Opinion ID: 563465
Heading Depth: 2
Heading Rank: 1

Heading: Smythe's Shareholder Status

Text: 7 Count III of Smythe's counterclaim stated a shareholder's derivative action alleging Green and the other plaintiffs had wasted corporate assets and usurped corporate opportunities. Under Kentucky law, Smythe must have been a shareholder in Ironsides, Inc. in order to bring such a claim. K.R.S. Sec. 271B.7-400(1). Accordingly, summary judgment would be proper if a rational trier of fact could not conclude that Smythe was a shareholder based upon the record as a whole. See Celotex Corp., 477 U.S. at 322-23; Matsushita Elec. Indus. Co., 475 U.S. at 587. 8 Smythe offers various documents that he maintains support his claim of stock ownership. These items include personal discussion notes and correspondence created by some of the plaintiffs during the formation and early operation of Ironsides, Inc. Most of these material are handwritten, cryptic, and inconclusive. Smythe also offers certain other documents that he prepared during the course of Ironsides' creation. Smythe suggests that these documents, taken together, raise a genuine factual question concerning his stock ownership. 9 Smythe's principal evidence in support of his alleged stock ownership is a document he prepared that purports to summarize the discussions that transpired between Smythe and the Plaintiffs at a meeting in Virginia Beach, Virginia on July 12-13, 1980. This summary recites an alleged agreement between Smythe and the Plaintiffs concerning the issuance of penny stock to management. 2 Smythe would receive 2,608 shares in Ironsides for a purchase price of $26.08 conditioned upon management's presentation to the capital investors (the Plaintiffs) of a management plan guaranteeing the safe return of the investors' initial capital--approximately $468,000. Once Smythe had paid the stipulated price, the shares were to be escrowed in the Company's safe deposit box together with signed stock powers giving the Executive Committee of the Company the right to transfer these shares if the officers of the company have not presented the investors with a plan.... Plaintiff Green disputes that the parties ever agreed to this arrangement; nevertheless, for purposes of summary judgment we may assume such an agreement existed. 10 Smythe contends that he paid the $26.08 purchase and was, therefore, a stockholder notwithstanding the escrowed nature of the shares. However, a sale of stock is not completed where the shares are placed in escrow and the condition necessary for completion of the sale is not satisfied. See, e.g., Binns v. United States, 385 F.2d 159 (6th Cir.1967) (Order) (shares placed in escrow until full consideration paid); see also Fletcher Cyc. Corp. Sec. 5567 (perm. ed.) (Title to stock subject to an escrow agreement does not pass until the conditions are performed, or, perhaps, until delivery of the stock to the vendee, and does not relate back to the time when the stock was deposited). The face of the meeting summary clearly indicates the parties intended consideration for management's purchase of shares to consist of the plan to return the Plaintiffs' initial capital investment as well as the payment of the one cent per share price. The record reveals that Smythe was legally dismissed before he presented the required plan. Thus, because the precondition to completion of the sale failed, Smythe's purchase was never completed. Under these circumstances, Smythe could not be a shareholder based on the agreement in the Virginia meeting summary. 11 At oral argument, Smythe argued that no evidence disclosed the alleged shares were actually placed in escrow. This valid observation does not go far enough: in point of fact, the scant record before us offers little evidence from which a jury could conclude that Smythe's alleged shares were ever even issued. First, the record contains stock certificates, albeit unsigned, bearing the names of the Plaintiffs; however, the record reveals no such certificates bearing Smythe's name, despite the undisputed fact that Smythe himself prepared the certificates. Second, Smythe, under penalty of perjury, signed and filed a Subchapter S Election form with the Internal Revenue Service (IRS) that purported to list all of the shareholders in Ironsides, Inc. Smythe did not identify himself as a shareholder in the company on this form. Finally, Smythe states in his deposition that his alleged shares were never issued and did not exist. In the face of this and other persuasive evidence contradicting his shareholder status, Smythe offers only his payment of $26.08 to support the claim that he was a shareholder. This showing does not suffice to raise a genuine issue of material fact for trial. See McAdoo v. Dallas Corp., No. 90-3690, slip op. at 4 (May 7, 1991) ([S]ummary judgment may be granted where the evidence is merely colorable or is not significantly probative.).