Opinion ID: 1381928
Heading Depth: 1
Heading Rank: 6

Heading: Removal from the Board of Directors

Text: Finally, appellants argue that the trial court erred in finding that Taylor and Hufstedler grossly abused their discretion, thus necessitating their removal from BEIIFE's board of directors pursuant to Ark.Code Ann. § 4-27-809 (Repl.2001). We hold otherwise. At the 2000 board of directors/shareholders meeting, Taylor and Hufstedler voted to remove Hinkle as president of BEIIFE, and installed Taylor in his place. In addition, they passed a measure requiring the corporation to open a savings account with a Jonesboro bank, and another measure authorizing the issuance of additional corporate stock, which could not be transferred to a non-shareholder. They also passed a measure allowing shareholders to purchase these shares up to their pro-rata ownership percentages, but the shares could only by purchased with cash, not with debt owed by the corporation. Finally, they intended to move the corporation's checkbook to Jonesboro, and they wanted to have the mail sent there as well, but Hinkle adjourned the meeting before these two measures could be voted upon. Ark.Code Ann. § 4-27-809 provides, in pertinent part: (a) The circuit court of the county where a corporation's principal office (or, if none in this state, its registered office) is located may remove a director of the corporation from office in a proceeding commenced either by the corporation or by its shareholder holding at least ten percent (10%) of the outstanding shares of any class if the court finds that (1) the director engaged in fraudulent or dishonest conduct, or gross abuse of authority or discretion, with respect to the corporation and (2) removal is in the best interest of the corporation. The issue is whether Taylor's and Hufstedler's actions constituted a gross abuse of discretion. It is well established that the first rule in considering the meaning and effect of a statute is to construe it just as it reads, giving the words their ordinary and usually accepted meaning in the common language. When a statute is clear, we will not search for legislative intent; rather, that intent must be gathered from the plain meaning of the language used. Cave City Nursing Home, Inc. v. Arkansas Department of Human Services, 351 Ark. 13, 89 S.W.3d 884 (2002). Taylor and Hufstedler argue that all of their actions at the January 2000 board/shareholders meeting were authorized by corporate documents. The stock purchase agreement, item 19 on Taylor's checklist for the January 2000 meeting, provided: Motion that each shareholder buy Five (5) or up to their pro rata basis (as included in Article Tenth of the Articles of Incorporation of the corporation) of shares of common stock of BEIIFE, Inc. These shares can be purchased for cash and not for any moneys owed to the shareholder by BEIIFE, Inc. Also, all moneys from this stock sale must be placed in the above savings account at Mid-South Bank in Jonesboro, AR. This offer expires in thirty (30) days from today. In support of his argument that this move was authorized, Taylor points to article 4 of the articles of incorporation, which authorizes the corporation to issue 1,000 shares of stock. At the time the measure had passed, the corporation had only issued 100 shares of stock. Article 5 of the articles of incorporation allows the corporation to select a depository bank, and the appellants argue that they were within their rights to pick a bank in Jonesboro, rather than one close to the franchise. Next, the appellants point to Article 10 of the articles of incorporation, giving each shareholder a first right to purchase shares up to their pro rata percentage of ownership, a right which expires after thirty days. Hinkle counters by saying that these measures violate the franchise agreement, which cannot be changed without Honda's prior written approval. The franchise agreement provides, in pertinent part: B. Dealer covenants and agrees that this agreement is personal to dealer, to the dealer owner, and to the dealer manager, and American Honda has entered into this agreement based on their particular qualifications and attributes and a continued ownership or participation dealership operations. The parties agree that the ability of the dealer to perform this agreement itself are both conditioned upon the continued active involvement in the ownership of dealer by the following person(s) in the percentage(s) shown: Percentage of Name Title Ownership ----------------------------------------------- Michael Hinkle President 51% Steven Hufstedler Shareholder 25% Alan Taylor Shareholder 24% C. Dealer represents and American Honda enters into this agreement in reliance on the representation that Michael Hinkle exercises the functions of dealer manager and is in complete charge of the dealership operations with authority to make all decisions on behalf of the dealer with respect to dealership operations. Dealer agrees that there will be no change in dealership manager without prior written approval of American Honda. Such approval shall not be unreasonably withheld. First, Hinkle asserts that the stock purchase measure would have forced him to have to purchase his pro rata percentage of stock or else he would no longer have maintained his 51% ownership interest. As stated above, per the franchise agreement, Hinkle is to remain 51% owner unless Honda gives prior approval to a change in the ownership percentages. In the case at bar, Honda gave no such prior approval. Next, Hinkle points to the intended use of the money from the stock purchase agreement to highlight the alleged misconduct. Items 13 through 21 of the Taylor checklist at the board meeting say: that the stock will be sold; that a used inventory, floor planning and retail financing loan will be secured from Mid-South Bank; and that the stock sale proceeds will be placed in that bank. Taylor's testimony at trial showed that the sale proceeds would be used to establish a deposit relationship with Mid-South Bank. The corporation would then borrow $100,000 from the bank. The loan proceeds would then be put back into the business, and then distributed out to the shareholders in order to give Taylor and Hufstedler some cash out of the corporation. Hinkle contends Taylor's and Hufstedler's purpose in voting for the measure was to generate some cash for themselves, i.e. to benefit their own self-interest, rather than the corporation's best interest. The trial court found that directors of any corporation owe to the corporation certain duties. First, a director owes the duty to act within the bounds of his authority. Second, a director must exercise a standard of care which an ordinary prudent director of a similar corporation would exercise under similar circumstances. Finally, a director may not pursue his own interests in a manner which is injurious to the corporation. While the trial court's finding that the appellants had moved the mail and the checkbook from Forrest City to Jonesboro was in error, the appellants cannot show that they were prejudiced by that finding. We will not reverse absent a showing of prejudice. Peters v. Pierce, 314 Ark. 8, 858 S.W.2d 680 (1993). At trial, although he conceded that he could not own the Forrest City dealership, Taylor admitted that if he could wrest control from Hinkle, that would be a good thing for him. He also testified that he intended to take away all record-keeping or accounting-type functions, such as sales, expenses, profits, and that kind of thing, from Hinkle to his dealership in Jonesboro. Taylor admitted that he intended to take the checkbook to Jonesboro, and that he intended to shut down the mail and have it sent to Jonesboro as well. Taylor said that he did not think a person needed a checkbook to run a six or seven million dollar business. The appellants claim that their subjective desire to do several other things that would obviously hurt the corporation, such as moving the books, mail, and checkbook two counties away and keeping it from the person who was supposed to be running the corporation and the day-to-day operations, does not rise to the level of a gross abuse of discretion. We disagree. The appellants' intent to do those acts, coupled with the actions that appellants did, in fact, carry out, more than constitute a gross abuse of discretion. In its letter opinion, dated August 4, 2003, the trial court expressly ruled that: Here, the Defendant, Taylor was quite candid in admitting that his actions were taken as a result of Plaintiff Hinkle's insistence of having 51% of the corporation. The actions of the Defendants, described above, were retaliatory in nature. After acquisition of the Honda agreement the Defendants then became obstructive instead of supportive of the corporation. The court finds that these directors' actions were contrary to the best interest of the corporation and that the path the Defendants decided to take jeopardized the corporation. The court finds that the actions of these Defendants do constitute a gross abuse of their discretion and authority. Pursuant to A.C.A. 4-27-807 these Defendants are removed from the Board of Directors for a period of two (2) years. Taylor and Hufstedler's blatant violations of the franchise agreement, coupled with their clear intentions to commit other actions designed to wrest control away from Hinkle, are clearly injurious to the corporation, and such actions do, indeed, constitute a gross abuse of discretion. Based on the evidence presented in this particular case, we cannot say that the trial court abused its discretion in removing the appellants from the board of directors. Affirmed. THORNTON, J., not participating.