1 For 3 Million Reverse Split Fraud Claim Survives Motion To Dismiss

Nancy Wojtas at Cooley LLP alerted me to an interesting ruling case decided last week by the U.S. District Court for the Eastern District of New York, Gardner v. Major Auto. Cos., 2012 U.S. Dist. LEXIS 118191 (E.D. N.Y. Aug. 21, 2012).

According to a complaint, Bruce Bendell was the Chairman, Chief Executive Officer, and Chief Financial Officer of Major Automotive Companies, Inc., a Nevada corporation with its principal place of business in New York ("Major Automotive").  In December 2010, Major Automotive circulated a notice of special meeting of stockholders.  The purpose of the meeting was to vote on a 1-for-3,000,000 reverse stock split pursuant to which Mr. Bendell would become Major Automotive's sole stockholder.

In considering the plaintiffs' breach of fiduciary duty claim, Judge Frederic Block first ruled that Nevada law applied under New York's choice of law rules.  He noted that the Nevada Supreme Court has not directly addressed a director's fiduciary duty in a freeze-out merger case, but found that the situation was analogous to a cash-out merger. Quoting the Nevada Supreme Court's Cohen v. Mirage Resorts, Inc., 117 Nev. 1 (2003), Judge Block found:

"A minority shareholder may assert a direct claim that a 'merger was accomplished through the wrongful conduct of majority shareholders, directors, or officers of the corporation and attempt to hold those individuals liable for monetary damages under theories of breach of fiduciary duty or loyalty.'"

Reviewing the plaintiffs' complaint, Judge Block ruled that the plaintiffs' had alleged sufficient facts to state a claim, citing the alleged failure to establish a committee of disinterested directors, the failure to disclose that Mr. Bendell was either the sole or dominant member of the board of directors, and the failure to deliver current financial information that allegedly would have disclosed an improved financial situation.

Judge Block also found that the plaintiffs' failure to exercise their rights under Nevada's dissenters' rights law did not bar them from suing.  NRS 92A.380(2) provides that "A stockholder who is entitled to dissent and obtain payment pursuant to NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action creating the entitlement unless the action is unlawful or fraudulent with respect to the stockholder or the domestic corporation."  Judge Block, however, ruled (again citing Cohen) that fraud encompasses a wide variety of acts involving breach of fiduciary duty. 

As discussed in Chapter 9 of  my book, Bishop & Zucker on Nevada Corporations and Limited Liability Companies, Nevada, with certain exceptions, broadly immunizes directors and officers from liability for damages to the corporation, its stockholders and its creditors.  Pursuant to NRS 78.138(7), a director or officer will not be liable unless it is proven  that (i) the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and (ii) the breach of those duties involved intentional misconduct, fraud or a knowing violation of law.

Private Fund Adviser Rule Clears Final Hurdle

As reported in this post, the Department of Corporations submitted its proposed amendments to Rule 260.204.9 to the Office of Administrative Law last month.  I'm told that the OAL has completed its review and the amended rule has been filed with the Secretary of State with a request of immediate effectiveness.  See Cal. Govt. Code § 11343.4.