By its plain language, § 7-1.1-90.1 thus permits "a corporation, rather than be forced to
dissolve by a shareholder dissolution petition, [to] elect to buy out the shareholder’s stock." Charland v.
Country View Golf Club, Inc., 588 A.2d 609, 610 (R.I. 1991). However, fair value must be given for
those shares, and "if the fair value cannot be agreed upon, the court shall determine the value of such
shares as of the close of business on the day on which the petition for dissolution was filed." Id.
In the case at bar, we believe that the two motion hearing justices erred by failing to give
substantive consideration to Joyce’s pleadings under §§ 7.1.1-90 and 7-1.1-90.1. "Under Rhode
Island law, Rule 8 of the Superior Court Rules of Civil Procedure is a liberal-pleading rule." Bresnick v.
Baskin, 650 A.2d 915, 916 (R.I. 1994) (citing Haley v. Town of Lincoln, 611 A.2d 845, 848 (R.I.
1992)). "Although a plaintiff is not obligated to ‘set out the precise legal theory upon which his or her
claim is based,’ he or she must provide ‘the opposing party fair and adequate notice of the type of claim
being asserted.’ " Id. (quoting Haley, 611 A.2d at 848). "The policy behind these liberal pleading rules
is a simple one: cases in our system are not to be disposed of summarily on arcane or technical
grounds." Haley, 611 A.2d at 848.
We note that each count in Joyce’s amended complaint alleged conduct on the part of the cross
and counterclaim defendants that was "illegal, oppressive or fraudulent," and demanded relief pursuant
to §§ 7-1.1-90.1 and 7-1.1-90. While it is undeniable that these pleadings pursuant to §§ 7-1.1-90 and
7-1.1-90.1 could have been framed with more particularity, we believe that they provided the counter
and crossclaim defendants with more than sufficent notice of the type of claim that Joyce was asserting
against them in her complaint as well as the relief sought. Because the hearing justices failed to address
Joyce’s claims under §§ 7-1.1-90 and 7-1.1-90.1, summary judgment as to those counts was not
appropriate as a matter of law, and consequently must be considered reversible error.
Further, we are of the opinion that genuine issues of material fact do exist concerning whether
Joyce, as a minority shareholder, was oppressed by the actions of the other ECC shareholders pursuant
to both common law and statutory law. We note that the term "oppression" in § 7-1.1-90 has not yet
been specifically defined by this Court as it relates to close corporations. "Oppression," however, has
been defined by other courts to encompass that conduct which deviates from a heightened good faith
standard that exists in closely held corporations, a more stringent standard than found in their public
counterparts. See, e.g., Tomaino v. Concord Oil of Newport, Inc., 709 A.2d 1016, 1021 (R.I. 1998);
Donahue v. Rodd Electrotype Company of New England, Inc., 328 N.E.2d 505, 515 (Mass. 1975)
(oppressive conduct found where stockholders in a close corporation did not "discharge their
management and stockholder responsibilities in conformity with this strict good faith standard"); 19 Am.
Jur. 2d Corporations, § 2766 (1986) (oppression defined "as burdensome, harsh or wrongful conduct,
a visible departure from the standards of fair dealing or fair play * * *. It also constitutes a breach of the
fiduciary duty of good faith and fair dealing owed by the majority shareholders to the minority").
Alternatively, a more recent trend has been to define oppressive conduct as conduct "that
substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their
capital to the closed corporation." In re Rambusch, 533 N.Y.S.2d 423, 425 (N.Y.App.Div. 1988).
"This approach takes into account the fact that shareholders in close corporations may have
expectations that differ substantially from those of shareholders in public corporations." Muellenberg v.
Bikon Corp., 669 A.2d 1382, 1387 (N.J. 1996). The reasonable expectation analysis also recognizes
the fact sensitive nature of judicial inquiry into this area and the need to "examine the understanding of
the parties concerning their role in corporate affairs." Id.
Likewise, oppressive conduct can manifest itself in a range of actions designed to disadvantage
or freeze out a minority shareholder. The majority shareholders " ‘may refuse to declare dividends; they
may drain off the corporation’s earnings in the form of exorbitant salaries and bonuses to the majority
shareholder-officers and perhaps their relatives * * * [and] they may deprive minority shareholders of
corporate offices and of employment by the company.’ " Donahue, 328 N.E.2d at 513; Giannotti v.
Hamway, 387 S.E.2d 725, 731-32 (Va. 1990). Oppression also has been found to exist where the
majority shareholders have engaged in waste of the corporate assets, Mullenberg, 669 A.2d at 1388, or
where relevant financial information is withheld from shareholders. See generally 19 Am. Jur. 2d
Corporations, § 2767 (1986), for a check list of oppressive acts.
Whether in this case the existence of oppressive conduct is viewed under a heightened good
faith or reasonable expectation analysis, we conclude that both motion hearing justices erred by granting
summary judgment in favor of the counterclaim and crossclaim defendants on the issue of oppression
when genuine issues of material fact were particularly raised by Joyce’s submissions of affidavits and
pleadings. After reviewing the record before us, we believe a determination of whether Joyce, as a
minority shareholder, has been the victim of oppression appropriately can be made only at a hearing in
which she will have opportunity to fully develop and present the facts relevant to her claims.
In reaching that conclusion, we are mindful that, as discussed infra, oppression within a closely
held corporation can manifest itself as a series of acts or a pattern of conduct by majority shareholders
that can have the cumulative, overall effect of freezing out or depriving the minority shareholder of a
voice in the corporation, as well as manifesting itself in more distinct, identifiable actions. We note that
even in the absence of demonstrable oppression, we have upheld a Superior Court trial justice’s
determination that a forced buyout of a minority shareholder’s shares pursuant to § 7-1.1-90.1 was
warranted when there appeared no prospect for harmony between the shareholders and long-term
injunctive control of the actions of the majority shareholders was not practicable. A. Teixeira & Co., v.
Teixeira, 674 A.2d 407 (R.I. 1996). We believe that the hearing justices, however, "missed the forest
for the trees" in their inquiry, and instead focused exclusively on each count, to the exclusion of an
appropriate broader inquiry into an alleged pattern or series of acts by the ECC majority shareholders
that a fact-finder reasonably could conclude therefrom rose to the level of oppression toward Joyce as
alleged in her counterclaims and crossclaims. Further, we believe that the hearing justices
inappropriately made factual determinations concerning those various issues of fact raised by Joyce. We
emphasize that the correct judicial role in a summary judgment motion hearing is simply to identify
disputed material fact issues, and not to resolve them. Superior Boiler Works, Inc. v. R.J. Sanders, Inc.,
711 A.2d 628, 632 (R.I. 1998).
Viewing the evidence here in the light most favorable to Joyce, we are persuaded that Joyce has
demonstrated at least an arguable case that oppression against her and Jeffrey’s estate existed within
ECC, and has demonstrated that more than one reasonable inference could be drawn from the various
actions and pattern of conduct manifested by ECC and its officers and directors. Among Joyce’s
allegations that present several material disputed factual questions are (1) whether the ECC directors,
officers or stockholders acted coercively--violated Joyce’s reasonable expectations as a minority
shareholder or otherwise manifested bad faith in their dealings with her relating to the purchase
agreement, given the existence of the contradictory legal opinions by counsel for one of the trustees and
counsel for ECC about the scope of the purchase agreement and the trial justice’s specific finding and
the final judgment in the unappealed declaratory judgment portion of this litigation; (2) whether the
bonuses awarded were excessive, given the discrepancy of the bonus award between the minority
shareholder and the majority faction, given the IRS’s subsequent disallowance of part of that bonus
amount, and in light of ECC’s decision not to declare dividends to stockholders; (3) whether ECC
breached its fiduciary duty toward Joyce by terminating her employment in retaliation for her continued
participation in the litigation against ECC, and (4) whether the corporate records and books provided to
Joyce were adequate for proper purposes pursuant to § 7-1.1-46, given the evidence presented of their
apparent paucity and questionable accuracy. Further, we conclude that a material factual issue exists as
to the scope of the exculpatory clause in the purchase agreement and whether that clause shielded any
of the crossclaim and counterclaim defendants in their roles as directors, officers or shareholders relating
to the stock purchase-agreement transaction.
III
The Motion to Dismiss
Two of the counts in Joyce’s complaint (counts 4 and 7) alleged shareholder derivative- type
actions relating to the payment of bonuses to Peter and Paul and the purchase of the $400,000 land
parcel. Joyce asserted that by these two actions, the majority shareholders caused ECC to waste or
misapply corporate assets and failed to seek recovery of those amounts. The second hearing justice,
acting on the cross and counterclaim defendants’ motions to dismiss, found that as derivative claims,
both counts were improperly pleaded pursuant to Rule 23.1 of the Superior Court Rules of Civil
Procedure. The cross and counterclaim defendants had filed Super.R.Civ.P. 12(b)(6) motions to
dismiss those counts and also filed motions for summary judgment on the same counts. At the motion
hearing, the hearing justice, without objection by either counsel, decided the motions pursuant to the
standard employed in determining a Rule 12(b)(6) motion to dismiss. She concluded "based upon the
standards for granting a 12(b)(6) motion, the court grants the cross and counterclaim defendants’
motions to dismiss." Cf. Cipolla v. Rhode Island College Board of Governors for Higher Education,
742 A.2d 277, 280 (R.I. 1999) (holding that a motion to dismiss must be made strictly on the
pleadings, and a Rule 12 motion to dismiss that relies on matters outside the pleadings must be treated
as a motion for summary judgment).
In reviewing a hearing justice’s grant or denial of a Rule 12(b)(6) motion to dismiss, we
undertake the same analysis as used by the hearing justice. "A motion to dismiss under Rule 12(b)(6)
will only be granted ‘when it is clear beyond a reasonable doubt that the plaintiff would not be entitled to
relief from the defendant under any set of facts that could be proven in support of the plaintiff’s claim.’ "
Bruno v. Criterion Holdings, Inc., 736 A.2d 99, 99 (R.I. 1999) (quoting Folan v. State, 723 A.2d 287,
289 (R.I. 1999)). "In reviewing a motion to dismiss under Rule 12(b)(6), we accept the allegations of
the plaintiff’s complaint as true and view them in the light most favorable to the plaintiff." Id. (citing
Folan, 723 A.2d at 289).
After reviewing the record before us, we are of the opinion that the hearing justice properly
dismissed the derivative claims. Rule 23.1 provides in pertinent part:
"In a derivative action brought by one or more shareholders or members to enforce a
right of a corporation or of an unincorporated association, the corporation or
association having failed to enforce a right which may properly be asserted by it, the
complaint shall be verified and shall allege that the plaintiff was a shareholder or member
at the time of the transaction of which the plaintiff complains or that the plaintiff’s share
or membership thereafter devolved on the plaintiff by operation of law. The complaint
shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the
action the plaintiff desires from the directors or comparable authority and, if necessary,
from the shareholders or members, and the reasons for the plaintiff’s failure to obtain the
action or for not making the effort."
We note in particular that Rule 23.1 requires that the complaint allege with particularity the
efforts made to secure the desired corporate action or the reasons why such efforts were not made.
Although such efforts may indeed prove ultimately futile, the plain language of the rule requires that a
plaintiff demonstrate that all avenues of redress are foreclosed before a derivative suit may be brought.
Consequently, because Joyce’s claims chronicle no such attempts to secure action by ECC and set
forth no reasons for her failure to demand such corrective action, those counts were properly dismissed
pursuant to Rule 12(b)(6).
More problematic, however, is the hearing justice’s decision to dismiss those derivative claims
with prejudice. Although it is well settled that leave to amend a defective pleading is committed to the
sound discretion of the hearing justice, see Babbs v. John Hancock Mutual Life Insurance Co., 507
A.2d 1347, 1349 (R.I. 1986), "we have consistently held that Rule 15(a) liberally permits amendment
absent a showing of extreme prejudice." Wachsberger v. Pepper, 583 A.2d 77, 78 (R.I. 1990) (citing
Inleasing Corp. v. Jessup, 475 A.2d 989, 993 (R.I. 1984)). Further, we have held that the burden rests
on the party opposing the motion to amend to demonstrate the existence of such extreme prejudice.
Babbs, 507 A.2d at 1349. After reviewing the hearing record, we are of the opinion that the
counterclaim and crossclaim defendants failed to show in any manner how they would be substantially
prejudiced by Joyce’s amending of her derivative claims. Absent such a showing, we conclude from the
record that the hearing justice in reaching her decision was apparently influenced by what counsel for the
counterclaim and crossclaim defendants had asserted was the first hearing justice’s position and holding
foreclosing any further amendments to the case pleadings. Counsel informed the hearing justice that the
first hearing justice had warned the parties that he would deny any future attempts to amend the
pleadings that could prejudice the parties and delay the litigation. [10] However, we have said that mere
delay is insufficient reason for denying a party’s request to amend his or her pleading to avoid a Rule
12(b)(6) dismissal. Inleasing Corp., 475 A.2d at 993.
IV
Conclusion
In remanding the papers in this case to the Superior Court, we note "f ever there was a case
in which a remedy should be fashioned, this is such a controversy." Cheetham v. Cheetham, 121 R.I.
337, 342, 397 A.2d 1331, 1334 (1979). We believe that these notable words ring particularly true for
the case now before us. For purposes of severing the tangled Gordian knot that has been strangling the
litigants in this case for more than five years, this Court now looks to its inherent supervisory and
revisory powers, pursuant to Cheetham, for Alexander the Great’s proverbial sword such that we may
fashion a fair, yet appropriately sharp-edged remedy to cut through this protracted family feud and thus
achieve a final and fair conclusion to this litigation.
Accordingly, pursuant to our plenary authority, our remand is made with the following directions
to the Superior Court to proceed:
(a) To conduct an evidentiary hearing to determine whether Joyce is entitled to dissolution of ECC
pursuant to § 7-1.1-90, or in the alternative, to determine whether Joyce is entitled to a buyout of her
shares by ECC pursuant to § 7-1.1-90.1. In the event that the hearing justice concludes that ECC is to
be dissolved, he or she shall appoint a receiver to effect such liquidation and to pay a liquidation
dividend to each shareholder. Any statutory interest on Joyce’s liquidation dividend will accrue from
November 30, 1994, being the date of the initial demand for liquidation of ECC made by both the
estate of Jeffrey Hendrick and Joyce Hendrick in count 8 of their respective counterclaims and count 1
of their respective crossclaims. See A. Teixeira & Co., 674 A.2d at 408; Charland, 588 A.2d at 610.
In the alternative, if a buyout of Joyce’s shares by ECC is found to be warranted, the trial
justice is instructed to appoint an appraiser to determine the fair value of such shares. To that fair value
amount shall be added statutory interest computed from November 30, 1994. The combined total of
both fair value and interest shall constitute the final purchase price for Joyce’s shares. [11]
(b) The judgment dismissing Joyce’s derivative claims (counts 4 and 7) with prejudice is to be
vacated, and the dismissal of those claims will be noted as having been dismissed without prejudice with
leave to amend.
(c) If the hearing justice determines that Joyce is not entitled to dissolution of ECC pursuant to §
7-1.1-90 or to a buyout of her shares by ECC pursuant to § 7-1.1-90.1, we direct that Joyce’s
common law and statutory claims in her amended complaint shall then proceed to trial and shall be
accorded priority status on the appropriate trial calendar.
For the foregoing reasons, the plaintiff’s consolidated appeal is sustained, and the judgments of
the Superior Court appealed from are vacated. The papers in this case are remanded to the Superior
Court for further proceedings in accordance with this opinion.
FOOTNOTES:
[1] Because most of the parties in this litigation share the last name of Hendrick, we will refer to those
parties by their first names and no disrespect is intended. As to Joyce Hendrick, there is no material
distinction or significance between her status as an individual plaintiff and as executrix of the estate of her
late husband, Jeffrey, and thus for purposes of convenience and clarity, we will hereinafter refer to her
without designation of her particular capacity.
[2] Jeffrey’s health had been in decline, and his subsequent death apparently was not unexpected. At the
time of the purchase agreement, he owned 203 shares of Class A common shares and 1,858 Class B
common shares.
[3] Joyce asserts that the decision to list Paul as sole plaintiff and to list Peter as a codefendant was a
mutual decision among the trustees and the directors, including Peter.
[4] Rolland Jones died in October 1994.
[5] Paul died on April 9, 1998, and no representative of his estate has yet been substituted as a party.
[6] That judgment was never appealed.
[7] Joyce has not appealed the dismissal of her malicious prosecution and abuse of process claims. She,
however, maintains those counts on appeal, insofar as those claims relate to the oppressive pattern
alleged against the counterclaim and crossclaim defendants.
[8] General Laws 1956 § 7-1.1-33 provides in pertinent part:
"(b) A director shall discharge his or her duties as a director, including his or her duties
as a member of a committee:
(1) In good faith;
* * * (c) In discharging his or her duties, a director is entitled to rely on information, opinions,
reports, or statements, including financial statements and other financial data, if prepared
or presented by:
* * *
(2) Legal counsel, public accountants, or other persons as to matters the
director reasonably believes are within the person’s professional or expert competence
** *."
[9] Section 8.05 of the purchase agreement provided:
"The Trustees shall have no other duties or obligations hereunder than to hold
and receive the proceeds of the insurance and to hold and deliver the Stock Certificates
upon receipt of the purchase price therefor. Except as provided in this paragraph, the
Corporation and the Stockholders hereby release the Trustees of any and all claims
under this Agreement or otherwise. The Trustees shall not be required to take any
action for collection of insurance proceeds or against the Corporation for payment of
any balance of the purchase price unless indemnified to their mutual satisfaction by the
Corporation and/or Stockholders in their discretion."
[10]Actually what the first hearing justice had said was: "And I will not -- I don’t care what the contents
of it was, I will not accept anything late in this matter beyond today’s date from anybody."
[11] We are mindful that § 7-1.1-90.1 provides for statutory interest on the share purchase price to
accrue "from the date of the filing of the election to purchase the shares * * *." Given the protracted
nature of the proceedings before us, however, and pursuant to our inherent power to fashion a fair and
conclusive remedy, Cheetham v. Cheetham, 121 R.I. 337, 342, 397 A.2d 1331, 1334 (1979), we
believe that the date of the initial demand for ECC’s dissolution serves as the most appropriate historical
event in these proceedings for the commencement of the accrual of statutory interest. |
