Opinion ID: 857420
Heading Depth: 2
Heading Rank: 4

Heading: summary judgment was proper because

Text: THE 2009 RATIFICATION BY THE BOARD MOOTED THE NEED FOR A FAIRNESS HEARING ¶31 McLaughlin argues that summary judgment was improper. Specifically, he argues that the post-remand actions by the Board and shareholders could not be effective as a matter of law because there remained disputed issues of fact as to the adequacy and fairness of the information provided to the disinterested director. We agree with Cookietree and hold that the 2009 Ratification by the Board of Directors resolved any conflict of interest 9 MCLAUGHLIN v. SCHENK Opinion of the Court problem, rendering summary judgment appropriate. ¶32 Following our remand in 2009, Cookietree’s three directors, Greg Schenk, Harold Rosemann, and David Rudd, met to attempt to ratify the 2005 Waivers. “Prior to the meeting, David Rudd analyzed and reviewed documentation containing all of the material facts concerning the [s]tock [s]ale and the 2005 Waivers, including, but not limited to, the 2005 Waivers themselves, the 1991 Shareholders’ Agreement, Cookietree’s financial statements and other financial information, and the McLaughlin decision.” Schenk and Rosemann abstained from voting due to conflicts of interest. Rudd alone then voted to ratify the 2005 Waivers and to presently waive the stock transfer provision of the 1991 Shareholder Agreement. ¶33 Cookietree and Schenk are correct that such a vote is allowable under sections 850–853 of the Corporation Act, which specifies the requirement for quorums and directors’ actions. These sections of the Corporation Act expressly contemplate that there may be situations where corporate directors have conflicts of interest and specifies mechanisms for handling such circumstances.1 ¶34 Under section 851, “[a] director’s conflicting interest transaction may not be enjoined, be set aside, or give rise to an award of damages or other sanctions . . . solely because the director . . . has an interest in the transaction, if: directors’ action respecting the transaction was at any time taken in compliance with [s]ection 16-10a-852.” UTAH CODE § 16-10a-851(2)(a). Under section 852, “a quorum for purposes of action that complies with this section” is a “majority of the qualified directors on the board of directors,” and directors’ action is taken if there is the affirmative vote of the majority of those qualified directors. Id. § 16-10a-852(1)- (3). Section 850 defines a “qualified director” as any director who does not have either a conflicting interest respecting the transaction, or a familial, financial, professional, or employment relationship with a second director who does have a conflicting interest respecting the transaction, which relationship would, in the circumstances, reasonably be expected 1 In McLaughlin I, we held that, as a matter of law, the provisions in the Corporation Act addressing conflicting interest transactions also extend to nontransaction conflicts of interest, like the one at issue here. McLaughlin v. Schenk, 2009 UT 64, ¶ 37, 220 P.3d 146. 10 Cite as: 2013 UT 20 Opinion of the Court to exert an influence on the first director’s judgment when voting on the transaction. Id. § 16-10a-850(3). ¶35 In this case, the parties agree that the only qualified director on Cookietree’s Board was Rudd. Thus, Schenk and Cookietree assert that Rudd’s vote to waive the stock transfer provisions was sufficient. ¶36 In response, McLaughlin argues that since three board members were present at the meeting and two were disqualified, it was impossible to have a majority because “[o]ne of three is not a majority.” While McLaughlin is certainly correct that one of three is not a majority, the Corporation Act does not require a majority vote of all directors present. It requires only a quorum, which it specifically defines as a majority vote of all “qualified directors.” Id. § 1610a-852(3). ¶37 McLaughlin makes much of the fact that Cookietree’s Bylaws state that “the act of the majority of the directors present . . . shall . . . be the act of the Board.” He argues that because only Rudd voted to ratify the 2005 Waiver when there were three directors present, there was no majority. But this provision of the Bylaws simply restates the more general provision of the Corporation Act relating to quorums and voting. See Id. § 16-10a-824(3) (stating that “the affirmative vote of a majority of directors present is the act of the board of directors.”) Thus, it is not this section, but rather section 852, which provides the more specific requirements related to conflicted situations. Thus, when dealing with conflicts of interest, it is section 852 that fills in any potential gaps in a corporation’s articles and bylaws. ¶38 Under the circumstances presented here, the only qualified director was Rudd. As the sole disinterested director, Rudd’s vote in favor of the 2009 Ratification constituted a majority of the “qualified” directors entitled to vote. In fact, section 852 clearly provides that “[d]irectors’ action that otherwise complies with this section is not affected by the presence or vote of a director who is not a qualified director.” Id. § 16-10a-852(3). Here, the only qualified board member ratified the transfers. And under section 851(2) of the Utah Code, once director action is taken to ratify a conflicted transaction or “nontransaction,” it “may not be enjoined, be set aside, or give rise to an award of damages or other sanctions” as a matter of law. 11 MCLAUGHLIN v. SCHENK Opinion of the Court ¶39 McLaughlin makes much of the “adequacy of the disclosures made to” Rudd. He argues that Mr. Rudd did not know and still does not know material pieces of information which would allow him to evaluate the circumstances and fairness of the disputed stock transfer. For example, he does not know what consideration was paid for the disputed shares in 1999 or whether the provisions of the Shareholders Agreement setting forth how shares were to be valued were followed in 1999. He does not know how many shares Sam and Kim McLaughlin . . . would have been able to acquire in 1999, had they been given the opportunity or the value of those shares in 2010 compared to 1999. . . . He has never talked to Anna Schenk, the seller of 545,200 shares. He has never talked to Sam McLaughlin, the shareholder who challenged the transaction. He has never talked to Greg Schenk, the buyer, about the transaction. . . . There was no counter-opinion contained in the Disclosure Statement [provided to shareholders]. The document was drafted by litigation counsel and therefore subject to a reasonable inference that it was advocacy, not information. The Disclosure Statement was single spaced, rambling[,] and confusing to read. ¶40 McLaughlin’s alleged factual disputes about Rudd’s knowledge regarding the stock transfers are legally irrelevant. There is nothing in the Corporation Act or the Bylaws requiring that qualified directors have a perfect knowledge as to all matters on which they cast a vote. The only requirement is that they be disinterested and that the conflicted director disclose “the existence and nature of the conflicting interest . . . and all facts known to the director respecting the subject matter of the transaction that an ordinarily prudent person would reasonably believe to be material to a judgment about whether or not to proceed with the transaction.” Id. §§ 16-10a-850(4), 16-10a-852(3). And McLaughlin does not even attempt to argue that Rudd was conflicted. ¶41 The 2009 Ratification resolved any conflict of interest problem with the transfer of shares to Schenk. Summary judgment was therefore proper. 12 Cite as: 2013 UT 20 Opinion of the Court