John H. Tinney
Edward D. McDevitt
F. Richard Hall Kenneth E. Webb, jr.
J. Michael Weber Bowles Rice McDavid Graff & Love
Spilman, Thomas & Battle Charleston, West Virginia
Charleston, West Virginia Attorneys for the Respondent,
Attorneys for the Petitioners, Larry D. Smith
Eddie B. and Michael Smith
Robert B. Allen
Thomas E. McHugh
Allen, Guthrie & McHugh
Charleston, West Virginia
Attorneys for the Petitioner,
Donald P. Smith
JUSTICE ALBRIGHT delivered the Opinion of the Court.
1. In determining whether to entertain and issue the writ of prohibition for
cases not involving an absence of jurisdiction but only where it is claimed that the lower
tribunal exceeded its legitimate powers, this Court will examine five factors: (1) whether the
party seeking the writ has no other adequate means, such as direct appeal, to obtain the
desired relief; (2) whether the petitioner will be damaged or prejudiced in a way that is not
correctable on appeal; (3) whether the lower tribunal's order is clearly erroneous as a matter
of law; (4) whether the lower tribunal's order is an oft repeated error or manifests persistent
disregard for either procedural or substantive law; and (5) whether the lower tribunal's order
raises new and important problems or issues of law of first impression. These factors are
general guidelines that serve as a useful starting point for determining whether a
discretionary writ of prohibition should issue. Although all five factors need not be satisfied,
it is clear that the third factor, the existence of clear error as a matter of law, should be given
substantial weight. Syl. Pt. 4, State ex rel. Hoover v. Berger, 199 W.Va. 12, 483 S.E.2d 12
2. The majority of the stockholders of a solvent going corporation, in the
absence of fraud, or conduct amounting to fraud, and so long as they keep within their
charter, have the uncontrollable right to manage the corporate affairs, and a court of equity
will not interfere at the instance of a minority of the stockholders, by receivers or otherwise,
to control corporate acts or management. Syl. Pt. 1, Smiley v. New River Co., 72 W.Va.
221, 77 S.E. 976 (1913).
3. A court is without jurisdiction to reinstate a corporate officer removed
pursuant to the lawful acts of a corporation's directors absent a finding of fraud or statutory
4. While the officers and directors of a business corporation are accorded a
rather broad latitude in the conduct of the affairs of the corporation, they occupy a fiduciary
relationship toward it and its shareholders. The same fiduciary relationship exists on the part
of the majority shareholders of a business corporation toward its minority shareholders. Syl.
Pt. 2, Masinter v. WEBCO Co., 164 W.Va. 241, 262 S.E.2d 433 (1980).
5. A violation of the fiduciary relationship may result from oppressive
conduct, which is conduct that departs from the standards of good faith and fair dealing
which are inherent in the concept of a fiduciary relationship. Syl. Pt. 3, Masinter v.
WEBCO Co., 164 W.Va. 241, 262 S.E.2d 433 (1980).
6. An attempt to 'freeze or squeeze out' a minority shareholder from deriving any benefit from his investment in a private business corporation, without any legitimate business purpose, may constitute oppressive conduct. Syl. Pt. 4, Masinter v. WEBCO Co., 164 W.Va. 241, 262 S.E.2d 433 (1980).
Petitioners Carl E. Smith, Inc. (Smith, Inc.), Carl E. Smith Petroleum, Inc. (Petroleum, Inc.), Eddie B. Smith, Donald P. Smith, and Michael Smith seek a writ of prohibition in connection with the April 4, 2001, entry of an order by the Circuit Court of Jackson County which reinstated Respondent Larry D. Smith as President of Petroleum, Inc. and enjoined the individual Petitioners from taking any action to interfere with the operations of Petroleum, Inc. during the pendency of the underlying shareholder derivative cause of action initiated by Larry D. Smith. As grounds for the requested writ of prohibition, Petitioners argue that the trial court clearly exceeded its authority in nullifying the actions of Smith, Inc., as the sole stockholder of Petroleum, Inc., in removing Larry D. Smith as the president of Petroleum, Inc. and in enjoining the individual Petitioners from interfering with the operations of Petroleum, Inc. Upon a full review of the applicable statutory and case law, we conclude that the circuit court exceeded its authority in restoring Larry D. Smith as the president of Petroleum, Inc. following the decision of the majority stockholderSee footnote 1 1 to remove Mr. Smith as an officer of such company and in enjoining Petitioners from taking any action relevant to Petroleum, Inc. Accordingly, a writ of prohibition shall issue to prevent the enforcement of paragraphs four and five of the April 4, 2001, order of the circuit court.
On April 2, 1999, Larry D. Smith filed a shareholder derivative cause of action
in the Circuit Court of Jackson County against the individual Petitioners in this case and
Smith, Inc. Through that action, Larry D. Smith alleged that Eddie B. and Donald P. Smith
converted assets, breached fiduciary duties, engaged in fraud and misrepresentation, and
were unjustly enriched as a result of these actions. In response to the motion of Smith, Inc.See footnote 2
to convert the shareholder derivative action into a corporate dissolution action under West
Virginia Code § 31-1-134 (1974) (Repl.Vol.1996), a hearing was held on February 4, 2000,
which resulted in the entry of an order by the Honorable Charles E. McCarty on April 28,
2000, directing that the shareholder derivative action be converted into a section 134
proceeding;See footnote 3
appointing former Justice Franklin Cleckley as commissioner to appraise the
fair value of the stock of Smith, Inc., and staying further action in the section 134 proceeding
pending a determination of the value of Larry D. Smith's stock in Smith, Inc.
During the valuation stage of the section 134 proceeding, two vastly differing
valuations of the corporate stock were produced.See footnote 4
Before any final action was taken with
regard to the valuation required under section 134, the parties appeared before the circuit
court in connection with a March 2, 2001, motion filed by Petitioners seeking to compel an
accounting from Larry D. Smith with regard to Petroleum, Inc.; to confirm the removal of
Larry D. Smith as president of Petroleum, Inc. and as a director of Smith, Inc.; and to bar
Larry D. Smith from company premises. On the same date that this motion was filed, Eddie
B. and Donald P. Smith had executed a written agreement removing Larry D. Smith as the
president of Petroleum, Inc. and as a director of Smith, Inc.See footnote 5
As the result of a hearing held on March 14, 2001, before the Honorable Thomas C. Evans,See footnote 6 6 the circuit court entered the order which is the subject of this request for extraordinary relief. Included in the multiple rulings made by the trial court in its April 4, 2001, order is a rescission of the April 28, 2000, order authorizing the section 134 proceeding; the conditionalSee footnote 7 7 reinstatement of Larry D. Smith as president of Petroleum, Inc.; and the enjoinment of Eddie B. and Donald P. Smith from interfering with the operations of Petroleum, Inc. during the pendency of the litigation. Through this proceeding, Petitioners challenge the authority of the circuit court to reinstate an officer removed by corporate action, as well as the lower court's directive regarding interference with the operations of Petroleum, Inc.
Since the power of removal is vested solely in the corporation,See footnote 8
it stands to
reason that a court is without jurisdiction to reinstate a corporate officer removed pursuant
to the lawful acts of a corporation's directors absent a finding of fraud or statutory authority.
Similarly, a court lacks jurisdiction, absent statutory authority,See footnote 9
to grant injunctions
restraining officers from performing their corporate duties since this would have the same
effect as their removal. Harkey v. Mobley, 552 S.W.2d 79, 81 (Mo. Ct. App. 1977).
Arguing that the trial court was within its grant of power in reinstating him as president, Larry D. Smith relies upon this Court's recognition in Masinter v. WEBCO Co., 164 W.Va. 241, 262 S.E.2d 433 (1980), of the oppressive conduct exception to the general rule that a corporation has complete control of its affairs. We recognized in syllabus point two of Masinter that
[w]hile the officers and directors of a business corporation are accorded a rather broad latitude in the conduct of the affairs of the corporation, they occupy a fiduciary relationship toward it and its shareholders. The same fiduciary relationship exists on the part of the majority shareholders of a business corporation toward its minority shareholders.
Id. at 241, 262 S.E.2d at 435. In describing the nature of this fiduciary relationship, we held that [a] violation of the fiduciary relationship may result from oppressive conduct, which is conduct that departs from the standards of good faith and fair dealing which are inherent in the concept of a fiduciary relationship. Id. at syl. pt. 3. With regard to what qualifies as oppressive conduct, we stated that [a]n attempt to 'freeze or squeeze out' a minority shareholder from deriving any benefit from his investment in a private business corporation, without any legitimate business purpose, may constitute oppressive conduct. Id. at syl. pt. 4.
Because Masinter was presented as an appeal from a grant of summary
judgment and because the lower court did not make any findings regarding the existence of
oppressive conduct, we did not reach the issue of appropriate relief in connection with the
allegations of corporate wrongdoing made in that case.See footnote 10
We did, however, identify ten
recognized alternatives to outright corporate dissolution when oppressive conduct has been
(a) The entry of an order requiring dissolution of the corporation at a specified future date, to become effective only in the event that the stockholders fail to resolve their differences prior to that date.
(b) The appointment of a receiver, not for the purposes of dissolution, but to continue the operation of the corporation for the benefit of all of the stockholders, both majority and minority, until differences are resolved or 'oppressive' conduct ceases.
(c) The appointment of a 'special fiscal agent' to report to the court relating to the continued operation of the corporation, as a protection to its minority stockholders, and the retention of jurisdiction of the case by the court for that purpose.
(d) The retention of jurisdiction of the case by the court for the protection of the minority stockholders without appointment of a receiver or 'special fiscal agent.'
(e) The ordering of an accounting by the majority in control of the corporation for funds alleged to have been misappropriated.
(f) The issuance of an injunction to prohibit continuing acts of 'oppressive' conduct and which may include the reduction of salaries or bonus payments found to be unjustified or excessive.
(g) The ordering of affirmative relief by the required declaration of a dividend or a reduction and distribution of capital.
(h) The ordering of affirmative relief by the entry of an order
requiring the corporation or a majority of its stockholders to
purchase the stock of the minority stockholders at a price to be
determined according to a specified formula or at a price
determined by the court to be a fair and reasonable price.
(i) The ordering of affirmative relief by the entry of an order permitting minority stockholders to purchase additional stock under conditions specified by the court.
(j) An award of damages to minority stockholders as compensation for any injury suffered by them as the result of 'oppressive' conduct by the majority in control of the corporation.
Masinter, 164 W.Va. at 254-55 n. 12, 262 S.E.2d at 441-42, n. 12 (quoting Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 395-96 (1973) and citations omitted).
Larry D. Smith maintains that the lower court had before it, both through stipulation, and through testimonial and physical evidence, a sufficient basis from which to conclude that Eddie B. and Donald P. Smith had engaged in oppressive conduct. Based on this evidence of oppressive conduct, Larry D. Smith argues that the trial court acted within its powers, under authority of Masinter, in nullifying the actions of the individual Petitioners with regard to their removal of him as president of Petroleum, Inc.See footnote 11 11
There are two critical flaws in Larry D. Smith's reliance on oppressive conduct as authority for the circuit court's actions. First and foremost, is the fact that the trial court's order of April 4, 2001, contains no finding that the individual Petitioners have engaged in oppressive conduct. Although Larry D. Smith maintains in his responsive brief that the trial court properly concluded . . . that the majority shareholders have engaged and continue to engage in oppressive conduct, there simply is no finding by the lower court that supports this statement. The second flaw in Larry D. Smith's reasoning results from his contention that no factual finding of oppressive conduct was necessary due to Petitioner's stipulation to such wrongful conduct. The record makes abundantly clear that while Petitioners did stipulate to oppressive conduct at one point during the underlying proceeding, that stipulation was conditional and expressly limited in purpose. Petitioners both proposed and submitted a stipulation to the existence of oppressive conduct solely for the purpose of converting the shareholder derivative proceeding into a section 134 proceeding.See footnote 12 12 See W.Va. Code § 31-1-134. Based upon the trial court's rescission of the section 134 proceeding by its April 4, 2001, ruling, Petitioners maintain that their stipulation of oppressive conduct has been effectively withdrawn.
We agree with Petitioners that once the section 134 proceeding was vacated,
the stipulation as to oppressive conduct was constructively retracted. Absent either a factual
finding by the lower court of oppressive conduct or the continuing validity of Petitioners'
stipulation to such conduct, this Court has no basis from which it could proceed to consider
those alternatives to corporate dissolution identified in Masinter. See 164 W.Va. at 254-55,
n. 12, 262 S.E.2d at 441-42, n. 12. As in Masinter, we are analogously constrained from
reaching the ultimate issues concerning the attempted freeze or squeeze out of the minority
stockholder given the lack of a finding below of oppressive conduct. See id. at 256, 262
S.E.2d at 442.
Notwithstanding our procedural limitations, we feel compelled, given the substantial economic interests involved, to urge the lower court to assist the parties in reaching an expeditious resolution to the underlying issues which are in need of prompt attention. Unless the parties achieve a settlement of this matter or the circuit court is able to effect a judicial resolution, there is a substantial risk that very valuable corporate assets could be dissipated and additionally, the possibility that a significant number of jobs might be affected. While this case has reverted procedurally to its original posture of a shareholder derivative action, the parties may choose to seek amendment of the pleadings or through appropriate motion, again seek to force a resolution of these matters through a section 134 proceeding. See W.Va. Code § 31-1-134. If the circuit court takes additional evidence and concludes that oppressive conduct has occurred, the equitable options delineated in Masinter as an alternative to corporate dissolution are available for purposes of crafting appropriate relief to such a finding. See 164 W.Va. at 254-55, n. 12, 262 S.E.2d at 441-42, n. 12. Through his responsive pleading and attached exhibits, Larry D. Smith has informed this Court that Petitioners, simultaneous to instituting their petition for a writ of prohibition, have instituted a cash-out or freeze-out merger. See W.Va. Code §§ 31-1-34, -122, -123; Persinger v. Carmazzi, 190 W.Va. 683, 441 S.E.2d 646 (1994). While we take no position regarding how this matter should progress, we do exhort the trial court to proceed with alacrity to facilitate a prompt resolution of this matter on remand, barring an intervening settlement.
Based on our determination that the lower court exceeded its authority in reinstating Larry D. Smith as president of Petroleum, Inc. and in enjoining Petitioners from taking any actions with regard to Petroleum, Inc., the necessary foundation for issuing a writ of prohibition has been demonstrated. See Syl. Pt. 4, Berger, 199 W.Va. at 14-15, 483 S.E.2d at 14-15. Accordingly, a writ of prohibition is hereby issued with regard to enforcement of paragraphs four and five of the April 4, 2001, ruling of the Circuit Court of Jackson County.
desire to wind up its affairs; and (2) a demonstration of sufficient cause for the corporate dissolution. W.Va. Code § 31-1-134.
S.E.2d at 437-38, n. 3 (quoting the text of West Virginia Code § 31-1-81 (1931) and observing that plaintiff owned more than one-fifth of the outstanding shares of WEBCO).
as required by Oregon law. The Oregon Court of Appeals reasoned in Iwasaki v. Iwasaki Brothers, Inc., 649 P.2d 598 (Or. Ct. App. 1982), that the removal was nonetheless properly effectuated since the outcome would have been the same if the vote had been taken at a shareholder's meeting because [t]wo of the directors voting for removal held two-thirds of the corporation's shares. Id. at 601. Thus, notwithstanding a finding of oppressive conduct, it is possible that reinstatement may not be within the realm of appropriate relief because the individual Petitioners comprised the necessary majority to effect the removal of Larry D. Smith as the president of Petroleum, Inc.
questioned by the trial court at the March 14, 2001, hearing regarding this stipulation,
Petitioners' counsel confirmed the limited nature of the stipulation:
THE COURT: So -- so -- so you're saying that that's an
admission of oppressive conduct for one purpose but not
COUNSEL: Precisely, your Honor.