Where shareholders of a privately-held company filed suit to force the other shareholders to buy out their shares at an unwarranted premium rather than to remedy a wrong to the company, Plaintiffs’ lawsuit may be considered to have been brought for an improper purpose. Cone v. Blue Gem, Inc., 2023 NCBC 74 (J. Earp). As a result, the Business Court was within its discretion to award the defendants’ their reasonable attorneys’ fees.

Plaintiffs are two of four children who inherited stock in their father’s company, Blue Gem, Inc. (“Company”). Each Plaintiff owned roughly 23% of the Company’s stock. The other two siblings (“Defendants”) owned a combined 54% of the Company’s stock; one of the Defendant-siblings was the Company’s President and a director, while the other Defendant-sibling was a director. Plaintiffs filed a derivative suit seeking to dissolve the Company and further alleging Defendants breached their fiduciary duties to the Company by failing to convert the Company from a C-corporation and for refusing to adopt Plaintiffs’ proposals to have their shares bought out.  Defendants filed a motion to dismiss the fiduciary duty claims.  While the motion was pending,  Plaintiffs sought to voluntarily dismiss their claims without prejudice. The Business Court ultimately granted Defendants’ motion to dismiss and also granted Plaintiff’s voluntary dismissal of the dissolution claim without prejudice.  Defendants then brought a motion seeking to recover their expenses and attorneys’ fees as provided by statute.

The Business Court recognized that when a derivative lawsuit has been brought for an improper purpose, North Carolina allows a court to award a defendant its attorneys’ fees.  G.S. §55-7-46(2). In granting Defendants’ motion, the Business Court determined that Plaintiffs’ lawsuit had been brought for an improper purpose; namely, to force Defendants into voting for a proposal that would allow Plaintiffs to exit the Company while maximizing the value of their own interests.  (Opinion, ¶27).  Such a purpose had nothing to do with addressing a harm caused to the Company; instead, it was an action solely done to benefit Plaintiffs at the expense of Defendants.  Having satisfied the improper purpose standard, the Business Court granted Defendants’ request for fees.

Based upon this decision, any company faced with what it believes to be a “strike suit” from a disgruntled shareholder should consider pressing the issue of recovering its fees and expenses in any lawsuit.