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Quinn v. Yip

Superior Court of Rhode Island

December 11, 2015

DAVID L. QUINN, individually and derivatively on behalf of SILVERMINE BAY, INC., Plaintiff
v.
LOUIS YIP, TZE PING NG and ERIC LEUNG, Defendants.

Kent County Superior Court

For Plaintiff: Jeffrey H. Gladstone, Esq.; Steven E. Snow, Esq.; Thomas J. Enright, Esq.

For Defendant: Jeffrey B. Pine, Esq.; William J. Lynch, Esq. Max Wistow, Esq. for Counterclaim Plaintiffs.

DECISION

STERN, J.

The matter before the Court is a shareholder dispute alleging minority shareholder oppression. David L. Quinn (Plaintiff), a shareholder of Silvermine Bay, Inc. (Silvermine), brought this action directly and derivatively against Louis Yip (Yip), Tze Ping Ng (Ng), and Eric Leung (Leung), (collectively, Defendants), the remaining shareholders of Silvermine. Defendants filed an "Election to Purchase Shares Owned by David L. Quinn" (Motion for an Election), alleging that because Plaintiff's complaint invokes liquidation statutes, Defendants have an unqualified right to purchase Plaintiff's shares. Plaintiff counters that the motion is premature as liquidation has yet to be elected as a remedy. Jurisdiction is pursuant to G.L. 1954 §§ 7-1.2-1314 and 7-1.2-1323. For the following reasons, the Court grants Defendants' Motion for an Election.

I Facts[1] and Travel

Plaintiff is a twenty percent shareholder of Silvermine, a company incorporated in 1996. The remaining shares are divided unequally among Defendants. Less than two weeks after the Articles were filed, they were amended, reducing Silvermine's Board of Directors (the Board) to five members and effectively removing Plaintiff from his position on the Board.

Silvermine made distributions to its shareholders between 1997 and 2000. In 2000, Silvermine ceased making distributions to Plaintiff but continued to make distributions to other shareholders. Plaintiff submitted several inquiries to Yip, who was acting President of the Board, regarding the status of Plaintiff's investment. As a result of Yip's insufficient response to Plaintiff's inquiry, Plaintiff sent a letter to Yip demanding to inspect the books and records of Silvermine. Two months after Plaintiff's request, Yip authorized the accountant of Silvermine to meet with an accountant hired by Plaintiff and review the financials. During this inspection, it became clear to Plaintiff's accountant that Yip had not furnished all the requested materials. As a result, on December 29, 2011, Plaintiff sent a letter to Yip, noting his lack of compliance with the document request, and made additional, specific requests for certain records. Yip acknowledged receipt of the demand, but failed to produce the requested documents.

Plaintiff, at his own expense, had a "cash flow analysis" prepared. According to this analysis, $940, 000 in total cash flow was potentially available to the shareholders between 1996 and 2010. Of that amount, roughly $425, 000 was loaned to various other shareholders, and $100, 000 was loaned to Yip's other business organizations. None of the loans charged interest to its debtor. Moreover, starting in 1999, Yip began to pay himself between $10, 000 and $15, 000 annually for "management fees." As of 2010, he has paid himself a total of $149, 200 in "management fees." Further, Yip paid Kwai Chun Leung (Chun Leung), a relative of Yip, $6000 annually for "management fees." As of 2010, Yip has paid Chun Leung a total of $59, 000 in "management fees."

Plaintiff filed a complaint on March 30, 2015, which (1) seeks an appointment of a special master pursuant to § 7-1.2-1314; (2) demands an inspection of the books and records of Silvermine pursuant to § 7-1.2-1502; (3) requests an accounting of Silvermine's business operations pursuant to §§ 7-1.2-1314 and 7-1.2-1502; (4) alleges breach of the fiduciary duty owed to Silvermine; and (5) alleges breaches of the fiduciary duties of care and loyalty owed to Plaintiff, personally. Plaintiff also sought an appointment of a Special Master, and one was appointed to conduct a forensic audit of the business operations of Silvermine. Subsequently, on October 8, 2015, Defendants filed a Motion for an Election. The motion was scheduled for hearing on November 12, 2015, but prior to the hearing, the parties indicated to the Court that they wished to waive oral argument on the Motion for an Election and rested on their papers.

II Analysis

Defendants, as majority shareholders, seek to purchase Plaintiff's shares at fair value. Defendants aver that their election to purchase is proper because they have an absolute right to purchase Plaintiff's shares under § 7-1.2-1315, which grants such right when a Plaintiff petitions for dissolution of a corporation. Conversely, Plaintiff contends that, because dissolution is not imminent, and is only a possible-not exclusive-remedy, Defendants' election to purchase Plaintiff's shares is premature. Further, Plaintiff maintains that Defendants' suggestion that they have an unqualified right to elect to purchase Plaintiff's shares is meritless.

A Timing of the Election to Purchase

The Rhode Island Business Corporation Act (RIBCA)[2] provides several remedies to shareholders of a company facing dissolution, one being an election to purchase a minority shareholder's shares. See § 7-1.2-1315. Section 7-1.2-1315, entitled "Avoidance of dissolution by share buyout, " (the Election Statute) states, in pertinent part, the following:

"Whenever a petition for dissolution of a corporation is filed by one or more shareholders (subsequently in this section referred to as the 'petitioner') pursuant to either § 7-1.2-1314 or a right to compel dissolution which is authorized under § 7-1.2-1701 or is otherwise valid, one or more of its other shareholders may avoid the dissolution by filing with the court prior to the commencement of the hearing, or, in the discretion of the court, at any time prior to a sale or other disposition of the assets of the corporation, an election to purchase the shares owned by the petitioner at a price equal to their fair value." (Emphasis added.)

The Election Statute explicitly allows for an election to purchase a shareholder's shares in three instances: (1) when a petition is brought pursuant to § 7-1.2-1314; (2) when a right to dissolution exists under § ...


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