Investors Can Proceed with Nevada Securities Lawsuit Over Reverse Stock Split That Made Company CEO the Only Shareholder

The U.S. District Court for the Eastern District of New York has ruled that plaintiffs can go ahead with their Nevada breach of fiduciary duty claims involving a reverse stock split that left Major Automotive Companies Inc.’s chief executive officer as the concern’s only shareholder. The case is Gardner v. Major Automotive Companies Inc.

The plaintiffs, Dorsey R. Gardner 2002 Trust trustees John Francis O’Brien and Dorsey Gardner, are accusing Bruce Bendell of abusing is fiduciary duty so he could get and approve a share price that was unfairly low. The trust had owned stock in Major during the relevant period in question.

Until 2006, when a going private deal was approved, Major’s stock was publicly traded, and CEO, acting CFO, and chairman Bendell owned 50.3% of the company’s outstanding common stock. According to the court, in December 2010, Major sent out a notice that there would be a special stockholders meeting to consider a 1 for 3 million reverse stock split that would make him the only shareholder. Meantime, the other shareholders would get $0.44 per pre-split share.

The district court dismissed the trustees claims that Major and Bendell issued false statements about the transaction’s fairness in the proxy system, which would have been a violation of the 1934 Securities Exchange Act’s Section 14(a). It noted that the section is only applicable to registered securities. The court also rejected the plaintiffs’ contention that claims should be allowed under that section because at the time their shares were bought Major’s common stock was held and the defendants should therefore be held liable as if the stock was never deregistered. The court said its own research and the plaintiff’s brief did not bring up any law that supported this interpretation of section 14 (a).

However, the district court did say that the Nevada breach of duty claim can go forward, noting that the allegations given as grounds for the lawsuit are “are more than adequate.” The court said that even though Bendell had “plain personal interest” in the transaction, the company failed to create a committee made up of disinterested members to assess the fairness factor. It also pointed out that the proxy statement did not disclose that Bendell was not only the chairman of the board but also its only member/dominated it, especially as it was the board that “unanimously determined” that the transaction was a fair one and in the best interests of not just the company but also its stockholders. The court also said that even though the plaintiffs did not invoke their rights under Nevada’s dissenters’ rights statute, this isn’t grounds for throwing out the case. It determined that the claim is viable because plaintiffs aren’t just challenging the share price but also the way Bendell exercised his fiduciary obligations.

Read the Memorandum and Order (PDF)

Securities Exchange Act of 1934, Legal Information Institute

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To speak with an experienced Nevada securities lawyer, contact Shepherd Smith Edwards and Kantas, LTD, LLP today.