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Brown v. Dick (01/21/2005) sp-5862
Brown v. Dick (01/21/2005) sp-5862
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
GREGORY O. BROWN and )
KARL H. GREENEWALD, JR., ) Supreme Court No. S-10976
individually and derivatively on )
behalf of Huna Totem Corporation, ) Superior Court No.
) 1JU-99-916 CI
Appellants, )
)
v. )
)
ALBERT W. DICK, BERTHA M. ) O P I N I O N
FRANULOVICH, SAM M. HANLON,)
JR., ERNEST W. HILLMAN, JR., )
ERNEST JACK, WILLIAM O. ) [No. 5862 - January 21, 2005]
OZZIE SHEAKLEY, and PETER )
D. HOCSON, individually and in )
their capacity as shareholders, )
officers and directors of Huna Totem )
Corporation, )
)
Appellees. )
)
Appeal from the Superior Court of the State
of Alaska,
First Judicial District, Juneau, Patricia A. Collins,
Judge.
Appearances: Fred W. Triem, Petersburg, for
Appellants. Barbra Zan Nault, Bankston,
Gronning, OHara, Sedor, Mills, Givens &
Heaphey, P.C., Anchorage, Bruce E. Gagnon,
Atkinson, Conway & Gagnon, Anchorage, and
Daniel G. Bruce, Baxter, Bruce & Sullivan,
P.C., Juneau, for Appellees.
Before: Bryner, Chief Justice, Eastaugh,
Fabe, and Carpeneti, Justices. [Matthews,
Justice, not participating.]
BRYNER, Chief Justice.
I. INTRODUCTION
The Huna Totem Corporation proposed a land exchange
that became controversial and sparked a struggle for control of
Hunas board of directors; the struggle ended in an unsuccessful
superior court action against individual members of Hunas board.
The pivotal issue on appeal is whether the superior court should
have awarded nominal damages against the directors for violating
two proxy disclosure requirements. We hold that, because the
violations occurred inadvertently as a result of the boards good-
faith reliance on expert advice and thus did not amount to a
fiduciary breach, the superior court properly denied nominal
damages.
II. FACTS AND PROCEEDINGS
In early 1997 the Huna Totem Corporations board of
directors unanimously voted to exchange corporate land for land
held by the United States Forest Service. The proposed exchange
eventually became controversial. Some dissident Huna
shareholders led by Gregory Brown and Karl Greenewald, Jr.,
(collectively, Brown) organized a group named Shareholders for
Shareholders (SFS) to recall the existing board of directors and
amend Hunas bylaws to block the proposed exchange. Huna and SFS
issued competing proxies before the corporations May 1999 annual
meeting. Both organizations subsequently complained to the
Alaska Department of Community and Economic Developments Division
of Banking, Securities, and Corporations (the Division), alleging
numerous proxy violations and irregularities.
Huna held its annual meeting and elections soon after
the Division received these complaints; the SFS recall and
proposed bylaw amendments received insufficient votes to prevail.
Brown then filed suit in superior court against Hunas CEO and
individual members of its board of directors, alleging violations
similar to those charged in the earlier complaints before the
Division and seeking injunctive relief, a declaratory judgment,
compensatory and punitive damages, and an award of costs and
attorneys fees.
Because the issues in the superior court case
paralleled those raised in SFSs complaint to the Division, the
court ordered the civil case to be stayed until the Division
decided the administrative action. The court indicated that
either party could then reactivate the superior court case by
appealing the Divisions ruling or seeking direct resolution of
any issues that the Division left undecided. In issuing this
order, the superior court relied on Wade Oilfield Service Co. v.
Providence Washington Insurance Co. of Alaska.1 There, we
considered an analogous situation and held that when a superior
court case raises regulatory issues involving agency expertise
that are simultaneously raised in a pending administrative
proceeding, the doctrine of primary jurisdiction allows the court
to stay the judicial action and retain jurisdiction until the
administrative proceeding is finally resolved, after which either
party could seek review of the agencys ruling under applicable
law governing administrative appeals.2 SFS did not contest the
stay pending completion of the Divisions proceedings.
After the superior court issued its stay, the Division
investigated the parties complaints and entered a temporary cease
and desist order against Huna, as well as a notice of intent to
levy fines against the company and a notice of right to a
hearing; these orders provisionally found the company guilty of
four separate proxy violations, directed it to cease and desist,
announced that it would be subject to fines totaling $10,000, and
notified it that these temporary provisions would become the
Divisions final order if Huna failed to request a hearing within
fifteen days.
Huna requested a hearing to contest the temporary
orders findings, and an administrative law judge was appointed to
hear the proceeding. The Division and Huna subsequently entered
into a consent agreement that resolved the cease and desist
orders charges and set out various findings.
As to two of the four most prominent violations charged
by the temporary cease and desist order failing to spell out
SFSs proposed amendment in Hunas proxy solicitation materials and
failing to provide a box in the proxy for shareholders to specify
their voting preference the consent decree set out the Divisions
finding that Huna had committed these violations but had acted
inadvertently. As to the cease and desist orders two other
prominent charges alleged misstatements in two election flyers
(the Know the Facts and Code of Conduct flyers) the consent
decree expressly provided that, in the interest of settlement,
the Division agreed not to pursue these allegations. And as to
all other alleged violations, the decree stated that the Division
found these allegations to be either factually unsupported or
insufficiently material to warrant further action. The consent
decree specifically declared itself to be a final settlement of
Hunas liability; it further specified that it would remain in
full force and effect and be binding until it is amended or
vacated by further order of the Administrator or the mutual
agreement of the parties.
After the consent decree was entered, Brown moved to
reopen the dormant superior court case and asked for judicial
notice of the consent decree and the Divisions findings of fact.
The superior court granted the motion in part. While declining
to take notice of the Divisions findings of fact, the court
lifted the stay, directed the civil action to proceed, and took
judicial notice of the decree as the Divisions final decision,
ruling that Brown had exhausted his administrative remedies.
As already mentioned, the courts earlier order staying
the civil case stated that either party would be allowed to
contest the Divisions final decision by following the applicable
procedures for pursuing an administrative appeal to the superior
court. The order had also established that the superior court
would directly resolve any issues left unresolved in the
administrative proceeding.
Brown did not contest the superior courts order
treating the consent decree as the Divisions final decision. Nor
did either party seek to appeal any aspect of that decision.3
The superior court thus set the matter for trial to resolve
issues left undecided by the Divisions consent decree.
By then, Brown had dropped the plaintiffs claim for
injunctive relief and compensatory damages. The only remedy
still sought was a judgment declaring that the individual
defendants had breached their fiduciary duty and an award of
nominal damages against them based on that breach. Given this
procedural setting, the superior court viewed the consent decree
as leaving four issues to be decided at trial. The first two
issues focused on the consent decrees finding that Huna had
inadvertently committed two proxy violations; the court sought to
determine whether either violation amounted to a fiduciary breach
warranting an award of nominal damages. The two remaining issues
focused on the two allegedly misleading proxy flyers the Know
the Facts flyer and the Code of Conduct flyer that the consent
decree had expressly declined to address.
Shortly before trial, Brown asked the superior court to
take judicial notice of the findings of intentional and knowing
proxy violations set out in the Divisions temporary cease and
desist order and to treat those findings as continuing to be
valid and binding. But while agreeing to take notice of the
temporary orders existence, the court declined to regard its
findings as having any continuing force and effect. At trial,
the defendants presented evidence to bolster the consent decrees
finding that the two proxy violations resulted from inadvertent
and good-faith actions; they also sought to show that the
disputed proxy flyers were not materially misleading.
After a two-day trial the superior court entered
extensive oral findings of fact and conclusions of law on the
record, and also issued a thorough written decision. The court
ruled in favor of the defendants, concluding that Brown had
failed to prove a fiduciary breach warranting nominal damages.
Specifically, regarding the two inadvertent proxy
violations described in the Divisions consent decree, the
superior court found that Hunas directors and CEO had acted in
good-faith reliance on expert advice that they had received from
competent, unbiased legal and securities counsel. The court
concluded that no breach of fiduciary duties occurred under these
circumstances. Relying on case law from Delaware and Arizona,
moreover, the court further ruled that it would be inappropriate
to award nominal damages for these inadvertent and good-faith
errors particularly because Brown had failed to allege or prove
that the plaintiffs had actually suffered any compensable
economic harm.
Turning next to the two disputed proxy flyers, the
court evaluated the totality of the circumstances surrounding
their preparation and issuance. As to the Code of Conduct flyer,
the court expressly found that testimony offered at trial by the
plaintiffs lacked credibility; while noting that the flyer itself
could have been more complete, the court found that it was not
materially misleading when viewed in context. Regarding the Know
the Facts flyer, the court similarly observed that, while it
might have been clearer, the flyer did not misstate or omit
material facts and would likely have been understood as a fair
response to statements by SFS members. And in any event, the
court concluded, the flyer did not amount to a fiduciary breach
and so would not support Browns request for nominal damages.
Based on this ruling, the court entered final judgment against
Brown.
Brown appeals.
III. DISCUSSION
On appeal, Brown raises several intertwined claims of
error and generally accuses the defendants of flagrant
misconduct: The six dominant directors and their CEO used an
illegal scheme to steal a corporate election They put their
hands over the ballot box and prevented shareholders from voting
in the directors recall The directors obvious motive was
entrenchment. But these claims tilt the facts and the law in
Browns direction: they largely ignore the superior courts careful
findings, and draw scant support from the record.
A. Proxy Violations
Brown argues at length that the defendants knowingly
committed multiple violations of corporate and securities law by
neglecting to set out the SFS initiative in detail in its proxy
materials and by failing to provide boxes on the proxy for
shareholders to mark their voting preferences. Yet the
defendants do not dispute that these circumstances amounted to
proxy violations. They emphasize instead that the Divisions
consent decree and the superior courts decision expressly found
the violations to be inadvertent errors resulting from the
defendants good-faith reliance on advice they obtained from a
qualified expert on proxy solicitations.
We agree with the defendants position that the nature
and scope of these violations is fixed by the Divisions findings
in the consent decree, which Brown failed to appeal, and by the
superior courts findings, which Brown has not persuasively
refuted.
The Divisions finding of inadvertence was incorporated
in the consent decree, which the superior court specifically
characterized as a final administrative determination from which
either party could appeal to the superior court. Brown asserts
in his reply brief that he could not have appealed from the
consent decree. Yet the superior courts express orders to the
contrary belie this conclusory assertion. The courts order
staying the case specifically decided that the Divisions final
determination would be subject to an administrative appeal under
the approach described in Wade Oilfield Service Co. v. Providence
Washington Ins. Co. of Alaska.4 And the courts subsequent order
dissolving the stay expressly deemed the consent decree to be the
Divisions final decision. Brown challenges neither order, which
together unambiguously required him to appeal any disputed
finding embodied in the consent decree. Because his failure to
appeal the point to the superior court precluded the preparation
of an administrative record and prevented that court from
reviewing the Divisions finding that the violations amounted to
inadvertent technical errors, Brown is now bound by this
characterization and is barred from advancing a contrary argument
here.
Brown nonetheless maintains that the consent decree was
merely a settlement agreement to dismiss the Divisions charges,
and so could not contain any meaningful findings. The Divisions
true findings, according to Brown, are located in its earlier
cease and desist order; and these findings continue to be
binding, Brown insists, because they have never been vacated.
Since the cease and desist orders findings characterize the
defendants violations as knowing or intentional actions that
amount to fiduciary breaches, Brown contends, these findings bar
the defendants from claiming inadvertence and good-faith
reliance.
On its face, however, the cease and desist order was
designated as a temporary order. Moreover, its findings were
merely preliminary: they were provisionally slated to become
final and binding only if Huna failed to request a hearing. As it
happened, Huna did file a timely request for a hearing, so the
findings remained mere allegations. And although the ensuing
consent decree undeniably reflected an amicable settlement, it
hardly resulted in an outright dismissal of the administrative
proceeding. Instead, the decree required Huna to relinquish its
right to dispute the charges of committing two proxy violations
and called for it to agree to pay the Division a substantial sum
as costs of investigation. In return, the Division set out
formal and final findings that Huna had committed two proxy
violations that were inadvertent; it agreed to drop the cease and
desist orders allegations stemming from Hunas two proxy flyers;
and it found all other alleged irregularities to be factually
unsupported or inconsequential.
As the defendants correctly observe, these findings by
the Division superseded, and thus effectively vacated, the
temporary cease and desist orders prior findings. The superior
court properly viewed the consent decree as incorporating the
Divisions formal and binding findings.
Brown separately asserts that the superior court erred
in excusing the defendants of fiduciary breaches even if they
acted inadvertently and out of good-faith reliance. Because
intentional misconduct or bad faith is unnecessary for a
violation of securities laws,5 Brown reasons, the superior courts
reliance on inadvertence and good faith erroneously required him
to prove scienter. But this argument conflates proof of a
violation with proof of a corporate directors or officers
individual liability for fiduciary breach: while good faith and
inadvertence may be irrelevant as to the former, this is not
necessarily so as to the latter. As the superior court tacitly
recognized, AS 10.06.450(b) controls the issue for corporate
directors, requiring directors to perform their duties
in good faith . . . and with the care,
including reasonable inquiry, that an
ordinarily prudent person in a like position
would use under similar circumstances.
[Except when a director knows that reliance
is unwarranted], a director is entitled to
rely on information, opinions, reports or
statements, including financial statements
and other financial data, in each case
prepared or presented by . . . counsel,
public accountants, or other persons as to
matters that the director reasonably believes
to be within the persons professional or
expert competence.[6]
Corporate officers are governed by a similar provision set out in
AS 10.06.483. The superior court thus properly took stock of
inadvertence and good-faith reliance in evaluating the defendants
individual liability for fiduciary breach.7
Brown insists that these protections do not extend to
entrenchment cases like this one, where directors have breached
their fiduciary duty of loyalty by impairing the shareholders
voting rights. He cites a United States District Court case from
Nevada, Shoen v. Amerco,8 as a useful model for the rule needed
here in Alaska. But Brown overstates Shoens ruling, which seems
to preclude good-faith reliance on experts as a defense in
shareholder voting cases only when the action in question
intentionally impairs the shareholder vote:
[W]hile the reasonable exercise of good faith
and due care generally validates, in equity,
the exercise of legal authority even if the
act has the effect of entrenching incumbent
board members, action designed for the
primary purpose of interfering with the
effectiveness of a stockholder vote is
subject to a standard of review more
demanding than the business judgment rule.
In such a case, the board bears the heavy
burden of demonstrating a compelling
justification for such action. It is this
concern for credible corporate democracy[ ]
[that] underlies those cases that strike down
board action that sets or moves an annual
meeting date upon a finding that such action
was intended to thwart a shareholder group
from effectively mounting an election
campaign.[9]
Here, despite Browns arguments to the contrary, the
Divisions finding of inadvertence precludes any contention that
the proxy violations were intended to thwart [SFS] from
effectively mounting an election campaign.10
B. Proxy Flyers
Brown briefly advances a similar claim that the Code of
Conduct and Know the Facts proxy flyers violated the law by
impermissibly misleading Huna shareholders and disparaging SFS
candidates. In raising this claim, Brown avoids directly
addressing the superior courts decision, which concluded that
neither flyer materially violated applicable regulations. Brown
does not contend that the factual findings underlying these
conclusions were unsupported by the evidence at trial; nor does
he specify how the courts reasoning might be legally flawed.
Instead, Brown simply asserts that the temporary cease and desist
orders findings conclusively establish that the defendants
intentionally committed multiple proxy violations.11
As already discussed above, however, the temporary
cease and desist orders findings were superseded by the
subsequent consent decree, which expressly left the proxy-flyer
issues unresolved. The superior court heard evidence on these
issues at trial and resolved them in its decision. Brown has
failed to demonstrate that the superior court erred on this
point.
C. Other Alleged Violations
Brown salts his brief with various allegations of
additional proxy violations. He argues, for example, that Huna
improperly put its thumb on the election scales by paying for
proxies. He suggests that the defendants improperly spent
corporate funds and resources to influence the election. He also
claims that they exacerbated the situation by delaying Hunas
distribution of required proxy information. But the consent
decree implicitly addressed these points by expressly providing
that all other allegations were found not to be supported by the
facts or not to rise to the level of materiality required for
administrative action. Given Browns failure to appeal this
finding to the superior court, it appears to control these
miscellaneous points.12
D. Nominal Damages
Last, Brown insists that the superior court erred in
failing to hold the defendants liable for nominal damages, even
if it properly found that their violations reflected inadvertent
and good-faith reliance, and even though no actual harm was
alleged or proved. According to Brown, nominal damages are
appropriate and should be awarded as a matter of course for any
proxy violation in a shareholder election case. Brown cites an
array of Delaware cases13 and the United States District Courts
ruling in Shoen v. Amerco14 to support his proposal to adopt a per
se nominal damages rule.
We find Browns argument unpersuasive, since we do not
read the authorities he cites to create a blanket rule requiring
courts to award nominal damages against individual directors and
officers for innocent proxy violations in shareholder election
contests. The defendants persuasively argue that the Delaware
cases only approve nominal damages when actual economic harm is
proved or apparent. Furthermore, as already indicated, Shoen
suggests that director-liability in such cases for good-faith or
innocent violations should be limited to violations stemming from
conduct designed to restrict shareholders voting rights. And a
more recent decision by the Arizona Court of Appeals involving
the same parties and controversy at issue in Shoen flatly held
that nominal damages may not be awarded without proof that actual
economic harm has occurred.15
In the present case, we see no need to define the
permissible outer limits for awarding nominal damages in
situations involving director entrenchment; instead, we assume
for the sake of deciding the specific issue before us that the
superior court had discretion to award nominal damages. Here,
the court carefully considered all relevant evidence concerning
the inadvertent nature of the proxy violations at issue and the
defendants good-faith reliance on competent expert advice; the
court likewise considered the absence of any evidence of actual
economic harm and the lack of any claim for injunctive relief.
After properly taking account of Alaskas statutory business
judgment provisions and thoughtfully reviewing the relevant
authorities in other jurisdictions, the superior court exercised
its discretion by declining to award nominal damages. Having
carefully considered the totality of the record and reviewed the
cited authorities, we hold that Brown has failed to establish
that the superior court abused its discretion.
IV. CONCLUSION
We AFFIRM the superior courts judgment.
_______________________________
1 759 P.2d 1302, 1305 (Alaska 1988).
2 Id.
3 The procedures governing administrative appeals to the
superior court from a final order of the Division are set out in
AS 45.55.940 and Appellate Rules 601-612. Alaska Statute
45.55.940(a) provides, in relevant part: A person aggrieved by a
final order of the administrator may obtain a review of the order
in the superior court by filing, in accordance with the Rules of
Appellate Procedure, a notice of appeal. Appellate Rule 601(a)
generally authorizes the superior court to hear an appeal from
the decision of an administrative agency, and Appellate Rule
602(a)(2) specifies that the administrative appeal must be filed
within 30 days from the date that the decision appealed from is
mailed or otherwise distributed to the appellant.
4 759 P.2d 1302, 1305 (Alaska 1988).
5 See, e.g., Skaflestad v. Huna Totem Corp., 76 P.3d 391,
396 (Alaska 2003).
6 AS 10.06.450(b)(1), (c).
7 Cf. Shields v. Cape Fox Corp., 42 P.3d 1083, 1091-92
(Alaska 2002).
8 885 F. Supp. 1332, 1340-41 (D. Nev. 1994).
9 Id. at 1341 (quoting Blasius Indus., Inc. v. Atlas
Corp., 564 A.2d 651, 659, 661, 659 n.2 (Del. Ch. 1988)).
10 Id.
11 Brown attributes added significance to findings set out
in a decision letter that the Division sent to Browns attorney
shortly before issuing the cease and desist order. But the
decision letter merely advised Brown that the temporary cease and
desist order was about to be issued, and reiterated the findings
contained in that order. Because the findings in the letter
simply mirrored those in the forthcoming order, the letter could
have no independent evidentiary value.
12 The lack of an administrative record prevents us from
confirming that these points were actually included among the
other allegations considered by the Division. But even if they
were not, these miscellaneous claims would be barred by Browns
failure to raise them as issues remaining for trial after the
superior court revived the original civil action.
13 See, e.g., Malone v. Brincat, 722 A.2d 5, 12 (Del.
1998); Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 142 &
nn. 26-27 (Del. 1998).
14 885 F. Supp. 1332, 1341 (D. Nev. 1994).
15 Amerco v. Shoen, 907 P.2d 536, 540-42 (Ariz. App.
1995).
