O'Halloran Advertising Inc. v. O'Halloran
It is now clear under Connecticut law that claims alleging misconduct and violations of fiduciary duties by the majority shareholders in small or privately held corporations are derivative in nature and must be brought as a shareholder derivative action. O'Halloran Advertising, Inc. commenced this action against Mark O'Halloran, who owns 10 percent of the plaintiff's total shares of common stock. James O'Halloran, the defendant's father, owned 51 percent, his mother 21 percent and two siblings each owned nine percent of the common stock. Following alleged misconduct, the defendant was removed from his role as the plaintiff's president. He resigned and allegedly formed his own competing business. The plaintiff's shareholders approved a merger with New O'Ha, Inc. Pursuant to the merger agreement, the plaintiff paid the defendant $150,000 for his 100 shares of common stock. The defendant rejected the offer claiming that the fair market value of the shares was $540,000. The plaintiff brought this action pursuant to C.G.S. §33-871 seeking a judicial appraisal of the fair value of the defendant's shares. The defendant filed an answer with three counterclaims alleging breach of fiduciary duty and diversion of profits. The plaintiff filed a motion to strike all counterclaims and to dismiss the second and third counterclaims for lack of standing. The defendant conceded that the first counterclaim should be stricken. The trial court dismissed the remaining two counterclaims. The rule from the 2009 Connecticut Supreme Court case of May v. Coffey applied that "a shareholder--even the sole shareholder--does not have standing to assert claims alleging wrongs to the corporation." The allegations of the second and third counterclaims were, essentially, that misconduct and violations of fiduciary duties by the plaintiff and majority shareholders in diverting profits to overcompensate majority shareholders and paying their personal non-business expenses, denied the defendant his rightful share of the corporate profits as the minority shareholder. Under Connecticut law these types of claims are derivative in nature and must be brought as a shareholder derivative action. Thus, the defendant lacked standing to bring the claims and the court lacked subject matter jurisdiction over them.