Joann HOLMES and Mitch Gregoroff, Appellants and Cross-Appellees,
Kane WOLF, Carole Pagano, and Frank Grant, Appellees and Cross-Appellants.
[Copyrighted Material Omitted]
Michael J. Walleri, Law Offices of Michael J. Walleri, Fairbanks, for Appellants/Cross-Appellees.
David D. Clark, Law Office of David Clark, Anchorage, for Appellees/Cross-Appellants.
Before: FABE, WINFREE, CHRISTEN, and STOWERS, Justices.
Joann Holmes and Mitch Gregoroff appeal decisions by the superior court in connection with a shareholders' lawsuit against two current members and one former member of the Board of Directors of Leisnoi, Inc. (" Leisnoi" ) for failure to hold annual shareholder meetings, failure to prepare and distribute annual shareholder reports, failure to obtain and send out annual audited financial reports, and failure to reasonably inquire into a mediated settlement agreement. On appeal, Holmes and Gregoroff argue that the superior court should have ordered the defendant directors to hold annual shareholder meetings, to prepare and send annual shareholder reports, and to obtain and distribute annual audited financial reports. They also appeal the superior court's dismissal of the plaintiff shareholders' derivative claims, failure to award the plaintiff shareholders nominal damages, failure to bar Leisnoi from indemnifying the defendant directors, and award of enhanced attorney's fees against the plaintiff shareholders. Because we conclude that none of the superior court's decisions was in error, we affirm the superior court in all respects.
II. FACTS AND PROCEEDINGS
Leisnoi, Inc. (" Leisnoi" ) is certified under the Alaska Native Claims Settlement Act (ANCSA) as an Alaska Native Corporation for Kodiak's Woody Island. In October 2004 Robert Erickson, one of Leisnoi's shareholders, filed a complaint against Kane Wolf, Carole Pagano, and Frank Grant, three of Leisnoi's five directors, for failure to hold an annual meeting within thirteen months in violation of Alaska law and failure to provide an annual shareholder report in violation of Alaska law. The complaint also alleged that the defendants had breached their fiduciary duties to the corporation and had been improperly installed as directors.
In January 2005 the defendants filed a motion to require Erickson to file a security for reasonable attorney's fees and costs pursuant to the requirements for derivative shareholder lawsuits set forth in AS 10.06.435(h) and Alaska Civil Rule 23.1(h). The superior court granted the motion and ordered Erickson to file a security of $5,000. In April 2005 Erickson filed an amended complaint adding 17 shareholders, including Holmes and Gregoroff, as plaintiffs. In addition to the earlier allegations, this complaint alleged that the defendants failed to obtain an annual audit in violation of federal law. The plaintiffs requested money damages and orders directing the defendant directors to
hold a shareholder meeting and new election for all directors, to obtain an audit and send all financial statements to the shareholders, and to enter into a settlement with Omar Stratman.
In November 2005 the plaintiffs filed a motion to vacate the order requiring a security on the ground that the 18 plaintiffs listed in the third amended complaint held more than five percent of Leisnoi's outstanding shares. The superior court declined to vacate its order because the complaint had not been verified by all of the named plaintiffs.
The plaintiff shareholders filed two motions for partial summary judgment, one relating to the Board's failure to issue annual reports and the other relating to the Board's failure to enter into a settlement with Stratman. At oral argument on these motions in May 2006, the parties stipulated to dismiss the prayer for relief seeking a court order that the defendant directors enter into a settlement with Stratman, but they agreed that the dismissal would have no effect on the plaintiffs' claims for breach of fiduciary duties. In June the superior court denied the summary judgment motions, concluding that because issuing annual reports is a duty owed by all members of Leisnoi's Board of Directors, the plaintiff shareholders could only obtain relief by suing all five of Leisnoi's directors and/or Leisnoi, not just three individual directors. In light of the superior court's ruling, the plaintiffs informed the court that they would add Frank Pagano and Shannon Johnson, the other two directors, as defendants, but it does not appear that they ever did so.
In December 2006 the superior court granted a motion by the defendants to require the plaintiffs to file an increased security, and in February 2007 it denied a request by plaintiffs to stay that order. At that point, the court had dismissed two of the 18 plaintiffs listed on the third amended complaint.  In March 2007 the court dismissed five more plaintiffs. One month later, in April 2007, the defendants filed a motion to dismiss the plaintiffs' claims for their failure to file the court-ordered increased security. The superior court granted the defendants' motion to dismiss as to the plaintiffs' derivative claims. In late July the case went to trial.
In March 2008 the superior court issued its findings of fact and conclusions of law. It again concluded that it could not order the defendants, only three of the five directors, to hold annual shareholder meetings, prepare and send annual shareholder reports, or obtain and distribute annual audited financial reports. It further concluded that the defendant directors did not breach their duties regarding annual meetings or annual reports but did breach their duties by failing to inform themselves about the federal requirement to conduct annual financial audits and by failing to bring the requirement to the attention of the Board. Finally, the superior court concluded that the then-current Board of Directors was properly elected or appointed. The superior court ordered the defendants to raise with the entire Board of Directors the necessity of conducting an annual audit and to provide the Board's decision to the plaintiffs.
The plaintiffs filed motions requesting that the superior court reconsider its order dismissing their derivative claims as to breach of fiduciary duty, bar the defendants from indemnification by Leisnoi, and hold a post-trial hearing to determine money damages. All three motions were denied. The superior court also denied a cross-motion from the defendants to amend its findings.
Joann Holmes and Mitch Gregoroff, two of the eleven plaintiff shareholders who were part of this lawsuit when it concluded at the superior court level, appeal. The defendant directors cross-appeal.
III. STANDARD OF REVIEW
" We apply our independent judgment to any questions of law, adopting the rule of law that is most persuasive in light of precedent, reason, and policy."  We review a trial court's findings of fact under the clearly erroneous standard  and review awards for nominal damages and enhanced attorney's fees for abuse of discretion.
Holmes and Gregoroff appeal several decisions by the superior court. We first address the arguments that it was error to require the plaintiff shareholders to file a security, to increase the amount of the security, and then to dismiss their derivative shareholder claims for failure to file the increased security. Under AS 10.06.435(h) and Civil Rule 23.1(h), where a derivative action is brought by holders of less than five percent of a corporation's outstanding shares, " the corporation in whose right the action is brought or the defendants may at any time before final judgment move the court to require the plaintiff to give security for the reasonable expense, including attorney fees, that may be incurred by the moving party." As the statute and rule continue, " [t]he amount of the security may be increased or decreased from time to time in the discretion of the court upon a showing that the security has become inadequate or excessive."
Holmes and Gregoroff argue that the superior court should not have required the plaintiffs to post a security because they held more than five percent of Leisnoi's outstanding shares. They also argue that the superior court should not have required a security " because the [plaintiffs'] claims clearly had substantial merit." We conclude that the superior court's finding that the plaintiffs held less than five percent of Leisnoi's outstanding shares was not clearly erroneous. Thus, the superior court did not err in requiring the plaintiffs to post a security, in increasing that security, or in dismissing the plaintiffs' claims for failure to file the increased security. Holmes and Gregoroff's arguments were addressed by the superior court's order denying the plaintiffs' motion to stay the order requiring an increased security, and we adopt that order below as Appendix A.
In affirming the superior court's dismissal of all the plaintiffs' derivative claims, we also affirm its dismissal of the plaintiffs' breach of fiduciary duty claim for failure to reasonably inquire into the proposed mediated settlement with Stratman because, as the plaintiffs acknowledged in one of their post-trial motions, this claim is a derivative claim. Although the plaintiffs had filed a motion for summary judgment on this claim in March 2006, the claim was live until July 2007 when
it was dismissed with the plaintiffs' other derivative claims.
We next address the parties' arguments regarding annual shareholder meetings, annual shareholder reports, and annual audited financial reports. The plaintiffs argued below that the superior court should order the defendants-who represented a majority of the Board of Directors-to hold annual shareholder meetings, prepare and distribute annual shareholder reports, and obtain and distribute annual audited financial reports. In denying the plaintiffs' motions for partial summary judgment and in making its final rulings after trial, the superior court concluded that because these statutory obligations rest not with individual directors but with Leisnoi itself and with its Board of Directors as a whole, it could not order three out of the five directors to fulfill them. The superior court also concluded that the defendants had not breached their fiduciary duties with respect to holding annual shareholder meetings or providing shareholders with annual reports. However, the superior court concluded that the defendants had breached their fiduciary duties by failing to inform themselves about the federal requirement to conduct annual financial audits and by failing to bring the requirement to the attention of the Board. For that reason, the superior court ordered the defendant directors to raise the issue of the federal audit requirement with the full Board of Directors. On appeal, Holmes and Gregoroff maintain that the superior court " had sufficient parts-a majority of the board-before it to fashion a remedy." In their cross-appeal, Wolf, Pagano, and Grant argue that it was error to conclude that they violated their fiduciary duties because the plaintiffs did not prove damages. We conclude that the superior court did not err in declining to order the plaintiffs to hold annual shareholder meetings, prepare and distribute annual shareholder reports, or obtain and distribute annual audited financial reports. We also conclude that the superior court did not err in determining that the defendant directors did not act with reasonable care by failing to inform themselves about the federal requirement to conduct annual financial audits and by failing to bring the requirement to the attention of the Board. The superior court addressed these arguments in three orders-one denying the plaintiffs' motions for summary judgment, one setting out its findings of fact and conclusions of law, and one denying post-trial motions filed by the plaintiffs and the defendants. We adopt these orders, which we attach as Appendix B, Appendix C, and, to the extent that it addresses the defendants' cross-appeal, Appendix D.
Holmes and Gregoroff also argue that it was error not to award nominal damages to the plaintiff shareholders after finding that the defendants breached their fiduciary duties. We conclude that declining to award the plaintiffs nominal damages under the circumstances of this case was not an abuse of discretion. The superior court addressed this issue in the order we attach as Appendix D, and we adopt that order to the extent that it addresses plaintiffs' argument and does not conflict with this opinion. In Brown v. Dick, we held that the superior court was not required to award nominal damages against individual directors and officers of a corporation for proxy disclosure violations in shareholder election contests. As in Brown, we do not define " the permissible outer limits for awarding nominal damages" in situations involving a director's breach of fiduciary
duty. In this case, the superior court found that " the directors ... acted in good faith and in the best interests of Leisnoi" and were not " engaged in self-dealing" but were " serving on a pro bono basis for the benefit of Leisnoi and its shareholders." After reviewing applicable case law, the superior court determined that Alaska has no per se rule requiring an award of nominal damages where there is a breach of fiduciary duties under these circumstances. We agree and hold that failing to award nominal damages against the directors in this case was not an abuse of discretion.
Finally, Holmes and Gregoroff argue that the superior court should have barred Leisnoi from indemnifying the defendant directors after it concluded that the defendant directors breached their fiduciary duties with respect to the audited financial reports. Under AS 10.06.490(a), a corporation may indemnify its directors for expenses " reasonably incurred" in connection with litigation " if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation." Under AS 10.06.490(c), a corporation must indemnify a director who " has been successful on the merits or otherwise" in defense of certain lawsuits. It is not clear that the relief sought by plaintiffs, barring indemnification of directors, is available in a lawsuit against three of five individual directors. But it is clear that the superior court did not err in declining to bar Leisnoi from indemnifying the defendant directors because, under AS 10.06.490(c), the defendants' success on the merits of this case entitled them to indemnification. We therefore adopt the superior court's order declining to bar Leisnoi from indemnifying the defendants, which we attach as Appendix E.
For these reasons and the reasons discussed in the superior court's attached orders, we AFFIRM the superior court in all respects.
CARPENETI, Chief Justice, not participating.
IN THE SUPERIOR COURT FOR THE STATE OF ALASKA THIRD JUDICIAL DISTRICT AT ANCHORAGE
ROBERT ERICKSON, et al., Plaintiffs,
KANE WOLF, CAROLE PAGANO and FRANK GRANT, Defendants.
Case No. 3AN-04-13743CI
This matter is before the court on a Motion to Stay Order Requiring the Plaintiffs to Increase the Amount of the Bond.
In increasing the security, this court considered whether the 5% threshold had been met. Plaintiffs assert that there are 17 plaintiffs owning 166.31 shares, and with 2,639 outstanding shares, this is 6.2%. The plaintiffs are wrong to the extent that the number of total shares in the corporation is 2,971.801.  After adding up all of the shares of the plaintiffs named in the Third Amended Complaint, all named plaintiffs hold 166.313 outstanding shares. However this includes the 10 shares of Rosebel Baldwin, dismissed on March 17, 2006, and the 12 shares of Augustine Yovina, dismissed on April 25, 2006. Subtracting their 22 shares from the 166.313 leaves the remaining plaintiffs with 144.313 shares. Using 2,971.801 as the correct
number of outstanding shares leaves the remaining plaintiffs with only 4.8561 percent, short of the 5% required under Civil Rule 23.1(h). Further, the remaining plaintiffs have not verified the complaint. There is an issue whether Hazel Ardinger, who holds 10 shares, has agreed to proceed as a plaintiff.
The standard for issuing a stay on appeal is the same three-part test for deciding whether an injunction should issue. This involves whether exigent circumstances require that relief be granted before a full adjudication on the merits. In deciding whether to grant or deny a preliminary injunction, Alaska courts apply the " balance of hardships" test. Immediate injunctive relief is warranted when the following three factors are present: " (1) the plaintiff must be faced with irreparable harm; (2) the opposing party must be adequately protected; and (3) the plaintiff must raise ‘ serious' and substantial questions going to the merits of the case."  Where the harm is not irreparable, or where the other party cannot be adequately protected, then the moving party must show probable success on the merits.
Applying this standard for granting the stay, this court concludes that the balance of hardship tests does not warrant a stay here. Plaintiffs have not shown irreparable harm, and further have not raised serious and substantial questions going to the merits of the issue, much less probable success on the merits of the case.
Accordingly, the Motion for a stay is denied.
Dated Feb. 22/07 at Anchorage, Alaska.
Sen K. Tan, Superior Court Judge
IN THE SUPERIOR COURT FOR THE STATE OF ALASKA THIRD JUDICIAL DISTRICT AT ANCHORAGE
ROBERT ERICKSON, et al., Plaintiffs,
KANE WOLF, CAROLE PAGANO, and FRANK GRANT, Defendants.
Case No. 3AN-04-13743CI
Before the court are two motions for summary judgment. The first, defendants' motion filed in April of 2005 with a late-filed opposition in May of 2006 related to plaintiffs' prayer for relief to order the defendants to enter into a settlement agreement with Omar Stratman, and the second, plaintiffs' motion with respect to claims for failure to provide annual reports. The court heard oral argument on May 24, 2006 on both of these motions and will address each in this order.
(1) Defendants' Motion for Summary Judgment Re: Prayer for Relief Five (5) Seeking To Order Defendants To Enter into a Settlement Agreement with Omar Stratman.
Defendants moved for summary judgment on plaintiffs' claim that seeks an order that the defendants enter into a settlement with Omar Stratman. At oral argument the parties stipulated that prayer for relief five (5) in the third amended complaint should be dismissed. The parties further agreed that the dismissal of this prayer for relief shall not have any effect on the plaintiffs' claims for breach of fiduciary duties. This court accordingly granted the dismissal of the claim on the record.
(2) Plaintiffs' Motion for Summary Judgment Re: Counts II and III
Plaintiffs have moved for summary judgment on counts II and III of their complaint. These two counts allege that the defendants failed to prepare and distribute annual reports. Plaintiffs rely on AS 10.06.433 for their proposition that they should be awarded penalties for the corporation's
failure to provide annual reports for certain years between 1999 and 2004. Alaska Statute 10.06.433(f) provides that " [a] corporation that neglects, fails, or refuses to prepare or submit" an annual report is subject to a penalty of $25 per day with a maximum penalty of $1500. (Emphasis added.)
The lead plaintiff in this case, Erickson, made a demand on the corporation for missing annual reports in August of 2004, and in October of 2004 filed suit against three of the corporation's directors. Subsequently, numerous other shareholders have joined the suit as plaintiffs. The plaintiffs now seek penalties from the named directors for failing to send out annual reports. Plaintiffs argue that the defendant directors should be liable for penalties for failing to prepare and provide annual reports essentially based on the status of a corporation as a legal fiction. They argue that the corporation cannot act without some action by the board and therefore the board and its directors are liable for the corporation's actions or inactions.
The defendants oppose the motion, arguing that any penalties for such a failure to provide annual reports are the obligation of the ...