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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. 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).