Corporate – Derivative Action – Attorneys – Disqualification – Bylaws Requirements

Gwaltney v. Gwaltney (Lawyers Weekly No. 020-023-17, 18 pp.) (Gregory McGuire, J.) 2017 NCBC 12

Holding: Where the nominal defendant-corporation’s bylaws require the unanimous agreement of all of its directors to act for the corporation, to select agents and fix their compensation, and to incur indebtedness for corporate purposes, the two defendant-directors did not have the authority to hire outside counsel to represent the corporation in this action without the assent of the plaintiff-director.

The court grants plaintiff’s motion to disqualify Harry Gordon and the Gordon Law Offices (Gordon) from representing Little Creek Electronics, Inc. Little Creek’s pleading is stricken.

Although Little Creek contends that the unanimity requirement was only intended to apply to an attempt by two of the directors to oust the third from the company, parol evidence is not admissible to vary or explain the unambiguous language of the bylaws.

Little Creek also contends that the three directors have acted for Little Creek on a majority basis and that this effectively amended the bylaws. This argument fails because the bylaws constituted a shareholder agreement that could only be amended by the procedure expressly provided for in the bylaws.

In any event, Little Creek’s evidence, at best, suggests that the directors may have acted inconsistently with the unanimity requirements on some occasions in taking certain corporate actions. This conduct was not effective to amend the bylaws.

The defendant-directors, acting alone as two members of the board of directors, did not have authority to retain Gordon on behalf of Little Creek.

Plaintiff also asks the court to strike Little Creek’s filings in this action on the ground that Little Creek is a nominal defendant which cannot defend against plaintiff’s derivative claims on the merits.

Little Creek opposes this motion in part because the plaintiff seeks damages from “Defendants.” This appears to be inartful drafting on plaintiff’s part.

Plaintiff was required to name Little Creek as a defendant for purposes of pursuing his claim for removal of defendants Gwaltney and Green as directors of Little Creek. Plaintiff also was required to name Little Creek as a nominal defendant in this action. In addition, the complaint expressly identified Gwaltney and Green as “Defendant[s]” and Little Creek as a “Nominal Plaintiff/Defendant.”

Contrary to Little Creek’s argument, shareholders may maintain derivative and individual actions simultaneously in the same litigation. Plaintiff’s pursuit of damages from the defendant-directors does not foreclose his derivative claims.

Little Creek has improperly attempted to defend plaintiff’s derivative claims on the merits. This is not the proper role of a corporation faced with allegations of the type in this action, i.e., that the defendant-directors terminated Little Creek’s CEO/COO and gave him a severance payment without the authorization of the directors or shareholders, took control of Little Creek’s management without such authorization, expended corporate funds without such authorization, took possession of Little Creek’s books and records and refused plaintiff’s requests for access to those records, and caused a substantial decline in Little Creek’s sales and profits. Little Creek does not have standing to defend these derivative claims.

Motions granted.