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Linde V. Linde: PA Superior Court’s Latest Take on the Business Judgment Rule

by Mary-Jo Rebelo, Esquire and Taylor Davis, Esquire

Summary

The Pennsylvania Superior Court’s recent opinion in Linde v. Linde, et al. offers a strong message to majority owners of closely-held businesses: Pennsylvania’s business judgment rule does not protect actions taken in bad faith. In Linde, the Superior Court revisited Pennsylvania’s business judgment rule in the context of a closely-held corporation, declining to apply its protections to a majority shareholder’s intentional squeeze-out of a minority shareholder. The Superior Court cited to the well-established duty that a majority shareholder owes to protect the interests of minority shareholders.

The Linde takeaway is that the playing field is arguably now reset regarding application of Pennsylvania’s business judgment rule to protect the conduct and actions of a business’ officers and directors. Based on Linde, this is particularly true for closely-held businesses when its owners are family members or have close personal affiliations. Linde reiterates that majority shareholders (owners) cannot take actions fueled by personal animus expecting to hide behind the protections of Pennsylvania’s business judgment rule. In future business litigation involving corporate governance, control and/or ownership issues, minority owners of closely-held businesses will likely cite Linde as establishing a higher threshold for those seeking protection under Pennsylvania’s business judgment rule. In sum, Pennsylvania business owners should take heed of Linde and the impact it will have on future business litigation in this jurisdiction involving corporate governance, control and ownership disputes.

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Linde v. Linde: Pennsylvania Superior Court’s Latest Take on the Business Judgment Rule

Pennsylvania’s business judgment rule protects directors and officers of a corporation from liability for business decisions made in good faith. In Linde, the Superior Court revisited Pennsylvania’s longstanding business judgment rule in the context of a closely-held corporation, LindeCo. Scott Linde and Barbara Linde, brother and sister-shareholders, formed LindeCo as an S Corporation in 2016. The siblings owned 75% and 25% of the issued shares of the corporation, respectively. Scott served as president of the company and both Scott and Barbara each served on LindeCo’s board of directors. When the relationship between the siblings soured, Scott demanded that Barbara, the minority shareholder, either liquidate her shares or immediately sell her shares at a price determined by him. Scott threatened to “economically destroy” Barbara if she refused.

When Barbara refused Scott’s demand, he called a special shareholders’ meeting. At that meeting, action was taken to: (i) amend the articles of incorporation of LindeCo to eliminate cumulative voting; (ii) remove the entire board of directors, including Barbara; and (iii) elect new directors, excluding Barbara. The new board of directors, which included Scott, promptly terminated Barbara’s employment with the company, cancelled her medical insurance and the medical insurance for her children, and eliminated her other benefits. Barbara brought suit on behalf of herself and LindeCo against several defendants, including Scott and the other six directors, asserting claims of breach of fiduciary duty and civil conspiracy, with a general prayer for relief following each count in the Complaint. Barbara requested removal of her brother from his positions in the company and the appointment of a custodian for the company.

The trial court found in favor of Barbara, awarding her $5,392,000 in damages, but denied her motion for the appointment of a custodian. The trial court determined that beyond Scott and the other directors’ intentional squeeze-out of the minority shareholder, LindeCo was an otherwise healthy and well-managed corporation. Recognizing that LindeCo was primarily run by Scott, the trial court held that his removal as President and as a director would have devastating effects on the company and could ultimately harm the interests of the shareholders. Instead, the trial court, sua sponte, ordered the buyout of Barbara’s shares, at a price to be determined by the court.

Scott and the other directors appealed the trial court’s decision, raising several questions on appeal including 1) whether the trial court erred in finding that Scott breached his fiduciary duty to Barbara, refusing to apply the business judgment rule, and 2) whether the trial court committed an abuse of discretion in ordering the buyout of Barbara’s shares, when she did not seek that relief.

The Superior Court affirmed the trial court’s decision, declining to find that Pennsylvania’s business judgment rule protected Scott’s and the other defendants’ conduct. The Superior Court held that Scott and the other key employees acted with animus in intentionally and systematically squeezing-out Barbara and that they breached their fiduciary duty to her. In support of its decision, the Superior Court relied upon the well-established duty that a majority shareholder owes to protect the interests of minority shareholders, particularly in closely-held corporations.

The Superior Court also upheld the buyout of Barbara’s shares noting that when a party asserts a general prayer for relief in a complaint, a court has the discretion to grant any relief that is consistent with the theory and purpose of the case. As such, the Superior Court ruled that the trial court’s decision to keep Scott in his positions with LindeCo, but to order the buyout of Barbara’s shares at a price to be determined by the trial court, was well reasoned and appropriate under the circumstances, and fully within the authority and discretion of the trial court.

The Linde takeaway is that the playing field is arguably now reset regarding application of Pennsylvania’s business judgment rule to protect the conduct and actions of a business’ officers and directors. This is particularly true for closely-held businesses when its owners are family members or have close personal affiliations. Linde reiterates that majority shareholders (owners) cannot take actions fueled by personal animus expecting to hide behind the protections of Pennsylvania’s business judgment rule. In future business litigation involving corporate governance, control and/or ownership issues, minority owners of closely-held businesses will likely cite Linde as establishing a higher threshold for those seeking protection under Pennsylvania’s business judgment rule.

In sum, Pennsylvania business owners should take heed of Linde and the impact it will have on future business litigation in this jurisdiction involving corporate governance, control and ownership disputes. When the relationship between or amongst the owners of a business sours, it can have costly and devastating effects on the business. Having appropriate business governance documents in place, including employment contracts for owners, a stock transfer restriction agreement or buy-sell agreement, a shareholder agreement or operating agreement, as applicable, and bylaws, to protect the business before any dispute or power struggle ensues is the best practice. Otherwise, as occurred in Linde, a court will likely decide the fate of the business’ owners and, potentially, even the business itself.