Electro-Mechanical Products, Inc. et al v. Alan Lupton Associates Inc.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Philip A. Brimmer
Civil Action No. 22-cv-00763-PAB-SKC
ELECTRO-MECHANICAL PRODUCTS, INC., a Colorado corporation,
DAVID P. MORRIS, an individual, and
DAVID J. WOLENSKI, an individual,
Plaintiffs,
v.
ALAN LUPTON ASSOCIATES INC., a New York corporation, and
ALAN LUPTON II, an individual,
Defendants.
ORDER
This matter comes before the Court on defendant Alan Lupton II’s Motion to
Dismiss and Memorandum in Support Thereof [Docket No. 17]. Defendant Alan Lupton
II seeks an order dismissing plaintiffs’ third and fourth causes of action for failure to
state a claim upon which relief can be granted and for lack of standing. See generally
Docket No. 17. The Court has jurisdiction pursuant to 28 U.S.C. § 1332.
I. BACKGROUND1
Plaintiffs’ third and fourth causes of action arise from Mr. Lupton’s failure to
approve the sale of Electro-Mechanical Products, Inc.’s (“EMP”) stock to an interested
buyer. Docket No. 7 at 7-9, ¶¶ 33-46. EMP is a closely-held corporation, of which Mr.
1 The facts below are taken from plaintiffs’ amended complaint, Docket No. 7, and are
presumed to be true, unless otherwise noted, for purposes of ruling on defendant’s
motion to dismiss.
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Lupton was an 8.9% shareholder at the time of the potential sale. Id. at 8, ¶¶ 36, 39.
Mr. Lupton is a principal shareholder, officer, and director of Lupton Associates, Inc.
(“Lupton Associates”). Id., ¶ 39. On November 1, 1989, EMP and Lupton Associates
entered into a contract whereby Lupton Associates agreed to provide its best efforts to
promote, develop, and extend the sales of EMP's services and products to original
equipment manufacturers or other contract manufacturers. Id. at 3, ¶ 11. In exchange
for Lupton Associates’ services, the parties agreed that EMP would pay Lupton
Associates 5% of net sales resulting from orders received and accepted by EMP as
produced by Lupton Associates. Id. On March 8, 2000, EMP and Lupton Associates
amended the contract. Id. at 3-4, ¶ 13. The amendment provided that “the Sales
Agreement may not be terminated by EMP (except for Cause), nor may EMP elect not
to renew . . . so long as Alan Lupton or any other shareholder in Lupton Associates or
family member . . . thereof or employee of Lupton Associates owns stock in EMP.” Id.
at 4, ¶ 15. The Court will refer to the contract between EMP and Lupton Associates and
the amendment to the contract collectively as the “Lupton Agreement.”
In 2021, a publicly traded company (“Potential Buyer”) executed a letter of intent
with EMP for the purchase of all of EMP’s stock. Id. at 7, ¶ 34. One of Potential Buyer’s
conditions for the purchase was the termination or renegotiation of the Lupton
Agreement. Id. at 8, ¶ 35. Mr. Lupton refused to renegotiate the terms of the Lupton
Agreement. Id. Potential Buyer also required the “affirmative support” of all of EMP’s
shareholders to execute the sale. Id., ¶ 36. Although seven of EMP’s eight
shareholders voted in favor of the sale, Mr. Lupton never tendered his vote or otherwise
confirmed his support of the sale. Id. Accordingly, the sale failed. Id.
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II. LEGAL STANDARD
To survive a motion to dismiss under Rule 12(b)(6), a complaint must allege
enough factual matter that, taken as true, makes the plaintiff’s “claim to relief . . .
plausible on its face.” Khalik v. United Air Lines, 671 F.3d 1188, 1190 (10th Cir. 2012)
(citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, (2007)). If a complaint’s
allegations are “so general that they encompass a wide swath of conduct, much of it
innocent,” then plaintiff has not stated a plausible claim. Id. at 1191 (quotations
omitted). Thus, even though modern rules of pleading are somewhat forgiving, “a
complaint still must contain either direct or inferential allegations respecting all the
material elements necessary to sustain a recovery under some viable legal theory.”
Bryson v. Gonzales, 534 F.3d 1282, 1286 (10th Cir. 2008) (alterations omitted).
III. ANALYSIS
Plaintiffs bring two claims against Mr. Lupton: breach of fiduciary duty and breach
of the duty of loyalty. Docket No. 7 at 7-9, ¶¶ 33-46. Plaintiffs allege that Mr. Lupton
breached his duties to EMP and EMP’s other shareholders by failing to renegotiate the
Lupton Agreement and by failing to vote in favor of the sale of EMP to Potential Buyer.
Docket No. 21 at 8.
Mr. Lupton argues that plaintiffs’ claims against him should be dismissed
because he did not owe fiduciary duties to EMP or its other shareholders. Docket No.
17 at 3-6. To prove a breach of fiduciary duty,2 a plaintiff must demonstrate that (1)
2 Plaintiffs’ theory supporting their claim for breach of the duty of loyalty is that
Mr. Lupton, by virtue of his position as a shareholder, had a duty to renegotiate the
terms of the Lupton Agreement. Docket No. 7 at 9, ¶ 45. Plaintiffs’ claim for breach of
fiduciary duties rests on the same theory. Compare id. with id. at 8, ¶ 40. Because
plaintiffs allege that both the duty of loyalty and fiduciary duties arise from the same
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defendant owed plaintiff fiduciary duties, (2) defendant breached those duties, and (3)
damages resulted from the breach. F.D.I.C. v. Refco Grp., Ltd., 989 F. Supp. 1052,
1080 (D. Colo. 1997) (applying Colorado law).
Plaintiffs claim that EMP is a closely held corporation. Docket No. 7 at 8, ¶ 36.
Furthermore, the parties agree that Mr. Lupton was a minority stockholder of EMP,
owing 8.9% of the company’s shares. Id., ¶ 39; Docket No. 17 at 5. Plaintiffs believe
that they have sufficiently pled that Mr. Lupton owed EMP and EMP’s other
shareholders fiduciary duties because, “[i]n closely held corporations, shareholders owe
each other fiduciary duties akin to the fiduciary duties in partnerships.” Docket No. 21 at
4. Plaintiffs cite River Mgmt. Corp. v. Lodge Properties Inc., 829 P.2d 398 (Colo. App.
1991), for the proposition that shareholders in a closely held corporation owe each other
fiduciary duties regardless of whether they are controlling or minority shareholders.
Docket No. 21 at 4-5. The shareholders’ agreement in River Mgmt. specified that it was
governed under New York law, which is the law that the Colorado Court of Appeals
quotes for the proposition that the relationship between shareholders is akin to that
between partners in a close corporation. River Mgmt., 829 P.2d at 401. River Mgmt. is
therefore not controlling authority for a partner-like duty applying to minority
shareholders because plaintiffs and Mr. Lupton agree that Colorado law applies to the
relationship between EMP’s shareholders. See Grynberg v. Total S.A., 538 F.3d 1336,
1346 (10th Cir. 2008) (“Because the parties’ arguments assume that Colorado law
applies, we will proceed under the same assumption.”).
circumstances, the Court will address the duty of loyalty through its discussion of
whether Mr. Lupton had any fiduciary duties to EMP or the other shareholders.
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Plaintiffs also cite Combs v. PriceWaterhouse Coopers LLP, 382 F.3d 1196 (10th
Cir. 2004), a case addressing, among other issues, whether a minority shareholder in a
closely held corporation had individual standing to sue. Docket No. 21 at 4. In Combs,
the Tenth Circuit declined to grant the stockholder-plaintiff individual standing to sue,
but noted that Colorado courts had imposed partnership-like fiduciary duties on
shareholders in some cases concerning closely held corporations. 382 F. 3d at 1202
(citing Van Schaack Holdings v. Van Schaack, 867 P.2d 892, 897 (Colo. 1994) (“it is
widely recognized that the fiduciary duty imposed on corporate directors and officers
dealing with minority shareholders is enhanced in the context of closed corporations.”);
Pueblo Bancorporation v. Lindoe, Inc., 37 P.3d 492, 499 (Colo. App. 2001), aff'd 63
P.3d 353 (Colo. 2003) (“In a closely held corporation, the relationship between directors
and shareholders is treated like a relationship between partners.”); and Colt v. Mt.
Princeton Trout Club, Inc., 78 P.3d 1115, 1119 (Colo. App. 2003) (same)). However,
the cases cited by the Tenth Circuit discuss the duties imposed on corporate directors
and controlling shareholders in their dealings with minority shareholders, and do not
shed light on whether, under Colorado law, minority shareholders owe fiduciary duties in
return.
Colorado caselaw is clear that corporate directors and majority shareholders of
close corporations owe fiduciary duties to minority shareholders. See, e.g., Van
Schaack, 867 P.2d at 897 (holding that corporate directors and officers of close
corporations owe minority shareholders heightened fiduciary duties); Pueblo
Bancorporation, 37 P.3d at 499 (holding that corporate directors “owe the highest
degree of loyalty and trust to the other shareholders, are required to exercise good faith,
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and cannot use their power to harm the other shareholders”) (citation omitted); Wisehart
v. Zions Bancorporation, 49 P.3d 1200, 1204 (Colo. App. 2002) (holding that corporate
directors and controlling shareholders have a fiduciary duty to remaining shareholders);
Polk v. Hegert Land & Cattle Co., 5 P.3d 402, 405 (Colo. App. 2000) (“The officers,
directors, and controlling shareholders of a corporation have a fiduciary duty to act in
good faith and in a manner they reasonably believe to be in the best interests of the
corporation and all of its shareholders.”) (citing Michaelson v. Michaelson, 939 P.2d 835
(Colo. 1997)).
However, plaintiffs concede that “no Colorado case [has] directly involved a
question of whether minority shareholders in a closely held corporation owe fiduciary
duties.” Docket No. 21 at 4. Mr. Lupton argues that Colorado state court precedent
does not require the Court to conclude that minority shareholders owe fiduciary duties
because “[t]he basis for finding such a duty on the part of a shareholder in a closely held
corporation is its ability, by virtue of actual control of corporate processes, to make
decisions that are oppressive to the minority shareholders’ interests.” Docket No 17 at
4. Mr. Lupton’s position finds support in Colorado caselaw. See, e.g., Colt, 78 P.3d at
1119 (holding that a controlling shareholder’s actions that were illegal, oppressive, and
fraudulent also constituted a breach of his fiduciary duties to the minority shareholders);
Polk, 5 P.3d at 404-05 (“In the context of a close corporation, oppressive conduct of
those in control is closely related to breach of the fiduciary duty owed to minority
shareholders.”) (citation omitted); see also Van Schaack, 867 P.2d at 897 (holding that
corporate directors owe minority shareholders heightened fiduciary duties in order to
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equalize the minority shareholders’ bargaining position and permit minority shareholders
to exercise informed judgment) (citations omitted).
A case from the North Carolina Supreme Court analyzes many of the issues
involved in this case. In Corwin v. British Am. Tobacco PLC, 821 S.E.2d 729 (N.C.
2018), Reynolds American, Inc. (“Reynolds”), the second largest tobacco company in
the United States at the time, purchased Lorillard, Inc., the third largest tobacco
company at the time. Id. at 732. The board of directors of Reynolds unanimously
approved the transaction. Id. at 733. British American Tobacco PLC (“BAT”) owned
42% of the stock of Reynolds. Id. at 731. Robert Corwin, a minority stockholder in
Reynolds, filed suit against BAT, Reynolds, and a group of Reynolds’ directors alleging,
among other things, that BAT, although not a majority stockholder of Reynolds, was a
controlling shareholder of Reynolds and, as a result, owed fiduciary duties to plaintiff.
Id. at 733. Plaintiff alleged that BAT’s control over Reynolds allowed BAT to negotiate
benefits for itself that were not shared with other Reynolds stockholders. Id. Reviewing
the adequacy of plaintiff’s allegations on a motion to dismiss, the court held that,
because BAT was not a majority or controlling shareholder, it did not owe fiduciary
duties to the other shareholders. Id. at 743.
In reaching its conclusion, the court noted that, under North Carolina law, it is
“the fact of control of the common property held and exercised . . . that creates the
fiduciary obligation on the part of the majority stockholders in a corporation for the
minority holders.” Id. at 737 (quoting Gaines v. Long Mfg. Co., 67 S.E.2d 350, 353
(N.C. 1951)). Although the court had never held that a minority shareholder owed
fiduciary duties to other stockholders, the court noted that it had also never held that a
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minority stockholder cannot owe fiduciary duties to other stockholders. Id. The court
then considered Delaware law. Id. In Delaware, a minority stockholder can owe
fiduciary duties to other stockholders, but only if the minority stockholder is a
“controlling” stockholder by virtue of it exercising “domination . . . through actual control
of corporate conduct.” Id. (citing In re Morton’s Rest. Grp., Inc. Shareholder Litig., 74
A.3d 656, 664 (Del. Ch. 2013)). “This inquiry focuses on actual control over the board
of directors.” Id. Under Delaware law, an allegation that a minority shareholder merely
possessed power or had leverage over the board of directors is insufficient. Id. at 738
(citing In re Sea-Land Corp. Shareholder Litig., 1988 WL 49126, at *3 (Del. Ch. May 13,
1988)). Moreover, in terms of adequate allegations of control, the court noted that,
under Delaware law, “[u]nexercised contractual rights alone, such as board veto power,
do not equate to actual control over the board.” Id. (citing Williamson v. Cox Commc’ns,
Inc., 2006 WL 1586375, at *5 (Del. Ch. June 5, 2006)). “Merely being able to stop a
transaction does not give a minority stockholder the same level of power that a majority
stockholder would have, because a majority stockholder would have the power both to
stop a transaction and to make it happen.” Id. at 740 (citing Gaines, 67 S.E.2d at 353).
“Even a stockholder who exercises its contractual rights to further its own goals ‘is
simply exercising [its] own property rights, not that of others, and is no fiduciary.’” Id. at
738 (quoting Thermopylae Cap. Partners, L.P. v. Simbol, Inc., 2016 WL 368170, at *14
(Del. Ch. Jan. 29, 2016)).
The Corwin court determined that, “[e]ven if we agreed with Delaware courts that
a minority stockholder may owe fiduciary duties to other stockholders based on its
exercising actual control over the board of directors, the complaint in this case would
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still fail to state a claim upon which relief can be granted because the Complaint does
not adequately allege that BAT exercised actual control over the Reynolds board.” Id.
at 737. Thus, the court held that, “[b]ecause BAT was not a majority or controlling
stockholder, it did not owe fiduciary duties to the other Reynolds stockholders.” Id. at
743.
As in Corwin, the Court does not need to predict that the Colorado Supreme
Court would adopt the position of Delaware courts that, under certain circumstances, a
minority shareholder owes fiduciary duties to other shareholders. Rather, it is sufficient
for the Court to predict that the Colorado Supreme Court would not find that a minority
shareholder who did not exercise control over the corporation and who is alleged to
have acted in his own contractual interests to the detriment of other shareholders owed
fiduciary duties to other shareholders.
Here, the complaint does not allege that Mr. Lupton, despite his minority
shareholder status, had the ability to control corporate processes and thereby control
the corporation. To the contrary, the complaint’s allegations indicate that Mr. Lupton
was only able to prevent the sale to Potential Buyer because of a condition imposed by
Potential Buyer, not because of a right given to him by the corporation. Moreover, the
fact that Mr. Lupton was the principal stockholder, officer, and director of Lupton
Associates did not create a fiduciary duty, or a conflict of interest, requiring Mr. Lupton
to renegotiate the terms of the Lupton Agreement or vote in favor of the sale. The
allegations of the complaint simply state that Mr. Lupton acted in his economic or
contractual self-interest when he refused to approve the sale. However, he had no
fiduciary duty to act against his economic self-interest given that there are no
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allegations that he controlled the board of directors, assuming that EMP had one, or
controlled the other shareholders such that he could direct the business of the
corporation. As a result, the Court agrees with Mr. Lupton that the third and fourth
claims fail to state a claim against him.
IV. CONCLUSION
Therefore, it is
ORDERED that defendant Alan Lupton II’s Motion to Dismiss [Docket No. 17] is
GRANTED. It is further
ORDERED that plaintiffs’ third and fourth claims, asserted against Mr. Lupton,
are DISMISSED with prejudice. It is further
ORDERED that defendant Alan Lupton II is dismissed from the case.
DATED March 23, 2023.
BY THE COURT:
___________________________
PHILIP A. BRIMMER
Chief United States District Judge
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