Navigate Up
Sign In
Bookmark and Share

146289 - Madugula v Taub

Rama Madugula,
 
Gerard V. Mantese
 
Plaintiff/Counter-Defendant-Appellee,
 
v
(Appeal from Ct of Appeals)
 
 
(Washtenaw – Brown, A.)
 
Benjamin A. Taub,
 
Ian James Reach
 
Defendant/Counter-Plaintiff-Appellant,
 
and
 
 
Dataspace, Inc.,
Defendant,
 
and
 
 
Andrew Flower,
Defendant.
 
 
 
 


Summary

In 2002, Benjamin Taub hired Rama Madugula as an independent contractor to be a sales consultant for Taub’s information technology firm, Dataspace, Inc., which provided data warehousing services. According to Taub, Madugula remained as a contractor and not an employee; Madugula contends that he was an employee.

On January 1, 2004, Madugula and another man working at Dataspace, Andrew Flower, became vice-presidents and part owners of the firm; until then, Taub had been the sole shareholder. Madugula bought 29 percent of the shares; Flower purchased 20 percent.

Under the stockholders’ agreement, a vote of 70 percent of the stock is required for the corporation to take certain actions, including making “Material changes in the nature of the business conducted by Dataspace,” “Material changes in compensation, or methods of determining compensation, of Taub, Madugula and Flower, or other managers employed by Dataspace,” and “Any other corporate action that would have a material adverse impact on Taub, Madugula or Flower, as opposed to the shareholders as a group in relation to their percentage ownership of the stock of Dataspace.” The stockholders’ agreement also contains an arbitration clause, which covers “any” dispute or “any matter” relating to or arising from the agreement. The agreement provided that Taub could appoint three members of the firm’s five-member board of directors, while Madugula and Flower could each choose one.

The buy-sell agreement addresses the purchase of the shares of any party who wishes to voluntarily withdraw from Dataspace, at a price based on 75 percent of the shares’ fair market value. In about 2007, Flower exercised his right to withdraw, and Taub and Madugula bought his shares, giving Madugula 36.25 percent of the stock.

In 2007, Taub proposed selling software developed by Dataspace, called JPAS, to help manage jails. Madugula did not object.

In July 2007, Taub informed Madugula that he was terminating Madugula’s services, claiming that doing so was best for the company and its shareholders. After August 2007, Madugula no longer received any pay from Dataspace, but he kept his shares and his position on the board of directors. He also received dividends as a shareholder when they were paid.

Madugula sued Taub and Dataspace on May 23, 2008. The complaint alleged “shareholder oppression” under MCL 450.1489, breach of fiduciary duty, breach of a duty of good faith under MCL 450.1541a, and fraud and misrepresentation. Among other things, Madugula sought money damages, a buy-out of his stock, and Taub’s removal from Dataspace. Madugula argued that Taub terminated Madugula’s employment without obtaining the supermajority 70 percent vote required by the Stockholders’ Agreement and also violated the agreement by changing the nature of Dataspace’s business from data warehousing to software development.

Taub did not deny that he never obtained a 70 percent vote of stockholders, but claimed that he acted in the firm’s best interest in ending Madugula’s employment. Taub also argued that Madugula could not show that his interests as a shareholder – as opposed to his employment and contractual interests – were adversely affected, and that therefore there could be no violation of MCL 450.1489, the shareholder oppression statute.

In a bench ruling on October 29, 2009, the circuit judge dismissed all counts against Taub and Dataspace, except for Madugula’s shareholder oppression claim against Taub personally. Taub later moved to bar a jury trial. The kinds of remedies Madugula was seeking – for example, the buy-out of his shares – were equitable in nature, Taub asserted, and could not go to a jury; the matter had to go to a bench trial, in which a judge, not a jury, acts as the finder of fact. The circuit judge disagreed, noting that he had not been shown binding authority that would prohibit a jury from hearing the case. Further, the judge allowed evidence about the stockholders’ agreement to show stockholder oppression.

A jury found in Madugula’s favor, concluding that Taub had engaged in willfully unfair and oppressive conduct that substantially interfered with Madugula’s interests as a shareholder. The jury found economic damages of $191,675 and determined that Taub had to buy Madugula’s stock for $1.2 million. The judge denied Taub’s post-trial motions to overturn the verdict, holding that the lack of a 70 percent vote to terminate Madugula’s compensation and to change Dataspace’s primary business supported the jury verdict of shareholder oppression.

Taub appealed, but the Court of Appeals affirmed in a split, unpublished per curiam opinion. All three judges agreed that there was evidence of shareholder oppression, based on the failure to comply with the 70 percent shareholder vote requirement. The judges also thought that this failure to comply could disproportionately affect Madugula’s shareholder interests, since he was not paid and was not involved in corporate decisions, such as the development of JPAS.

The Court of Appeals panel split regarding whether Madugula’s shareholder oppression claim should have been heard by a jury. The author of the lead opinion concluded that the trial judge did not abuse his discretion in denying post-trial relief, because there was no binding authority that would require a bench trial; a second judge concurred, but for different reasons. The dissenting judge would have held that a jury is not available, without the consent of the parties, for the equitable relief in MCL 450.1489.

In an order dated June 5, 2013, the Supreme Court granted leave to appeal. The Court directed the parties to address “(1) whether claims brought under MCL 450.1489 are equitable claims to be decided by a court of equity; (2) whether the provisions of a stockholders’ agreement can create shareholder interests protected by MCL 450.1489; and (3) whether the plaintiff’s interests as a shareholder were interfered with disproportionately by the actions of the defendant-appellant, where the plaintiff retained his corporate shares and his corporate directorship.”