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Friday
Dec282012

Torian v. Craig: Individual Injury Allows Shareholders to Sue Directly

In Torian v. Craig, No. 20100919, 2012 WL 4466150 (Utah Sept. 28, 2012), the Supreme Court of Utah reversed the district court’s dismissal of the plaintiff’s claim that defendant diluted the value of his shares through corporate misdeeds. The court held that the plaintiff could assert his claim directly as an individual and that he was not barred by Utah’s dissenters’ rights statute.

According to the complaint, the plaintiff, Doug Torian, worked as a sales manager for EnvironMax, a company that marketed software developed by EnMax. The defendant, Robert Craig, founded and owned a controlling interest in both EnvironMax and EnMax. In 2005, EnvironMax issued shares to several of its employees and EnMax to cover the cost of debts and unpaid wages. EnvironMax allegedly issued 200,000 shares to the plaintiff and 6,000,000 shares to EnMax, even though the debts owed to each were roughly equal.  As a result, the value of Torian’s shares, according to the claim, underwent significant dilution. 

Torian brought direct and derivative claims against former directors, officers, and controlling shareholders of EnvironMax.  He asserted that the defendants had "engaged in various self-dealing transactions to benefit themselves at the expense of certain minority shareholders and that he only discovered the wrongful acts after he and other minority shareholders parted with their shares." 

The trial court dismissed the claims, concluding that they were “derivative in nature” and that Torian lacked proper standing to bring the claims directly. The trial court determined that shareholders were required to file suits derivatively against EnvironMax because it “was not a ‘closely held corporation,’” and that Torian’s direct claims were barred due to Torian’s failure to utilize Utah’s dissenters’ rights statute.

The Supreme Court of Utah stated that to bring a direct claim, a shareholder must show an injury  “that is distinct from that suffered by the corporation.”  Thus, in analyzing whether a claim is direct, the court first must determine “who suffered the alleged harm.”  Second, the court must determine “who would receive the benefit of recovery or other remedy.” A transaction that extracts “economic value or voting power from” minority shareholders while benefiting controlling shareholders is an instance in which “minority shareholders are harmed, uniquely and individually . . . .”  The Court found that the dilution alleged in this case met this standard and could be asserted individually. 

The Utah Supreme Court also held that Utah’s dissenters’ rights statute did not bar the plaintiff from bringing his claim. The statute allows a shareholder “to dissent from, and obtain payment of the fair value of shares held by him” in instances such as "merger, exchange and acquisition,” and other corporate actions authorized by an entity’s organic documents. The court found the action belonged to the corporation and had to be initiated by the corporation.   Nothing in the statute “would deem the corporation's cause of action to be preclusive of a minority shareholder's right to sue.”

The court did discuss cases finding that dissenters’ rights were, in certain circumstances, the exclusive remedy in cases alleging shareholder dilution.  This is not the case in claims alleging breach of fiduciary duty. Additionally, the statute allowed a shareholder to “‘challenge the corporate action creating the entitlement’ to dissent and obtain payment in the event that ‘the action is unlawful or fraudulent’ . . . .” The court held that the plaintiff did not waive his right to bring an individual claim directly by not utilizing the dissenters’ rights statute.

The primary materials for this case may be found on the DU Corporate Governance website.  

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