Opinion ID: 1238867
Heading Depth: 3
Heading Rank: 3

Heading: The Superior Court Was Correct to Permit the Plaintiffs to Proceed with a Direct Action

Text: If a direct action were not permitted in this case, the possible defendants in a derivative action would be (1) the shareholders who received payments under the financial security plan, and (2) the corporation's officers and directors. For the following reasons, it is unlikely that a derivative suit against either or both of these groups would be an adequate remedy for the plaintiffs. First, the corporation may not be entitled to any damages from the shareholders who received payments under the financial security plan. Under AS 10.06.378, liability is imposed on shareholders who receive unlawful dividends only when they have accepted payments knowing that the distribution was in violation of certain legal limits. It is unlikely that the beneficiaries of the financial security plan knew that the payments violated the law. This suggests that the beneficiaries of the financial security plan would not be liable to the corporation. Second, it is unlikely that any damages collected from the responsible directors and officers would approximate the sum of payments made under the plan. [4]
Courts generally have wide discretion in interpreting whether a complaint states a derivative or primary claim. Charles R.P. Keating & Jim Perkowitz-Solheim, 12B Fletcher Cyclopedia of the Law of Private Corporations § 5911 (perm. ed. rev.vol. 1993) (hereinafter Fletcher ). Indeed, as the United States Supreme Court has recognized, the same allegations of fact in a complaint may support either a derivative or an individual cause of action. See J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) (stating with regard to claim that proxy was false and misleading, we believe that a right of action exists as to both derivative and direct causes.). It is possible to characterize the allegations in this case as stating a derivative claim. Courts have held that when a wrong has been done to the corporation, the shareholder's right to sue the directors or wrongdoers for redress is derivative and not primary. 13 Fletcher, supra, § 5928. And, in a metaphysical sense, the illegal payments in this case can be said to have harmed the corporation. There is also ample support for the proposition that these allegations state a direct claim against the corporation. Two points supporting this contention warrant emphasis. First: A plaintiff alleges a special injury and may maintain an individual action if the shareholder complains of an injury distinct from that suffered by other shareholders, or a wrong involving one of the shareholder's contractual rights as a shareholder. Thus, where there is no question that plaintiffs are claiming an injury that was not suffered by all shareholders, but only by minority shareholders, that action is properly classified as representative rather than derivative. 13 Fletcher, supra, § 5908. In this case, the plaintiffs do not allege that the corporation was harmed. Their claim is that the corporation by paying certain shareholders a discriminatory distribution harmed them. Another way of expressing this point is that the rule that a shareholder cannot sue for injuries to his corporation ... [does not apply when] the shareholder suffered an injury separate and distinct from that suffered by other shareholders. 13 Fletcher, supra, § 5911. In this case, the excluded shareholders clearly suffered an injury separate and distinct from other shareholders. The shareholders who received payments under the plan suffered no meaningful injury whatsoever. Although it seems anomalous to say that a shareholder who has received illegal payments has suffered an injury, it is true that there are cases in which courts have required a derivative suit where fiduciaries of a corporation who were also shareholders received illegal payments. [5] Such courts have reasoned that all the shareholders of the corporation  even the fiduciaries who received illegal payments  were harmed by the diminution in value of their shares and that the corporation therefore was injured. A holding permitting the plaintiffs here to proceed through a direct action would not be inconsistent with these cases: In all such decisions of which we are aware, the defendant shareholders were also fiduciaries of the corporation. This difference is significant because, as already suggested, a corporation can recover from fiduciaries who misappropriate corporate assets. It may not be able to recover from rank and file shareholders. Consequently, where the recipients of the misappropriated funds are fiduciaries, a derivative action will adequately compensate the plaintiffs; where the recipients of misappropriated funds are rank and file shareholders, a derivative action will not adequately compensate the plaintiffs. The second point supporting the contention that a direct action is appropriate here is that there are many reported cases concerning discriminatory distributions which proceeded as direct actions. See, e.g., Amalgamated Sugar Co. v. NL Industries, Inc., 644 F. Supp. 1229 (S.D.N.Y. 1986); Asarco, Inc. v. Holmes A. Court, 611 F. Supp. 468 (D.N.J. 1985); Jones v. H.F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal. Rptr. 592, 460 P.2d 464 (1969); Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505 (1975); Erdman v. Yolles, 62 Mich. App. 594, 233 N.W.2d 667 (1975); Stoddard v. Shetucket Foundry Co., 34 Conn. 542 (1868). Although such cases usually involve close corporations, our research has not revealed a single case in which (1) a publicly-held corporation made a discriminatory distribution to a group of its rank and file shareholders, (2) the shareholders attempted to proceed through a direct action, and (3) the court held that the plaintiffs had to proceed through a derivative action. Thus, on the facts at issue here, a court has sufficient discretion to permit this action to proceed as either a direct or a derivative suit. The crucial inquiry, therefore, is how the court should exercise its discretion. [6]