Appeal from the Circuit Court of Alexander County. No. 02-CH-021 Honorable William J. Thurston, Judge, presiding.
The opinion of the court was delivered by: Justice Hopkins
The plaintiffs, Louie Housman and Albert Johnson, Jr., appeal from an order of the circuit court of Alexander County dismissing the shareholders' derivative complaint that they filed against the defendants, Dana Albright, Deborah Guetterman, David Jackson, and Geoffrey Smith, the president of the board of directors and the chief executive officer of Waterfront Services Company (Waterfront), in their capacities as Waterfront's board of directors (Board). For the following reasons, we reverse the circuit court's dismissal of the plaintiffs' complaint and remand for further proceedings consistent with this opinion.
Housman worked for Waterfront, a Delaware corporation, from June 1973 to June 2002. Johnson worked for Waterfront from September 1984 to January 2002. In June of 2002, Smith fired Housman and other employees in retaliation for their support for and activities on behalf of the Laborers' International Union of North America, Local 773, AFL-CIO (Union). Housman, other discharged Union employees, and the Union filed suit against Smith and Waterfront for unfair labor practices in violation of the National Labor Relations Act (29 U.S.C.§151 et seq. (2000)). An administrative law judge heard the case and ordered that Housman and other discharged employees be reinstated to their former positions and be compensated for lost wages. Waterfront Services Co., No. 14-CA-27001 (N.L.R.B. Div. of Judges December 12, 2002). On December 19, 2003, a three-member panel of the National Labor Relations Board affirmed the decision. Waterfront Services Co., 340 N.L.R.B. 1305 (2003).
Housman and Johnson participated in Waterfront's "Employee Stock Ownership Plan" (ESOP). Each participant received an annual "Individual Report of Benefits Statement" showing his account balance and the number of shares allocated to his account. The most recent statement provided to this court shows that on May 31, 2003, Housman's stock account had a balance of $521,387.56. The report stated:
"The stock portion represents 120.02476 shares of Waterfront Services Company Stock. You are 100% vested in your total account balance ***. This means you have a vested interest of $521,387.56. Your shares represent participation in the ownership and success of Waterfront Services Company."
On the same date, Johnson's statement showed an account balance of $34,828.15 and noted:
"The stock portion represents 8.01753 shares of Waterfront Services Company Stock. You are 100% vested in your total account balance ***. This means you have a vested interest of $34,828.15. Your shares represent participation in the ownership and success of Waterfront Services Company."
The ESOP's assets were placed in a trust and invested primarily in shares of Waterfront common stock. The ESOP gave the trustee, who was appointed and could be removed by the Board, the authority to administer the trust. The trustee was responsible for holding and investing the trust assets in shares of company stock.
In 1991, the ESOP's trustee purchased all the stock from the company's stockholders. The purchased stock was held in a special account known as the "ESOP Suspense Account" and was used as collateral for the ESOP's promise to pay the selling stockholders the agreed-upon purchase price. As the selling stockholders were paid, the ESOP suspense account released shares of the company stock and allocated them to the individual ESOP accounts for all the active participants. The company made cash contributions to the ESOP trust, which held all the assets of the ESOP, in amounts sufficient to permit the trustee to make installment payments due to the selling stockholders. The amount of company stock released from the ESOP suspense account was proportional to the payments made during the year to the selling stockholder. Each year, an independent appraiser valued the company stock that was held in the ESOP. The account was adjusted to reflect allocations of company stock income (including dividends or other credits paid with respect to the shares of stock credited to each account), expenses, and losses. Trust income was allocated, and losses were charged, to each account in the proportion that the value of the account had to the value of all the participants' accounts.
The ESOP specifically stated that a participating employee's interest in the ESOP was invested in shares of company stock held for the employee's benefit by the trustee. The "Committee" had the right to vote and exercise other rights of a company stockholder. In the event of a corporate matter involving a merger or consolidation, recapitalization, reclassification, liquidation, dissolution, or sale or transfer of substantially all the assets of the company, the participating employee was entitled to direct the trustee how to vote the company stock allocated to his or her account. The ESOP allowed the participating employees to sell their stock to the company if they notified the company in writing.
On October 3, 2002, the plaintiffs filed the initial verified shareholders' derivative complaint alleging that Smith had engaged in a scheme of systematic corporate looting and self-dealing by using Waterfront's assets to purchase items for himself and his friends. The plaintiffs made the following allegations against Smith: (1) he awarded a substantial contract to a personal friend to construct Waterfront's new corporate headquarters without seeking competing bids and without regard for the fact that the friend's construction company had never built a structure of the type that Waterfront needed, (2) he used corporate funds to purchase a four-wheel vehicle for his personal use, (3) he used corporate funds to purchase exercise equipment for a gym that only Smith and his friends could use, and (4) he used corporate funds to purchase season tickets for St. Louis Blues hockey games and St. Louis Cardinals baseball games that only Smith and his friends used. The complaint alleged that Smith accomplished this wrongdoing by stacking the Board with his personal friends and Waterfront employees that were loyal to him. The complaint claimed that due to the foregoing events, Waterfront suffered financial injury.
On October 12, 2002, only nine days after the plaintiffs' initial complaint was filed, a letter was sent to all Waterfront ESOP participants, alternate payees, and beneficiaries receiving benefits, informing them that effective April 1, 2002, the company had converted from subchapter C corporate status to subchapter S corporate status. The notice stated that all distributions from the plan made on or after April 1, 2002, would be made in cash only and that no distributions of company stock would be made.
In November of 2002, the defendants filed a notice of removal, seeking to remove this case to federal court. On February 14, 2003, the United States District Court entered an order remanding this case ...