Hennepin County District Court

File No. 9610488

John G. Westrick, Westrick & McDowall-Nix, P.L.L.P., 400 Minnesota Building, 46 East Fourth Street, St. Paul, MN 55101 (for Appellant)

Peter M. Lancaster, Dorsey & Whitney LLP, Pillsbury Center South, 220 South Sixth Street, Minneapolis, MN 55402-1498 (for Respondents)

Considered and decided by Willis, Presiding Judge, Huspeni, Judge, and Schultz, Judge.

Appealing from the trial court's summary judgment for respondent corporation and directors, appellant asserts that he is entitled to additional shares of stock because the corporation issued shares of stock without permitting appellant to exercise his preemptive rights and the corporate directors breached their fiduciary duties by not distributing the initial stock equally. We affirm.

In May 1993, the corporation offered 800,000 shares to private investors, and although appellant was aware of the sale, he did not object at that time. In July 1993, appellant offered to purchase additional shares, but the directors rejected his offer. In August 1993, the directors sought to amend the articles of incorporation by eliminating preemptive rights by circulating a written document signed by all original founders except one. Although appellant conceded that he signed the document, he claimed that no one disclosed that it concerned preemptive rights and that respondent Szymborski obtained his signature on the pretense that it was necessary to change the corporate address. Between November 1993 and February 1994, the corporation issued 2,500,000 shares to investors. In August 1994, the corporation shipped its first computers. Shortly thereafter, appellant became dissatisfied with the corporation and resigned. The corporation issued approximately 1,000,000 additional shares to private investors between December 1994 and September 1995.

In July 1996, appellant commenced this action seeking additional shares in the corporation through the exercise of his statutory preemptive rights, or in the alternative, the dissolution of the corporation. Appellant essentially claimed that respondents issued additional shares of the corporation without his consent and in violation of his preemptive rights and that Beeman and Szymborski wrongly allocated themselves 900,000 shares of stock without his knowledge. The trial court granted summary judgment for respondents.

Appellant asserts that the trial court erred by concluding that appellant's conduct estopped him from objecting to the additional stock distributions. Although "the application of equitable estoppel is ordinarily a question of fact," it is a question of law when "only one inference can be drawn from the facts." Rice Street VFW, Post No. 3877 v. City of St. Paul, 452 N.W.2d 503, 508 (Minn. App. 1990).

We conclude that the trial court did not err because the equitable doctrines of acquiescence and estoppel prevent appellant from recovery. A shareholder who has knowledge of a corporate action, yet fails to object without explanation, may not maintain a suit to set the action aside because the shareholder has acquiesced in it. Polans v. Oreck's, Inc., 220 Minn. 249, 255, 19 N.W.2d 435, 438 (1945); Erickson- Hellekson-Vye Co. v. A. Wells Co., 217 Minn. 361, 379, 15 N.W.2d 162, 172 (1944) ("A stockholder who participates in and consents to an illegal or ultra vires transaction by the corporation, or who, with full knowledge, acquiesces therein, or accepts pecuniary benefits thereunder, is generally estopped from calling in question the validity of such acts."); see Bacich v. Northland Transp. Co., 185 Minn. 544, 562, 242 N.W. 379, 387 (1932) (stating that under Delaware law, "[s]tockholders cannot sit idly by, acquiesce in dealings with others, and later, when dissatisfied with the results and the fruits of the bargain are consumed, seek to avoid the consequences."). The supreme court has reasoned:

It is inequitable for a stockholder, knowing that an act done by the directors and a majority of the stockholders in good faith for the benefit of the corporation is in fact unauthorized, apparently to acquiesce by his silence but secretly to reserve an option to repudiate the act in case of loss or to enjoy its benefits if it proves profitable. Fairness requires in such cases that dissenting shareholders should act promptly and make known their objections without unreasonable delay.

Polans, 220 Minn. at 255, 19 N.W.2d at 438 (citations omitted).

The record reveals that appellant acquiesced in the issuance of the additional shares. His deposition provides:

Q. Did you participate in presentations in which others at the company tried to persuade people to put money into the company?

A. Yes.

* * * *

Q. And you were aware in these presentations that of course the company was trying to sell stock to investors other than the founders?

A. Yes.

Q. And you didn't have any objection to that.

A. No.

Q. And, in fact, I assume you believed that the company would benefit from the infusion of new money. Is that fair to say?

A. Yes.

* * * *

Q. Were you aware of this private placement of 800,000 shares around May 1993?

A. I was aware of our fund raising activities in general.

Q. And more particularly, were you aware of this 800,000 share private placement?

A. We talked about several different kinds of placements. This would certainly have been one of them.

Q. And did you have any objection to any of those including this one?

A. No.

Thus, appellant knew about the new shares, participated in securing some of these investments, and did not object at that time. Because the record supports only the inference that appellant acquiesced to the issuance of additional stock, the trial court properly estopped appellant from objecting to it several years later.

In addition, a recovery by appellant would substantially prejudice the innocent shareholders. The corporation issued at least 3,500,000 new shares of stock between November 1993 and the commencement of this action. If we were to permit a recovery by appellant, these new shareholders, whom appellant actively helped to solicit, would see the value of their stock unexpectedly diluted. Moreover, because these shareholders purchased the stock before the commencement of this suit, they had no notice of appellant's claim of entitlement to additional shares at a presumptively lower price.

Appellant's failure to offer to purchase more shares at the time the corporation issued the new shares estops appellant from asserting his entitlement to preemptive rights because the corporation relied on appellant's silence and a recovery by appellant would substantially prejudice the innocent shareholders. Although appellant offered to buy more shares in July 1993, the record lacks any indication that this offer was tied to the issuance of new shares to the private investors.

Furthermore, the corporation relied on appellant's signing of a document that would have eliminated preemptive rights had it contained the signatures of all founders.[1] Although appellant asserts on appeal that the document he signed was missing the pages related to preemptive rights, appellant mischaracterizes the record. In his deposition, appellant merely stated:

The one thing I recall involving a signature from that time period, I recall [Szymborski] dropping off a document at my desk for a signature telling me that we needed to update the corporate address and do a little bit of housecleaning and I know I looked at the document at the time, didn't see anything particular that raised any flags with me and signed it.

"Summary judgment is not to be avoided simply because there is some metaphysical doubt as to a factual issue." Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 328 (Minn. 1993). Even viewing his deposition in a light most favorable to him, appellant has not raised an issue of material fact that the document failed to mention preemptive rights.

Finally, respondents argue that appellant's claims are barred by the equitable doctrine of laches. Courts apply laches to prevent a party who has not diligently asserted a known right from recovering at the expense of a party prejudiced by the delay. Byrd v. Independent Sch. Dist. No. 194, 495 N.W.2d 226, 233 (Minn. App. 1993), review denied (Minn. Apr. 20, 1993). The doctrine of laches will not bar a claim, "enforceable in an action at law," for a delay of less than the statutorily-defined time period, "at least, unless it be shown that the enforcement of the claim will result in substantial injury to innocent parties." McRae v. Feigh, 143 Minn. 241, 246, 173 N.W. 655, 657 (1919). Although the doctrine of laches normally would not bar appellant's claim because the apparent six-year statute of limitations under Minn. Stat. § 541.05 (1996) had not run, a recovery by appellant would result in substantial injury to the innocent investors who purchased their stock before the commencement of this action. We would find such a result inequitable. See Partech Corp. v. Luoto, No. C7-90-1695 (Minn. App. Jan. 15, 1991) (stating that the doctrine of laches could be applied to bar preemptive rights claims after five-year delay because the claimants may receive a windfall by waiting until the stock's value rose significantly before they sought relief). Thus, we conclude that the circumstances of this case warrant the application of laches because the enforcement of appellant's claim would result in substantial injury to innocent parties.

Each shareholder in a closely-held corporation owes the others a fiduciary duty. Pedro v. Pedro, 463 N.W.2d 285, 288 (Minn. App. 1990), review denied (Minn. Jan. 24, 1991). The directors of a corporation also owe a fiduciary duty to individual shareholders. Wenzel v. Mathies, 542 N.W.2d 634, 641 (Minn. App. 1996), review denied (Minn. Mar. 28, 1996). "One who stands in a confidential or fiduciary relation to the other party to a transaction must disclose material facts." Klein v. First Edina Nat'l Bank, 293 Minn. 418, 421, 196 N.W.2d 619, 622 (1972). The law treats the breach of a fiduciary duty as a constructive fraud, regardless of the actor's intent or motive. Perl v. St. Paul Fire & Marine Ins. Co., 345 N.W.2d 209, 213 (Minn. 1984).

Viewing the evidence in a light most favorable to appellant, we conclude that appellant has not demonstrated any entitlement to the same number of shares as the respondent directors. Appellant stated in his affidavit that he acted with the "understanding" that the five founders would receive equal allocations of shares, but in his deposition, he concedes that he never discussed the allocation of shares with respondents Beeman and Szymborski before the initial distribution and that the founders never expressly agreed to divide the original shares equally. Thus, appellant's mere "understanding" that he would receive more shares, absent an express agreement to divide the initial shares equally, does not sufficiently support a cause of action against respondent directors for breach of a fiduciary duty.

Affirmed.

[ ]^* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.

[ ]¹A written action by the shareholders requires a writing "signed by all of the shareholders entitled to vote on that action," and it is not effective until "it has been signed by all of those shareholders." Minn. Stat. § 302A.441 (1996). Because respondents failed to produce a copy of the document with the signatures of all requisite shareholders, it did not effectively terminate preemptive rights.