Reynolds Health Care Services, Inc. v. HMNH, Inc. (Ark. Sup. Ct. 2005)

Safari File Edit View History Bookmarks Window Help ? )) 75% Wed 12:54 PM QE platform.virdocs.com C Upgrade to macOS Monterey Install V Busines... S b M E Get new FaceTime features, SharePlay, THE MDCA mints the duration of voung trusts to Is shares. It several minority shareholders conceavery and Live Text. Details 10 years, though all or part of the participating sharehold- own a majority of the shares of a corporation, they may 44-4 ers may agree to extend the term for another 10 years. Also, appoint a proxy to vote their shares and thereby control + - ooo Use the graph to a voting trust must be made public, with copies of the vot- the corporation. The ordinary proxy has only a limited estimate th ing trust document available for inspection at the corpora- duration-11 months under the MBCA-unless a longer tion's offices. term is specified. Also, the ordinary proxy is revocable at any time. As a result, there is no guarantee that control Shareholder Voting Agreements As an alternative to a agreements accomplished through the use of revocable voting trust, shareholders may merely agree how they will proxies will survive future shareholder disputes. vote their shares. For example, shareholders collectively However, a proxy is irrevocable if it is coupled with an owning a majority of the shares may agree to vote for each interest. A proxy is coupled with an interest when, among other as directors, resulting in each being elected to the other things, the person holding the proxy is a party to a board of directors. shareholder voting agreement or a buy-and-sell agreement. A shareholder voting agreement must be written; only The principal use of irrevocable proxies is in conjunction shareholders signing the agreement are bound by it. When MG_6376.JPG with shareholder voting agreements. a shareholder refuses to vote as agreed, courts specifically In the RHCS case, the court found that the parties cre- enforce the agreement. ated only a revocable proxy when they wanted a long-term Shareholder voting agreements have two advantages shareholder voting agreement. The case is a good example over voting trusts. First, their duration may be perpetual. of the need for careful drafting of corporate documents. IG_6428.JPG Reynolds Health Care Services, Inc. v. HMNH, Inc. 217 S. W.3d 797 (Ark. 2005) John Reynolds was the sole shareholder and manager of his family's longtime business, the Hillsboro Manor Nursing Home Inc. in El Dorado, Arkansas. In 1993, Reynolds needed capital to expand the nursing home, so he approached Dr. James Sheppard, who contacted three additional investors: Sheppard's two brothers, Andrew and Courtney Sheppard, and his brother-in-law, Eugene Bilo. The Sheppards and Bilo formed a corporation called HMNH, Inc. to acquire 80 percent ownership of Hillsboro Manor. HMNH, Inc. made a contract with Reynolds Health Care Services, Inc. (RHCS), a corporation in which Reynolds was the sole shareholder. PNG Under the contract, RHCS agreed to manage the nursing home in return for 6 percent of HMNH's gross revenues. HMNH agreed to provide adequate working capital and oversight on budgets, policies, and personnel. Of course, RHCS hired Reynolds as admin- Kre co istrator of the facility. To buy the nursing home, HMNH and Hillsboro Manor Nursing Home Inc. entered into a stock purchase agreement by which HMNH purchased all of the stock of Hillsboro Manor Nursing Home for $ 1,804,000. Hillsboro Manor Nursing Home was merged into HMNH with the three Sheppards, Bilo, and RHCS each receiving 20 shares of stock of the 100 outstanding shares of stock in HMNH. The Sheppards and Bilo also agreed to give RHCS the power to vote 7.5 of each of their shares on any matter submitted to shareholders in the next 20 years. The effect of the voting agreement was to give RHCS 50 percent voting control, which meant that Reynolds, who owned RHCS, could veto any matter submitted to HMNH's shareholders. Logo By 1999, HMNH had become concerned with the way Reynolds was running the nursing home. The shareholders held PM a meeting on September 14, 2000, at which the Sheppards and Bilo were present, but Reynolds was absent. The Sheppards voted their combined 60 shares to elect a new board of directors comprising the three Sheppards, Bilo, and Reynolds. At the directors' meeting, held immediately thereafter, all five men were elected as officers of HMNH, although Reynolds-while now BB IMG_7047 4.pdf 76,809 MAY 13 18Safari File Edit View History Bookmarks Window Help ? )) 75% Wed 12:54 PM QE A platform.virdocs.com C Upgrade to macOS Monterey Install V Busines... S b M E * E Get new FaceTime features, SharePlay, and Live Text. Details 44-5 71 present-abstained from the vote. Andrew Sheppard then made a motion that the board of directors authorize its attorney to + institute a lawsuit in the name of HMNH against Reynolds and RHCS to recover damages caused by RHCS's breach of the 8 Use the graph to management contract. The Sheppards and Bilo voted to adopt the resolution. On January 19, 2001, HMNH filed suit against estimate th RHCS and Reynolds, alleging that RHCS had breached the management contract. Reynolds and RHCS asked the trial court to dismiss the lawsuit on the grounds that HMNH's board had no authority to bring the lawsuit. Reynolds and RHCS argued that the directors were not properly elected because the Sheppards voted all their shares to elect the new directors, a violation of the shareholder voting agreement that gave RHCS the power to vote 7.5 of each of their shares. The trial court disagreed, ruling that the voting agreement was merely a revocable proxy, which the Sheppards revoked at the September 2000 shareholder meeting, and therefore, the Sheppards could vote all of their shares. Reynolds and RHCS appealed to the Arkansas Supreme Court. Glaze, Justice Care Services, Inc., and HMNH, Inc., and I authorize Reyn- MG_6376.JPG RHCS argues that it entered into a voting agreement with the olds Health Care Services, Inc. to act for me and in my name Sheppards and Bilo when they signed a document titled "Option and stead as fully as I could act if I were personally present, to Purchase Stock." In particular, RHCS points to the following giving to Reynolds Health Care Services, Inc., attorney and language in support of its contention that a voting agreement was agent, full power of substitution. created: The trial court found that these agreements were not voting agreements, but rather were revocable proxies. Under Ark. [HMNH] shall grant to [RHCS] a proxy to vote one-half of the issued and outstanding shares of stock of HMNH, Inc. Code Ann. $ 4-27-722 (Repl. 2001), proxies are revocable by a IG_6428.JPG pending the term of this option to purchase stock, which shareholder "unless the appointment form conspicuously states proxy shall be reduced to twenty-five percent of the issued that it is irrevocable and the appointment is coupled with an and outstanding shares of stock of the corporation for a interest." An appointment coupled with an interest includes the period of twenty years from the effective date of the Agree- appointment of "a party to a voting agreement created under ment to Provide Management Services to a Health Care $ 4-27-731." None of the proxy agreements stated conspicu- Facility executed the 8th day of January, 1993, as set forth ously on its face that it was irrevocable; indeed, in its reply in paragraph IV thereof, by and between Reynolds Health brief, RHCS abandons its argument that the proxies were irre- Care Services, Inc., and HMNH, Inc., upon the exercise of vocable. Nonetheless, RHCS maintains that the proxies " were this option and transfer to [RHCS] of the shares of stock merely the means of implementing the parties' foundational subject to this option. PNG voting agreement," by which the Sheppards and Bilo gave A subsequent agreement among the shareholders, dated RHCS the right to vote fifty percent of their shares in HMNH Kre cos September 19, 1996, provided that the Sheppards and Bilo "shall for twenty years. execute a proxy to Reynolds Health Care Services, Inc., appoint- However, we conclude that the document that RHCS calls ing Reynolds Health Care Services, Inc. as [their ] proxy to vote a "voting agreement" is nothing more than a revocable appoint- 7.5 shares of each of the said shareholder's stock held in HMNH, ment of proxy. The plain language of the agreement says nothing Inc." Those proxies were executed by each of the Sheppards and about how the stock is to be voted; it merely gives RHCS the right Bilo on October 21, 1996; the proxy agreements provided as to vote a percentage of the stock. Because the agreement does not follows: 'provide for the manner in which" the shares are to be voted, it is not a voting agreement; it is a proxy. Logo I, the undersigned shareholder of HMNH, Inc., an Arkan Further, the proxies assigned to RHCS were revocable. PM sas corporation, do hereby appoint Reynolds Health Care Thus, the Sheppards and Bilo were acting within their rights Services, Inc., an Arkansas corporation, my true and law- as shareholders when they voted to revoke their proxies at the ful attorney and agent, for me and in my name, place and September 2000 shareholders' meeting. Accordingly, the trial BB stead to vote as my proxy 7.5 shares of stock held by me court did not err when it concluded that the actions of the duly in HMNH, Inc. at any stockholders' meetings to be held elected board of directors in voting to authorize the instant law- between the date of this proxy and 20 years from the effect tive date of the Agreement to Provide Management Services suit were valid IMG_7047 to a Health Care Facility dated January 7, 1993, as set forth 4.pdf n Paragraph IV thereof, by and between Reynolds Health Judgment for HMNH affirmed. L' 76,809 MAY 13 18