Filed: July 22, 1993
John H. Tinney
K. Paul Davis
Charleston, West Virginia
Attorneys for Petitioners Elish,
Bartel, Evans and Gilmore
Robert B. King
James S. Arnold
Charleston, West Virginia
Attorneys for Petitioners Sperry,
Gould, Bruhn, Robertson, Rechin,
Schubert, Hurlbert, Isaacs,
Bluestone and Sturges
Carl N. Frankovitch
Arthur M. Recht
Weirton, West Virginia
Attorneys for Petitioner
Weirton Steel Corporation
Edward A. Zagula
William E. Watson
David E. Khorey
Weirton, West Virginia
Attorneys for the Respondents
JUSTICE BROTHERTON delivered the Opinion of the Court.
JUSTICE MILLER concurs and reserves the right to file a concurring
1. "In determining whether to grant a rule to show cause in prohibition when a court is not acting in excess of its jurisdiction, this Court will look to the adequacy of other available remedies such as appeal and to the over-all economy of effort and money among litigants, lawyers and courts; however, this Court will use prohibition in this discretionary way to correct only substantial, clear-cut, legal errors plainly in contravention of a clear statutory, constitutional or common law mandate which may be resolved independently of any disputed facts and only in cases where there is a high probability that the trial will be completely reversed if the error is not corrected in advance." Syllabus point 1, Hinkle v. Black, 164 W.Va. 112, 262 S.E.2d 744 (1979).
2. The local law of the state of incorporation should be
applied to determine who can bring a shareholder derivative suit.
3. The Employee Stock Ownership Plan participants are
shareholders within the definition of the term found in the
comments to § 303 of the Restatement(2d) of Conflicts, which states
that "a shareholder is one who is recorded as such on the books of
the corporation. One who is not so recorded but who has title to
a share will be entitled to be recorded as a shareholder on the
books of the corporation."
This case is before the Court on a motion for a writ of
prohibition by the petitioners, the Board of Directors at Weirton
Steel, and Weirton Steel. These parties petition the Court to
prohibit the Circuit Court of Hancock County from refusing to
dismiss Larry G. Godich, John L. Bird, Raymond A. Sacripanti, Sr.,
Sheridan Buffington, Martin A. Reitter, Jo Ann Branlett, Edward A.
Godich, and Barbara J. Wilson from the shareholder derivative suit
on the grounds that the respondent "exceeded his legitimate powers
under W.Va. Code § 53-1-1."
The shareholder derivative suit was filed on August 6,
1992, by the respondents, plaintiffs below, active members of the
Weirton Steel Employee Stock Ownership Plan (ESOP). They seek to
recover damages as beneficial shareholders of Weirton Steel from
the individuals listed as petitioners above because of an alleged
breach of fiduciary duty. The petitioners, defendants below, are
current and former officers and members of the Board of Directors
of Weirton Steel. The respondents contend that the petitioners
were grossly negligent in taking certain actions during the course
of contracting for the construction of two reheat furnaces.
The ESOP participants of Weirton Steel contend that they
brought suit because the defendants issued a purchase order to
construct two new reheat furnaces at the cost of $49,065,740.00,
and that they knew or should have known that Brickmont &
Associates, the company hired to provide the furnaces, had a
negative net worth of $1,466,105.00. They also contend that the
Board should have known that Brickmont & Associates could not
provide a performance bond, yet they paid the company
$28,132,190.00 prior to the execution of the contract without a
performance bond. Finally, they complain that at the completion of
the first reheat furnace, Brickmont had been paid approximately
$50,000,000.00. As a result, they contend that Weirton Steel had
to pay in excess of $30,000,000.00 to complete the project.
This case was initially before Judge Craig Broadwater.
However, after the circuit judges rotated, Judge Wilson became the
presiding judge. On February 8, 1993, the defendants below, the
members of the Board of Directors, filed a joint motion to dismiss
eight of the nine plaintiffs below on the basis that they lacked
standing to bring the derivative action because they were not
"holders of record" of Weirton Steel shares as required under W.Va.
Code § 31-1-103 (1988).See footnote 1
On April 20, 1993, Judge Wilson denied the defendants'
joint motion to dismiss. In its order and opinion dated April 20,
1993, the Hancock County Circuit Court examined the history of the
Model Business Corporation Act of 1969, which was used as the basis
for W.Va. Code § 31-1-1 et seq., adopted in 1974. The court found
that W.Va. Code § 31-1-103, which required, in part, that a
plaintiff must be a "holder of record," also required
contemporaneous ownership, which "did not exclude the concept of
equitable ownership."See footnote 2 The court noted that the majority of
jurisdictions, including Delaware, find equitable ownership is
enough to bring a derivative suit. Rosenthal v. Burry Biscuit
Corp., 60 A.2d 106 (Del.Ch. 1948). More recently, the Delaware
legislature, in Title 8, § 327, allowed equitable or beneficial
owners to sue under their statute.
Similarly, Judge Wilson concluded that under the common
law of West Virginia, an equitable owner of stock could maintain a
derivative suit. He found that the "holder of record" requirement
in W.Va. Code § 31-1-103 mandated contemporaneous ownership, which
did not preclude an action by equitable owners of stock. He noted
that the interests of ESOP members and registered shareholders are
identical. Thus, Judge Wilson found there was no basis for a
distinction. He also stated that the legislature never intended to
bar ESOP employees from bringing a derivative law suit because
until 1989, there were no Weirton Steel shareholders of record.
Under the petitioners' interpretation of W.Va. Code § 31-1-103, no
one was entitled to bring a shareholder derivative suit prior to
1989, when the company went public. Consequently, the court
refused to dismiss the plaintiffs. The defendants below, now
petitioners, filed this appeal from the April 20, 1993, order of
the Hancock County Circuit Court.
The petitioners contend that in doing so, Judge Wilson,
in effect, "rewrote the statute to permit what he considered to be
equitable holders to maintain shareholder derivative actions in
West Virginia." The petitioners seek a writ of prohibition from
the Court in order to preclude Judge Wilson, the respondent, from
refusing to dismiss the eight plaintiffs who were not holders of
record of Weirton Steel stock.
All nine plaintiffs are employees of Weirton Steel and
participate in Weirton Steel's employee stock ownership plan
(ESOP). Under the terms of the ESOP, an account is maintained for
each participating Weirton Steel employee and shares of Weirton
Steel stock, which are owned of record by the ESOP trust, are
allocated to each participant's account. The ESOP provides the
participants with pass through voting rights through the trustee
and receive dividends through the transfer agent into their
accounts. The allegation that they do not have standing is based
on the fact that the respondents are not actually owners of record
of the stock, with the exception of the one plaintiff with
preferred shares, because the stock shares are owned of record by
the ESOP trust.
Thus, the issue to be addressed by this Court is whether
the plaintiffs below have standing in West Virginia to initiate a
shareholder derivative suit when they are participants in an
employee stock ownership plan, but do not hold actual title of the
West Virginia Code § 53-1-1 (1981) provides that a "writ
of prohibition shall lie as a matter of right in all cases of
usurpation and abuse of power, when the inferior court has not
jurisdiction of the subject matter in controversy, or, having such
jurisdiction, it exceeds its legitimate powers." In this case,
there is no question that Judge Wilson has the jurisdiction over
the subject matter in controversy. The second question then, is
whether, having such jurisdiction, he has exceeded his legitimate
power by refusing to dismiss the plaintiffs. In cases involving
writs of prohibition, we have held that:
In determining whether to grant a rule to show cause in prohibition when a court is not acting in excess of its jurisdiction, this Court will look to the adequacy of other available remedies such as appeal and to the over-all economy of effort and money among the litigants, lawyers and courts; however, this Court will use prohibition in this discretionary way to correct only substantial, clear-cut, legal errors plainly in contravention of a clear statutory, constitutional or common law mandate which may be resolved independently of any disputed facts and only in cases where there is a high probability that the trial will be completely reversed if the error is not corrected in advance.
Syl. pt. 1, Hinkle v. Black, 164 W.Va. 112, 262 S.E.2d 744 (1979).
The petitioners, of course, argue that if a writ of
prohibition is not issued to prevent Judge Wilson from refusing to
dismiss eight of the nine plaintiffs who were not holders of record
of the stock, the case would come up on appeal and be reversed.
They also contend that there is a clear positive command of statute
which requires that those petitioners be dismissed.
West Virginia Code § 31-1-103 (1988) sets forth the
requirements for a shareholder to file suit in this State:
No action shall be brought in this State by a shareholder in the right of a domestic or foreign corporation unless the plaintiff was a holder of record of shares or of voting trust certificates therefor at the time of the transaction of which he complains, or his shares or voting trust certificates thereafter devolved upon him by operation of law from a person who was a holder of record at such time. (Emphasis added.)
First, let us address what the ESOP participants are not.
The ESOP participants do not hold voting trust certificates as
contemplated by W.Va. Code §§ 31-1-94 and 31-1-103. West Virginia
Code § 31-1-94 requires certain elements before a group of
shareholders are considered to be part of a voting trust:
Any number of shareholders of a corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote or otherwise represent their shares, for a period of not to exceed ten years, by entering into a written voting trust agreement specifying the terms and conditions of the voting trust, by depositing a counterpart of the agreement with the corporation at its principal office, and by transferring their shares to such trustee or trustees for the purposes of the agreement. Such trustee or trustees shall keep a record of the holders of voting trust certificates evidencing a beneficial interest in the voting trust, giving the names and addresses of all such holders and the number and class of the shares in respect of which the voting trust certificates held by each are issued, and shall deposit a copy of such record with the corporation at its principal office.
In this case, the ESOP participants were not shareholders
who placed their shares in a joint trust by signing a voting trust
agreement. The ESOP participants became shareholders only when the
ESOP was created, not before. No signed voting trust agreement
exists. There is no time limitation on the ESOP; in fact, the
respondents note that the ESOP was not intended to last only ten
years, but instead until the last participant reached retirement
age. Consequently, for the purposes of W.Va. Code § 31-1-103, the
ESOP participants are not holders of voting trust certificates
under either West Virginia or Delaware law.See footnote 3
The next question is whether the ESOP participants have
standing to sue. The petitioners argue that a party's standing to
maintain a stockholder derivative action depends upon whether the
party is a shareholder of record. West Virginia Code § 31-1-103
requires that parties be "holders of record" in order to have
standing to participate in a shareholder derivative suit. Black's
Law Dictionary defines "record owner" as the person in whose name
stock shares are registered on the records of a corporation.
Black's Law Dictionary 1274 (6th ed. 1990). Because Weirton Steel
is a Delaware corporation doing business in West Virginia, our
analysis of standing must revolve around what state's law is to be
The general rule regarding choice of law requires that
the substantive law of the place of incorporation is to be applied
unless another state has a more substantial connection or the
application of the other state's law would be contrary to our
public policy. Section 302 of Restatement(2d) of Conflicts,
Chapter 13, provides:
(1) Issues involving the rights and liabilities of a corporation, other than those dealt with in § 301, are determined by the local law of the state which, with respect to the particular issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.See footnote 4
(2) The local law of the state of incorporation will be applied to determine such issues, except in the unusual case where, with respect to the particular issue, some other state has a more significant relationship to the occurrence and the parties, in which event the local law of the other state will be applied. (Emphasis added.)
In the comments to § 302, the Restatement explains the rationale
behind the application of the local law of the state of
incorporation in most cases:
Application of the local law of the state of incorporation will usually be supported by those choice-of-law factors favoring the needs of the interstate and international systems, certainty, predictability and uniformity of result, protection of the justified expectations of the parties and ease in the application of the law to be applied.
Section 303 of the Restatement, entitled "Shareholders,"
specifically applies the law of the state of incorporation when
determining who are shareholders of a corporation, with certain
The local law of the state of incorporation will be applied to determine who are shareholders of a corporation except in the unusual case where, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the person involved and the corporation, in which event the local law of the other state will be applied.
The ESOP shareholders are considered shareholders for the purposes
of the Restatement. A shareholder is defined in the comments as:
a. Meaning of "shareholder." As used in the Restatement of this Subject, a shareholder is one who is recorded as such on the books of the corporation. One who is not so recorded but who has title to a share will be entitled to be recorded as a shareholder on the books of the corporation. He will also be entitled to the share as against third persons. (Emphasis added.)
The comments to Section 303 discuss the importance of uniform
treatment of shareholders in determining their rights and
As stated in Comment e of § 302, uniform treatment of the shareholders of a corporation is an important objective which can only be attained by having their rights and liabilities with respect to the corporation governed by a single law. This will be the local law of the state of incorporation except when, as stated in Comment e, the courts of this state would apply the local law of another state in the determination of the particular issue or in the extremely rare situation where some other state has a more significant relationship to the parties and the corporation with respect to the particular issue . . . .
The state of incorporation will usually be the
state of most significant relationship,
because (1) this state will usually have the
dominant interest in the question of what
persons are shareholders of the corporation,
(2) the parties, to the extent that they think
about the matter, would usually expect to have
this issue determined by the local law of this
state or, at least, by the law that would be
applied by the courts of this state and (3)
this state is easy to identify with the result
that application of its law will satisfy the
choice-of-law policy of ease of application.
We concur with the rationale set forth in the
Restatement(2d) of Conflicts.See footnote 5 Although the petitioners classify
the case before us as a question of standing, and therefore purely
procedural, we believe it is more. While we agree that there are
procedural aspects in W.Va. Code § 31-1-103, it takes a secondary
role to the substantive question of the rights of the ESOP
shareholders.See footnote 6 The underlying issue revolves around who are the
shareholders, what are their rights and liabilities, and what
relationship do they hold to the corporation and the other non-ESOP
shareholders. Further, there is no identifiable public policy
reason for West Virginia law to be applied over that of Delaware,
or the existence of an "extremely rare situation where some other
state has a more significant relationship to the parties and the
corporation. . . ." Restatement(2d) of Conflicts, at comments to
§ 303.See footnote 7 While Weirton Steel is a prominent employer in West
Virginia, the battle over who can participate in a shareholder
derivative suit is a struggle peculiar to the corporation itself
and must be handled as such.
Finally, our decision to apply the law of the state of
incorporation reflects the importance of applying choice of law
principles -- "certainty, predictability and uniformity of result,
protection of the justified expectations of the parties and ease in
the application of the law to be applied." Restatement(2d) of
Conflicts, at comments to § 302. The only way West Virginia can
expect fair and equal treatment from our fellow states is if we
play by the rules.See footnote 8 As no sufficient reason was presented to this
Court to convince us that West Virginia has a more significant
relationship to this transaction and that West Virginia law should
be applied, we will comply with the choice of law principles and
apply the law of the state of incorporation -- Delaware.
In Rosenthal v. Burry Biscuit Corp., 60 A.2d 106 (Del.Ch.
1948), the Delaware Chancery Court ruled that in Delaware,
equitable owners could be party to derivative suits. The Rosenthal
court reasoned that "under the common law of Delaware as applicable
to proceedings in equity an equitable owner of stock can maintain
a stockholder's derivative action . . . ." Id. at 113. The court
also found that the rigidity of stockholder lists was not necessary
where the equitable owner sought to protect corporate interests.
Id. at 112. Delaware Code Annotated, Title 8, § 327 (1991), does
not limit to "holders of record" those who can file a shareholder
In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which he complains or that his stock thereafter devolved upon him by operation of law.
Of course, the Delaware Code does limit those who can maintain a
derivative suit to parties who were shareholders at the time of the
transaction. Schreiber v. Bryan, 396 A.2d 512 (Del.Ch. 1978).
Consequently, in Delaware, ESOP participants could institute a
derivative suit if they owned stock at the time the contract for
the reheat ovens was executed.
In summary, we rule that the local law of the state of
incorporation should be applied to determine who can bring a
shareholder derivative suit. In the case now before us, the ESOP
participants are shareholders within the definition of the term
found in the comments to § 303 of the Restatement(2d) of Conflicts.
Under the local law of Delaware, beneficial or equitable
shareholders can participate in a shareholder derivative suit.
Accordingly, we refuse to issue the requested writ of prohibition
and rule that the Circuit Court of Hancock County was within its
legitimate power in refusing to dismiss the ESOP participants from
this shareholder derivative suit.
Footnote: 1Of the nine plaintiffs who filed this suit below, only one holds stock in his own name, in an amount insufficient to file a lawsuit without the posting of a bond estimated at $1,000,000.00. The remaining eight plaintiffs are members of the Weirton ESOP. The stock owned by the ESOP plaintiffs is held in the name of the ESOP by its trustee. Together, the nine plaintiffs own stock of approximately $68,123.00, plus 316 shares of preferred stock.
Footnote: 2In the 1984 Model Business Corporation Act, which has not been adopted by West Virginia, there is no holder of record requirement.
Footnote: 3Delaware law similarly defines a voting trust as "'a device whereby two or more persons owning stock with voting powers, divorce the voting rights thereof from the ownership, retaining to all intents and purposes the latter in themselves and transferring the former to trustees in whom the voting rights of all the depositors in the trust are pooled.'" (Citations omitted.) Oceanic Exploration Co. v. Grynberg, 428 A.2d 1, 6 (Del.Supr. 1981). See also 8 Del.C. § 218(a) (1991).
Footnote: 4Section 6 of the Restatement(2d) of Conflicts explains:
(1) A court, subject to constitutional restrictions, will follow a statutory
directive of its own state on choice of law.
(2) When there is no such directive, the
factors relevant to the choice of the
applicable rule of law include
(a) the needs of the interstate and
(b) the relevant policies of
(c) The relevant policies of
other interested states and the
relative interests of those states
in the determination of the
(d) the protection of justified
(e) the basic policies
underlying the particular field of
(f) certainty, predictability
and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Footnote: 5The structure of the ESOP plan supports our conclusion. The ESOP gave the members proportional voting rights, meaning that every member's vote was voted by the trustee. The members also receive a dividend. Moreover, from 1984 through 1989 all the stock was owned through the ESOP plan. If the ESOP participants were not permitted to participate in a shareholders derivative suit, then no one could sue other than, we assume, the trustee. It is difficult to believe the Legislature intended that the shareholders be left without recourse.
Footnote: 6In Gallup v. Caldwell, 120 F.2d 90 (3rd Cir. 1941), the court stated that the question of who is a shareholder of record "is a question of the law of New Jersey, the state under the law of which this company was incorporated." Id. at 93. See also Steinberg v. Hardy, 90 F.Supp. 167 (D.Conn. 1950).
Footnote: 7We have previously held that a corporation is a creature of the state in which it was incorporated: "A corporation is a creature of the state by which it is chartered; the courts of one state do not have the power to dissolve a corporation created by the laws of another state." Syl. pt. 2, Young v. JCR Petroleum, 188 W.Va. 280 423 S.E.2d 889 (1992).
Footnote: 8See also Liberty Mutual Ins. v. Triangle Industries, 182 W.Va. 580, 390 S.E.2d 562 (1990), in which we examined an insurance policy to determine the choice of law. Because the place of contract, place of insured risk, and place of injury were different, we analyzed § 6 of the Restatement(2d) of Conflicts and determined that although both West Virginia and Ohio had significant relationships to the contract, the policy was bargained for, created and agreed to in New Jersey. "[C]ertainty, predictability and uniformity of result" were found to be the essential elements in reaching that conclusion.