Opinion ID: 2180448
Heading Depth: 1
Heading Rank: 6

Heading: Corporate Counsel

Text: Barry placed this issue squarely in this case when he stated at the 22 September 2003 hearing that he took great issue with the fact that Shale Stiller is general counsel of Custom, and if the court can construe that as a deadlock issue, we will concede that issue. Although Barry presented the issue of the alleged director deadlock regarding the selection of corporate counsel in his petition for certiorari, inexplicably, he did not dedicate any portion of his petitioner's brief to that issue. Thus, we are left to presume that, if the distribution of dividends was a discretionary act and not a matter essential to the existence of the corporation (and of greater importance than the appointment of general counsel), the appointment of general counsel, where such an appointment was also a discretionary act of the board of directors, was not a matter essential to the existence of the corporation. We turn now, with this in mind, to Barry's analysis of Wollman and In re Admiral Rubber Corporation as it may bear on this issue. In Wollman, the trial court ordered dissolution of Chevreau, Ltd., a corporation whose stock was held, 50% each, by two distinct parties, the Nierenberg sisters and the Littmans. Wollman, 316 N.Y.S.2d at 527. The Littman faction had sued the Louis Nierenberg Corporation (also owned by the Nierenberg sisters) and the Nierenberg sisters for seeking to lure away Chevreau's customers. In response, the Nierenbergs petitioned for dissolution of Chevreau and alleged that the corporate management is at such odds among themselves that effective management is impossible. Rather than grant the Nierenbergs' dissolution request and leave them the ultimate victor in the Littmans' lawsuit, the Appellate Division of the Supreme Court reversed the order and remanded for further findings, stating that [i]rreconciable differences even among an evenly divided board of directors do not in all cases mandate dissolution. Id. The one page opinion stated that the court did not agree that the division made effective management impossible, but failed to indicate whether the petition for dissolution was brought under § 1104(a) of the New York Business Corporation Law or a common law remedy available under the equity powers of the courts of New York. Admiral Rubber decided that involuntary dissolution was inappropriate and should be granted when competing interests are so discordant as to prevent efficient management and the object of corporate existence unobtainable. Admiral, 172 N.Y.S.2d at 954. The manufacturing corporation in Admiral ceased its manufacturing functions and became no more than a holding company, although the holding company was solvent and the corporate objectives, assets, functions, and creditors... were not in jeopardy. Id. One factor in the decision was a section of the New York law, § 117 of the General Corporation Law, that dissolution must be beneficial to the stockholders. [23] Forman argues that the deadlock over the selection of corporate counsel was an insufficient ground upon which to justify involuntary dissolution. Custom has no purpose other than to manage marketable securities obtained with the proceeds from the sale of Custom Savings, which management Custom outsources to Vanguard based on historically unanimous director approval. He notes that the appointment and function of corporate counsel is permissive in Custom's by-laws and, until the current litigation, Custom engaged in no litigation as plaintiff or defendant. Michael argues that § 3-413(a)(1) does not require a finding of deadlock but merely a division, arguably a lesser standard. A division does not require a court to find irreparable harm to the corporation (similar to the Model Act). A division also would not require a finding that the conflict impacts or otherwise materially affects the daily operation of the corporation. Michael further argues that even if deadlock were required, the Maryland statute grants the trial court significant discretion to consider the fairness to all shareholders in an involuntary dissolution. Such a provision explicitly appears in the New York Business Corporation Law, § 1111, he points out, and, because the Maryland General Assembly relied upon the Commission Report which probably relied upon the New York statute in crafting its involuntary dissolution statute, should be engrafted upon our interpretation of § 3-413(a)(1). Michael links the conflict over corporate counsel to the brothers' inability to access the income from, and / or the corpus of, the proceeds of the sale of their former business, Custom Savings, without the distribution of dividends. Michael reasons that Barry's obstruction prevented them from reaching an agreement for the distribution of dividends. Thus, dissolution and distribution of the net assets of Custom would benefit the shareholders by delivering the proceeds from the sale of Custom Savings to its shareholders. We reiterate that § 3-413(a)(1) allows a shareholder to petition for involuntary dissolution when the directors are so divided respecting the management of the corporation's affairs that the votes required for action by the board cannot be obtained. In addition to a requirement of a present conflict, three other prerequisites are apparent from the statutory language. First, a formal vote is not necessary, although preferred, if it is obvious from the conduct of the directors that the vote required for action cannot be obtained. Second, the directors must be more than merely divided, otherwise the use of the word so becomes mere surplusage. Third, the division among the directors must go towards the management of the corporation's affairs, which is otherwise undefined. We hold that, in order to satisfy the meaning of so divided regarding the management of the corporation's affairs, the directors must be in deadlock, not mere division. We define a deadlocked corporation under § 3-413(a)(1) in familiar terms  one which, because of decision or indecision of the directors that cannot be remedied by the shareholders, the corporation cannot perform its corporate powers. See Murray v. Requardt, 180 Md. 245, 253, 23 A.2d 697, 700 (1942). [24] This modified- Murray standard addresses the issue of deadlock in a manner contemplated by § 3-413(a)(1) where the directors, and not the shareholders, are the modality in deadlock. Mere division between the directors is an insufficient basis upon which to order dissolution. It is clear that originally § 79A was enacted to craft a statutory remedy for divided corporations to permit a court to dissolve a corporation only in those instances where such a dissolution did not run contrary to the established public policy of permanence of the corporate entity. It is also evident that the statute sought to prevent courts from arbitrat[ing] personal disputes about policy or management of the business enterprise. Commission, supra, at 73. Prior to the enactment of § 79A, involuntary dissolution or receivership could be obtained through either repeated shareholder deadlock over the election of directors or insolvency. Md.Code (1957, 1966 Repl. Vol.) Art. 23 §§ 52(e), 80. A division standard incorrectly would permit a shareholder to petition for involuntary dissolution over a mere dissension among the board of directors and would embolden shareholders to seek involuntary dissolution over personal disputes among the directors, shareholders, or both. James J. Hanks, Maryland Corporation Law, § 11.7[a] (1992, Supp.1997) (Intra-board disputes or differences of opinion are not alone sufficient to justify involuntary dissolution on the ground of deadlock.) (citing Du Puy v. Transportation & Terminal Co., 82 Md. 408, 426, 33 A. 889, 890 (1896) (holding that court will not exercise its equity powers in a shareholder petition for receivership for differences or disputes between management)); see Hornstein, supra, § 820 at 363 (observing that dissension usually reaches the stage of deadlock when both the directors and the shareholders are evenly divided... and neither side being authorized or having the majority vote to impose its views upon the other). When the General Assembly enacted § 79A, it was obvious from the language of the Commission report that the intent of the Act was not to supplant the entire body of Maryland corporate law jurisprudence, albeit sparse at the time, with a mere dissension standard for dissolution. Rather, § 79A was designed to address issues of deadlock. When dissension is serious enough to reach the stage of deadlock, then a court has the discretion to order dissolution based on an appropriate evidentiary showing pursuant to § 3-413(a)(1). See Hornstein, supra, at 363. Michael also is incorrect to read into § 3-413(a)(1) a requirement that the trial judge consider the benefit to all shareholders, as found in the New York Business Corporation Law at the time § 79A was enacted. Such a standard, were it appropriate, would have been adopted expressly by the General Assembly. The absence of any language similar to § 1111 of the New York Business Corporation Law in the Maryland General Corporate Law reflects a rejection of the benefit to the shareholders standard. Only one term remains undefined in our statute that goes directly to the question of the management of the corporation's affairs  corporate powers. To be consistent with the intent of the statute, corporate powers cannot mean any and all powers of the corporation. Such an understanding would result in the non-sensical fostering of involuntary dissolution petitions in the case of trivial dissensions over the use of corporate powers, or even a dispute about the day-to-day operations of the corporation, an issue best resolved by the corporate officers, not the directors (which, in this case, would involve the same people). Useful factors to determine what exactly a corporate power envisioned by the statute include: (a) whether the corporate function(s) have ceased; (b) the power in dispute is expressed as a discretionary or mandatory power in the corporation's Articles of Incorporation, by-laws, or other corporate governing documents; (c) the role of that power in achieving the corporation's primary function(s); and, (d) whether the corporation has exercised, as a matter of practice, that power routinely in its operations. See Murray, 180 Md. at 253, 23 A.2d at 700; Admiral Rubber, 172 N.Y.S.2d at 954 (holding that dissolution should be granted only when the efficient management of the corporation is at risk and the object of corporate existence unobtainable.). Evaluating the dispute over corporate counsel for Custom in light of the foregoing, we conclude that this dispute, on this record, is insufficient to justify an order of dissolution. It is clear from this record that the issue of corporate counsel had little impact, if any, on Custom's transcendent corporate function, managing the investment securities obtained as proceeds from the sale of Custom Savings. The directors agreed to the selection of a management/investment advisor and the allocation of assets. They conducted a teleconference with the advisor during these proceedings, even while Barry obstinately refused to recognize Shale Stiller as Custom's corporate counsel. The governing documents for Custom show that the officers and directors have a duty to consult with counsel only if one has been appointed. This duty naturally is dependent on there being an appointed counsel. In fact, the by-laws provide that the board of directors may appoint counsel in its discretion. As Forman points out, there has been no occasion since Custom's inception to sue or defend itself against suit until the present dispute. Although corporate counsel in the abstract has greater value then simply as a litigation facilitator, Forman's well-taken point is that Custom's need for legal advice would, and did, not impact necessarily its ability to fulfill its main corporate function of managing investment securities. Even though the board of directors of Custom may have been divided as to the choice of corporate counsel, that division does not rise to the level of deadlock required by § 3-413(a)(1). The trial court did not have the discretion contemplated by the statute to order dissolution for that reason.