Mclaughlin v. Schenk

230 P.3d 146 (2009)

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Nature of the Case

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Facts

Cookietree, Inc. is a privately held Utah corporation that produces and retails baked goods. The company was formed in 1981, with Greg Schenck and his father, Boyd Schenck. Greg was named president at the corporation's founding. In 1992, Greg recruited (P) to work as the operations leader for Cookietree. P was quickly promoted to vice president of operations and then chief operating officer and vice president of operations. P also invested his personal finances in the corporation by slowly purchasing increasing amounts of shares in the corporation. P had an option of acquiring up to 200,000 shares of common stock in the company. P was an at-will employee, and either party could terminate the employment relationship at any time so long as six-months notice was given. In 1993, Cookietree and P entered into an Incentive Stock Option Agreement that allowed P to purchase an additional 200,000 shares of the company's common stock. This agreement also required P to agree to a 1991 Shareholder Agreement. The 1991 Shareholder Agreement limited the ability of shareholders to sell, assign, or pledge their common stock. Cookietree had a first right of refusal. Then shareholders would get the right. If any shares were left, they could be sold to anyone. The board of directors or the owners of at least two-thirds of the shares (excluding the shares owned by the selling shareholder) could waive the agreement's restrictions on share transfers. In 1998, the majority shareholder, Boyd Schenck, passed away. Just before his death, he transferred 818,000 shares to Greg. Greg owned around 49 percent of Cookietree, with Boyd Schenck retaining around ten percent (545,200) of the company's shares. Boyd's wife, Anna, sold Greg the 545,200 shares, making Greg the majority shareholder, with about sixty-five percent of the company's stock. This transfer was not recorded, and a right of first refusal was not provided to the corporation or the other shareholders. Stock certificates were nonetheless issued. The transfer violated the 1991 Shareholder Agreement. In 2003, Greg was interested in selling Cookietree. P wanted to purchase the company and sent a letter of intent. P was never able to raise the full amount of the purchase price. Greg began discussions with, Otis Spunkmeyer. Things went south between P and Greg. P would not agree to various terms of the Otis Spunkmeyer transaction, including consent to a non-compete agreement. P then learned of the prior stock transfer. P insisted on his right of first refusal for any sold and transferred stock. P was eventually fired. P continued to receive his salary and bonuses for six months, although this compensation was paid at his original contract rate rather than his current salary and bonus rate. P was immediately relieved of all duties, blocked from company email, and excluded from the corporate premises. P sued Ds for breach of contract and breach of fiduciary duty based on Greg's stock acquisition. P also filed a derivative action. P was awarded damages for Cookietree's breach of an implied duty of good faith and fair dealing for paying the 1992 contract salary rate for P's severance pay rather than his most recent salary and bonus rate. The arbitrator dismissed all other contract claims and deferred to the district court to resolve the breach of fiduciary duty claim relating to the termination. In May 2005 during an unnoticed meeting, Cookietree's board of directors ratified the 1999 stock transaction by waiving the corporation's right of refusal. The shareholder consent represented nearly ninety percent, of Cookietree's shares. Ds moved to dismiss P's claims on summary judgment. The court granted the motion and held Greg did not owe any fiduciary duty to P with respect to the 'dealings related to McLaughlin in his role as an employee' and that Cookietree, not Greg, terminated P from his employment. The district court found that 'all of the actions taken by both Cookietree and Mr. Schenck were within the terms of the [1991 shareholder] agreement and, to the extent certain corporate actions were not undertaken at the time of the sale, the 2005 waiver and ratification actions were effective as a matter of law.' P appealed.