Hamilton Herald Masthead


Front Page - Friday, July 22, 2016

Dispute leads to new standard for shareholder lawsuits

In a case involving claims between siblings who were shareholders in a closely held family corporation, the Tennessee Supreme Court has adopted a new standard for when a shareholder can file a direct lawsuit on claims that concern the corporation.

Ten siblings owned shares in McRedmond Brothers, Inc., a family-run grease business that purchased grease from restaurants and other suppliers and then processed the grease to sell for reuse, primarily to animal feed manufacturers.

A number of years after their father died, the siblings became embroiled in a long-running lawsuit that pitted one group of siblings against the others. Eventually, all of the siblings agreed to dissolve the corporation and sell the grease business assets under the supervision of the court.

One group of siblings bought the assets of the corporation. After the closing, the purchasers discovered that the sibling who had been responsible for operating the grease business had started his own competing grease business. The competing sibling had recruited the purchasers’ customers for his new business and had depleted their grease inventory, leaving them unable to immediately operate the business.

The purchasers filed a direct suit against the competing sibling, alleging that he had sabotaged the business prior to the sale. The competing sibling asked the trial court to dismiss the suit, claiming that the purchasers’ lawsuit was derivative in nature and could only be filed by the corporation, not the siblings as individuals. The trial court denied the motion and awarded damages to the purchasers. The Court of Appeals reversed, holding that all purchaser claims were derivative in nature.

On appeal, the Supreme Court set aside Tennessee’s  standard for determining whether a shareholder claim is derivative or direct – that is, whether the claim can be filed directly by a shareholder or whether it has to be filed on behalf of the corporation. The Court instead adopted the standard used by courts in Delaware, well known for expertise in corporate law. The Delaware standard, the Court said, “is clear and easily understood” and “should facilitate consistent and predictable outcomes in disputes involving shareholder claims.”

Applying the new standard, the Court held that some of the claims could be filed directly by the purchasers and others were derivative claims that had to be filed by the corporation. Therefore, purchasers could recover on some of the claims filed against the competing sibling.

Unanimous opinion in Stephanie Keller, et al. v. Estate of Edward Stephen McRedmond, et al., authored by Justice Holly Kirby, can be read at TNCourts.gov.

Source: The Tennessee Supreme Court