ATTORNEY FOR APPELLANTS
Joni L. Grayson
Jeffersonville, Indiana
ATTORNEYS FOR APPELLEES
Kyle P. Williams
Jeffersonville, Indiana
Gary K. Kemper
Madison, Indiana
__________________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
ANNETTE GALLIGAN, )
CHARLES GALLIGAN, and )
JENNIFER GALLIGAN, )
)
Appellants (Plaintiffs Below), )
)
v. )
)
THOMAS GALLIGAN and ) Indiana Supreme Court
LARRY RICE, ) Cause No. 10S01-0004-CV-261
)
Appellees (Defendants Below), )
) Indiana Court of Appeals
IRISH PARK, INC. and ) Cause No. 10A01-9807-CV-256
THE MONEY STORE INVESTMENT )
CORPORATION, )
)
Defendants Below, )
)
GOLDEN SHAMROCK, INC., )
)
Intervening Plaintiff Below. )
__________________________________________________________________
APPEAL FROM THE CLARK CIRCUIT COURT
The Honorable Daniel F. Donahue, Judge
Cause No. 10C01-9708-CT-324
__________________________________________________________________
ON PETITION FOR TRANSFER
__________________________________________________________________
February 2, 2001
BOEHM, Justice.
This case deals with the effect of a corporation’s failure to follow statutory
requirements in a sale of substantially all of its assets.
Factual and Procedural Background
Irish Park, Inc. is an Indiana corporation operating a family-owned construction business.
It was founded by Thomas R. Galligan in 1983. From its inception,
Galligan has apparently owned fifty-two of the one hundred issued shares and his
four children, Annette, Charles, Jennifer, and William, have owned twelve shares each.
Galligan served as president and director of Irish Park until January 1996, when
he resigned both positions, and Larry Rice, a long-time employee and member of
the board, became president. Galligan’s ex-wife, Jo Ann, apparently remained as the
only other director. In 1994, Rice and Galligan formed a second corporation,
Golden Shamrock, Inc., to engage in hauling aluminum. Galligan owned eighty-five percent
of the shares and Rice owned the remaining fifteen percent.
By the end of 1996, Irish Park was struggling. It owed more
than $750,000 in bank debt and had assets estimated to be worth only
approximately $250,000. According to the minutes of a later meeting, this balance
sheet severely impaired the company’s ability to get new contracts. In January
1997, Galligan sold his Golden Shamrock shares to Rice for one dollar and
the assumption by Golden Shamrock of some of Irish Park’s obligations. At
about the same time, Rice and Galligan started negotiations directed towards a sale
of all of Irish Park’s assets to Golden Shamrock.
On May 23, 1997, Galligan and Golden Shamrock entered into an agreement whereby
Golden Shamrock would purchase all of Irish Park’s assets and also real and
personal property owned by Galligan individually. At that time, Galligan remained the
majority shareholder of Irish Park, but was neither an officer nor a director
of either Irish Park or Golden Shamrock. The transaction was closed on
May 30, 1997. None of the actions required by the Indiana Business
Corporation Law for a disposition of substantially all of Irish Park’s assets were
taken. There was no recommendation by the Board, no notice to shareholders,
and no shareholder vote on the transaction. Indeed, it is not clear
from the record who comprised the Board of Irish Park at that point.
On August 15, 1997, three of the four minority shareholders, Annette, Charles,
and Jennifer, filed suit against Irish Park, Galligan, and Rice for fraud, breach
of fiduciary duty, conspiracy to misappropriate funds, and employment claims. The complaint
was later amended to add allegations of self-dealing and a claim that the
sale was ultra vires.
In response to the complaint, Galligan, as majority shareholder, sent a notice to
all the shareholders of a special shareholder meeting to be held March 11,
1998. The purpose of this meeting was stated to be the removal
of the board, election of a new board, and ratification of the asset
sale. On March 10, the minority shareholders served a “Shareholders’ Notice Asserting
Dissenters Right,” addressed to Galligan, Jo Ann, Rice, and Irish Park, in which
they objected to the asset sale and sought to assert their dissenters’ rights
pursuant to Indiana Code section 23-1-44-8. Galligan was the only shareholder who
attended the March 11 meeting. Acting as a shareholder, he elected himself
as the sole director. Then, as director, he elected himself president and
secretary of Irish Park. Finally, as a shareholder, Galligan voted to ratify
the asset sale.
After these corporate actions were taken, the defendants filed a motion for partial
summary judgment, contending that the plaintiffs were limited to dissenters’ rights under the
doctrine set forth in
Fleming v. International Pizza Supply Corp., 676 N.E.2d 1051,
1056-57 (Ind. 1997). The plaintiffs responded with their own motion for partial
summary judgment asking the court to rule that: (1) Rice was an
officer or director of Irish Park at the time of the asset sale;
(2) the asset sale was voidable because of Rice’s conflict of interest; (3)
Rice breached his fiduciary duties as an officer and director of Irish Park
and Galligan breached his fiduciary duty as a majority shareholder; (4) Rice’s conduct
was willful and reckless; and (5) the asset sale was not in compliance
with the requirements for a major asset sale by an Indiana corporation.
The trial court granted the defendants’ motion for partial summary judgment and denied
the plaintiffs’. The Court of Appeals affirmed the denial of plaintiffs’ motion
for partial summary judgment, but reversed the trial court’s grant of defendants’ motion
for partial summary judgment. Galligan v. Galligan, 712 N.E.2d 1028 (Ind. Ct.
App. 1999).
Standard of Review
On appeal, the standard of review of a summary judgment motion is the
same as that used in the trial court: summary judgment is appropriate
only where the evidence shows there is no genuine issue of material fact
and the moving party is entitled to a judgment as a matter of
law. Ind.Trial Rule 56(C); Shell Oil Co. v. Lovold Co., 705 N.E.2d
981, 983-84 (Ind. 1998). All facts and reasonable inferences drawn from those
facts are construed in favor of the nonmoving party. Id.; Colonial Penn
Ins. Co. v. Guzorek, 690 N.E.2d 664, 667 (Ind. 1997). The review
of a summary judgment motion is limited to those materials designated to the
trial court. T.R. 56(H); Rosi v. Business Furniture Corp., 615 N.E.2d 431,
434 (Ind. 1993).
I. Defendant’s Motion for Partial Summary Judgment
The trial court granted defendants’ motion for partial summary judgment on the grounds
that “the plaintiffs’ claim in this case is for a statutory appraisal proceeding
under I.C. 23-1-44-8 to determine the fair market value of plaintiffs’ shares in
Irish Park” and that under
Fleming v. International Pizza Supply Corp., 676 N.E.2d
1051, 1056-57 (Ind. 1997), “the statutory appraisal procedure is plaintiffs’ exclusive remedy.”
The Court of Appeals reversed, holding that because the initial asset sale did
not meet the statutory requirements for a sale of substantially all of the
assets of a corporation, the dissenters’ rights were not triggered, and, therefore, the
shareholders could assert the common law remedies pleaded in the complaint. The
court also held that the later attempt to ratify the sale was ineffective
because the defendants did not invoke the statutory procedures to trigger the plaintiffs’
dissenters’ rights. As a result, the Court of Appeals concluded that Fleming
was inapplicable. Galligan, 712 N.E.2d at 1032.
A.
Fleming v. International Pizza Supply Corp.
In Fleming, this Court held that, “in a merger or asset sale, the
exclusive remedy available to a shareholder seeking payment for the value of the
shareholder’s shares is the statutory appraisal procedure.” 676 N.E.2d at 1056.
This was based on Indiana Code section 23-1-44-8(c), which reads: “A shareholder:
who is entitled to dissent . . . may not challenge the
corporate action creating . . . the shareholder’s entitlement.” The Official Comments
to section 23-1-44-8 note that the Indiana legislature deleted the language from the
Revised Model Business Corporation Act that stated that dissenters’ rights are exclusive “unless
the action is unlawful and fraudulent.” Deletion of the exception for “unlawful
and fraudulent” actions reflected a legislative policy choice to limit shareholders to dissenters’
rights, even in fraudulent situations. It was also consistent with the policies
of corporate majority rule, finality, and resolving dissenters’ claims on a timely basis.
Fleming, 676 N.E.2d at 1057. Fleming noted that the legislature specifically
intended to eliminate the doctrine stemming from Gabhart v. Gabhart, 267 Ind. 370,
392, 370 N.E.2d 345, 358 (1977), namely, that an action for a claim
of fraud was an alternative remedy available to shareholders attacking a transaction that
triggers dissenters’ rights. Fleming, 676 N.E.2d at 1054-55. Fleming also noted
that any claims that the corporation had disposed of assets for less than
full value, or any other claim of injury to the corporation, could be
asserted in the dissenters’ rights valuation proceeding and be valued along with the
other assets of the corporation:
[W]e generally agree that the expression “corporate action to which the dissenter objects”
as used in Ind. Code § 23-1-44-3 includes not only the merger or
asset sale itself but genuine issues of breach of fiduciary duty and fraud
affecting the value of the shares at the time of the transaction.
While we acknowledge that the appraisal remedy does not provide for the individual
liability of majority shareholders or the recovery of punitive damages, we believe that
those are the policy choices made by the legislature in adopting Ind. Code
§ 23-1-44-8(c) and are clearly within the legislature’s prerogative.
Id. at 1058.
B.
The Requirements for an Asset Sale
Fleming applies only to corporate transactions that trigger dissenters’ rights. Among those
is a sale of “substantially all” of the corporate property “other than in
the usual and regular course of business.” Ind.Code § 23-1-44-8 (1998).
Indiana Code section 23-1-41-2 requires that, in order for an asset sale to
be authorized, “the board of directors must recommend the proposed transaction to the
shareholders . . . and the shareholders entitled to vote must approve the
transaction.” That section also requires the corporation to notify the shareholders of
the meeting in which they will vote on the proposed transaction and provide
a description of the transaction. Id. § 23-1-41-2(d).
The May 30 sale of Irish Park’s assets to Golden Shamrock did not
comply with corporate law in several respects. Galligan did not have the
authority to sell the corporation’s assets. He was not an officer of
the corporation and the bylaws specifically required that “all . . . written
contracts and agreements to which the Corporation shall be a party shall be
executed in its name by the President or . . . Vice
Presidents and attested by the Secretary or an Assistant Secretary.” More importantly,
the requirements of Indiana Code section 23-1-41-2 for the sale, lease, or disposition
of “all, or substantially all, of its property . . . otherwise than
in the usual and regular course of business” were not met. Specifically,
there was no proposal by the board, no notice to the shareholders, and
no approval by the shareholders.
C.
Ratification
The defendants effectively concede that the initial sale did not conform to the
requirements of the Indiana Business Corporation Law. They argue that the asset
sale was ratified on March 11, 1998, and that the plaintiffs are therefore
limited to statutory dissenters’ rights. We agree that the March 11 meeting
ratified the earlier sale.
Any corporate action that is defectively undertaken may be ratified by subsequent action.
Cf. Indiana Trust Co. v. International Bldg. & Loan Ass’n, 165 Ind.
597, 607, 76 N.E. 304, 307 (1905). In May 1998, Galligan, as
the majority shareholder,
See footnote
sent each shareholder a notice of a “Special Meeting of
Shareholders, Irish Park, Inc.” The notice listed as one of the meeting’s
purposes “[t]o consider the ratification of the sale of Irish Park assets to
Larry Rice d/b/a Golden Shamrock on May 30, 1997.” This satisfied the
statutory notice requirement for the meeting. Then, at the meeting held on
March 11, 1998, Galligan replaced the current board of directors and officers with
himself as the sole director and chairman. Finally, the minutes state:
The Chairman stated that Golden Shamrock, Inc. had made an offer to purchase
the assets of Irish Park along with two buildings, six acres of land
and various pieces of heavy equipment which are the personal property of Thomas
R. Galligan. The sale of assets had become necessary when the Internal
Revenue Service stated that it would levy upon Irish Park’s assets on June
2, unless over $76,000.00 of delinquent withholding taxes were repaid on that date.
In addition, the Corporation had lost its ability to bond construction projects.
Without its bonding capacity, the Corporation was unable to liquidate its existing
bank debt. All of the shareholders having personally guaranteed corporate debt, it
was believed that immediate liquidation of the corporate bank debt was in the
best interest of the Corporation as well as the shareholders.
Because Galligan was the sole director, this satisfied the requirement of a recommendation
by the board. Finally, the motion was voted on and a majority
of the issued shares—Galligan’s fifty-two percent—voted in favor of the transaction, thus satisfying
the final requirement of the Code. Generally, at this point, as Fleming
held, the minority shareholders are limited to dissenters’ rights and may not challenge
the validity of the asset sale.
D.
Dissenters’ Rights
The analysis would normally end here because there has been a valid asset
sale and Indiana Code section 23-1-44-8 and Fleming limit a shareholder’s remedies to
dissenters’ rights. However, the Court of Appeals held that because the corporation
did not follow the procedures detailed by the statute providing for dissenters’ rights,
the shareholders were not limited to the rights provided by that statute.
Indiana Code sections 23-1-44-1 to 20 govern dissenters’ rights. First, Indiana Code
section 23-1-44-8 identifies the transactions that may trigger dissenters’ rights. Among these
is an asset sale requiring a shareholder vote. The transaction approved at
the March 11 meeting plainly falls within this description. The fact that
Galligan as a director or shareholder may have had an interest in the
transaction by reason of his concurrent sale of his own property to Golden
Shamrock does not disable him from voting as a shareholder in favor of
the sale. As the Official Comments to the Indiana Business Corporation Law
make clear, the statute explicitly intended to permit a majority shareholder to vote
on a transaction even if it is a “conflict of interest” transaction.
Ind.Code Ann. § 23-1-35-2 cmts. (d) (West 1998).
Indiana Code section 23-1-44-10(a) then requires a notice of the meeting at which
the proposed transaction is to be voted. The notice must inform the
shareholders that they “are or may be entitled to assert” dissenters’ rights.
At the shareholders’ meeting, any shareholder wishing to assert dissenters’ rights must deliver
a notice of intent to demand payment before the vote and must not
vote in favor of the proposed transaction. Ind.Code § 23-1-44-11.
Within ten days after approval by the shareholders or within ten days after
the corporate transaction if no vote was taken, the corporation must send
those entitled to dissent a notice that must:
(1) state where the payment demand must be sent and where and when
certificates for certificated shares must be deposited; (2) inform holders of uncertificated shares
to what extent transfer of the shares will be restricted after the payment
demand is received; (3) supply a form for demanding payment that includes the
date of the first announcement to news media or to shareholders of the
terms of the proposed corporate action and requires that the person asserting dissenters’
rights certify whether or not the person acquired beneficial ownership of the shares
before that date; (4) set a date by which the corporation must receive
the payment demand, which date may not be fewer than thirty (30) nor
more than sixty (60) days after the date the subsection (a) notice is
delivered; and (5) be accompanied by a copy of this chapter.
Id. § 23-1-44-12(b).
The dissenting shareholders must then demand payment, certify whether they acquired beneficial ownership
of the shares before the date the transaction was first announced to the
media or shareholders, and deposit the certificates according to the terms set forth
in the notice sent by the corporation. Id. § 23-1-44-13(a). The shareholders
retain all the rights of a shareholder until these rights are changed by
the proposed transaction. Id. § 23-1-44-13(b). A shareholder’s failure to follow
these procedures ends the shareholder’s dissenters’ rights. Id. § 23-1-44-13(c).
As soon as the corporate action is taken, the corporation must pay the
corporation’s estimate of the “fair value” of the deposited shares to every shareholder
who complies with the above requirements. Id. § 23-1-44-15(a). “Fair value”
is defined to mean the value of the shares “immediately before” the sale.
Id. § 23-1-44-3. The payment must be accompanied by the corporation’s
balance sheet, income statement, a statement of changes in shareholders’ equity, interim financial
statements, the corporation’s estimate of the fair value of the shares, and a
statement of the dissenters’ ability to demand payment. Id. § 23-1-44-15(b).
If the corporation does not take the proposed corporate action within sixty days,
the shares must be returned to the shareholders. Id. § 23-1-44-16(a).
If, at some later time, the corporation desires to take the proposed action,
a new dissenters’ notice must be sent. Id. § 23-1-44-16(b).
A dissenting shareholder who disagrees with the valuation placed on the shares may
notify the corporation of the shareholder’s estimate of the fair value of the
shares and demand payment.
Id. § 23-1-44-18(a). This action must be
taken within thirty days after the corporation offers payment. Id. § 23-1-44-18(b).
If the corporation and dissenters cannot agree on the fair value of
the shares, Indiana Code section 23-1-44-19 requires the corporation to initiate a court
proceeding to determine fair value of the shares on pain of liability for
the amount demanded by the shareholders.
E.
Irish Park’s Failure to Comply with the Dissenters’ Rights Statute
Although the March 11, 1998 ratification of the asset sale complied with the
statutory requirements for a sale of substantially all of a corporation’s assets, see
Ind.Code § 23-1-41-2, it did not satisfy the dissenters’ rights statute. The
defendants partially complied with Indiana Code section 23-1-44-10(a) when they included in the
notice of the 1998 shareholder’s meeting a statement that one of the purposes
was “[t]o consider the ratification of the sale of Irish Park assets to
Larry Rice d/b/a Golden Shamrock on May 30, 1997.” They failed to
meet the statutory requirement that the notice advise the shareholders of their ability
to assert dissenters’ rights. However, this omission was harmless because the plaintiffs
clearly were aware of their dissenters’ rights and had served a “Shareholders Notice
Asserting Dissenters’ Right” the day before the proposed meeting.
There was, however, a material flaw in the corporation’s performance under the dissenters’
rights statute. Once the proposed sale was ratified and the shareholders gave
their notice of dissent, it then became the corporation’s obligation to supply a
dissenters’ notice in accordance with section 23-1-44-12(b). The notice would have told
the shareholders where to deposit their certificates and fixed a date by which
the surrender had to be accomplished. This did not occur.
F. The Effect of Non-Compliance
As a result of the corporation’s failure to send the notice required by
section 12(b) of the dissenters’ rights statute, the clock prescribed by Indiana Code
section 23-1-44-12(b)(4) leading to a specific date for the dissenting shareholders to demand
payment did not start to tick. Specifically, the plaintiffs were not told
where and when to submit their shares. This error was not harmless
because the plaintiffs did not submit their certificates or meet the other mechanical
requirements of section 13 and the timetable for initiating an appraisal proceeding was
not triggered. In effect, the failure to send the notice put the
chain of corporate procedures into limbo. If the shareholders had not challenged
this action, the corporation’s obligation to pay for the shares would have been
deferred forever. The statute is designed to achieve quick payment and to
minimize litigation. But, the statute obviously contemplates that each party will take
the prescribed steps in the sequence dictated by the statute. The corporation’s
failure to take the required steps, if unredressed, would frustrate that goal.
Finally, the corporation did not meet the payment requirements of section 15, unless
the amount due was zero. Even if no amount was due, the
corporation did not comply with the mandate of subsection 15(b) that the corporation
supply the required documentation, including a statement of its estimate of the share
value.
The issue thus becomes the proper remedy for these failures. Although the
dissenters’ rights statute expressly provides a remedy when the dissenters fail to follow
its requirements, I.C. §§ 23-1-44-11(b), 13(c) & 18(b), it remains largely silent as
to what happens if the corporation fails to initiate the dissenters’ rights proceeding.
Presumably this is because most corporations scrupulously follow the dictates of the
statute to foreclose litigation, including the possibility of individual shareholders seeking remedies against
the corporation and its management in addition to payment of the value of
their shares.
The Court of Appeals held “that Galligan and Rice are not entitled to
hold Plaintiffs to the remedy provisions of Ind. Code § 23-1-44 while exempting
themselves from its notice provisions.”
Galligan, 712 N.E.2d at 1032. The
Court of Appeals concluded that a suit for breach of fiduciary duty and
fraud would be available to attack the underlying transaction. Presumably, the remedies
for such a claim include rescission and, under some circumstances, punitive damages.
We do not agree that these claims are available. As Fleming pointed
out, the statutory scheme strongly favors majority rule and finality of corporate transactions.
676 N.E.2d at 1057. The 1986 Indiana Business Corporation Law sought
to eliminate the opportunity created by prior decisional law to invoke broader remedies
than a fair valuation of the shares. For that reason, we think
the consequence of disregarding the statute is not to vitiate the dissenters’ rights
provisions altogether. Moreover, we do not believe the corporation should be able
to eliminate dissenters’ rights by its own inaction. Here, the plaintiffs, as
shareholders, had attempted to assert dissenters’ rights at the time of the ratified
corporate action. They cannot be held to have forfeited their rights by
reason of the corporation’s ineptitude. Accordingly, the notice of intent to dissent
remained valid as to the ratified transaction and the dissenters are entitled to
their rights under the statute.
The defendants contend that despite the corporation’s disregard for statutory requirements the dissenters
are limited to their dissenters’ rights as articulated in
Fleming. This result
is also unsatisfactory because it provides little incentive for corporations and their managers
to comply with the statute. If a failure to send the dissenters’
notice as required by Indiana Code section 23-1-44-12 has only the effect of
tolling the dissenters’ statutory time periods for invoking the procedure, dissenters’ sole remedy
would be to petition the court to force the corporation to obey the
statute. But some shareholders may be ignorant of their remedies or have
little incentive to move promptly and at potentially significant expense. If this
is the sole remedy, disregard of the statute with a consequent relegation of
the minority shareholders to a legal limbo will go unredressed.
We conclude that the proper resolution of these conflicting considerations is to restrict
the shareholders to their dissenting shareholder rights as to the underlying transaction, but
also to recognize that they may proceed with a separate claim against the
persons responsible for a breach of statutory duty with respect to the dissenters’
rights proceeding. Otherwise stated, dissenters’ rights are the exclusive remedy afforded for
actions or omissions in a merger or asset sale, but failure to afford
the dissenters’ rights remedy is an independent wrong that is not itself subject
to the dissenters’ rights provisions.
Damages for a breach of the statutory duty to provide dissenters’ rights would
presumably include any loss incurred from delay in consummating the dissenting shareholders’ proceeding
or otherwise occasioned by the failure to comply with the statute. If
the corporation is solvent there will normally be no damages in addition to
the amount recoverable by the exercise of dissenters’ rights. However, if the
corporation’s financial capacity to make full payment of the fair value has been
impaired by reason of the delay, the shortfall may be a component of
those damages. Here, the plaintiffs requested dissenting shareholder rights despite the corporation’s
failure to comply with the notice requirements. If the corporation’s minutes are
to be believed, the value of the shares may ultimately prove to have
been zero at all relevant times. Thus, in this case, there may
be no consequences of the failure to comply with corporate law, but that
is an issue for the trial court.
The 1986 wholesale revision of Indiana corporate law included a number of provisions
that were intended to limit the liability of directors of Indiana corporations.
We find nothing, however, in that statute that abrogates the basic principle that
directors who breach duties to the corporation or to shareholders may be held
accountable. Nor do we believe that this recognizes a “new” cause of
action for breach of the statutory duties imposed by the Indiana Business Corporation
Law. Rather, we simply apply the commonly accepted principle that the directors
may be liable for disregarding a statutory mandate to these unusual facts, where
the directors failed to take the steps necessary to enjoy the safe harbor
provided by the dissenters’ rights statute.
No party has raised the issue of the requisite scienter for director liability,
but we note that the Indiana Business Corporation Law has explicitly addressed that
issue in Indiana Code section 23-1-35-1. More particularly, subsection (e) of that
section provides that a director “is not liable” for an act or omission
unless “[t]he breach or failure to perform constitutes willful misconduct or recklessness.”
This section seems rather clearly to recognize that a claim can exist for
breach of statutory duty of a director.
See also Ind.Code Ann. §
23-1-36-2 & cmts. (West 1998) (discussing the duties and potential liabilities of officers).
In sum, the shareholders accept the risk of loss from various causes, including
competition, natural disasters, and a variety of business judgments. But the risk
that the corporate law will be ignored is not one of them.
A shareholder has a right to assume that the corporation will be operated
in conformity with the statute. The statute is quite clear that directors
who recklessly or willfully disregard statutory directives may be liable. Those provisions,
like the dissenters’ rights provisions, are built into the structure the shareholder accepts
by buying a share in an Indiana corporation.
G.
Attorney’s Fees
We also note that the statute itself provides an additional deterrent to disregarding
its procedures. Although the statute does not specifically address what happens when
the corporation fails to comply with the requirements of notice and other steps
set forth in sections 10 through 18, Indiana Code section 23-1-44-20(b) provides that:
The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable: (1) against
the corporation and in favor of any and all dissenters if the court
finds the corporation did not substantially comply with the requirements of sections 10
through 18 of this chapter; or (2) against either the corporation or a
dissenter, in favor of any other party, if the court finds that the
party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or
not in good faith with respect to the rights provided by this chapter.
This provides an incentive to obey the statute in the initial transaction, because
in addition to having to pay the fair value of dissenters’ shares, the
corporation may be liable for fees and expenses of counsel and experts for
both sides.
H.
Interest
Because the corporation caused the delay in the dissenters’ rights proceedings, the response
time for dissenters has been delayed until the corporation abides by the statute.
The statute also provides for interest on the unpaid balance of fair
value from the date of tender of the shares to the corporation to
judicial resolution of a valuation dispute. Ind.Code § 23-1-44-19(e). It does
not provide for interest if the corporation pays voluntarily. Ind.Code Ann. §
23-1-44-18(a) & cmts. (West 1998). Given that the corporation did not comply
with the statute, interest from the date of the sale should follow.
If the value of the shares was zero, this is an academic point.
I.
Summary
In this case, the plaintiffs can proceed in court to force Irish Park
to comply with the dissenters’ rights statute. As
Fleming held, shareholders’ claims
for fraud in the underlying transaction, including the breach of fiduciary duty claims,
may be evaluated as part of the dissenters’ rights proceeding to the extent
any fraud or breach caused a decline in the value of their shares.
676 N.E.2d at 1058. But, as Fleming held, these claims may
not be pursued as independent actions. Id. at 1056. The plaintiffs
can also seek to recover attorney’s fees and any other expenses, if they
can show that these fees and costs were caused by Irish Park’s failure
to follow the mandate of the dissenters’ rights statute, and interest. Finally,
if damages can be shown to have been caused by a breach of
a statutory duty with respect to the dissenters’ rights proceedings, the plaintiffs may
bring a separate claim against the persons responsible.
II. Plaintiffs’ Motion for Partial Summary Judgment
The Court of Appeals affirmed the trial court’s denial of the plaintiffs’ motion
for partial summary judgment on five issues including: (1) whether Rice was
an officer and director of Irish Park at the time of the asset
sale, (2) whether the asset sale between Irish Park and Golden Shamrock was
voidable for conflict of interest, (3) whether Galligan and Rice breached their fiduciary
duties as majority shareholder and officer and director, respectively, (4) whether Rice’s conduct
was reckless and willful giving rise to personal liability under the Indiana Code,
and (5) whether the asset sale was in accordance with the Indiana Code.
First, the issue of whether Rice was an officer and director at the
time of the asset sale is not appropriate for summary judgment. Summary
judgment is proper when there are no genuine issues of any material fact
and the moving party is entitled to judgment as a matter of law.
Ind.Trial Rule 56. On a summary judgment motion, the court cannot
weigh evidence to determine its credibility. National City Bank v. Shortridge, 689
N.E.2d 1248, 1251 (Ind. 1997). In this case, although the plaintiffs designated
evidence that Rice was an officer and director, namely, Rice’s signature on the
Irish Park corporate tax return and the lack of records indicating Rice’s resignation,
Rice designated deposition testimony that he resigned as an officer and director of
Irish Park in January of 1997. This raises a genuine issue of
fact. To the extent Rice’s status is material to any issue in
the case, it remains for trial.
Plaintiffs next claim that the asset sale to Golden Shamrock was voidable because
Rice was an officer and director of Irish Park and also owned Golden
Shamrock. Indiana Code section 23-1-35-2 defines a conflict of interest transaction as
“a transaction with the corporation in which a director of the corporation has
a direct or indirect interest.” It is not clear that Rice was
a director of Irish Park at the time of the asset sale.
Even if he was a director, there is a factual issue raised as
to whether the transaction was valid. This issue is also not appropriate
for summary judgment.
Similarly, the issues of whether Rice breached his fiduciary duties to the shareholders
as an officer and director and whether his conduct was willful and reckless
as described in Indiana Code section 23-1-35-1 require resolution of his role in
Irish Park at the time of the asset sale, as well as a
determination of the other factual issues these claims raise.
The plaintiffs also contend that as a matter of law Galligan breached his
fiduciary duty to them as minority shareholders. Although it is true that
the majority shareholder owes fiduciary duties to the minority shareholders under Indiana law,
Barth v. Barth, 659 N.E.2d 559, 561 (Ind. 1995), the facts in this
case do not establish as a matter of law that Galligan breached his
duties as a fiduciary by failing to act in the best interests of
the shareholders and the corporation. He may have caused the corporation to
take action that did not comply with statutory requirements, but there is no
showing by undisputed facts that he failed to act in the interests of
the corporation and its shareholders. We affirm the trial court’s denial of
summary judgment on this issue. Moreover, if, as Galligan apparently claims, the
shares were worthless by the time of the transaction, there may well be
no damages even if there were breaches of corporate protocol.
Finally, plaintiffs seek summary judgment on whether the sale of assets was in
accordance with the Indiana Code. Indiana Code section 23-1-41-2 allows a corporation
to sell all or substantially all of its assets, not in the regular
course of business, if the board of directors recommends and its shareholders approve
the proposed transaction. In this case, it is clear that the original
sale on May 30, 1997 did not comply with the requirements of the
statute. However, for the reasons given above, the corporation’s subsequent acts satisfied
the requirements of the asset sale statute. Therefore, the plaintiffs’ motion for
summary judgment was correctly denied.
Conclusion
The trial court’s grant of defendants’ motion for summary judgment is affirmed as
to the corporation, but vacated as to the other defendants. The trial
court’s denial of plaintiffs’ motion for summary judgment is affirmed. This case
is remanded for proceedings consistent with this opinion.
SHEPARD, C.J., and DICKSON and RUCKER, JJ., concur.
SULLIVAN, J., concurs in part with separate opinion.
Attorney for Appellants
Joni L. Grayson
Jeffersonville, IN
Attorneys for Appellees
Kyle P. Williams
Jeffersonville, IN
Gary K. Kemper
Madison, IN
IN THE
INDIANA SUPREME COURT
ANNETTE GALLIGAN,
CHARLES GALLIGAN, and
JENNIFER GALLIGAN
Appellants (Plaintiffs below),
v.
THOMAS GALLIGAN, and
LARRY RICE,
Appellees (Defendants below).
IRISH PARK, INC. and
THE MONEY STORE INVESTMENT
CORPORATION,
(Defendants below).
GOLDEN SHAMROCK, INC.,
(Intervening Plaintiff below).
)
) Supreme Court No.
) 10S01-0004-CV-261
)
) Court of Appeals No.
) 10A01-9807-CV-256
)
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APPEAL FROM THE CLARK CIRCUIT COURT
The Honorable Daniel F. Donahue, Judge
Cause No. 10C01-9708-CT-324
ON PETITION FOR TRANSFER
February 2, 2001
SULLIVAN, Justice, concurring in part.
I concur in the majority’s opinion except for its recognition of a private
cause of action for breach of a statutory duty with respect to dissenters’
rights proceedings. I believe that under common law principles of agency and
contract, shareholders have sufficient protection in such situations.
See Official Comments to
Indiana Code § 23-1-36-2.
Footnote:
The bylaws authorized the President, any Vice President, the Board of Directors,
or shareholders holding no less than one-fourth of the outstanding shares to call
a special shareholder’s meeting. Pursuant to Indiana Code section 23-1-29-2(a), this was
a valid provision.