decoration decoration
Stories

GROKLAW
When you want to know more...
decoration
For layout only
Home
Archives
Site Map
Search
About Groklaw
Awards
Legal Research
Timelines
ApplevSamsung
ApplevSamsung p.2
ArchiveExplorer
Autozone
Bilski
Cases
Cast: Lawyers
Comes v. MS
Contracts/Documents
Courts
DRM
Gordon v MS
GPL
Grokdoc
HTML How To
IPI v RH
IV v. Google
Legal Docs
Lodsys
MS Litigations
MSvB&N
News Picks
Novell v. MS
Novell-MS Deal
ODF/OOXML
OOXML Appeals
OraclevGoogle
Patents
ProjectMonterey
Psystar
Quote Database
Red Hat v SCO
Salus Book
SCEA v Hotz
SCO Appeals
SCO Bankruptcy
SCO Financials
SCO Overview
SCO v IBM
SCO v Novell
SCO:Soup2Nuts
SCOsource
Sean Daly
Software Patents
Switch to Linux
Transcripts
Unix Books
Your contributions keep Groklaw going.
To donate to Groklaw 2.0:

Groklaw Gear

Click here to send an email to the editor of this weblog.


To read comments to this article, go here
Canopy Group Shareholder Agreement (Yarro et al v Kreidel et al) - PDF and text
Saturday, February 26 2005 @ 02:44 AM EST

Here's the November 8, 2000 Shareholders Agreement [PDF] for Canopy Group. This is one of the documents attached as exhibits to the Yarro et al complaint [PDF], although why they thought they would help them is a bit hard to fathom. I've prepared a lot of shareholder agreements in my time, and I never drew up one like this.

There are companies that sell template document-producing software to lawyers. I hope you guys are writing some FOSS ones, by the way. Anyway, the template stuff gives you many choices on how you want to set up the shareholder agreement, and you answer questions, and based on your answers, the software provides the wording you need. I never saw any software that would give you some of the wording I see in this agreement.

The first thing you notice is that it says that the Noordas had 10,000 shares of Class A Common Stock, and "[s]imultaneous with the execution of this Agreement, Yarro is exercising his option to purchase 10,000 shares of Class A Common Stock." If I were reading this document as mean Mr. Mustard, I believe I'd conclude that this is when Yarro made his move to start taking over Canopy control. If I were Mr. Yarro, I would see it as the Noordas implementing their selfless desire for him to share equal status with them, while acing their children.

This is a significant agreement, because it tells what happens (if the agreement is held to be lawful) if one, or both, of the Noordas is found to have lacked capacity to effectuate the December 17th coup. If Mr. Noorda's health examination were to lead to a determination that he lacked capacity, for example, this document tells the process for replacing him. And man, oh, Manischewitz, what an incredible method they have set up. It goes like this: Upon an opening, the Noordas then appoint one director, and Ralph Yarro (or his rightful successor to his shares of Class A Common Stock) gets to appoint one, and the third director gets picked by the two new directors appointed, by mutual agreement. And what are the odds, in this scenario, that any such mutual agreement would ever be possible? And why do the two Noordas get only one appointment, when there are two of them, and so it's Yarro one and the two of them only one? And how come Yarro gets to pass along his vote to a successor, but there is no provision for the Noordas to do the same?

If a client told me they wanted to set something like this up, I'd feel obligated to explain to them why it wouldn't work. The trick to drawing up a contract is to imagine various scenarios, and then plan for them. Here, they start with three directors, Yarro, and the two Noordas. If one of the three is incapacitated or in some other way unwilling or unable to serve, then instead of just filling in the empty slot, all three directors must be appointed as above. It's asking for a lawsuit or an impasse at best. And the shareholders are obligated to make it happen. It's just unworkable.

And keep in mind that currently we have potentially all three slots needing to be filled. Mr. Noorda and Mrs. Noorda must be examined to test their mental capacity (yes, the Yarro team appears to be asking for that, as you will see soon, when I put up that document), and Yarro has been terminated as CEO and President and there is a motion to remove him from the Board. So who picks the replacements then? Presumably precisely what the agreement says, and that should result in some fireworks. Then there is the detail that there is no provision for what happens if *both* Noordas are found to be incapaciated. And did they really intend for Mr. Yarro to be able to continue to appoint his successor if he was terminated for cause? That's what it seems to say. For that matter, did they intend for him to remain on the board if he were canned for cause as CEO and President? Why didn't the drafter of this document think about all the possible scenarios and plan for them? Just a real mess. Or maybe they never expected what has happened to happen, so they planned only for the Noordas to end up gone?

This document solves one mystery for me. I've been wondering why all the affidavits end by saying that there were no shareholder meetings in 2004 and they were not aware of any scheduled for 2005. It's because of article 2, Corporate Governance, which requires that shareholders vote on extraordinary matters. Like making Yarro leap overboard, presumably.

Here's what the Canopy Group had to say about the shareholder agreement in their complaint against Yarro, Mott and Christensen:

D. The Shareholder Agreement.

36. On or about November 8, 2000, on the advice of Defendants, the Trust, Yarro, and Canopy entered into a Shareholder Agreement (the "Shareholder Agreement") pursuant to which the parties, including all future Canopy shareholders, purportedly agreed as follows:

(a) That for so long as they are willing and able to serve as directors, the Noordas and shall be elected directors of Canopy. (Shareholder Agreement 1(a).)

(b) That consent of all of the shareholders holding Class A stock is required for the following matters:

(i) A "Liquidation Event,"as defined in the Amended Articles.

(ii) Amendment, modification or restatement of the Amended Articles, or entry into any voting or management agreement inconsistent with the Shareholder Agreement.

(iii) Entry into any transaction with any shareholder or any person or entity that is an affiliate of or has a significant relationship with a shareholder, other than on an arms' length basis. (iv) An increase or decrease in the size of the Board of Directors or any other action that "adversely affects the rights of any of the Shareholders set forth in this Agreement." (Id at 2(b).)

(c) That directors may not be removed except as provided in Utah Code Ann. 16-10a-809, as amended. (Id. at 3.)

(d) That "any person who serves as a director of [Canopy] will be obligated as a fiduciary to [Canopy] and its shareholders, as is more specifically provided by Utah Code Section 16-10a-840(1)." (Id. at 4.)

(e) That the Shareholder Agreement shall terminate upon agreement of the shareholders or the last to die of the Noordas. (Id. at 7.)

37. Christensen, in his capacity as legal counsel to Canopy, participated in drafting the Shareholder Agreement and, along with Yarro and Mott, advised that its adoption was in Canopy's and the Trust's best interests. At the time, the Noordas' trust and confidence in Defendants, particularly Yarro, led them to believe the Shareholder Agreement was in Canopy's and the Trust's best interests.

38. Pursuant to a Stock Purchase Agreement executed by Yarro personally and on purportedly on behalf of Canopy on November 17, 2000, Yarro exercised his Class A stock options and acquired 10,000 shares of Class A voting stock, an amount equivalent to that held by the Trust. . . .

TENTH CAUSE OF ACTION

(Breach of Contract -Shareholder Agreement)

112. Plaintiffs incorporate by reference the allegations above.

113. To the extent the Shareholder Agreement entered into between Plaintiffs and Defendants constitutes a valid and enforceable contract, Defendants have breached their obligations under 2(b)(iii), 2(b)(iv) and 4 of the Shareholder Agreement by implementing excessive and unfair incentive and equity compensation packages for themselves and Canopy's other employees, ceding undue control of Canopy to its employees, and otherwise breaching their fiduciary duty of loyalty to Plaintiffs.

114. The foregoing breaches constitute material breaches of Defendants' obligations under the Shareholder Agreement.

115. As a direct and proximate cause of Defendants' breaches, Plaintiffs have suffered and will continue to suffer damages.

116. Plaintiffs are therefore entitled to avoid, terminate and rescind Defendants' purported rights under the Shareholder Agreement and to an award of damages in an amount to be proved at trial.

ELEVENTH CAUSE OF ACTION

(Breach of Covenant of Good Faith and Fair Dealing -Shareholder Agreement)

117. Plaintiffs incorporate by reference the allegations above.

118. To the extent the Shareholder Agreement entered into between Plaintiffs and Defendants constitutes a valid and enforceable contract, Defendants, as parties to that contract, owe Plaintiffs a duty to act in good faith and deal fairly with Plaintiffs.

119. This duty included a duty on Defendants to act consistently with the purpose of the Shareholder Agreement, principally to procure Defendants' undivided loyalty to Plaintiffs.

120. Defendants breached the duty of good faith and fair dealing implied in the Shareholder Agreement by, among other things, implementing excessive and unfair incentive and equity compensation packages for themselves and Canopy's other employees, ceding undue control of Canopy to its employees, and otherwise breaching their fiduciary duty of loyalty to Plaintiffs.

121. The foregoing breaches constitute material breaches of Defendants' obligations under the Shareholder Agreement.

122. As a direct and proximate result of Defendants' breaches of the covenant of good faith and fair dealing implied in the Shareholder Agreement, Plaintiffs have suffered and will continue to suffer damages.

123. Plaintiffs are therefore entitled to avoid, and rescind Defendants' rights under the Shareholder Agreement and to an award of damages in an amount to be proved at trial.

As you can see, Canopy is basing two causes of action on this agreement, stating that if the agreement is legal, the three defendants breached it. The agreement states that the signatories acknowledge a fiduciary duty to Canopy, and they didn't act in Canopy's best interest, only in their own. In any case, they ask that the court issue a judgment "declaring that Defendants' purported rights under the Agreement are void, terminated, and rescinded."

******************************

SHAREHOLDER AGREEMENT

THIS SHAREHOLDER AGREEMENT (this "Agreement") is entered into this 8th day of November, 2000, by and among The Canopy Group, Inc., a Utah corporation (the "Corporation"), Raymond J. Noorda, Trustee under Declaration of Trust dated 10/8/80, as amended, Lewena Noorda, Trustee under Declaration of Trust dated 10/8/80, as amended, and Ralph J. Yarro (hereinafter the parties hereto as well as any additional future holders of the Corporation's shares of capital stock (as permitted under this Agreement), are sometimes hereinafter referred to collectively as "Shareholders" and all of the shares of capital stock of the Corporation, legally or beneficially owned by the Shareholders, including any shares hereinafter acquired by any of them are referred to as the "Shares").

A. Raymond J. Noorda, Trustee, and Lewena Noorda, Trustee (hereinafter collectively referred to as "the Noordas"), presently own as co-trustees all of the issued and outstanding capital shares of the Corporation consisting of 10,000 shares of Class A Common Stock and 9,990,000 shares of Class B Common Stock;

B. Ralph J. Yarro ("Yarro") holds an option from the Corporation to purchase 10,000 shares of Class A Common Stock and 9,990,000 shares of Class B Common Stock, and when the option is exercised, the shares issued pursuant thereto will be subject to the terms of this Agreement. Simultaneous with the execution of this Agreement, Yarro is exercising his option to purchase 10,000 shares of Class A Common Stock. For purposes of this Agreement, Yarro shall be deemed to be a Shareholder having the rights and obligations hereunder.

C. The Noordas, Yarro and the Corporation desire to enter into this Agreement and put into place certain corporate governance requirements during the term of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree as follows:

1. Management of the Corporation. The Shareholders shall take such action, as shareholders, directors and officers of the Corporation, as may be necessary, required or appropriate to accomplish the following:

(a) For so long as all of them are willing and able to serve as directors of the Corporation, each of the Noordas and Yarro shall be elected as directors of the Corporation.

(b) If any member of the group consisting of the Noordas and Yarro shall, during the term of this Agreement, be unwilling or unable to serve as a director of the Corporation (by reason of death, incapacity, resignation or otherwise), then the three directors of the Corporation shall be appointed as follows:

1

(i) The Noordas (if both of them are then living and are not incapacitated) shall appoint two of the three directors of the Corporation.

(ii) The Noordas (if either of them has died or become incapacitated) shall appoint one of the three directors of the Corporation.

(iii) Yarro (or the rightful successor to Yarro's shares of Class A Common Stock) shall appoint one of the three directors of the Corporation.

(iv) The third director shall be appointed by mutual agreement of the two directors who are appointed under paragraphs (ii) and (iii) above.

2. Corporate Governance.

(a) Ordinary Matters. Notwithstanding anything contained in the contrary in the Bylaws of the Corporation, the Board of Directors of the Corporation shall make all decisions with respect to the management, business or operations of the Corporation by a simple majority vote of the directors present at a duly called meeting where a quorum is present, except for those matters described in Section 2(b), which shall require the approval or consent of all of the Shareholders holding Class A Common Stock.

(b) Extraordinary Matters. The Corporation shall not proceed with any of the following matters unless each of the Shareholders holding Class A Common Stock has approved the matter:

(i) a Liquidation Event (as defined in the Corporation's Articles of Incorporation, as amended (the "Amended Articles");

(ii) amend, modify or restate the Amended Articles or Bylaws of the Corporation or entering into any voting or management agreement regarding the governance of the Corporation that would be inconsistent with the terms of this Agreement;

(iii) enter into any transaction with any Shareholder or any person or entity that is an affiliate of a Shareholder, or any person or entity having a significant relationship with any Shareholder, other than on an arms' length basis; or

(iv) increase or decrease the size of the Board of Directors or take any action that adversely affects the rights of any of the Shareholders set forth in this Agreement.

3. Removal of Directors. Neither the Corporation nor any Shareholder shall remove a Shareholder from the Board of Directors, except as provided under Utah Code Section 16-1Oa-809, as amended.

2

4. Fiduciary Obligations. The Shareholder acknowledges that any person who serves as a director of the Corporation will be obligated as a fiduciary to the Corporation and its shareholders, as is more specifically provided by Utah Code Section 16-10a-840(1).

5. No Transfer, Sale, Encumbrance, Etc. During the term of this Agreement, no Shareholder shall sell, assign, transfer, pledge, hypothecate or otherwise encumber any of the Shares, whether now owned or hereafter acquired, or contract to sell, assign, transfer, pledge, hypothecate or encumber such Shares, except as permitted by the terms of this Agreement or by the express written consent of all of the Shareholders. The restrictions contained in this Agreement shall not apply to a bona fide gift or bequest by a Shareholder to his or her child, grandchild or spouse, including gifts in trust, but such transferee shall remain subject to this Agreement.

6. Marking of Certificates. Each certificate representing Shares shall have inscribed thereon the following legend:

The Shares represented by this certificate are subject to all the terms of an Agreement dated as of November 8, 2000, between the corporation and its Shareholders, a copy of which is on file at the office of the corporation. Such Agreement, among other things, limits the right of the owner to sell, assign, transfer, pledge or encumber the Shares represented hereby and provides that the owner is subject to certain restrictions as to the governance of the corporation under conditions set forth in the Agreement.

If any Shareholder shall acquire any other Shares, they shall be subject to all the terms of this Agreement and the certificates representing them shall be similarly marked.

7. Term. This Agreement shall terminate upon the occurrence of any of the following events: (a) upon the last to die of Raymond J. Noorda and Lewena Noorda, or (b) agreement of all of the Shareholders.

8. Governing Law. This Agreement shall be governed by the substantive laws of the State of Utah.

9. Entire Agreement; Modifications. This instrument sets forth the entire Agreement among the parties. No provision of this Agreement shall be altered, amended, or revoked except by an instrument in writing signed by the Corporation and the Shareholders. The execution of this Agreement by future Shareholders shall not be deemed to be an amendment hereof, except for the addition of the signing Shareholder.

10. Cessation of Rights. A Shareholder shall have no further rights under this Agreement when he or she ceases to own any Shares.

3

11. Successors and Assigns. Except as herein set forth, this Agreement shall extend to and be binding upon the successors, assigns, heirs, and legal representatives of the parties hereto. No Shareholder may assign this Agreement without the prior written consent of each of the other Shareholders.

12. Saving Clause. Should any part or any provision of this Agreement be rendered or declared invalid by reason of any state or federal law or by decree of any court of competent jurisdiction, such invalidation shall not invalidate the remaining portions thereof, and the remaining parts or provisions of this Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties set forth below have caused this instrument to be duly executed as of the day and year set forth above.

The Canopy Group, Inc.

By:__[signature of R.J.Noorda]___
Its: Vice President

____[signature of R.J.Noorda]___
Raymond J. Noorda, Trustee under Declaration of
Trust dated 10/8/80, as amended

___[signature of Lewena Noorda]__
Lewena Noorda, Trustee under Declaration of Trust
dated 10/8/80, as amended

___[signature of Ralph J. Yarro]___
Ralph J. Yarro


  View Printable Version


Groklaw © Copyright 2003-2013 Pamela Jones.
All trademarks and copyrights on this page are owned by their respective owners.
Comments are owned by the individual posters.

PJ's articles are licensed under a Creative Commons License. ( Details )