Articles Posted in Corporate Compliance

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Employee-shareholders Steven Nichols, Deborah Deavours, Terry Akers, Thomas Dryden, and Gary Evans appealed a circuit court’s dismissal of their action against HealthSouth Corporation ("HealthSouth"). The employee shareholders at one time were all HealthSouth employees and holders of HealthSouth stock. In 2003, the employee shareholders sued HealthSouth, Richard Scrushy, Weston Smith, William Owens, and the accounting firm Ernst & Young, alleging fraud and negligence. The action was delayed for 11 years for a variety of reasons, including a stay imposed until related criminal prosecutions were completed and a stay imposed pending the resolution of federal and state class actions. In their original complaint (and in several subsequent amended complaints) the employee shareholders alleged that HealthSouth and several of its executive officers mislead investors by filing false financial statements of HealthSouth from 1987 forward. When the employee shareholders filed their action, the Alabama Supreme Court's precedent held: (1) that "[n]either Rule 23.1[, Ala. R. Civ. P.,] nor any other provision of Alabama law required stockholders' causes of action that involve the conduct of officers, directors, agents, and employees be brought only in a derivative action," and (2) that claims by shareholders against a corporation alleging "fraud, intentional misrepresentations and omissions of material facts, suppression, conspiracy to defraud, and breach of fiduciary duty" "do not seek compensation for injury to the [corporation] as a result of negligence or mismanagement," and therefore "are not derivative in nature." In the present case, the Alabama Supreme Court concluded the employee shareholders' claims were direct rather than derivative and that, the trial court erred in dismissing the employee shareholders' claims for failure to comply with Rule 23.1, Ala. R. Civ. P. Furthermore, the Court found employee shareholders' eighth amended complaint related back to their original complaint and thus the claims asserted therein were not barred by the statute of limitations. Accordingly, the judgment of the trial court was reversed and the cause remanded for further proceedings. View "Nichols v. HealthSouth Corporation" on Justia Law

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Employee-shareholders Steven Nichols, Deborah Deavours, Terry Akers, Thomas Dryden, and Gary Evans appealed a circuit court’s dismissal of their action against HealthSouth Corporation ("HealthSouth"). The employee shareholders at one time were all HealthSouth employees and holders of HealthSouth stock. In 2003, the employee shareholders sued HealthSouth, Richard Scrushy, Weston Smith, William Owens, and the accounting firm Ernst & Young, alleging fraud and negligence. The action was delayed for 11 years for a variety of reasons, including a stay imposed until related criminal prosecutions were completed and a stay imposed pending the resolution of federal and state class actions. In their original complaint (and in several subsequent amended complaints) the employee shareholders alleged that HealthSouth and several of its executive officers mislead investors by filing false financial statements of HealthSouth from 1987 forward. When the employee shareholders filed their action, the Alabama Supreme Court's precedent held: (1) that "[n]either Rule 23.1[, Ala. R. Civ. P.,] nor any other provision of Alabama law required stockholders' causes of action that involve the conduct of officers, directors, agents, and employees be brought only in a derivative action," and (2) that claims by shareholders against a corporation alleging "fraud, intentional misrepresentations and omissions of material facts, suppression, conspiracy to defraud, and breach of fiduciary duty" "do not seek compensation for injury to the [corporation] as a result of negligence or mismanagement," and therefore "are not derivative in nature." In the present case, the Alabama Supreme Court concluded the employee shareholders' claims were direct rather than derivative and that, the trial court erred in dismissing the employee shareholders' claims for failure to comply with Rule 23.1, Ala. R. Civ. P. Furthermore, the Court found employee shareholders' eighth amended complaint related back to their original complaint and thus the claims asserted therein were not barred by the statute of limitations. Accordingly, the judgment of the trial court was reversed and the cause remanded for further proceedings. View "Nichols v. HealthSouth Corporation" on Justia Law

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In 2014, Traci Salinas and Sharon Lee Stark, as shareholders of Sterne Agee Group, Inc. ("SAG") filed a shareholder-derivative action, on behalf of nominal defendant SAG, against James and William Holbrook and the nonHolbrook directors, who together composed the SAG board of directors. Salinas and Stark alleged that the Holbrooks had breached their fiduciary duty to the SAG shareholders by misusing, misappropriating, and wasting corporate assets and that the non-Holbrook directors had knowledge of, and had acquiesced in, the Holbrooks' alleged misconduct. In 2015, while Salinas and Stark's action was pending, SAG entered into a merger agreement with Stifel Financial Corp. ("Stifel") pursuant to which Stifel would acquire SAG ("the merger"). As a result of the merger, each share of certain classes of SAG stock was to be converted into a right of the shareholder to receive a pro rata share of merger consideration in cash and/or shares of Stifel common stock. The Holbrooks moved for summary judgment in which they argued that, under Delaware law, when a plaintiff in a shareholder-derivative action ceases to be a shareholder of the corporation on whose behalf the action was brought, the shareholder was divested of standing to continue prosecuting the derivative action. Thus, the Holbrooks argued, because Salinas and Wainwright were no longer SAG shareholders following the merger, they lacked standing to prosecute their derivative action and, the argument continued, the Holbrooks were entitled to a judgment as a matter of law. In response, Salinas and Wainwright amended their complaint to allege that a merger "cannot absolve fiduciaries from accountability for fraudulent conduct that necessitated the merger." Rather, they maintained, "such conduct gives rise to a direct claim that survives the merger, as the injury caused by such misconduct is suffered by the shareholders rather than the corporation, and thereby supports a direct cause of action." Subsequently, the parties filed a stipulation of dismissal in which they dismissed Salinas from the action, leaving Wainwright as the sole plaintiff. The Alabama Supreme Court determined that a May 2017 trial court order did not come within the subject-matter-jurisdiction exception to the general rule that the denial of a motion to dismiss or a motion for a summary judgment was not reviewable by petition for a writ of mandamus. “The petitioners have an adequate remedy by way of appeal should they suffer an adverse judgment. Accordingly, we deny the petitions.” View "Ex parte Jon S. Sanderson et al." on Justia Law

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On May 10, 2013, CAG MLG, L.L.C. sued Bart Smelley and Smelley Family Investments, L.L.C., alleging six counts of misrepresentation and/or fraud and a single count of unjust enrichment. Smelley responded with a motion to dismiss, arguing that CAG was a foreign limited-liability company formed and organized in the State of Florida in 2010 and that it was "not registered or qualified to do business in the State of Alabama." Smelley also alleged that CAG had domesticated in Wyoming as Oceans, LLC, in March 2011 and that CAG was subsequently dissolved as a Florida entity in April 2011. Smelley argued that CAG "failed to state the jurisdictional element establishing its ability to maintain an action in its initial pleading." Accordingly, Smelley argued, the circuit court lacked "subject matter jurisdiction and/or personal jurisdiction over the matters contained in the [c]omplaint." CAG amended its complaint to add an eighth count requesting that the circuit court issue an injunction preventing Smelley from selling a piece of real property. Smelley amended its motion to dismiss to include the additional claim. CAG filed a motion to strike the paragraphs of Smelley's motion to dismiss that alleged that CAG was a foreign entity that was not registered to transact business in Alabama and the exhibits attached in support thereof. The circuit court held a hearing on the motions, and, the next day, issued an order granting CAG's motion to strike the objected to paragraphs of Smelley's motion. The court dismissed the request for an injunction as moot, and instructed the parties to file briefs regarding the remainder of Smelley's motion. Later that year, the circuit court granted Smelly's motion. CAG appealed. On review, the Supreme Court found that the circuit court granted Smelley's motion to dismiss without considering the exhibits attached thereto (having struck those exhibits pursuant to CAG's motion). Accordingly, Smelley's motion was not converted to a motion for a summary judgment. The the circuit court's dismissal of CAG's complaint would have only been proper if CAG's alleged lack of capacity was evident from the face of CAG's complaint. The Court concluded that it was not. Therefore, the circuit's court's dismissal of the complaint was reversed. View "CAG MLG, L.L.C. v. Smelley" on Justia Law

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Peacock Timber Transport, Inc. ("Peacock"), appealed the grant of summary judgment entered by the Montgomery Circuit Court in favor of B.P. Holdings, LLC, William Blount, Derek Parrish, Diamond Homes, LLC, and Sunbelt Environmental, LLC ("the defendants"). Blount and Parrish are partners in Blount Parrish & Company ("BPC"), an investment firm that specializes in public financing. In 2001 Blount formed Diamond Homes to take over unfulfilled contracts that had been entered into by a now bankrupt company, Dencraft Furniture Company; Blount and Parrish owned Diamond Homes in equal portions. In relation to a bond issue closed by BPC, B.P. Holdings had acquired an interest in Dencraft before its bankruptcy. In their efforts to make Diamond Homes succeed, Blount and Parrish had personally guaranteed substantial debt taken on by Dencraft and by Diamond Homes. Diamond Homes eventually "closed down with very few assets, mostly unused raw materials, and several hundred thousand in debt, some of which was guaranteed by [Blount] and/or [Parrish]." Peacock obtained a judgment against B.P. Holdings. Although Blount was a defendant in Peacock's action and although judgment in that action was entered against B.P. Holdings, the judgment stated that "[s]aid verdict was also returned in favor of ... Blount." Parrish was not a party to Peacock's 2003 action. $1,120,000 was deposited in B.P. Holdings' account as compensation for work BPC and others had performed on behalf of Jefferson County in closing a bond issue -- at that time, B.P. Holdings had not yet satisfied the 2003 judgment. The amount of the fee earned by BPC for the Jefferson County transaction was used to pay other consultants; B.P. Holdings did not earn any portion of the $1,120,000 but, according to Parrish's affidavit testimony, was used as a conduit to receive the money and to transfer the money to the appropriate parties. Blount's deposition testimony indicated that he was aware of the 2003 judgment at the time of the transfer but that he "believe[d] [that] the judgment [had been] appealed. So [he] [did not] know if that judgment was a live judgment or not." Peacock then sued B.P. Holdings, Blount, and Parrish seeking to have the transfer set aside as fraudulent. Upon review, the Supreme Court reversed the summary judgment in favor of the defendants, and remanded the case for the circuit court to determine whether Peacock was entitled to avoid the transfer under the AFTA and whether the corporate veil of B.P. Holdings should be pierced, thereby holding Blount and Parrish personally liable for the transfer. View "Peacock Timber Transport, Inc. v. B.P. Holding, LLC, et al. " on Justia Law

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Callan Associates petitioned the Supreme Court for the writ of mandamus to direct the Montgomery Circuit Court to dismiss an action filed by Carol Perdue in her role as the legal guardian of Anna Perdue, who sued on behalf of the Wallace-Folsom Prepaid College Trust Fund. Ms. Perdue opened an account with the Trust Fund on behalf of her Daughter Anna. After making monthly payments, Anna would be entitled to reduced in-state tuition and fees. The Trust's assets pooled all such contributions and invested them so that designated beneficiaries would receive the promised benefits. The Trust hired Callan Associates as an investment consultant. The Trust's management notified beneficiaries that because of the stock market downturn of 2009, the Trust's assets were negatively impacted. Subsequently, Ms. Perdue sued on behalf of Anna and the Trust, contending that Callan and the Trustees mismanaged the Trust's assets. Callan moved to dismiss which the Circuit Court denied. On appeal to the Supreme Court, Callan argued that Ms. Perdue lacked standing to bring her claims. Furthermore, Callan argued that Ms. Perdue's claims were not ripe for adjudication since none of the beneficiaries have had tuition paid from the Trust. The Supreme Court concluded that "Callan's motion to dismiss in the trial court was well founded"; therefore the Court granted Callan's petition and issued the requested writ to direct the trial court to dismiss Ms. Perdue's claims. View "Perdue v. Callan Associates, Inc." on Justia Law

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Plaintiffs James Adams, Stanley Dye and Ed Holcombe were all shareholders in Altrust Financial Services, Inc. They sued Altrust, the Peoples Bank of Alabama (collectively, Altrust) and Dixon Hughes, LLC, Altrust's public-accounting firm, for violating the Alabama Securities Act. Altrust is a holding company that fully owns, controls and directs the operations of the Bank. Altrust and the Bank share common officers and directors and issue consolidated financial statements. Shareholders voted to reorganize the company in 2008 from a publicly held company to a privately held company. The move would have freed the company of certain reporting obligations imposed by the federal Securities Exchange Act and allowed the company to elect Subchapter S status for tax purposes. Relying on information in a proxy statement, Plaintiffs elected not to sell their shares of Altrust stock and instead voted for reorganization. Plaintiffs alleged that the proxy statement and financial reports contained material misrepresentations and omissions that induced them to ultimately sign shareholder agreements that made them shareholders in the newly reorganized Altrust. Plaintiffs contended that if (in their view) instances of mismanagement, self-dealing, interested-party transactions and "skewing" of company liabilities had been fully disclosed, they would have elected to sell their shares rather than remain as shareholders. Upon review, the Supreme Court found that Plaintiffs' allegations were not specific to them but to all shareholders, and as such, they did not have standing to assert a direct action against the company. Because Plaintiffs did not have standing to assert claims against Altrust, they also lacked standing to assert professional negligence claims against the accounting firm. The Court remanded the case for further proceedings. View "Altrust Financial Services, Inc. v. Adams" on Justia Law