The plaintiff, an officer of a privately held corporation, filed suit against other shareholders who supported a recapitalization of the company. Pursuant to an agreement among the shareholders, the plaintiff was granted 1.4 million Class B shares to be held in trust until one of three events occurred (there was no dispute that none of the triggers had occurred).
The plaintiff alleged that the shareholders who voted in favor of the plan breached obligations owed to him under the shareholder agreement. He based his claim on a provision which provided that a recapitalization in which the Company was valued at less than $2.73 per share could not be approved by either the Board or the shareholders without the approval of the holders of at least 85% of the outstanding Class B shares, alleging that the defendant shareholders violated this provision by approving a recapitalization in which the company was valued at less than the stipulated amount.
Although the minutes reported that the owners of 87.71% of the Class B shares voted for the recapitalization, the plaintiff alleged that the vote failed to take his shares into account and, thus, violated the supermajority provision.
The District Court rejected the plaintiff’s argument that the shareholder agreement permitted direct claims for breach of contract against shareholders who voted for recapitalizations in which the requisite supermajority was not achieved. The Court reasoned that such a construction would lead to “irrational results” and “impute superhuman prescience to the shareholders” who could not be charged with knowing the outcome of the vote before it was taken.
To avoid such results, the Court construed the agreement to mean that a vote for a recapitalization that failed to achieve the stipulated supermajority was a nullity but not one that subjected the shareholders who voted in favor of the recapitalization to liability for casting their votes in favor of the plan. Accordingly, the court granted defendants motion to dismiss the complaint. (DeSouza v. PlusFunds Group, Inc., 2007 WL 4287745 (S.D.N.Y. Dec. 7, 2007))