# FILED

December 22, 1997 Cecil W. Crowson Appellate Court Clerk December 22, 1997 1 FOR PUBLICATION 2 3 4 IN THE SUPREME COURT OF TENNESSEE 5 6 AT NASHVILLE 7 8 9 10 WILLIAM A. HALL AND BEEF ( 11 TRANSPORT, INC., ( 12 ( 13 Plaintiffs-Appellees-Appellants,( 14 ( 15 v . ( 16 ( 17 TENNESSEE DRESSED BEEF CO. AND ( 18 RICHARD N. HALL, ( 19 ( Davidson Chancery 20 Defendants-Appella nts-Appellees,( 21 ( Hon. Robert S. Brandt, 22 and ( Chancellor 23 ( 24 WILLIAM A. HALL, DERIVATIVELY ( S. Ct. No. 01S01-9611-CH-00236 25 ON BEHALF OF TENNESSEE DRESSED ( 26 BEEF CO., ( 27 ( 28 Plaintiff-Appellee, ( 29 ( 30 v . ( 31 ( 32 RICHARD N. HALL, ( 33 ( 34 Defendant-Appellant . ( 35 36 37 For Plaintiffs-Appellees-Appellants: For Defendants-Appellants-Appellees: 38 39 Jeffrey A. Greene John S. Hicks 40 Alvin L. Harris Darwin A. Hindman, III 41 Greene & Greene Brigid T. Miller 42 Nashville Baker, Donelson, Bearman 43 & Caldwell 44 Nashville 45 46 47 48 O P I N I O N 49 50 JUDGMENT OF TRIAL COURT REVERSED; 51 JUDGMENT OF COURT OF APPEALS REVERSED 52 IN PART AND AFFIRMED IN PART. REID, J. 53 This case presents appeals by all parties from the 54-2-

decision of the Court of Appeals affirming in part and reversing in 1 part the order of the trial court granting summary judgment in 2 favor of the defendants on all issues. The decisions granting 3 summary judgment are reversed and the case is remanded. 4 5

I 6 7 William A. Hall, individually and derivatively on behalf 8 of Tennessee Dressed Beef Co., and Beef Transport, Inc. brought 9 suit against Hall’s brother, Richard N. Hall, and Tennessee Dressed 10 Beef Co. alleging numerous causes of action based on transactions 11 whereby Richard N. Hall gained control of Tennessee Dressed Beef 12 Co. and subsequent actions taken by that corporation. 13 14 For purposes of summary judgment the facts are not 15 disputed. Plaintiff William A. Hall and defendant Richard N. Hall 16 each were issued one-third of the shares of stock in the defendant 17 Tennessee Dressed Beef Co. when it was incorporated in 1962. The 18 remaining one-third shares were divided equally between Louis and 19 Patrick McRedmond. Tennessee Dressed Beef Co. is engaged in the 20 business of brokering, slaughtering, and processing cattle. In 21 1965, another corporation, Beef Transport, Inc., was incorporated 22 with William A. and Richard N. Hall as its sole and equal 23 shareholders. Beef Transport, Inc. provides transportation 24 services to Tennessee Dressed Beef Co., as well as to other 25 customers. From 1962 until 1992, when the McRedmonds sold their 26 interests in Tennessee Dressed Beef Co., the Halls used their 27-3-

majority voting power to control the business of the corporation. 1 The McRedmonds frequently disagreed with the Halls and even brought 2 an unsuccessful suit alleging that the Halls received secret 3 profits through the formation of Beef Transport, Inc. Tennessee 4 Dressed Beef Co. v. Hall, 519 S.W.2d 805 (Tenn. Ct. App. 1974), 5 cert. denied, (Tenn. 1975). 6 7 In the late 1960s or early 1970s, William A. and Richard 8 N. Hall began to disagree about management issues and corporate 9 policy. Although they continued to align themselves against the 10 McRedmonds, the relationship between the Halls deteriorated, and, 11 in 1988 William A. Hall ceased to be active in the daily operations 12 of Tennessee Dressed Beef Co. He continued as president of Beef 13 Transport, Inc. In the early 1990s, each of the Halls undertook to 14 buy the other's stock in Tennessee Dressed Beef Co. When their 15 attempts to reach an agreement were unsuccessful, they each 16 approached the McRedmonds. A deal was struck between Richard N. 17 Hall and the McRedmonds whereby Richard N. Hall would acquire 18 control of a majority of the shares of stock of Tennessee Dressed 19 Beef Co. That transaction and subsequent actions taken by Richard 20 N. Hall and Tennessee Dressed Beef Co. are the basis for this case. 21 22 At that time, the bylaws of Tennessee Dressed Beef Co. 23 contained the following provision: 24 25 No stock shall be sold by any stockholder 26 unless he has given the corporation twenty days 27 notice of his intentions to sell, during which 28 time the other stockholders of record shall 29-4- have the privilege of purchasing same at the 1 lowest price at which said stockholder offers 2 to sell, but this restriction shall not apply 3 to sales by and between the four original 4 stockholders, or their heirs or the personal 5 representatives of their estates. 6 7 8 9 On October 26, 1992, Richard N. Hall, on behalf of 10 himself and as president of Tennessee Dressed Beef Co., executed a 11 Stock Purchase and Redemption Agreement with the McRedmonds. The 12 agreement provided that Richard N. Hall would purchase 100 shares 13 of the McRedmonds' stock at $187.39 per share for a total cost of 14 $18,739.15 and Tennessee Dressed Beef Co. would redeem the 15 remaining 7,400 shares of the McRedmonds' stock at the same price 16 per share, for a total cost of $1,386,724. The agreement provided 17 that Tennessee Dressed Beef Co. would pay the McRedmonds $280,000 18 in cash at closing and the balance of $1,106,724 over seven years 19 at 8.75 percent interest. In addition, a company owned by the 20 McRedmonds, Nashville Recycling, which had an overdue account with 21 Tennessee Dressed Beef Co. of approximately $500,000, would repay 22 the debt over five years at 6.25 percent interest. Pursuant to the 23 agreement, the McRedmonds designated Richard N. Hall as their 24 proxies to vote their shares at subsequent meetings of the 25 shareholders of Tennessee Dressed Beef Co. 26 27 The following day, Richard N. Hall gave notice of a 28 special meeting of Tennessee Dressed Beef Co.’s shareholders for 29 November 9, 1992, for the purpose of amending the bylaws. The 30 proposed amendment would repeal the above-quoted stock transfer 31 restriction, which granted shareholders the right of first refusal 32-5-

before shares could be sold to someone other than the original four 1 shareholders. At the shareholders meeting, Richard N. Hall voted 2 his shares and those owned by the McRedmonds for the amendment, 3 which was adopted. William A. Hall voted his shares against the 4 proposal. At a subsequent shareholders meeting, Richard N. Hall 5 used his majority vote to add three new members to the board of 6 directors. At the board of directors meeting that immediately 7 followed, Richard N. Hall disclosed, for the first time, the 8 agreement between himself, the corporation, and the McRedmonds. 9 The newly elected board ratified the agreement. As a result, 10 Richard N. Hall became the owner of 50.3 percent of the outstanding 11 shares of Tennessee Dressed Beef Co., with William A. Hall owning 12 the remaining 49.7 percent. 13 14 Subsequently, Richard N. Hall terminated William A. 15 Hall’s employment with Tennessee Dressed Beef Co. and thereby 16 eliminated William A. Hall’s annual income from the corporation of 17 $150,000; the corporation increased Richard N. Hall’s annual income 18 by the same amount; and Tennessee Dressed Beef Co. unilaterally 19 modified the contract between it and Beef Transport, Inc. to 20 substantially eliminate Beef Transport, Inc.’s profits and increase 21 Tennessee Dressed Beef Co.’s profit, causing an additional annual 22 loss of income to William A. Hall of approximately $250,000. 23 24

I I 25 26

A 27-6- The complaint alleges several causes of action in 1 contract and tort and seeks, in addition to money damages, removal 2 of Richard N. Hall as a director of Tennessee Dressed Beef Co. and 3 Beef Transport, Inc. and judicial dissolution of both corporations. 4 5 The record presents three determinative and interrelated 6 issues. The first is whether the corporation was obligated by the 7 provision in its bylaws to give notice to all its shareholders of 8 the McRedmonds’ offer to sell their shares of stock; the second is 9 whether William A. Hall can bring a derivative action on behalf of 10 Tennessee Dressed Beef Co. against Richard N. Hall; and the third 11 is whether William A. Hall has a cause of action against Richard N. 12 Hall for breach of a fiduciary duty. All three issues will be 13 answered in the affirmative. 14 15

B 16 17 William A. Hall claims that Tennessee Dressed Beef Co. 18 breached the first refusal provision of the corporation’s bylaws by 19 not notifying him that the McRedmonds had offered to sell their 20 stock to a non-shareholder, the corporation itself. This Court has 21 not previously addressed the issue, but the weight of authority 22 from other jurisdictions holds that properly adopted bylaws 23 constitute a binding contract between the corporation and its 24 shareholders. See, e.g. , Elisian Guild, Inc. v. U.S., 412 F.2d 25 121, 124 (1st Cir. 1969); Gross v. Texas Plastics, Inc., 344 F. 26 Supp. 564, 566 (D. N.J. 1972); Schraft v. Leis, 686 P.2d 865, 872 27-7-

(Kan. 1984); Mass. Charitable Mechanic Ass’n v. Beede, 70 N.E.2d 1 825, 829 (Mass. 1947); Appeal of Two Crow Ranch, Inc. , 494 P.2d 2 915, 919 (Mont. 1972); Golden v. Oahe Enterprises, Inc. , 240 N.W.2d 3 102, 108 (S.D. 1976). To suggest that a corporation has no legal 4 duty to follow its own bylaws "would be to reduce the bylaws to 5 meaningless mouthing of words." Lewisburg Community Hosp., Inc. v. 6 Alfredson, 805 S.W.2d 756, 759 (Tenn. 1991) (citation omitted). 7 8 In this case, Tennessee Dressed Beef Co. had notice of 9 the proposed sale of stock. In order to give effect to the right 10 of first refusal, the bylaw provision must be read to obligate 11 Tennessee Dressed Beef Co. to notify the other shareholders of the 12 proposed sale. Otherwise, the other shareholders would be unaware 13 of the opportunity to buy the stock, which would render the right 14 of first refusal meaningless, a result contrary to the clear 15 purpose of the bylaw provision. See Smithart v. John Hancock Mut. 16 Life Ins. Co., 71 S.W.2d 1059, 1063-64 (Tenn. 1934). 17 18 The defendants contend that William A. Hall had no right 19 of first refusal to purchase the McRedmonds' stock because the 20 bylaw provision was amended before the transaction was closed. 21 Regardless of the validity of the action to repeal the bylaw 22 provision, as of October 26, 1992 when the Stock Purchase and 23 Redemption Agreement was executed, the bylaw provision was in 24 effect. At that time, Tennessee Dressed Beef Co. had a duty to 25 notify William A. Hall of the intention of the McRedmonds to sell 26 their stock. This Court holds that William A. Hall may proceed 27-8-

with his claims against Tennessee Dressed Beef Co. and Richard N. 1 Hall based on the alleged breach of the bylaw provision. 2 3
C 4 5 The second issue is whether William A. Hall has 6 standing to bring a derivative action on behalf of Tennessee 7 Dressed Beef Co. against Richard N. Hall, despite the fact that 8 William A. Hall is the only affected shareholder and has brought an 9 independent action against Tennessee Dressed Beef Co. A 10 shareholder may bring a derivative action in the name of the 11 corporation to enforce the rights of the corporation. Tenn. Code 12 Ann. § 48-17-401(a) (1988). In order to bring the action, the 13 shareholder must have been a "shareholder of the corporation when 14 the transaction complained of occurred." I d. Also, the 15 shareholder must allege with particularity that the shareholder 16 made a demand that was refused by the board of directors or that 17 such a demand was not given for sufficient reason. Tenn. Code Ann. 18 § 48-17-401(b) (1988). Finally, Tenn. R. Civ. P. 23.06 provides 19 that the shareholder must "fairly and adequately represent the 20 interests of the shareholders or members similarly situated." 21 22 Rule 23.06 refers to "a derivative action brought by one 23 or more shareholders." (Emphasis added.) Rule 23.06 does not 24 require a specific number of similarly situated shareholders. 25 Other jurisdictions addressing this issue have held that the class 26 of shareholders represented in the derivative action may consist of 27-9-

only one person. Larson v. Dumke, 900 F.2d 1363, 1368-69 (9th 1 Cir.), cert. denied sub nom. Round Table Pizza, Inc. v. Larson, 498 2 U.S. 1012, 111 S. Ct. 580, 112 L. Ed. 2d 585 (1990); Jordan v. 3 Bowman Apple Prods. Co., Inc. , 728 F. Supp. 409, 412-13 (W.D. Va. 4 1990); Halstead Video, Inc. v. Guttillo, 115 F.R.D. 177, 179-80 5 (N.D. Ill. 1987); Brandon v. Brandon Constr. Co., Inc., 776 S.W.2d 6 349, 353-54 (Ark. 1989); Eye Site, Inc. v. Blackburn, 796 S.W.2d 7 160, 161-63 (Tex. 1990). This Court agrees with the Court of 8 Appeals that the class of shareholders contemplated by Tenn. R. 9 Civ. P. 23.06 may consist of one shareholder. Otherwise, as the 10 court below noted, a shareholder of a closely held corporation 11 might be deprived of the ability to bring a derivative action. 12 Thus, the fact that William A. Hall is the only affected 13 shareholder does not preclude him from maintaining a derivative 14 action in this case. 15 16 Citing an unreported decision of the Court of Appeals, 17 Richard N. Hall claims that William A. Hall lacks standing because 18 of a conflict of interest. Maintaining a derivative action on 19 behalf of a corporation while at the same time asserting an 20 individual claim against the corporation may constitute a conflict 21 of interest; and, if there is a conflict of interest, the 22 shareholder is disqualified from maintaining a derivative action 23 pursuant to Tenn. R. Civ. P. 23.06. However, there is no conflict 24 of interest in this case. William A. Hall is not attempting to 25 represent the interests of any other shareholders. He is the only 26 similarly situated shareholder. Shareholders may bring derivative 27-10-

and individual actions simultaneously. See In re TransOcean Tender 1 Offer Securities Litig. , 455 F. Supp. 999, 1014 (N.D. Ill. 1978). 2 While there is always a theoretical conflict of interest, the great 3 weight of authority rejects a per s erule prohibiting such 4 representation. Id.Because there is no evidence in the record to 5 support a finding that William A. Hall is incapable of fairly 6 representing the interests of the corporation in the derivative 7 action while maintaining his individual suit, the existence of both 8 is no reason to deny him standing. 9 10

D 11 12 In the final issue, William A. Hall asserts several 13 claims that Richard N. Hall breached a fiduciary duty owed William 14 A. Hall. Recently, in Nelson v. Martin and Gammon, ___ S.W.2d 15 ___ (Tenn. 1997), the Court addressed the relationship between 16 shareholders in a close corporation. In that case, a shareholder 17 sued the two remaining shareholders alleging the wrongful 18 termination of his employment by the corporation and also his 19 wrongful removal as an officer and a director. The Court stated: 20 21 The shareholders of a close corporation 22 share a fiduciary relationship which imposes 23 upon all shareholders the duty to act in good 24 faith and fairness with regard to their 25 respective interests as shareholders. Officers 26 and directors of a corporation owe a similar 27 duty to the corporation. In order to withstand 28 a motion for summary judgment, allegations that 29 the fiduciary duty has been violated must be 30 supported by material evidence that the action 31 was not in the best interests of the 32 corporation and further that it was motivated 33-11- by malice, avarice, or self-interest. 1 2 3 4 Id.at ___ [slip op., p. 20]. In Nelson, the Court found that the 5 evidence in the record did not present a disputed issue of material 6 fact. Consequently, the motions for summary judgment were 7 sustained, and the suit was dismissed. 8 9 In the present case, there is evidence that the 10 execution and performance of the Stock Purchase and Redemption 11 Agreement was in violation of the duty owed by Richard N. Hall. 12 Richard N. Hall stresses that legitimate business considerations 13 supported every act about which William A. Hall has complained and 14 that it is not a breach of fiduciary duty for one shareholder of a 15 close corporation to attempt to acquire controlling interest in the 16 corporation. He relies on Johns v. Caldwell, 601 S.W.2d 37, 45 17 (Tenn. Ct. App.), cert. denied, (Tenn. 1980). A transaction 18 whereby an officer or director uses his position with the 19 corporation, uses the corporation, or uses corporate funds for the 20 purpose of promoting his personal interest at the expense of 21 another shareholder may be the basis for a cause of action against 22 the officer or director. Johns v. Caldwelldoes not support Richard 23 N. Hall’s position. See Nelson v. Martin and Gammon, ___ S.W.2d at 24 ___ [slip op., pp. 12-13]. There is sufficient evidence in this 25 case to withstand a motion for summary judgment on this issue. 26 27

III 28 29-12- In summary, the Court holds that (1) Tennessee Dressed 1 Beef Co. was obligated by a provision of its bylaws to provide 2 William A. Hall the opportunity to exercise a right of first 3 refusal to purchase the McRedmonds' stock before it was sold to the 4 corporation; (2) William A. Hall has standing to bring a derivative 5 action on behalf of Tennessee Dressed Beef Co. against Richard N. 6 Hall; and (3) the evidence in the record presents a disputed issue 7 of material fact with regard to Richard N. Hall's breach of 8 fiduciary duty. Consequently, the trial court and Court of Appeals 9 are reversed as to the first issue, and the Court of Appeals' 10 reversal of the trial court as to the second and third issues is 11 affirmed. The result is that summary judgment is denied on all 12 issues, and the case is remanded to the trial court for further 13 proceedings. 14 15 16 Costs are assessed against Richard N. Hall. 17 18

________________________ 19 Reid, J. 20 21 Concur: 22 23 Anderson, C.J., Drowota, Birch, 24 and Holder, JJ. 25