Opinion ID: 1807665
Heading Depth: 1
Heading Rank: 1

Heading: Claims Arising From Pre-July 21, 1986 Events

Text: In dismissing the claims of appellant which alleged that certain respondents had, before July 21, 1986, paid themselves excessive compensation, that respondents Skoglund, Lynn, Steele and Kaplan had dissipated corporate assets, and claims arising from Lynn's 1984 employment contract, the trial court ruled that PJ lacked standing to assert those claims. Neither in its amended complaint, in its brief, nor in oral argument did appellant identify any direct injury to it as a shareholder in Vikings II as the result of any alleged acts of misconduct on the part of respondents. The prayer for relief in the amended complaint in paragraphs (e), (f), (g), and (h), itself, seemingly acknowledges that any claims for improper diversion of assets belong to the corporation. [7] Since the allegations of the amended complaint addressing those issues fail to allege any direct injury to appellant, as shareholders, but rather only to Vikings II, the corporation, itself, and because appellant seeks relief in favor of Vikings II rather than itself, the trial court concluded the action in reality was a shareholder's derivative action, and, accordingly, was subject to the procedural requirements of Minn.R.Civ.P. 23.06 governing such actions. [8] That rule precludes the maintenance of a shareholder's derivative action unless the plaintiff alleges it was a shareholder at the time the acts occurred of which it complains and has made a demand on the board. The parties concede PJ became a shareholder on July 21, 1986. Thus, the complaint did not, nor could it, contain an allegation that PJ was a shareholder at the time when the acts alleged to have resulted in diversion and dissipation of corporate assets occurred prior to that date. Hence, if Rule 23.06 is applicable, the trial court correctly held that appellant lacked standing to assert claims for alleged wrongful acts that occurred before it became a shareholder. Either by statute or court rule, virtually every state requires contemporaneous ownership and demand on board as preconditions to maintenance of a shareholder's derivative suit. [9] Our first inquiry, then, is whether the trial court erred in concluding that the appellant's amended complaint, notwithstanding its allegation of claims under various subsections of Minn.Stat. ch. 302A, sought relief only for Vikings II, and, therefore, was a derivative shareholder's action. Resolution of the issue involves an analysis of the complaint by consideration of the shareholder's claimed injury in conjunction with the remedies requested. When we apply that analysis, we conclude that the trial court correctly determined that those claims were derivative and, therefore, appellant had no standing to bring suit on those claims which occurred prior to July 21, 1986, when it became a shareholder. See, e.g., Miller v. Miller, 301 Minn. 207, 219-220, 222 N.W.2d 71, 77-78 (1974); Westgore v. Grimm, 318 N.W.2d 56, 58 (Minn.1982); Seitz v. Michel, 148 Minn. 80, 87, 181 N.W. 102, 105 (1921). [10] Appellant seeks to avoid that consequence by asserting that certain provisions in Minn.Stat. ch. 302A permit it to maintain these claims as a direct action for equitable relief even though the acts of the respondent officers and directors of which it complains occurred before appellant became a shareholder. Because its amended complaint alleges violations of Minn.Stat. § 302A.255 and .751 (1988) (provisions generally codifying duties and proscribing certain conduct by officers and directors), it argues that the court may grant equitable relief to it in a direct action under Minn.Stat. § 302A.751 even though, admittedly, it was not a shareholder at the time the alleged acts resulting in corporate waste took place or the alleged breaches of director and officer fiduciary duties occurred. [11] In support of its argument, appellant cites a portion of a law review article entitled A Statutory Elixir for the Oppression Malady, 36 Mercer L.Rev. 627 (1985) authored by Professor Joseph E. Olson who was draftsman of some of the 1983 amendments to Minnesota's Business Corporation Act. In that article Professor Olson states An action under section 751 is an individual action by the shareholder to gain relief in his own right, it is not a derivative right. Id. 635-36. (Emphasis supplied). In our view appellant's attempt to stretch that statement, which, in context, seemed to relate to a shareholder's oppression suit, to cover a true derivative action where the relief sought is on behalf of the corporation itself as well as other shareholders, is inapt. While Minn.Stat. § 302A.751, subd. 1 (1988) does expand the options of shareholders to bring actions seeking personal damages, as distinguished from derivative damages, the equitable remedy expanded does not replace the traditional derivative action. For example, in Masinter v. WEBCO Co., 164 W.Va. 241, 255, 262 S.E.2d 433, 442 (1980), the case Professor Olson cites as authority for the quote from his article, the West Virginia Court of Appeals clearly delineated the distinction between an equitable oppressive suit under a similar statute and a shareholder's derivative suit, and, in doing so, reaffirmed its rule that courts should utilize the traditional analysis to determine whether the suit is derivative. Additionally, we observe that nowhere in Minn.Stat. ch. 302A nor in Professor Olson's law review article does one find any intimation that a shareholder, who acquires shares after the commission of the acts alleged to have resulted in improper diversion of corporate assets, may maintain a direct equitable action in its own name when seeking relief similar to that sought by appellant in this case. Nor is that surprising. It has long been the law that a shareholder who purchases stock in a corporation is prevented from maintaining a derivative suit if the alleged wrongs forming the basis of the suit occurred before the shareholder's acquisition of its stock. See, e.g., Bateson v. Magna Oil Corp., 414 F.2d 128, 130 (5th Cir.1969), cert. denied sub nom Magna Oil Corp. v. Bateson, 397 U.S. 911, 90 S.Ct. 909, 25 L.Ed.2d 91 (1970). Rule 23.06 likewise makes that clear. No reason is readily ascertainable why in 1983 when it enacted Minn.Stat. ch. 302A, the legislature had any intention to provide personal equitable relief to one, who, at the time of the alleged misfeasance or malfeasance by officers or directors, owned no shares. Indeed, it seems to us, the contrary conclusion  that the plaintiff must have been a shareholder, as defined by Minn.Stat. § 302A.011, subd. 29 (1988), at the time of the alleged wrongs  would be the proper result. [12] Commentators writing on the statute seem to have so assumed. See, e.g., Olson, A Statutory Elixir for the Oppression Malady, 36 Mercer L.Rev. 627 (1985); Note, The Limited Liability of Corporation Directors under Minnesota Statute § 302A.251, subdivision 4 (1987), 11 Hamline L.Rev. 371 (1988). But even if the court considers some of appellant's claims to be of a derivative nature and, therefore, subject to the contemporaneous requirement of Rule 23.06, PJ argues, at least those claims based on Lynn's employment contract and the directors' alleged diversion of corporate funds, although occurring before July 1, 1986, were erroneously dismissed by the trial court because they are continuing wrongs. It relies upon an exception to the general requirement of contemporaneous ownership, which provides, that in some limited circumstances, a shareholder's derivative suit may be maintained even though the alleged wrong occurred before the claimant's stock acquisition provided the alleged wrongful conduct spans the plaintiffs ownership, or if new elements in a pattern of wrongful conduct occur after acquisition. Bateson, 414 F.2d at 130. However, the cases make clear that the mere fact that some of the effects of the alleged acts of wrongdoing continue beyond the time of occurrence is insufficient to trigger the application of the exception. For example, in a case factually strikingly similar to the instant case, Schreiber v. Bryan, 396 A.2d 512 (Del.Ch.1978), the plaintiff attempted to come within the exception by alleging that certain amendments had been made to a managerial contract, which originally had been entered into before plaintiff acquired his shares, after the plaintiff had purchased his stock. In rejecting that attempt, the Delaware court held that the amendment, which reconfirmed the earlier agreement, was insufficient to convert the original consummated transaction into a continuing wrong. Id. at 517. As was true in Schreiber, in this case all of the terms of Lynn's employment contract and all of the facts surrounding the alleged diversion of corporate assets were known by appellant before it acquired the Winter shares; therefore, they do not fall within the continuing wrong exception. Admittedly, the resulting contracts, then in existence, may presently have unexpired terms, but, as noted by the Delaware court, even though in one sense the results of the alleged wrongful conduct may be said to constitute a continuing wrong to the corporation until remedied, that residual impact is insufficient to afford standing to maintain a derivative action to one who acquired corporate shares after the alleged wrongful conduct under the continuing wrong exception. Id. at 517. In the instant case, the alleged misconduct of respondents took place long before PJ became a shareholder, and the claimed misconduct was known to it before it closed the transaction purchasing the Winter shares. [13] In those circumstances, application of the analysis employed by the Delaware court in Schreiber, and by the trial court in the instant case, in our opinion, best serves the underlying rationale of the law regulating the maintenance of shareholder derivative actions  the prevention of purchase of corporate shares for litigious motives. Schreiber, 396 A.2d at 516. For that reason, we affirm the trial court's conclusion that these facts do not bring appellant's claims within the continuing wrong exception, and, accordingly, likewise affirm its holding that PJ lacked standing to assert claims based upon events which transpired prior to July 21, 1986.