By: Jeff Dutson, King & Spalding LLP
A thorough review of company emails reveal a plot by the majority members to squeeze out the minority member. Wilson v. Gandis, 844 S.E. 2d 631 (S.C. Sup. Ct. 2020).
David Wilson, a minority member in a 3-member LLC (Carolina Custom Converting, LLC, aka “CCC”) brought an action in the Circuit Court of Greenville County, South Carolina against the majority members, John Gandis and Andrea Shirley, for oppression and sought a buyout of his membership interests. The majority members and CCC counterclaimed for breach of fiduciary duty and misappropriation of CCC’s trade secrets. Following a five-day bench trial, the Circuit Court found in favor of Wilson on the oppression claim, on the breach of fiduciary duty counterclaim, and also on the trade secrets claim. The Circuit Court ordered Gandis and Shirley to buy out Wilson’s membership interest in CCC for $347,863.23. On appeal, the Court of Appeals affirmed the lower court’s decision in its entirety. Gandis, Shirley and CCC appealed to the Supreme Court of South Carolina.
Wilson and Gandis formed CCC, with each member owning a 50% membership interest. Prior to the formation of CCC, Wilson owned and operated EFS, which conducted business in the same industry as CCC. Wilson agreed to run some of EFS’s business through CCC. Eventually, Wilson wound-down EFS and ran all of its previous business through CCC. In exchange for transferring EFS’s business to CCC, Gandis agreed to pay Wilson $8,000 per month, which they later agreed to increase to $12,000. Gandis agreed to fund CCC through credit lines from his other businesses – DecoTex and M-Tech. M-Tech also owned the building that CCC operated out of (and Gandis received the benefit of the rent payments). Shortly afterwards, Gandis engaged Shirley, a certified public accountant, to provide CCC with accounting and formation advice. In return for Shirley’s service, Gandis and Wilson each transferred to Shirley a 5% interest in CCC, after which Shirley took an active role in managing CCC. During the five-day bench trial, the court received over 300 exhibits and heard testimony from ten witnesses, which the court agreed, revealed a pattern of oppression shortly after Shirley’s involvement in CCC. As CCC’s business grew, Gandis and Shirley started to exclude Wilson from their discussions about CCC’s operations in order to squeeze him out of his ownership in the business. First, while CCC typically reserved funds in order to distribute to members to cover their annual income taxes, Shirley urged Gandis to use such funds to free up the M-Tech line of credit, which CCC shared, and then to use the available credit to pay his own taxes, which he did, and after which Shirley told Wilson he would not receive a distribution to cover his tax liabilities. Second, Shirley and Gandis began secretly monitoring Wilson’s emails, including private emails from Wilson’s wife, in order to gain leverage over Wilson and formulate a strategy to pressure him into giving up his equity in CCC. This was reflected in an email from Shirley to Gandis where Shirley presented a framework whereby Wilson would: (i) become a salaried employee, on onerous terms that would allow CCC to terminate him for little reason and (ii) sign a noncompete. In constructing this framework, Shirley mentioned the private emails from Wilson’s wife and pointed out the then current stress and strain on Wilson’s marriage. Third, Shirley prepared a misleading balance sheet to accompany an offer to Wilson to buy his membership interest in CCC. The balance sheet contained questionable accruals and removed assets that had been listed on CCC’s previous balance sheets. Furthermore, among various other tactics, Gandis and Shirley refused to pay Wilson his monthly compensation, which he earned in exchange for re-routing his business and customers from EFS to CCC, locked Wilson out of his office, and increased CCC’s monthly rent payments to M-Tech, which Gandis wholly owned.
Upon the review of such findings by the lower court, and the determination that Gandis’ and Shirley’s rebuttal testimony was not credible, the Supreme Court of South Carolina affirmed the lower court’s opinion but modified the obligation to buy out Wilson’s membership interest – CCC would be first be obligated to buy Wilson out, and if it did not, Gandis and Shirley would have to. The Supreme Court also agreed with the lower court in that (i) Gandis and Shirley did not have standing to bring a breach of fiduciary duty counterclaim against Wilson, and (ii) the information that Wilson took with him when he was removed from CCC did not have the required independent value to be considered a “trade secret”.