A number of lawsuits have percolated through New York’s courts over the past five years between Adam Max, son of world-renowned visual artist Peter Max, and Adam’s sister, Libra, over control and management of the family business, ALP, Inc., a corporation Peter formed in 2000 to produce, maintain, market, license, and commercialize his prolific catalogue of artwork.
One of those cases culminated in a recent decision by the Manhattan-based Appellate Division – First Department, Max v ALP, Inc., 203 AD3d 580 [1st Dept 2022], in which the Court brought to conclusion a putative shareholder derivative lawsuit Adam brought against Libra in 2019, which Justice Bannon dismissed in full, the dismissal of which the appeals court then affirmed in full.
The stock interests of ALP are Adam (40%), Libra (40%), and Peter (20%). Adam’s 27-page amended complaint against Libra alleged a “hostile takeover” by Libra and Flynn on behalf of Peter’s stake, the two collectively holding a controlling 60% of ALP’s voting shares, aimed at “cutting Adam out of the family business completely.”
Adam complained that Flynn, the swing vote, “to this day has provided absolutely no valid business, legal, or other reason why he would have sided with Libra against Adam.” Adam alleged that once he was removed as officer, Libra and Michael Anderson, her co-director, made decisions with which Adam disagreed, such as taking “steps to diminish his authority to prevent him from paying expenditures and from continuing with his worthy and successful efforts at the continued rejuvenation of the Corporation,” terminating various professionals Adam would prefer continue to work for ALP, causing ALP to become engaged in other litigations, allegedly using corporate funds to pay legal fees, and allegedly participating in dissemination of a scandalous New York Times article about Peter.
Adam’s amended complaint derivatively alleged (i) breach of fiduciary duty, (ii) appointment of a receiver, (iii) declaratory judgment to void a prior shareholders meeting, (iv) attorneys’ fees, (v) removal of Libra and Anderson as directors and Libra as officer, (vi) accounting, and (vii) negligence.
The Dismissal Motion
Libra adamantly denied the allegations, swiftly moving to dismiss the amended complaint. Front and center in Libra’s motion was ALP’s certificate of incorporation containing the following exculpatory provision:
The personal liability of directors to the corporation or its shareholders for damages for any breach of duty in such capacity is hereby eliminated except . . . if a judgment or other final adjudication adverse to such director establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or, other advantage to which he was not legally entitled or that his acts, violated Section 719 of the Business Corporation Law.
ALP’s exculpatory clause was an almost verbatim copy of the language of Section 402 (b) (1) of the Business Corporation Law, and a twin of the exculpatory clause in an LLC’s operating agreement in John v Varughese, 194 AD2d 799 [2d Dept 2021], a case about which we recently wrote.
Libra also argued that Adam’s amended complaint, viewed as a whole, alleged no more than a mere disagreement over the correct direction of ALP’s business, decisions shielded by the common-law business judgment rule.
The Dismissal Decision
In the lower court, Justice Bannon granted dismissal under both fiduciary defenses.
With respect to the exculpatory agreement, the Court ruled:
Although Adam states, in conclusory fashion, that ‘Libra and Anderson have taken such action in bad faith and intentionally with full knowledge that their action constituted misconduct in knowing violation of the law and for the improper purpose of personally gaining financial profits and advantages to which they are not entitled,’ Adam pleads no facts that would permit such inferences to be drawn. Libra and Anderson’s decisions to distance ALP from Adam’s prior course of business, even if such decisions made ALP less profitable, do not constitute bad faith or intentional misconduct.
A cause of action sounding in breach of fiduciary duty does not lie where the complaint merely alleges that a course of action other than that pursued by a board of directors would have been more advantageous. . . . Rather, the complaint must sufficiently allege that the corporate decisions of the board of directors lacked a legitimate business purpose or were tainted by a conflict of interest, bad faith, or fraud (citations omitted).
The Appellate Decision
Plaintiffs’ claims asserted against defendants in their capacity as directors are . . . barred by the exculpation clause in ALP’s certificate of incorporation. In New York, a shareholder’s right to bring a derivative action against directors for breach of duty is expressly subject ‘to any provision of the certificate of incorporation’ authorized by Business Corporation Law § 402 (b) (Business Corporation Law § 720 [a] ). Plaintiffs’ attempts to plead around the exculpatory language are conclusory, and insufficient to overcome the protections in the company’s governing documents.
The motion court properly dismissed plaintiffs’ causes of action alleging breach of fiduciary duty and negligence. The law is well settled that the business judgment rule bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. While plaintiffs might disagree with decisions of ALP’s Board of Directors, a cause of action will not lie where, as here, the complaint merely alleges that a course of action other than that pursued by the board of directors would have been more advantageous . . . . (quotations and citations omitted).