JONATHAN MAY et al. v. WILLIAM COFFEY et al., SC 17936

Judicial District of Waterbury


      Corporations; Dilution of Stock Equity; Whether Minority Shareholders have Standing to Bring Suit in their Individual Capacities to Challenge Offering of Stock at an Artificially Low Price.  Plaintiffs Jonathan and Carolyn May are minority shareholders of Latex Foam International Holdings, Inc. (LFIH), a manufacturer of latex foam products with its headquarters and manufacturing facility in Shelton.  The plaintiffs brought this action against the company's directors and various other shareholders claiming the defendants had breached their fiduciary duties and unjustly enriched themselves in causing the company to offer additional stock to existing shareholders at an artificially low price.  The plaintiffs, who had chosen not to participate in the stock offering, claimed that the defendants' purchase of additional stock was intended to dilute the plaintiffs' percentage share of outstanding stock and to increase unfairly the defendants' proportional share.  The parties stipulated that the stock was offered at an unreasonably low price and that it was not unreasonable for the plaintiffs to refrain from participating in the offering.  The trial court granted the defendants' motion to dismiss the action, finding that the plaintiffs lacked standing to sue in their individual capacities because any harm they suffered due to the offer of stock at an artificially low price was not separate and distinct from any injury suffered by the corporation and by other minority shareholders who did not purchase shares in the offering.  The court also noted that, while the plaintiffs could properly press their claims in a shareholder derivative suit, any recovery by the plaintiffs in their individual capacities would be at the expense of the corporation and other minority shareholders.  The plaintiffs appeal, claiming they can assert their claims in their individual capacities because the offering harmed only the non-participating shareholders and did not harm the corporation.  The plaintiffs contend that, where majority shareholders such as the defendants disproportionately increase their equity interest in breach of their fiduciary duties and at the expense of the minority shareholders' interests, the corporation is not harmed because the majority shareholders are not harmed.  The plaintiffs also contend that the fact that other minority shareholders may have also suffered harm as a result of the defendants' conduct does not preclude the plaintiffs from proceeding in their individual capacities as long as all the other shareholders were not harmed.  Finally, the plaintiffs contend that, even assuming their claims are derivative in nature, they nonetheless have standing to assert them in their individual capacities because LFIH is a closely held corporation.