Stephenson v. Drever

In 1980 Allen Stephenson (plaintiff) became an employee of Drever Partners, Inc. In 1990 Stephenson became a minority shareholder with 11 percent of outstanding common stock. The remaining 89 percent of common stock was held by Maxwell Drever (defendant). Stephenson acquired his shares pursuant to a buy-sell agreement that provided that in the event of his termination of employment, on or before 90 days after the date of his termination, Drever Partners had the right and obligation to repurchase all of Stephenson’s shares at fair market value. The agreement did not provide a specific dollar amount or formula for determining fair market value. Instead, the agreement provided that the parties had to work in good faith to determine value, and if they could not agree, the value would be determined by a binding appraisal process. Subsequently, on May 16, 1994, Stephenson entered an agreement with Drever, providing that his employment with Drever Partners would terminate as of July 1, 1994, and that for the purposes of stock valuation, the shares would be valued as of May 1, 1994. However, the parties were not able to come to an agreement on the fair market value of the shares, causing the dispute to proceed to the appraisal process. According to Stephenson, after his termination but prior to the repurchase of his shares, Drever caused Drever Partners to pay Drever excessive compensation and otherwise manipulated corporate assets and accounts to undermine the fair market value of the shares. Stephenson filed a derivative action against Drever for breach of fiduciary duty, claiming that Stephenson was still owed a fiduciary duty as a minority shareholder because he still owned the shares until their formal repurchase. Drever argued that Stephenson was owed no fiduciary duty because his status as shareholder terminated on May 1, 1994, the valuation date in the termination agreement. The trial court ruled in favor of Drever, and the court of appeal affirmed that ruling. The California Supreme Court then granted review.