. Instead, Nickell alleges that ESSI shareholders sustained
decreased share value due to Respondents’ actions. Gieselmann specifically
recognized the general rule that an action based on acts relating to the capital stock
as an entirety is a derivative action rather than an individual action. Id. at 131.
Here, Nickell’s allegation that all ESSI shareholders lost share value amounts to
“an action based on acts relating to the capital stock as an entirety” that is
derivative in nature. 5
Second, while Gieselmann recognized corporate shares are individual rather
than corporate property, this fact does not aide Nickell’s case. All ESSI shares
were sold to effectuate the merger with DRS. Nickell’s allegation that
Respondents’ misdeeds diminished the value of ESSI shares is, by necessity, an
5
Grogan v. Garner, 806 F.32d 829 (8th Cir. 1996), is distinguishable on similar grounds.
In Grogan, two shareholders alleged that they did not receive their share of assets that
were transferred following the sale of the company. Specifically, the plaintiffs alleged
that the defendant corporate officer executed post-sale transactions that benefited some
shareholders but harmed others. The Eighth Circuit held that the plaintiffs could pursue
individual claims. The court noted, however, that the claim would be derivative if the
plaintiff shareholders were challenging the overall consideration paid as part of the sale
of the company. Id. at 835. In that case, all shareholders would be affected and the case
would be derivative in nature. In other words, like Gieselmann, Grogan stands for the
proposition that a claim is individual rather than derivative when the petition alleges
harm unique to a discrete group of shareholders.
8
allegation that Respondents’ actions diminished the value of ESSI as a
corporation. The diminished corporate value is a corporate injury. While
individual shareholders may have sustained damages in the form of decreased
share price, this damage was common to every ESSI shareholder and stemmed
from the underlying corporate injury. The action is, therefore, derivative in nature.
Conclusion
The circuit court did not err in dismissing Counts I through III of Nickell’s
second amended petition. The judgment is affirmed.
_________________________________
Richard B. Teitelman, Judge
Russell, C.J., Fischer, Stith, Draper and
Wilson, JJ., and Luber, Sp.J., concur.
Breckenridge, J., not participating.
9