FILED

December 22, 1997

Cecil W. Crowson

Appellate Court Clerk

1 December 22, 1997

2 FOR PUBLICATION

3

4

5 IN THE SUPREME COURT OF TENNESSEE

6

7 AT NASHVILLE

8

9

10

11 WILLIAM A. HALL AND BEEF (

12 TRANSPORT, INC., (

13 (

14 Plaintiffs-Appelle es-Appellants, (

15 (

16 v . (

17 (

18 TENNESSEE DRESSED BEEF CO. AND (

19 RICHARD N. HALL, (

20 ( Davidson Chancery

21 Defendants-Appella nts-Appellees, (

22 ( Hon. Robert S. Brandt,

23 and ( Chancellor

24 (

25 WILLIAM A. HALL, DERIVATIVELY ( S. Ct. No. 01S01-9611-CH-00236

26 ON BEHALF OF TENNESSEE DRESSED (

27 BEEF CO., (

28 (

29 Plaintiff-Appellee , (

30 (

31 v . (

32 (

33 RICHARD N. HALL, (

34 (

35 Defendant-Appellan t . (

36

37

For Plaintiffs-App ellees-Appellants 38 : For Defendants-App ellants-Appellees :

39

40 Jeffrey A. Greene John S. Hicks

41 Alvin L. Harris Darwin A. Hindman, III

42 Greene & Greene Brigid T. Miller

43 Nashville Baker, Donelson, Bearman

44 & Caldwell

45 Nashville

46

47

48

49 O P I N I O N

50

51 JUDGMENT OF TRIAL COURT REVERSED;

52 JUDGMENT OF COURT OF APPEALS REVERSED 

53 IN PART AND AFFIRMED IN PART. REID, J.

54 This case presents appeals by all parties from the
-2-

1 decision of the Court of Appeals affirming in part and reversing in

2 part the order of the trial court granting summary judgment in

3 favor of the defendants on all issues. The decisions granting

4 summary judgment are reversed and the case is remanded.

5

6 I

7

8 William A. Hall, individually and derivatively on behalf

9 of Tennessee Dressed Beef Co., and Beef Transport, Inc. brought

10 suit against Hall’s brother, Richard N. Hall, and Tennessee Dressed

11 Beef Co. alleging numerous causes of action based on transactions

12 whereby Richard N. Hall gained control of Tennessee Dressed Beef

13 Co. and subsequent actions taken by that corporation. 

14

15 For purposes of summary judgment the facts are not

16 disputed. Plaintiff William A. Hall and defendant Richard N. Hall

17 each were issued one-third of the shares of stock in the defendant

18 Tennessee Dressed Beef Co. when it was incorporated in 1962. The

19 remaining one-third shares were divided equally between Louis and

20 Patrick McRedmond. Tennessee Dressed Beef Co. is engaged in the

21 business of brokering, slaughtering, and processing cattle. In

22 1965, another corporation, Beef Transport, Inc., was incorporated

23 with William A. and Richard N. Hall as its sole and equal

24 shareholders. Beef Transport, Inc. provides transportation

25 services to Tennessee Dressed Beef Co., as well as to other

26 customers. From 1962 until 1992, when the McRedmonds sold their

27 interests in Tennessee Dressed Beef Co., the Halls used their
-3-

1 majority voting power to control the business of the corporation. 

2 The McRedmonds frequently disagreed with the Halls and even brought

3 an unsuccessful suit alleging that the Halls received secret

4 profits through the formation of Beef Transport, Inc. Tennessee

5 Dressed Beef Co. v. Hall , 519 S.W.2d 805 (Tenn. Ct. App. 1974),

6 cert. denied , (Tenn. 1975).

7

8 In the late 1960s or early 1970s, William A. and Richard

9 N. Hall began to disagree about management issues and corporate

10 policy. Although they continued to align themselves against the

11 McRedmonds, the relationship between the Halls deteriorated, and,

12 in 1988 William A. Hall ceased to be active in the daily operations

13 of Tennessee Dressed Beef Co. He continued as president of Beef

14 Transport, Inc. In the early 1990s, each of the Halls undertook to

15 buy the other's stock in Tennessee Dressed Beef Co. When their

16 attempts to reach an agreement were unsuccessful, they each

17 approached the McRedmonds. A deal was struck between Richard N.

18 Hall and the McRedmonds whereby Richard N. Hall would acquire

19 control of a majority of the shares of stock of Tennessee Dressed

20 Beef Co. That transaction and subsequent actions taken by Richard

21 N. Hall and Tennessee Dressed Beef Co. are the basis for this case. 

22 

23 At that time, the bylaws of Tennessee Dressed Beef Co.

24 contained the following provision:

25

26 No stock shall be sold by any stockholder

27 unless he has given the corporation twenty days

28 notice of his intentions to sell, during which

29 time the other stockholders of record shall
-4-

1 have the privilege of purchasing same at the

2 lowest price at which said stockholder offers

3 to sell, but this restriction shall not apply

4 to sales by and between the four original

5 stockholders, or their heirs or the personal

6 representatives of their estates.

7

8

9

10 On October 26, 1992, Richard N. Hall, on behalf of

11 himself and as president of Tennessee Dressed Beef Co., executed a

12 Stock Purchase and Redemption Agreement with the McRedmonds. The

13 agreement provided that Richard N. Hall would purchase 100 shares

14 of the McRedmonds' stock at $187.39 per share for a total cost of

15 $18,739.15 and Tennessee Dressed Beef Co. would redeem the

16 remaining 7,400 shares of the McRedmonds' stock at the same price

17 per share, for a total cost of $1,386,724. The agreement provided

18 that Tennessee Dressed Beef Co. would pay the McRedmonds $280,000

19 in cash at closing and the balance of $1,106,724 over seven years

20 at 8.75 percent interest. In addition, a company owned by the

21 McRedmonds, Nashville Recycling, which had an overdue account with

22 Tennessee Dressed Beef Co. of approximately $500,000, would repay

23 the debt over five years at 6.25 percent interest. Pursuant to the

24 agreement, the McRedmonds designated Richard N. Hall as their

25 proxies to vote their shares at subsequent meetings of the

26 shareholders of Tennessee Dressed Beef Co.

27

28 The following day, Richard N. Hall gave notice of a

29 special meeting of Tennessee Dressed Beef Co.’s shareholders for

30 November 9, 1992, for the purpose of amending the bylaws. The

31 proposed amendment would repeal the above-quoted stock transfer

32 restriction, which granted shareholders the right of first refusal
-5-

1 before shares could be sold to someone other than the original four

2 shareholders. At the shareholders meeting, Richard N. Hall voted

3 his shares and those owned by the McRedmonds for the amendment,

4 which was adopted. William A. Hall voted his shares against the

5 proposal. At a subsequent shareholders meeting, Richard N. Hall

6 used his majority vote to add three new members to the board of

7 directors. At the board of directors meeting that immediately

8 followed, Richard N. Hall disclosed, for the first time, the

9 agreement between himself, the corporation, and the McRedmonds. 

10 The newly elected board ratified the agreement. As a result,

11 Richard N. Hall became the owner of 50.3 percent of the outstanding

12 shares of Tennessee Dressed Beef Co., with William A. Hall owning

13 the remaining 49.7 percent.

14

15 Subsequently, Richard N. Hall terminated William A.

16 Hall’s employment with Tennessee Dressed Beef Co. and thereby

17 eliminated William A. Hall’s annual income from the corporation of

18 $150,000; the corporation increased Richard N. Hall’s annual income

19 by the same amount; and Tennessee Dressed Beef Co. unilaterally

20 modified the contract between it and Beef Transport, Inc. to

21 substantially eliminate Beef Transport, Inc.’s profits and increase

22 Tennessee Dressed Beef Co.’s profit, causing an additional annual

23 loss of income to William A. Hall of approximately $250,000.

24

25 I I

26

27 A
-6-

1 The complaint alleges several causes of action in

2 contract and tort and seeks, in addition to money damages, removal

3 of Richard N. Hall as a director of Tennessee Dressed Beef Co. and

4 Beef Transport, Inc. and judicial dissolution of both corporations.

5

6 The record presents three determinative and interrelated

7 issues. The first is whether the corporation was obligated by the

8 provision in its bylaws to give notice to all its shareholders of

9 the McRedmonds’ offer to sell their shares of stock; the second is

10 whether William A. Hall can bring a derivative action on behalf of

11 Tennessee Dressed Beef Co. against Richard N. Hall; and the third

12 is whether William A. Hall has a cause of action against Richard N.

13 Hall for breach of a fiduciary duty. All three issues will be

14 answered in the affirmative.

15

16 B

17

18 William A. Hall claims that Tennessee Dressed Beef Co.

19 breached the first refusal provision of the corporation’s bylaws by

20 not notifying him that the McRedmonds had offered to sell their

21 stock to a non-shareholder, the corporation itself. This Court has

22 not previously addressed the issue, but the weight of authority

23 from other jurisdictions holds that properly adopted bylaws

24 constitute a binding contract between the corporation and its

shareholders. See, e.g. 25 , Elisian Guild, Inc. v. U.S. , 412 F.2d

26 121, 124 (1st Cir. 1969); Gross v. Texas Plastics, Inc. , 344 F.

27 Supp. 564, 566 (D. N.J. 1972); Schraft v. Leis , 686 P.2d 865, 872
-7-

1 (Kan. 1984); Mass. Charitable Mechanic Ass’n v. Beede , 70 N.E.2d

2 825, 829 (Mass. 1947); Appeal of Two Crow Ranch, Inc. , 494 P.2d

3 915, 919 (Mont. 1972); Golden v. Oahe Enterprises, Inc. , 240 N.W.2d

4 102, 108 (S.D. 1976). To suggest that a corporation has no legal

5 duty to follow its own bylaws "would be to reduce the bylaws to

6 meaningless mouthing of words." Lewisburg Community Hosp., Inc. v.

7 Alfredson , 805 S.W.2d 756, 759 (Tenn. 1991) (citation omitted).

8

9 In this case, Tennessee Dressed Beef Co. had notice of

10 the proposed sale of stock. In order to give effect to the right

11 of first refusal, the bylaw provision must be read to obligate

12 Tennessee Dressed Beef Co. to notify the other shareholders of the

13 proposed sale. Otherwise, the other shareholders would be unaware

14 of the opportunity to buy the stock, which would render the right

15 of first refusal meaningless, a result contrary to the clear

16 purpose of the bylaw provision. See Smithart v. John Hancock Mut.

17 Life Ins. Co. , 71 S.W.2d 1059, 1063-64 (Tenn. 1934).

18

19 The defendants contend that William A. Hall had no right

20 of first refusal to purchase the McRedmonds' stock because the

21 bylaw provision was amended before the transaction was closed. 

22 Regardless of the validity of the action to repeal the bylaw

23 provision, as of October 26, 1992 when the Stock Purchase and

24 Redemption Agreement was executed, the bylaw provision was in

25 effect. At that time, Tennessee Dressed Beef Co. had a duty to

26 notify William A. Hall of the intention of the McRedmonds to sell

27 their stock. This Court holds that William A. Hall may proceed
-8-

1 with his claims against Tennessee Dressed Beef Co. and Richard N.

2 Hall based on the alleged breach of the bylaw provision.

3 

4 C

5

6 The second issue is whether William A. Hall has

7 standing to bring a derivative action on behalf of Tennessee

8 Dressed Beef Co. against Richard N. Hall, despite the fact that

9 William A. Hall is the only affected shareholder and has brought an

10 independent action against Tennessee Dressed Beef Co. A

11 shareholder may bring a derivative action in the name of the

12 corporation to enforce the rights of the corporation. Tenn. Code

13 Ann. § 48-17-401(a) (1988). In order to bring the action, the

14 shareholder must have been a "shareholder of the corporation when

the transaction complained of occurred." I d 15 . Also, the

16 shareholder must allege with particularity that the shareholder

17 made a demand that was refused by the board of directors or that

18 such a demand was not given for sufficient reason. Tenn. Code Ann.

19 § 48-17-401(b) (1988). Finally, Tenn. R. Civ. P. 23.06 provides

20 that the shareholder must "fairly and adequately represent the

21 interests of the shareholders or members similarly situated."

22

23 Rule 23.06 refers to "a derivative action brought by one

24 or more shareholders." (Emphasis added.) Rule 23.06 does not

25 require a specific number of similarly situated shareholders. 

26 Other jurisdictions addressing this issue have held that the class

27 of shareholders represented in the derivative action may consist of
-9-

1 only one person. Larson v. Dumke , 900 F.2d 1363, 1368-69 (9th

2 Cir.), cert. denied sub nom. Round Table Pizza, Inc. v. Larson , 498

3 U.S. 1012, 111 S. Ct. 580, 112 L. Ed. 2d 585 (1990); Jordan v.

4 Bowman Apple Prods. Co., Inc. , 728 F. Supp. 409, 412-13 (W.D. Va.

5 1990); Halstead Video, Inc. v. Guttillo , 115 F.R.D. 177, 179-80

6 (N.D. Ill. 1987); Brandon v. Brandon Constr. Co., Inc. , 776 S.W.2d

7 349, 353-54 (Ark. 1989); Eye Site, Inc. v. Blackburn , 796 S.W.2d

8 160, 161-63 (Tex. 1990). This Court agrees with the Court of

9 Appeals that the class of shareholders contemplated by Tenn. R.

10 Civ. P. 23.06 may consist of one shareholder. Otherwise, as the

11 court below noted, a shareholder of a closely held corporation

12 might be deprived of the ability to bring a derivative action. 

13 Thus, the fact that William A. Hall is the only affected

14 shareholder does not preclude him from maintaining a derivative

15 action in this case. 

16

17 Citing an unreported decision of the Court of Appeals,

18 Richard N. Hall claims that William A. Hall lacks standing because

19 of a conflict of interest. Maintaining a derivative action on

20 behalf of a corporation while at the same time asserting an

21 individual claim against the corporation may constitute a conflict

22 of interest; and, if there is a conflict of interest, the

23 shareholder is disqualified from maintaining a derivative action

24 pursuant to Tenn. R. Civ. P. 23.06. However, there is no conflict

25 of interest in this case. William A. Hall is not attempting to

26 represent the interests of any other shareholders. He is the only

27 similarly situated shareholder. Shareholders may bring derivative
-10-

1 and individual actions simultaneously. See In re TransOcean Tender

2 Offer Securities Litig. , 455 F. Supp. 999, 1014 (N.D. Ill. 1978). 

3 While there is always a theoretical conflict of interest, the great

4 weight of authority rejects a per s e rule prohibiting such

5 representation. Id. Because there is no evidence in the record to

6 support a finding that William A. Hall is incapable of fairly

7 representing the interests of the corporation in the derivative

8 action while maintaining his individual suit, the existence of both

9 is no reason to deny him standing.

10

11 D

12

13 In the final issue, William A. Hall asserts several

14 claims that Richard N. Hall breached a fiduciary duty owed William

15 A. Hall. Recently, in Nelson v. Martin and Gammon , ___ S.W.2d 

16 ___ (Tenn. 1997), the Court addressed the relationship between

17 shareholders in a close corporation. In that case, a shareholder

18 sued the two remaining shareholders alleging the wrongful

19 termination of his employment by the corporation and also his

20 wrongful removal as an officer and a director. The Court stated:

21

22 The shareholders of a close corporation

23 share a fiduciary relationship which imposes

24 upon all shareholders the duty to act in good

25 faith and fairness with regard to their

26 respective interests as shareholders. Officers

27 and directors of a corporation owe a similar

28 duty to the corporation. In order to withstand

29 a motion for summary judgment, allegations that

30 the fiduciary duty has been violated must be

31 supported by material evidence that the action

32 was not in the best interests of the

33 corporation and further that it was motivated
-11-

1 by malice, avarice, or self-interest.

2

3

4

5 Id. at ___ [slip op., p. 20]. In Nelson , the Court found that the

6 evidence in the record did not present a disputed issue of material

7 fact. Consequently, the motions for summary judgment were

8 sustained, and the suit was dismissed.

9

10 In the present case, there is evidence that the

11 execution and performance of the Stock Purchase and Redemption

12 Agreement was in violation of the duty owed by Richard N. Hall. 

13 Richard N. Hall stresses that legitimate business considerations

14 supported every act about which William A. Hall has complained and

15 that it is not a breach of fiduciary duty for one shareholder of a

16 close corporation to attempt to acquire controlling interest in the

corporation. He relies on Johns v. Caldwell 17 , 601 S.W.2d 37, 45

18 (Tenn. Ct. App.), cert. denied , (Tenn. 1980). A transaction

19 whereby an officer or director uses his position with the

20 corporation, uses the corporation, or uses corporate funds for the

21 purpose of promoting his personal interest at the expense of

22 another shareholder may be the basis for a cause of action against

23 the officer or director. Johns v. Caldwell does not support Richard

24 N. Hall’s position. See Nelson v. Martin and Gammon , ___ S.W.2d at 

25 ___ [slip op., pp. 12-13]. There is sufficient evidence in this

26 case to withstand a motion for summary judgment on this issue.

27

28 III

29
-12-

1 In summary, the Court holds that (1) Tennessee Dressed

2 Beef Co. was obligated by a provision of its bylaws to provide

3 William A. Hall the opportunity to exercise a right of first

4 refusal to purchase the McRedmonds' stock before it was sold to the

5 corporation; (2) William A. Hall has standing to bring a derivative

6 action on behalf of Tennessee Dressed Beef Co. against Richard N.

7 Hall; and (3) the evidence in the record presents a disputed issue

8 of material fact with regard to Richard N. Hall's breach of

9 fiduciary duty. Consequently, the trial court and Court of Appeals

10 are reversed as to the first issue, and the Court of Appeals'

11 reversal of the trial court as to the second and third issues is

12 affirmed. The result is that summary judgment is denied on all

13 issues, and the case is remanded to the trial court for further

14 proceedings.

15

16

17 Costs are assessed against Richard N. Hall. 

18 

19 ________________________

20 Reid, J.

21

22 Concur:

23

24 Anderson, C.J., Drowota, Birch,

25 and Holder, JJ.