v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014
MUSTANG JOURNAL OF LAW AND LEGAL STUDIES VOLUME 7 (2014)
EDITOR-IN-CHIEF William T. (Will) Mawer Dean, School of Education and Behavioral Sciences Southeastern Oklahoma State University
SENIOR ADVISORY EDITOR Marty Ludlum Assistant Professor of Legal Studies College of Business University of Central Oklahoma
The Mustang Journal of Law and Legal Studies is an Official publication of Mustang Journals, Inc., PO Box 2193, Edmond OK 73083 www.MustangJournals.com Print ISSN: 1949-1751 Online ISSN: 1949-1743 Listed in: Cabell’s Directory
Copyright to the contests of the articles published herein is retained by the respective authors. Copyright to the design, format, logo and other aspects of this publication is claimed by the Mustang Journals, Inc. The views expressed herein are to be attributed to the authors and not to this publication, Mustang Journals, Inc., its officer, the editors, or any named college or university. The material appearing in this publication are for information purpose only and should not be considered legal advice or be used as such. For a specific legal opinion readers must confer with their own legal counsel.
1 v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014 Table of Contents Mustang Journal of Law and Legal Studies Volume 7 (Fall, 2014)
Title . . . . . 1 Table of Contents . . . . . 2 Editor’s Notes . . . . . 3 Advisory Editors . . . . . 5-6 Announcement for Mustang Las Vegas Conference . . . . . 8 Announcements for Mustang Journals . . . . . 9-14 Best Paper Award Winners . . . . . 14-16
Kate Sanderson, Peter Bell, & Shannon Merrington . . . . . 18 A CASE STUDY ANALYSIS OF THE MONTREAL (CANADA) CHAPTER OF THE HELLS ANGELS OUTLAW MOTORCYCLE CLUB (HAMC) (1995-2010): APPLYING THE CRIME BUSINESS ANALYSIS MATRIX (CBAM)
Brad Reid . . . . . 40 DERIVATIVE ACTIONS AND SHAREHOLDER OPPRESSION: TWO BITES OF THE APPLE?
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From the desk of the Editor-in-Chief. . . .
This is the seventh volume of the Mustang Journal of Law and Legal Studies, an official publication of Mustang Journals, Inc. The Journal is being published in hardcopy and electronically on the Mustang Journal’s web page at http://www.MustangJournals.com.
All articles that appear in this volume of the Mustang Journal of Law and Legal Studies have been recommended for publication by the Reviewers/Advisory Editors, using a double, blind peer review process. A personal thanks is extended to the Reviewers/Advisory Editors for all their hard work and dedication to the Journal. Without their work, the publication of this Journal would be impossible.
This is my third year as Editor-in-Chief, and I wish to express my sincere thanks and appreciation for all the support, encouragement, assistance and advice throughout this year. I would like to further express appreciation to Marty Ludlum of the University of Central Oklahoma, for his efforts in coordinating the entire process. The publishing of this journal is an intense educational experience which I continue to enjoy.
Congratulations to all our authors. I extend a hearty invitation to submit your manuscripts for the future issues of Mustang Journals.
To further the objectives of Mustang Journals, Inc., all comments, critiques, or criticisms would be greatly appreciated.
Again, thanks to all the authors for allowing me the opportunity to serve you as editor-in-chief of the Journal.
William Mawer Editor-in-Chief Mustang Journal of Law and Legal Studies www. MustangJournals.com
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Our Advisory Editors
Mustang Journals could not exist without the hard work and timely effort of our peer reviewers. Mustang Journals is seeking scholars willing to volunteer. Mustang Journals recognizes the importance of the peer review process in shaping the reputation and credibility of the journal and the individual papers. Reviewers will be expected to review no more than three papers a year. If you would like to become a peer reviewer, please contact us at [email protected]
Mustang Journals wishes to thank our Peer Reviewers.
Dr. Jennifer Barger-Johnson, Legal Studies, U. of Central Oklahoma Dr. Linda Barton, Marketing, Brenau U. (GA) Dr. Susan Baxter, Marketing, LIM College (NY) Dr. Chris Birkel, Accounting & Legal Studies, College of Charleston (SC) Dr. Christie Byun, Economics, Wabash College (IN) Roger Chao, Ethics, Curtin University, Australia. Dr. Michael D. Chatham, Accounting, Radford University Steven I-Shuo Chen, Business & Management, National Chiao Tung U., Taiwan. Dr. Wanda J. Corner, Management, Walden U. (GA) Dr. Shivakumar Deene, Business Studies, Central U. of Karnataka, India Dr. Mohinder C. Dhiman, Management, Kurukshetra U., India Dr. Khalid M. Dubas, Marketing, Mount Olive College (NC) Meredith Bagby Fettes, Art, U. of Arkansas - Little Rock Dr. Rita A. Fields, Human Resources Management, Central Michigan U. Dr. Aikyna Delores Finch, Management, Strayer U. (CA) Dr. Clifford Fisher, Business Law, Purdue University Dr. Darrell Ford, Legal Studies, University of Central Oklahoma Dr. James Gadberry, Sociology, Athens State University Dr. P. Ganesan, Marketing, Mburabuturo School of Finance & Banking, Rwanda Dr. Poog Garg, English, Post Graduate Government College, Punjab, India Dr. Andrew S. Griffith, Accounting, Iona College, New York. Dr. David Hartmann, ISOM, University of Central Oklahoma Dr. Randal Ice, Finance, University of Central Oklahoma Dr. Suresh Reddy Jakka, Business Management, Mahatma Gandhi U., India Z.E. Jeelani, Business Studies, Islamic U. of Science & Technology, India. Dr. Stellina Jolly, Legal Studies, Punjab University, India. Epameinondas Katsikas, Accounting, Oxford Brookes U., Ohio Dr. Stuart MacDonald, Legal Studies, University of Central Oklahoma Michael Machiorlatti, Economics, Oklahoma City Community College Dr. Bashar H. Malkawi, Intl. Trade Law, Hashemite U., Jordan Dr. William Mawer, Dean, School of Education & Social Sciences, Southeast Oklahoma State Dr. Laura Mays, Business, Tiffin U. (Ohio) Dr. Nicholas Miceli, Human Resources, Park U. (Missouri) Dr. Sergey Moskalionov, Economics, Ulyanovsk State U. (Russia) Dr. Zlatko Nedelko, Management, U. of Maribor (Slovenia) Dr. Ngboawaji Daniel Nte, Rivers State U. of Education, Nigeria.
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Mohammad Nurunnabi, Accounting, Edge Hill University, UK. Dr. Raj Parikh, Dean of Business, Southern Oregon U. Dr. William L. Quisenberry, Management, Ottawa U. (KS). Dr. A.F.M. Ataur Rahman, Economics, North South U. Bangladesh Vijayan Ramachandran, Management, Oklahoma City Community College Dr. Suresh Reddy, Management, Vivekananda C. of Comp. Sciences, India Dr. Mark R. Riney, Education, West Texas A&M University Dr. David Ritter, Business Law, Texas A & M - Central Texas Dr. Ali Saeedi, Accounting, Taylors Business School, Malaysia Amir Mohammad Sayem, Research Methods, Bangladesh Institute of Social Research Cherie Ann Sherman, Business Law, Ramapo College of New Jersey Karen Sneary, Business, Northwest Oklahoma State University. Dr. Cathy Taylor, Management, Park University, Missouri Dr. Yu Tian, Business, Wesley College (DE) Dr. Lee Tyner, Management, University of Central Oklahoma K.E.Ch. Vidyasagar, Biomedical, Nandurkar College of E&T, India Dr. L. Vijayashree, Dept. of MBA, PES School of Engineering, Bangalore Dr. Aubree Walton, Accounting, Cameron University (OK) Dr. Zulnaidi Yaacob, Management, University Sains Malaysia. Yue Yuan, Economics, U. of Chicago, Dr. Shishu Zhang, Economics, U. of the Incarnate Word (TX)
If you are interested in serving as an Advisory Editor, please contact us at [email protected]
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Call for Papers Sixth International Academic Conference
Las Vegas, Nevada on Feb. 26-28, 2015
Deadline for Submission is January 15, 2015
You are cordially invited to our upcoming conference in Las Vegas, Nevada. Our Sixth International Conference will provide a friendly and supportive environment for new and established academicians an opportunity to share their research and works in progress with members inside and outside their disciplines.
The Conference and the Journals invite submissions in all business and social science disciplines, including accounting, anthropology, business, finance, communication, criminology, cultural studies, economics, education, management, international business, marketing, history, political science, psychology, sociology, social work, business ethics, and business law, in all areas domestic and international. Pedagogy, case studies, teaching notes, book reviews, cross- disciplinary studies, and papers with student co-authors are especially welcome.
The Conference is affiliated with our six peer-reviewed journals: The International Journal of Social Science Research, The International Journal of Economics and Social Science, The Mustang Journal of Management and Marketing, The Mustang Journal of Accounting and Finance, The Mustang Journal of Business, and The Mustang Journal of Law and Legal Studies.
All accepted presentations will be published in the Conference Proceedings!
Top 3 Papers will receive a Distinguished Paper Award!
Students receive a discounted registration!
Conference website: http://www.MustangJournals.com
Submit an abstract for quick review to [email protected]
Can’t join us in Las Vegas? Our fall, 2015 conference will be in Dallas!
8 v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014 Call for Papers The Mustang Journal of Accounting & Finance
Call for Papers: We are now accepting submissions for the Mustang Journal of Accounting & Finance. Two issues per year, April and October. All submissions undergo a blind, peer- reviewed process. The ISSN is 1949-1794 print and 1949- 1786 online. The MJAF is listed in Cabell's Directory and Ulrich's Directory, and is available in full text on Ebsco Host as well as on our website.
The scope of this journal is the discussion of current controversies and trends in all fields of accounting and finance, both teaching and practice, in both the domestic and international sphere.
Papers are welcomed which use original research, add to existing theory, or discuss pedagogical innovations developed for the classroom. Innovative research ideas which span discipline areas or which incorporate other nations or cultures are especially encouraged. In addition, we welcome case studies, teaching tips, book reviews, and multi-disciplinary papers.
The Editor of MJAF is Dr. David Ritter, CPA, JD, and DBA, Texas A&M University - Central Texas. The Mustang Journal of Accounting & Finance had its premiere issue in 2011. To submit, email your submission to [email protected]
9 v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014 Call for Papers The Mustang Journal of Business & Ethics
Call for Papers: We are accepting submissions for Mustang Journal of Business & Ethics. Issues are twice a year, April and October. All submissions undergo a blind, peer-reviewed process. The ISSN is 1949-1735 print and 1949- 1727 online. The MJBE is listed in Cabell's Directory and Ulrich's Directory, and is available in full text on Ebsco Host as well as on our website.
The scope of this journal is the discussion of current controversies and trends in all fields of business, including accounting, finance, management, ethics, marketing, and economics in both the domestic and international sphere. Papers are welcomed which use original research, add to existing theory, or discuss pedagogical innovations developed for the classroom. Innovative research ideas which span discipline areas or which incorporate other nations or cultures are especially encouraged. In addition, we welcome case studies, teaching tips, book reviews, and multi-discip linary papers.
The editor of MJBE is Dr. Brad Reid, Lipscomb University.
The Mustang Journal of Business and Ethics was started in 2009. Past authors have been from 25 universities and 12 countries.
To submit, email your submission to [email protected]
10 v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014 Call for Papers The Mustang Journal of Law and Legal Studies
Call for Papers: We are accepting submissions for the Mustang Journal of Law and Legal Studies. Two issues per year, April and October. All submissions undergo a blind, peer-reviewed process. The ISSN is 1949-1751 print and 1949- 1743 online. The MJLL is listed in Cabell's Directory and Ulrich's Directory, and is available in full text on Ebsco Host as well as on our website.
The scope of this journal is the discussion of current controversies and trends in all fields of law and legal studies in business, including the domestic and international spheres. Papers are welcomed which use original research, add to existing theory, or discuss pedagogical innovations developed for the classroom. Innovative research ideas which span discipline areas or which incorporate other nations or cultures are especially encouraged. In addition, we welcome case studies, teaching tips, book reviews, and multi-disciplinary papers.
The Editor of MJLL is Dr. Will Mawer, Dean of School of Education, Southeast Oklahoma State University.
The Mustang Journal of Business and Ethics was started in 2009.
Past authors have been from 25 universities and 12 countries.
To submit, email your submission to [email protected]
11 v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014 Call for Papers The Mustang Journal of Management & Marketing
Call for Papers: We are accepting submissions for the Mustang Journal of Management & Marketing. Two issues per year, April and October. All submissions undergo a blind, peer-reviewed process. The ISSN is 1949-176x print and 1949-1778 online. The MJMM is listed in Cabell's Directory and Ulrich's Directory, and is available in full text on Ebsco Host as well as on our website.
Papers are welcomed in all areas of management and marketing which use original research, add to existing theory, or discuss pedagogical innovations developed for the classroom. Innovative research ideas which span discipline areas or which incorporate other nations or cultures are especially encouraged. In addition, we welcome case studies, teaching tips, book reviews, and multi- disciplinary papers.
The editor of MJMM is Dr. Perwaiz Ishmaili, College of Business, College of St. Scholastica.
The Mustang Journal of Management & Marketing had its premiere issue in 2012.
To submit, email your submission to [email protected]
12 v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014 International Journal of Economics and Social Science International Journal of Social Science Research
All submissions to the IJESS and IJSSR undergo a blind, peer-reviewed process. Papers are welcomed in all areas of the social sciences, including anthropology, communication, criminology, cultural studies, economics, education, history, human geography, political science, psychology, sociology, and social work which use original research, add to existing theory, or discuss pedagogical innovations developed for the classroom. Innovative research ideas which span discipline areas or which incorporate other nations or cultures are especially encouraged. In addition, we welcome case studies, teaching tips, book reviews, and multi- disciplinary papers. The International Journal of Economics and Social Science and the International Journal of Social Science Research each are published in April and October. Submissions are accepted now.
To submit, email your submission to [email protected]
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Distinguished Paper Awards
Mustang International Academic Conferences!
We are honored to announce the winners of our Top 3 Papers competition at our recent International Academic Conference.
Nashville, Fall 2014 Conference:
Wilburn Lane, Christopher Manner, Union University
Who Tends to Forward Viral Advertising Videos? The Effect of Demographics, Social Media Use, and Personality on the Intent to Forward Viral Video Ads
Hui “Harry” Xia, University of St. Joseph (Macao)
Coping with Emerging and Advanced Market Risks
Richard Monahan, American Public University
Brand Equity Valuation for Prospective Candidates in the 2016 U.S. Presidential Race
14 v. 7, Mustang Journal of Law & Legal Studies, Fall, 2014 Distinguished Paper Awards
Mustang International Academic Conferences!
Past winners include:
Las Vegas, Spring 2014 Conference:
Thomas Liesz, Scott Metlen, University of Idaho
Using Excels Solver to Enhance Student Understanding of the Financial Planning Process
Patrick Rishe, Webster University
Pricing Insanity at March Madness: Exploring the Causes of Secondary Price Markups at the 2013 Final Four
Joseph Blake, Jelena Vucetic, University of Phoenix
The Influence of Financial Literacy on Faith-Based Epistemology: A Case Study of Arizona Church Members
Distinguished Paper Awards
Dallas, Texas, Fall, 2013 Conference:
Richard Hauser, Gannon Univ. & John Thornton, Kent State Univ.
Dividend Policy and Corporate Valuation
Thomas Krueger, Texas A&M University - Kingsville
Paying for Acceptance: A Study of Academic Management Journals
Aimee Tiu Wu, Teachers College, Columbia University
The Balancing Act of Dr. Mommy
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Distinguished Paper Awards
Mustang International Academic Conferences!
Past winners include:
Las Vegas, Spring 2013 Conference:
Joseph Groch, Florida Gulf Coast
Satisfaction: A Path to Success for the Golf Industry
Shawn Schooley, Auburn University
Appreciative Inquiry: Answering the Call of the New Public Service by Creating a Democratic Discursive Space through Positive Storytelling wherein Direct Citizen Participation can Flourish
Yue Yuan, University of Chicago
Examining Stock Returns through Anomalous Volume: 1966-2009
Distinguished Paper Awards
Oklahoma City, Fall, 2012 Conference:
Kusum Singh, LeMoyne-Owen College
Paper: Distance to the Border: The Impact of Own and Neighboring States’ Sales Tax Rates on County Retail Activity
Daniel Adrian Doss, Russ Henley & David McElreath, University of West Alabama
Paper: The Arizona Border with Mexico: A Pearson Correlation Coefficient Analysis of US Border Crossing Data versus US Reported Cybercrime Incidents
Ralph Bourret & Dana Roark, Northwest Oklahoma State University
Paper: Are Routine Retiring CEOs More Closely Monitored in their Last Year?
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A CASE STUDY ANALYSIS OF THE MONTREAL (CANADA) CHAPTER OF THE HELLS ANGELS OUTLAW MOTORCYCLE CLUB (HAMC) (1995-2010): APPLYING THE CRIME BUSINESS ANALYSIS MATRIX (CBAM)
Kate Sanderson QUT Faculty of Law, School of Justice
&
Dr Peter Bell Senior Lecturer, School of Criminology & Criminal Justice, Griffith University
&
Shannon Merrington Southern Cross University SCU Business School Bilinga, QLD, 4225
Abstract
For many years the Hells Angels Motorcycle Club (HAMC) was a dominant force in Quebec, Canada. The available academic literature indicates that the group’s strength arose from a variety of factors, including the use of violence, entrepreneurialism, considerable financial resources and successful business planning. This paper will utilize the sources located to provide an analysis of the group’s history, criminality, structure, activities and operations as a criminal business organization. The paper will also provide an analysis of the characteristics of the Quebec HAMC using the Criminal Business Analysis Matrix (CBAM) method as proffered by Dean, Fahsing & Gottschalk (2010). This paper will show that OMGs, in particular the Quebec HAMC, is experienced in identifying criminal opportunities, mobilizing the required resources and maximizing profits. However, like most organizations both illegal and legitimate, decision making during times of uncertainty remain a challenge.
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Keywords: Canada, Criminal Business Analysis Matrix, Hells Angels Motorcycle Club (HAMC), outlaw motorcycle gangs (OMGs)
INTRODUCTION
For most people, taking a ride on a motorcycle is a leisure activity, where individuals join together in groups or clubs because of their common interest in motorcycles and behave in accordance to the norms of society. On the other hand, there is a small percentage of individuals that belong to deviant motorcycle clubs, where members make the club’s priorities their own and deviate from society’s norms and engage in unconventional or criminal behavior. National and international law enforcement agencies have labeled these deviant clubs as outlaw motorcycle gangs (OMGs). These OMGs distinguish themselves from conventional motorcycle clubs by the type of bikes they ride (e.g. Harley Davidson motorcycles), tattoos and three-piece patches to signify their affiliation to a club or gang and its territory. Fear and intimidation are important territorial defenses uses by OMGs to ward off intrusions from outsiders and where only righteous bikers are considered for membership. Those who are invited to become members are put through the necessary ‘testing’ to demonstrate that he has what it takes to be a club member. For those that endure this intensive process will receive chapter approval and become an official patch holder.
One of the largest OMGs and most notorious motorcycle clubs is the Hells Angels. The Hells Angels Motorcycle Club (HAMC) are arguably one of the most dangerous and powerful criminal organization in Canada (Katz, 2011) and are said to contain “the most vicious and conscienceless bikers in the world” (Lavigne quoted in Barker 2005, 104). The HAMC is a highly structured criminal organization that has been involved in a number of criminal activities, such as, assault, armed robbery, extortion, murder, contraband, importation of illicit drugs, money laundering and possession of illegal weapons (Ontario Association of Chiefs of Police, 2006, p. 6). Between 1984 and 2001, the HAMC was the dominant group within Quebec’s OMGs population (Morselli 2009, 147) and at its peak, the group had six chapters in Quebec (Morselli 2009, 146) and over 100 full patch members (Schneider 2009, 424).
The aim of this paper is to first provide a review of the literature as it relates to the HAMC with particular emphasis on the Quebec (Montreal Chapter) in Canada. The paper will examine the clubs evolution as an OMG and its involvement in criminal activities, in particular, its involvement in the illicit drug market. In particular, it will examine the structure and composition of the Quebec HAMC while at its peak (1984-2001) and more recently following targeted law enforcement efforts which commenced in 2001. Second, the paper will provide an analysis of the characteristics of the Quebec HAMC during both periods, using the Criminal Business Analysis Matrix (CBAM) method as proffered by Dean, et al. (2010).
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The CBAM assesses the criminal networks’ performance and characteristics against five (5) entrepreneurial capabilities (Opportunity Perspective, Resources Mobilisation, Decision in Uncertainty, People & Cooperation; and Profit Maximization) and four (4) business phases (Establishment Phase, Expansion Phase, Consolidation Phase; and the Positioning Phase). The four business phases are comprised of a total of 16 business development factors. Against these capabilities, a rating of HIGH, MEDIUM or LOW is assigned, with accompanying explanations. A graphical representation of these ratings for both capabilities and business development factors can be found in figure 1.
Approach
This case study of the HAMC, using the CBAM (Dean, et al. 2010) incorporates a comparative review of the literature on several aspects of the club’s activity, with an emphasis on the Montreal chapter of the HAMC chapter based in the province of Quebec, Canada. The Montreal chapter is of particular interest, as it once served as the power-base for the former Canadian National President of the HAMC; Maurice ‘Mom’ Boucher.
Data collected against the following themes were compared and contrasted and used to complete the CBAM as proffered by Dean et al. (2010):
• History and development of HAMC in Canada • The expansion from domestic activity to Transnational status • The HAMC Montreal chapter’s distinction from other OMGs • The modus operandi of HAMC in criminal activities including drug trafficking and money laundering • Growing global recognition of the threat posed by OMGs
This paper will show that OMGs, in particular the HAMC, is experienced in identifying criminal opportunities, mobilizing the required resources and maximizing profits. However, like most organizations both illegal and legitimate, decision making during times of uncertainty remain a challenge.
DISCUSSION
PART A: History and development of Hells Angels Outlaw Motorcycle Club (HAMC) in Canada
A comparative review of the literature suggests that the HAMC is an OMG that began in San Bernardino in the United States in 1948. At its inception, the group was comprised of disillusioned World War II veterans who struggled to assimilate into civilian life (Grennan and Britz 2006, 95, 101). The HAMC rapidly expanded, with numerous new chapters formed nationally and internationally (Grennan and Britz 2006, 101).
The HAMC expanded from America into Canada in the 1970’s with the first chapter created in Sorel, Quebec in 1977 (Morselli 2009, 147). Between 1984 and 2001, the HAMC was the dominant group within Quebec’s OMG population (Morselli 2009, 147).
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At its peak, the group had six chapters in Quebec (Morselli 2009, 146), including the powerful Nomad chapter (are kind of a combination elite death squad that operate independent of any particular chapter authority and are known to do the hits for the club if need be) (Schneider 2009, 407), and over 100 full patch members (Schneider 2009, 424).
The HAMC has been deeply involved in Quebec’s illegal drug trade, particularly in the province’s cannabis and cocaine markets (Tremblay, Buouchard and Petit 2009). Like other OMGs, the HAMC has also been involved in other criminal activities, including assault, armed robbery, extortion, fraud, money laundering, murder, prostitution, theft and the trafficking of illegal weapons, stolen goods and contraband (Katz 2011, 246).
In 1985, a Lenoxville (Quebec) chapter of the HAMC suspected the Laval Chapter of the HAMC of wasting drug profits by consuming much of the illicit drugs themselves, this resulted in a shortfall of approximately $96,000 to the HAMC chapter in Nova Scotia Canada. In March that year, the Laval chapter members were invited to Lennoxville chapter party. Upon their arrival the Laval members were ambushed and murdered. Approximately two months later police divers located the decomposing bodies of the victims in the St Lawrence River, Quebec. They were wrapped in sleeping bags and weighted down by gym weights. This became known as the Lenoxville massacre and announced the arrival of the HAMC in Canada as a violent and dangerous criminal group (Nathenson Centre on Transnational Crime, 2002). This particular event was pivotal for the HAMC in Canada, not only did it send a very strong message, but it caused a rift between Boucher and Cazzetta. Boucher now entrenched as a member of the HAMC in Montreal, Cazzetta saw the ‘killing of their own’ as unforgivable. He left the HAMC and formed a rival club known as the Rock Machine in 1986. By the early-1990s, Boucher was considered one of the most powerful bikers in the province, and was involved in numerous lucrative criminal activities such as cocaine trafficking and loan sharking.
The 1994 arrest of Salvatore Cazzetta (now President of the Rock Machine OMG) for conspiring to import 200 kilograms of cocaine left the Rock Machine without a leader. Boucher, by now president of the Montreal chapter of the Hells Angels, decided to make his move against the Rock Machine and other independent clubs. Boucher’s goal was to establish a Hells Angels monopoly over street-level, biker gang drug-dealing in the Montreal area—and eventually, all of Quebec (Nathenson Centre 2002, Morselli, 2009).
Boucher organized to persuade Rock Machine controlled bars and their resident drug dealers to surrender their illegal drug business. Rock Machine resistance led to bloodshed. On July 14, 1994, two members of the Hells Angels' top puppet club entered downtown motorcycle shop and shot down a Rock Machine associate. This would be the spark that would set off the Quebec Biker war. A war that lasted from 1994-2002, saw a number of drug dealers and crime families provide support to the Rock Machine through what became known as the “Alliance to fight the Angels’ (Morselli 2009, Edwards 2012).
The Quebec biker war resulted in the bombings of many establishments and murders on both sides. It has claimed more than 150 lives including some innocent bystanders such
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as the killing an 11-year-old boy, Daniel Desrochers, who was playing in a nearby schoolyard when a Jeep 4wd loaded with explosives was detonated. A month later, the first full Hells Angels member was shot to death entering his car at a shopping mall. Nine bombs were detonated in various parts of the province that year.
In 1995, Boucher decided to start a new Hells Angels chapter which he would lead. The Hells Angels Nomads chapter was a group made up of the most powerful Hells Angels in Quebec and not bound by geographical locations like the other Hells Angels chapters.
During the Quebec biker war, the Bandidos formed an alliance with the Rock Machine, which was officially folded into the Bandidos in 1999. The Hells Angels and Bandidos are historic rivals, implicated in biker violence across the globe. In Ontario (Canada), a rivalry between the two gangs was blamed for seven murders between August 2001 and May 2002.
From 2003, the group suffered a substantial decline, as law enforcement offensives led to the arrest and imprisonment of numerous Quebec HAMC members (Morselli 2009, 148), with only two active members remaining by 2009 (Criminal Intelligence Service Canada 2009, 15). Pivotal to the decline in Quebec HAMC members in the province, was the arrest and eventual conviction of the former national president Maurice ‘Mom’ Boucher, who was recruited by the HAMC from a white supremacy group known as the ‘SS’ back in the 1980s. Also recruited by the HAMC was onetime close associate of Boucher; Salvatore Cazetta.
In April 2009, over 156 members of the Hells Angels were arrested in Quebec, New Brunswick, France and the Dominican Republic mostly associated to crimes related to the Quebec Biker war. The arrests solved at least 22 murders committed between 1992 and 2009. Four Hells Angels bunkers were also seized by police including one in Sorel- Tracy that was firebombed in 2008. Several arrests were previously made earlier in the year as part of a series of joint operations between the Sûreté du Québec (or SQ) and the Royal Canadian Mounted Police (RCMP), namely; Operation Axe in February and Operation Baladeur in March (2009) (Edwards, 2012, Nathenson Centre 2012).
Following several successful operations by police and the conviction of Boucher for the murder and attempted murder, and his subsequent sentencing to 25 years in a Canadian correctional facility, the Montreal Chapter of the HAMC has diminished in both power and influence within the province of Quebec.
PART B: Case Study Analysis. Application of Crime Business Analysis Matrix to Quebec HAMC
Crime Business Analysis Matrix (CBAM)
Dean, Fahsing and Gottschalk (2010) have identified that the development of a crime business requires the amalgamation of four key phases to maximize the criminal group’s business opportunities. These phases are establishing, expanding, consolidating and
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positioning. Each phase involves a particular entrepreneurial capacity, which incorporates a number of business factors. The CBAM is an analytical tool that uses fuzzy logic (multivalence) and information already known about a particular crime group to assign the group a “fuzzy rating” for each business factor. This results in a graphical business profile (see the CBAM chart at figure 1) which allows for both an assessment of the group’s strengths and vulnerabilities at each phase of development and identification of the group’s potential entrepreneurial capabilities (Dean, Fahsing and Gottschalk 2010, 63).
The Quebec HAMC’s high fuzzy ratings in the majority of business factors may account for the group’s extended period of dominance in Quebec’s criminal landscape. However, as discussed above, the group’s numbers have since been decimated through targeted law enforcement efforts (Criminal Intelligence Service Canada 2009, 15). With the majority of its members now incarcerated, the Quebec HAMC’s fuzzy ratings in relation to the relevant business factors are likely to be low. This report will therefore consider the group’s position both at its peak (between 1984 and 2001) and, to a lesser extent, at the current time. The group’s fuzzy ratings at each stage are reflected in the CBAM chart in Figure 1.
PHASE 1: Establishment: (Overall Rating: HIGH)
Opportunity Perspective
The first part of the ‘establishing’ phase relates to the identification of opportunities that can be turned into viable criminal business activities. The business factors associated with opportunity perspective are explained below.
Entrepreneurial Vision: HIGH
This business factor requires both the ability to perceive a business opportunity and the self-confidence to carry that vision out (Dean, Fahsing and Gottschalk 2010, 46).
The Quebec HAMC’s ‘entrepreneurial flair’ was a driving force that allowed the group to achieve dominant economic influence in Quebec’s cannabis trade in the 1990's (Tremblay, Buouchard and Petit 2009). The HAMC had chapters and clubs spread throughout Quebec, which combined with experience in manufacturing amphetamines and an established cocaine distribution framework, placed the group in a unique position to take advantage of the booming cannabis market (Tremblay, Buouchard and Petit 2009, 36). The Quebec HAMC had the ability to identify this opportunity and the confidence to aggressively pursue it. Additionally, under leader Maurice “Mom” Boucher (Boucher), the group was said to traffick any drug that would make money, including bootleg Viagra (Schneider 2009, 408). It is clear that Boucher’s entrepreneurial vision pushed the Quebec HAMC towards many of its business ventures.
At the group’s peak, the Quebec HAMC would have received a medium to high fuzzy rating in relation to entrepreneurial vision. Currently, the Quebec HAMC, with the
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majority of its members incarcerated, is likely to have a limited ability to perceive a business opportunity. The low level of active membership also means that the group is unlikely to have the confidence to attempt to execute any new ideas. Accordingly, the group would currently have a low fuzzy rating with regard to this factor. However, this could change (leading to business growth) if some of the current incarcerated members were released from jail or if new entrepreneurially-orientated members joined the group.
Business planning
Business planning is required to take an entrepreneurial vision from an idea to a reality (Dean, Fahsing and Gottschalk 2010, 48).
An example of the business planning capabilities of the Quebec HAMC during its peak can be seen in the group’s creation of a puppet club called the Rockers. This club was the primary drug trafficking and enforcement arm of the Quebec HAMC, aimed at insulating high level members of the Quebec HAMC from prosecution. The Rockers were crucial to the Quebec HAMC’s plans to control the cocaine trade, with each member given a particular area of Montréal in which to sell drugs on behalf of the Quebec HAMC, and tasked with discovering new areas that could be monopolized by the Quebec HAMC’s drug trafficking machine (Schneider 2009, 407). This is an example of the type of systematic approach adopted by leader Boucher (Schneider 2009, 407, 414). The Quebec HAMC, under Boucher’s leadership, would have received a high fuzzy rating in relation to the business planning factor.
Though it was Boucher’s decision to form a Nomads Chapter in 1995 that enabled Boucher to plan and expand the Quebec HAMC brand in the province. A collective of the most powerful Quebec HAMC members in the province, the Nomad chapter led by Boucher, were not constrained by geographical boundaries as were other Quebec HAMC chapters in the province. Following the recent incarceration of Boucher and other influential members, the Quebec HAMC would now have a low rating for this factor. Again, this could change if the dynamics of the group were to change.
Crime money management
This business factor involves the ‘laundering’, investment and management of money gained through illegal activities (Dean, Fahsing and Gottschalk 2010, 52).
During the group’s period of dominance in Quebec’s drug markets, the Nomads and other HAMC chapters were responsible for an estimated billion dollar a year distribution of hashish and cocaine (Gabor et al. 2010, 45). Involvement in legitimate businesses including bars, restaurants, escort agencies, and the construction and auto industries provided ample opportunities for the Quebec HAMC to launder money made from drug trafficking and other criminal activities (Dawson 2009). Ostensibly legitimate business connections such as accountants were also used to clean “dirty” money (Schneider 2004, 74).
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The Quebec HAMC invested capital back into their drug trafficking business, buying immense quantities of drugs wholesale to distribute between the group’s chapters and puppet clubs for on-selling (Schneider 2009, 407, 426). The Quebec HAMC’s ability to manage the proceeds of its criminal activities was apparent from the meticulous financial records seized during police raids, which accounted for the expenditure and receipt of massive amounts of capital (Schneider 2009, 408).
The Quebec HAMC clearly gave considerable thought to how they managed their crime money, and accordingly during this period, the group would have received a medium to high fuzzy rating for this business factor. The group’s crime money management abilities are now likely to be stymied, with their network and business operations significantly diminished. Accordingly, it is likely that the group would now have a low fuzzy rating in relation to crime money management.
Resources mobilization
The second part of the ‘establishing’ phase relates to resources mobilization, which is the progressing of a business opportunity to the next stage (Dean, Fahsing and Gottschalk 2010, 8). The business factors associated with this capability are explained below.
Financial capital
A criminal group needs to obtain or create funding to cover the initial outlays of its criminal enterprise. As legitimate sources of capital (for example, bank loans) are not normally available to criminal entrepreneurs and therefore funding is usually sought from crime money (Dean, Fahsing and Gottschalk 2010, 56).
The Quebec HAMC appears to have had ample financial resources arising out of its own criminal enterprises, which allowed the group to enter into new business ventures, such as the cannabis market in the 1990’s (Tremblay, Buouchard and Petit 2009). These resources also allowed the Quebec HAMC to expand its existing criminal enterprises. Between March 1999 and December 2000, two Nomads members spent in excess of $10 million dollars to purchase 267 kilograms of cocaine and 173 kilograms of hashish as part of the Nomads drug syndicate (Schneider 2009, 426). Investments of this size provided significant returns, with the group estimated to have made $900 million from drug sales in 2000 (Schneider 2009, 408).
Based on this information, it is clear that at its peak, the Quebec HAMC would have received a high fuzzy rating for financial capital. The current fuzzy rating would be low to medium, as large sums were confiscated during police raids (Schneider 2009, 408) and the group now has limited opportunity to create new capital, due to its severely reduced active membership (Criminal Intelligence Service Canada 2004, 15; 2009, 14).
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Operational logistics
Operational logistics involves working out in detail how a crime business will operate (Dean, Fahsing and Gottschalk 2010, 57).
The example given above for business planning is also relevant to this factor. As explained, the Quebec HAMC under Boucher formulated a specific and detailed operative plan for expanding the group’s share of the cocaine trade in Montréal (Schneider 2009, 407).
The group’s use of its established cocaine distribution framework to capitalize on the cannabis market also shows strength in the area of operational logistics (Tremblay, Buouchard and Petit 2009, 36). Accordingly, it can be surmised that during Boucher’s reign, the Quebec HAMC would have received a medium to high fuzzy rating for this factor. However, in light of the incarceration of Boucher and other key members (Schneider 2009, 422), it is likely that the Quebec HAMC’s current fuzzy rating would be low.
Human resources
Recruiting and retaining the right staff is as important for a crime business as it is for a legitimate business (Dean, Fahsing and Gottschalk 2010, 60).
The Quebec HAMC often recruited members from the group’s puppet or satellite clubs. Puppet club members were required to perform criminal and dangerous tasks on behalf of the Quebec HAMC, to prove their loyalty to the group (Quinn and Forsyth 2009, 239). This recruitment method made it extremely difficult for undercover law enforcement officers to infiltrate the group (Gabor et al. 2010, 6). In the early years of the Quebec HAMC, “hard core criminal type members” were also selectively recruited from other biker gangs in Quebec in order to populate additional chapters of the group (Schneider 2009, 395).
The emphasis upon loyalty to the Quebec HAMC above all other obligations (Quinn 2010, 384) along with the flexible and beneficial opportunities for promotion available within the group (Tremblay, Buouchard and Petit 2009, 36) allowed the Quebec HAMC to retain a strong and dedicated membership during its peak. At this time, the group would have received a high fuzzy rating for the business factor of human resources. However, with the majority of members now imprisoned (Criminal Intelligence Service Canada 2009, 15), the Quebec HAMC would currently have a low fuzzy rating for this business factor.
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Phase 2 Expanding Implementation: (Overall Rating: HIGH)
Decision-making under uncertainty
This phase involves the organising of an established crime business in order to increase market share (Dean, Fahsing and Gottschalk 2010, 68). A crime business needs to possess effective risk management techniques to deal with constant threats from law enforcement and competitors. The associated business factors are detailed below.
Business intelligence
Business intelligence involves the identification of market potential, along with an ability to counter, capture or neutralise market rivals (Dean, Fahsing and Gottschalk 2010, 70).
The Quebec HAMC has been considered an example of a “strategically mobile” criminal organization with an ability to regenerate itself by recruiting new members and expanding into new territories and criminal markets (Morselli, Turcotte and Tenti 2011, 12). In the 1990’s, the group identified the market potential presented by the rapidly expanding cannabis market. Factors assisting the group to neutralise market competitors, included an established distribution infrastructure unmatched by their rivals, a preparedness to use extreme violence, substantial financial resources allowing for large wholesale purchases from growers, counter-intelligence on police and rivals and a remarkable degree of organization (Tremblay, Buouchard and Petit 2009). Dean, Fahsing and Gottschalk (2010, 71) note that the HAMC’s method of ‘patching over’ smaller clubs in return for the coveted HAMC patch is a very successful business expansion strategy.
From the above, it can be reasoned that the Quebec HAMC at its peak would have received a medium to high fuzzy rating for business intelligence. In its current state however, the group, although perhaps still able to identify market potential, is unlikely to have the ability to quash its competitors. Unless the group regains an influence in the region (perhaps through the movement of members from other chapters), “patching over” of rival clubs is unlikely to occur. Accordingly the Quebec HAMC would currently have a low fuzzy rating for this factor.
Violence
Violence may be used by criminal entrepreneurs to achieve a defined aim (instrumental violence) or purely for its own sake, or to achieve the aggressor’s personal need for power, control and aggression (expressive violence) (Dean, Fahsing and Gottschalk 2010, 73).
The Quebec HAMC, throughout its development and at its peak, appeared to have a relentless capacity and propensity for violence. The group used instrumental and reputational violence to its fullest extent, as “a tool to control criminal networks, intimidate rivals, intimidate law enforcement and potential witnesses to disrupt and delay judicial proceedings” (Criminal Intelligence Service Canada 2003). Violence was used
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extensively by the group to achieve hegemony in various drug markets. For example, the Quebec HAMC used extreme and brutal violence during the Quebec biker war of the 1990's in an attempt to dominate Quebec’s wholesale cocaine market (Schneider 2013; Hicks 1998, 333). Based on the above, it is clear that the group at its peak would have received a very high fuzzy rating for violence.
At the current time, the Quebec HAMC’s reduced active membership means that the group could not maintain the same levels of violence as it has in the past, or hope to have the resources to defend against rivals. Additionally, whilst the few remaining active members may be comfortable with violence as part of the OMG lifestyle, they may want to avoid the unwanted law enforcement and public attention that violence tends to attract. It can therefore be reasoned that the group would currently have a low to medium fuzzy rating for this factor.
Corruption
Corruption is a market control mechanism, which uses strategies including bribery and kick-backs to police and others to facilitate business opportunities and increase market share (Dean, Fahsing and Gottschalk 2010, 73).
At its peak, the Quebec HAMC used bribery to corrupt police and obtain counter- intelligence, which enabled the group to subvert police investigations (Williams and Godson 2002, 338). Recently, Benoît Roberge, a former Montréal police investigator who led some of the most difficult investigations into Quebec’s OMGs, was accused of leaking information to the Quebec HAMC (Hamilton 2013; Woods 2013). It has also been reported that individuals working within the police were paid up to $10,000 to steal information from police databases for the Quebec HAMC (Schneider 2009, 286). The Quebec HAMC allegedly also corrupted jurors, in one instance offering a bribe of $100,000 to each jury member of an entire jury (Plowman 2006, 67). Given the above, the Quebec HAMC is likely to have received a medium fuzzy rating for corruption.
The group’s current ability to corrupt would be impeded by a reduced level of financial capital and a lack of influential active members, resulting in a low fuzzy rating.
Counter-intelligence
Counter-intelligence is used by criminal organizations both in a reactive manner (to shield their own communications from law enforcement) and in a proactive manner (to infiltrate law enforcement entities) (Dean, Fahsing and Gottschalk 2010, 81).
Examples of the Quebec HAMC’s reactive counter-intelligence include the group’s use of sophisticated security systems and video cameras around clubhouse perimeters (Criminal Intelligence Service Canada 2003) and in the organization of meetings, whereby the location was changed each month with business cards delivered to puppet club members to advise of the meeting time (Plowman 2006, 66).
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The Quebec HAMC also employed innovative proactive counter intelligence methods, including stealing police laptops and monitoring police radio frequencies in order to compile a database of officers’ names, addresses and car registrations and hiring ex- police officers as private investigators (Plowman 2006, 67).
The group at its peak would have received a medium to high fuzzy rating for counter- intelligence. Given the understanding for the need for secrecy and security is likely to be almost innate to members of a crime business like the Quebec HAMC, it is probable that the group still has reactive counter-intelligence methods in place. However, as it is unlikely that the Quebec HAMC would currently have sufficient resources to commit to proactive counter-intelligence, a low to medium fuzzy rating may now be appropriate.
Phase 3: Consolidating: People Cooperation: (Overall Rating: HIGH)
During this phase, a criminal organization needs to focus on managing its crime business in order to maintain its market share (Dean, Fahsing and Gottschalk 2010, 87). This requires the ability to gain assistance from various legitimate and criminal business connections and other influential individuals (Dean, Fahsing and Gottschalk 2010, 89).
Criminal business connections
Criminal groups with an entrepreneurial focus are likely to make business connections and cooperate with other criminal groups (competitors) where there is profit to be made (Dean, Fahsing and Gottschalk 2010, 91).
The Quebec HAMC has historically had business connections with various powerful Mafia groups. From 1980, the group allegedly liaised with the Caruana-Cuntrera Mafia clan to import heroin and hashish from the United Kingdom. Boucher was said to have had a close relationship with the Rizzuto Mafia family, with the Quebec HAMC and the Mafia working together to import immense shipments of cocaine from Venezuela to Canada and the United States (Nicaso and Lamothe 2005, 223). It has also been suggested that the Quebec HAMC and the Rizzuto Mafia family divided up Montréal’s cocaine market between themselves, negotiating to fix the city’s per kilogram price of cocaine (Schneider 2013, 135).
Given the power and influence of these Mafia groups, the Quebec HAMC’s fuzzy rating for criminal business connections would have been medium to high. The remaining members of the group may have retained some of these connections, but given the decline in the HAMC’s influence in Quebec, the group itself would not be as attractive a criminal business connection to other crime groups as it once was. Additionally, connections brokered though Boucher may have been abandoned due to his incarceration. The group is now likely to have only a low to medium fuzzy rating for this business factor.
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Legitimate business connections
Like licit businesses, crime businesses require assistance from individuals with specialist skills in areas such as law, accounting and information technology (Dean, Fahsing and Gottschalk 2010, 93). Substantial financial resources allowed the Quebec HAMC to hire “the best lawyers money could buy” (Plowman 2006, 67). In 1998, when Boucher was tried for ordering the murder of prison guards, his defence team so thoroughly discredited the police informant that Boucher was pronounced innocent of all charges (Schneider 2009, 417); however, this verdict was overturned on appeal (Schneider 2009, 419). The Quebec HAMC also employed accountants as part of its crime money management strategy (Schneider 2004, 74).
Based on the above, it is likely that the group would have received a medium to high fuzzy rating for this business factor. At the current time, confiscation of substantial amounts of the group’s capital, along with the loss of influential and strategic members such as Boucher means that the Quebec HAMC’s fuzzy rating for legitimate connections would be low.
Influential people connections
This business factor involves building and maintaining business relationships with powerful individuals both in the legitimate world and the criminal underworld (Dean, Fahsing and Gottschalk 2010, 96).
The Quebec HAMC’s relationships with various powerful Mafia families, as discussed above, provide a good example of the group’s strengths in this area. These relationships allowed the group to expand their operations in particular drug markets and to negotiate a truce with a potential rival, which allowed both parties to maximize profits. A medium to high fuzzy rating would have been applicable at this time.
As also noted above, these relationships are likely to have weakened due to incarceration of key members. This, combined with a decreased ability to sustain legitimate connections, would currently result in a low fuzzy rating.
Phase 4 Positioning: Profit Maximization: (Overall Rating: HIGH)
This phase requires a strategic focus on maintaining a crime business over time and into the future, in order to maximize profits (Dean, Fahsing and Gottschalk 2010, 103). The relevant business factors are discussed below.
Local Market Share
Most criminal groups seek to increase their market share in the local crime market. A rise in market share reduces the financial impact of rivals and at the same time increases bargaining power with suppliers (Dean, Fahsing and Gottschalk 2010, 106).
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During the 1990’s, the Quebec HAMC sought to dominate Quebec’s cannabis market by using excessive violence, conducting counter-intelligence on rivals and law enforcement and exploiting existing networks and infrastructure. Access to considerable financial resources and a tendency to make very large purchases provided significant bargaining power with cannabis wholesalers (Tremblay, Buouchard and Petit 2009).
It appears that the group took a slightly different approach in relation to Montréal’s cocaine market. As noted above, the Quebec HAMC and the Rizzuto Mafia family allegedly divided this market between themselves, negotiating to fix the per kilogram price of cocaine in the city (Schneider 2013, 135). It is likely that the Quebec HAMC recognized the benefits of maintaining a cooperative, rather than adversarial, relationship with the powerful competitor.
Given the above, the group at its peak would have received a high fuzzy rating for local market share in the cannabis market, and a medium fuzzy rating in the cocaine market. An overall fuzzy rating of medium to high has therefore been assigned. However, “Operation Springtime”, a 2001 police campaign targeting the Quebec HAMC, led to the arrest of over 100 members, including the entire Nomads chapter (Morselli 2009, 148; Schneider 2009, 422). This would have severely debilitated the group’s ability to maintain its share in both drug markets. Rival OMG, the Bandidos, attempted to capture the drug trafficking territory lost by the Quebec HAMC but were also thwarted by law enforcement efforts (Schneider 2009, 427).
In 2009, another major police investigation called “Operation SHARQC” (Stratégie Hells Angels Région Québec) (Morselli, Turcotte and Tenti 2011, 182; Standing Committee for Justice and Human Rights 2012, 8), resulted in the seizure of dozens of kilograms of cocaine, marihuana and hashish and more than five million dollars in cash. Charges including drug trafficking were laid against accused individuals, with only two members of the Quebec HAMC not in prison by May 2009 (Criminal Intelligence Service Canada 2009). The group’s current fuzzy rating in relation to local market share in Quebec’s cocaine and cannabis markets is now likely to be low. It is probable that some of the Quebec HAMC’s previous share in both markets has since been subsumed by rival groups, including Asian and Indo-Canadian criminal organizations (Royal Canadian Mounted Police 2006, 2, 6; 2009, 17) and street gangs (Criminal Intelligence Service Canada 2010, 24).
Global Market Share
Like legitimate businesses, criminal businesses are increasing ‘transnational’, and benefit from the effects of globalization (Dean, Fahsing and Gottschalk 2010, 109).
As part of an international group with chapters all over the world, the Quebec HAMC had access to a global infrastructure to try to expand its business operations outside of its own province. However, the group’s attention to this factor appears to have depended on leadership. From the available literature, it appears that Boucher’s primary focus was
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increasing the Quebec HAMC’s local market share, particularly in the province’s cocaine and cannabis markets (Schneider 2009, 426; Tremblay, Buouchard and Petit 2009).
However, a member of the Quebec Nomads, named Wolodumyr Stadnick, who ascended within the Canadian HAMC to become National President, aimed to build a HAMC empire in Canada that stretched from coast to coast, allowing for a national drug pipeline. It is noted that the OMG structure is ideal for drug trafficking, as chapters in various provinces provide a national and international distribution network that allows bikers to move drugs from the laboratory or from source countries down the distribution chain to consumers (Desroches 2007, 5). Stadnick succeeded in patching over bikers in Manitoba and Ontario, before being arrested as part of Operation Springtime and convicted of drug trafficking, gangsterism and conspiracy to commit murder (Schneider 2009, 426). Based on the above, the group at its peak would have received a medium fuzzy rating for this factor.
The incarceration of influential and globally motivated members such as Stadnick, and the group’s current low active membership levels, would now result in a low fuzzy rating for this business factor.
Competitive Advantages
This final business factor separates crime businesses that thrive from those that merely subsist. A competitive advantage can arise from the structure, operating methodology, location, profile, connections or any other characteristic of a crime business that positions it ahead of its competitors (Dean, Fahsing and Gottschalk 2010, 111)
At its pinnacle, the Quebec HAMC had a number of competitive advantages, including a willingness to use, and reputation for, extreme violence (Barker 2005, 104) (although it should be noted that this can also be a disadvantage in that it attracts attention from law enforcement); substantial financial resources (Gabor et al. 2010, 45); extremely loyal and criminally minded members (Barker and Human 2009, 174, 178); a driven, calculating and entrepreneurially focused leader in Boucher (Schneider 2009, 407) and criminal connections with influential Mafia groups (Schneider 2013, 135). However, even at this time, the group was not the only crime business in the province, but shared the various criminal markets with other OMGs, East European and Asian based organized crime groups and various Mafia clans (Criminal Intelligence Service Canada 1999). As such it is clear that the Quebec HAMC’s advantages were not such that the group was able to monopolise all criminal markets in the province.
Therefore, it is likely that at this time, the group would have received a medium to high fuzzy rating for competitive advantages. The substantial decline in the active membership levels and consequently the influence of the HAMC in Quebec means that most of the competitive advantages identified above no longer exist. A low fuzzy rating for this business factor would now be appropriate.
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CBAM Chart of HAMC (Peak & Current)
Figure 1, shows the various levels of criminal entrepreneurialism as described by Dean et al. (2010). It is apparent from the analysis of available material that the Montreal Chapter of the HAMC has been negatively affected by law enforcement operations and the incarceration of key members of the group.
The upper line demonstrates the level of skill and expertise at its peak performance period (mid to late 1990s). What is particularly interesting to note is the decline across all phases following the arrest and incarceration of key members, namely its president Maurice Boucher. The Human Resource element within the resource mobilization capability is noticeably low, as is the Influential People Connections criteria under the People Cooperation capability in the Consolidating Phase. This is collectively represented in the final Positing Phase where it is evident that profitability has been affected which has been caused by a loss of both local and global market share and the organization’s competitive advantage.
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Figure 1: CBAM Chart of HAMC (Peak & Current)
Criminal Business Analysis Matrix (CBAM) Dean et al (2010)
Peak Hells Angels Motorcycle Club, Quebec Current Entrepreneurial Capabilities Phase 1-Establishing Phase 2-Expanding Phase 3-Consolidating Phase 4-Positioning
Profit + + + Maximisation 5.
People + + + Cooperation
4. Decision + + + + Making under Uncertainty 3.
Resources + + + Mobilisation 2. Opportunity + + + Perspective
1. 1.1 1.3 2.1 2.3 1.2 2.2 3.1 3.2 3.3 3.4 4.1 4.2 4.3 5.1 5.2 5.3
Business Development Factors
Note: ‘Business model’ of a crime group is specific to their culture and context and shaped by global spheres in particular crime markets
CONCLUSION
At the peak of its influence in Quebec, the HAMC was an extremely powerful organization, with medium to high fuzzy ratings in all of the business factors associated with a successful crime business. However, the group’s strengths in some business factors, particularly violence, financial capital and local market share, may also have worked against them by attracting the attention of police, politicians and the public.
Targeted law enforcement efforts over the last 18 years have now all but eliminated the Quebec HAMC. With very few active members, all influential leaders are imprisoned and the remaining active members are likely to be disinclined to attract further law enforcement attention by committing acts of violence. The Quebec HAMC would
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currently face low fuzzy ratings in almost all business factors. The group’s power and influence in the region has therefore plummeted.
Notwithstanding the above, crime businesses rarely remain stagnant (Dean, Fahsing and Gottschalk 2010). It is therefore not unreasonable to suggest that the release of certain instrumental HAMC members from jail, or an influx of new entrepreneurially-orientated members, combined with the strength of the HAMC internationally, the group’s greed and appetite for expansion, and society’s unrelenting demands for prohibited goods and services, could result in an increase in the group’s ratings for particular business factors and a corresponding increase in the HAMC’s position in Quebec’s criminal landscape. As such, it is likely that law enforcement agencies will continue to carefully monitor the Quebec HAMC.
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Williams, P & Godson, R. 2002. "Anticipating organised and transnational crime." Crime, Law and Social Change 37 (4). Accessed 12 September 2013. doi: 10.1023/A:1016095317864.
Woods, A. 2013. "Montreal gang investigator arrested on suspicion of tipping off bikers." The Star. 9 October 2013. Accessed 9 October 2013. http://www.thestar.com/news/canada/2013/10/07/montreal_gang_investigator_arr ested_on_suspicion_of_tipping_off_bikers.html.
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DERIVATIVE ACTIONS AND SHAREHOLDER OPPRESSION:
TWO BITES OF THE APPLE?
Brad Reid* Dean Institute for Corporate Governance and Integrity; Lipscomb University
ABSTRACT
Shareholder derivative actions are brought by a shareholder on behalf of the corporation and any recovery goes to the corporation. Shareholder oppression actions assert that an individual shareholder has been harmed by majority shareholders or the board of directors. A successful lawsuit would allow the shareholder to personally recover damages. Frequently the conduct in question will be the same in both actions. Consequently the question arises: May the same circumstances support two distinct causes of action, hence allowing two bites of the apple?
KEYWORDS
Shareholder oppression, shareholder derivative action, board of directors, duty to shareholders, shareholders’ right to information, closely held corporation
INTRODUCTION
This article addresses the rights of individual shareholders in closely held corporations. There are uncertainties and contractions in the case law. A common problem related an abuse of power by officers and directors is theft from the corporation to the detriment of shareholders. When individual shareholders sue, all too often their case is dismissed since these duties are owed to the corporation. A work around this problem is the shareholder oppression lawsuit. The question arises: May shareholders bring both a derivative action on behalf of the corporation and, based upon the same facts, an action for shareholder oppression? Are two bites of the apple permissible?
AN OVERVIEW OF SHAREHOLDER RIGHTS AND DUTIES
As is well known, shareholders elect directors typically by a majority vote. Consequently a 51% shareholder may effectively control the corporation. These controlling shareholders have fiduciary duties of good faith, honesty and loyalty to the corporation and to minority
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shareholders (Schautteet v. Chester State Bank, 1988). As one court stated: “[T]he peculiar duty of a controlling shareholder to deal fairly with the corporation, its shareholders, and its creditors is broader than the trust fund doctrine. It rests upon his inside knowledge of the corporation’s affairs and his opportunity to manipulate them for his personal advantage” (Tigrett v. Pointer, 1978). In other respects share ownership alone does not impose duties to the corporation or other shareholders. Delaware addressed the duty of shareholders in this manner: “It is well-settled under Delaware law that a shareholder does not owe a fiduciary duty to the corporation unless it owns a majority interest in or exercises control over the affairs of the corporation” (US Airways Group, Inc. v. British Airways PLC, 1997). Consequently any duty owed by majority shareholders to minority shareholders is small at best. Actions asserting wrongful conduct in the management or control of a corporation cannot be asserted directly by shareholders. If the shareholders have a contract and the conduct in question violated the contract, then that is a different situation. As long as the actions by the directors are not ultra vires, the business judgment rule provides broad protection from lawsuits. It there is gross mismanagement or wasting of assets, the minority shareholders might petition a court to appoint a receiver. This appointment is very unusual. Many jurisdictions hold that there is no respondeat superior liability that may be asserted against a corporation for a breach of fiduciary duty by its directors (See, CCBN.Com, Inc. v. Thomson Financial, Inc, , 2003). As one court wrote: “[T]he imposition of respondeat superior liability on a corporation for breach of fiduciary duty by its directors on the board of another corporation would completely undermine Delaware corporate law, which limits such fiduciary duty to majority and controlling shareholders” (US Airways Group, Inc. v. British Airways PLC, 1997). Why should liability rest upon the corporation for wrongdoing that was initiated by and exercised through officers, directors, and other shareholders? The Sixth Circuit wrote: “Liability for breach of the directors’ fiduciary obligations could not possibly run against the corporation itself, for this would create the absurdity of satisfying the shareholders’ claims against the directors from the corporation, which is owned by the shareholders. There is not, and could not conceptually be any authority that a corporation as an entity has a fiduciary duty to its shareholders” (Radol v. Thomas, 1985). This reasoning presumes that the state law of the jurisdiction recognizes fiduciary duties running from the officers and directors to individual shareholders. However, some jurisdictions, perhaps the majority, see this fiduciary duty owed to the shareholders collectively and not individually. Of course, a contract may additionally create a direct obligation from the corporation to its shareholders.
DUTIES TO MINORITY SHAREHOLDERS IN THE PURCHASE AND SALE OF SHARES
In the context of a closely held corporation, the officers and directors as well as the corporation owe a fiduciary duty to a shareholder when repurchasing the shareholders stock, especially when they know confidential information that impacts the value of the stock (See, e.g. Miller v. Miller, 1985). However, the Fifth Circuit determined that a failure to reveal the “true purpose” or “secret plan” of the repurchase did not state a claim for securities fraud since there was no evidence of deception or fraudulent manipulation (Ward v. Succession of Freeman, 1988).Subjective motivation is not a material fact. However, the Fifth Circuit reached a different
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result “when directors or other officers step aside from the duty of managing the corporate business under the charter for the benefit of the shareholders, and enter into schemes among themselves or with others to dispose of the corporate business and reap a personal profit at the expense of the shareholders by buying up their shares without full disclosure and at an inadequate price …”(Westwood v. Continental Can Co., 1935). In a Delaware case the Court addressed the sale of corporate stock to a third party. The majority shareholders sold their stock to a third party who looted the corporation. The Court determined that the allegations by a minority shareholder were “more than a simple sale of stock by directors,” but rather negligent transfer (Harris v. Carter, 1990). The controlling shareholders had a duty to “take such steps as a reasonable person would take to ascertain that the buyer does not intend or is unlikely to plan any depredations of the corporation” (Harris v. Carter, 1990). The portion of the sale agreement that had the selling shareholders resigning as directors should have alerted a reasonably prudent person to the risk that the buyer was dishonest or untruthful. At the same time, controlling shareholders do not have a “duty to engage in self-sacrifice for the benefit of minority shareholders” when selling their shares (In re Synthes, Inc. Shareholder Litigation, 2012). An attempt by majority shareholders to “freeze-out” or “squeeze-out” a minority shareholder constitutes a breach of fiduciary duty (Bair v. Purcel, 2007). These actions frequently involve the refusal to pay a dividend or a termination of employment. In contrast, “there is no … implied duty of good faith and fair dealing to accept a minority shareholder’s ‘reasonable’ repurchase proposals” when negotiating at arms-length (Blaustein v. Lord Baltimore Capital Corporation, 2013). The Court stated that the minority shareholder was attempting to use fiduciary principles to obtain what could not be acquired at the negotiating table. While courts may not always find majority shareholders liable for breach of fiduciary duty in a squeeze out, they might uphold minority shareholders’ claims for unjust enrichment. A Delaware court, for example, determined that a merger in which the majority shareholders received an interest in the surviving entity triggered the entire fairness standard rather than the business judgment rule (Frank v. Elgamal, 2012). This decision stated that to succeed under a claim for unjust enrichment the plaintiff must prove: (1) an enrichment, (2) an impoverishment, (3) a relationship between the enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a remedy provided by law. In fiduciary relationships when a transaction is challenged, the fiduciary must show that that it was fair, honest, and equitable. In establishing fairness some significant factors are: (1) whether there was full disclosure regarding the transaction, (2) whether the consideration was adequate, (3), and whether the beneficiary had the benefit of independent advice (Estate of Townes v. Townes, 1993). Additionally, did the fiduciary benefit at the expense of the beneficiary? As this brief review indicates, majority shareholders owe duties to the minority shareholders under several legal doctrines that share in common fundamental concepts of fairness.
MINORITY SHAREHOLDERS’ RIGHT TO INFORMATION
Certainly minority shareholders as owners have the right to be informed concerning corporate actions. As one court wrote: “A minority shareholder has very few rights ... [however], a dissatisfied minority stockholder… [has] a right to inspect, coupled with his right to denounce any matters disclosed by his inspection” (Perry v. Perry Brothers, Inc., 1988). The right to
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inspect corporate books and records is fundamental. In 1905 the U.S. Supreme Court noted that the “right to inspect the books and records of a corporation is not an absolute right regardless of the stockholders’ motive” (Guthrie v. Hartness, 1905). The Supreme Court stated that in granting a right to inspect “… the court will exercise a sound discretion and grant the right under proper safeguards to protect the interests of all concerned. … [The right] should not be granted for speculative purposes, or to gratify idle curiosity, or to aid a blackmailer, but it may not be denied to the stockholder who seeks the information for legitimate purposes” (Guthrie v. Hartness, 1905). Typically the right of inspection is granted by statute to shareholders who have owned their shares at least six months or who hold at least 5% of the outstanding shares. However, all shareholders have a common law right of inspection if the request is made in good faith for a proper purpose. Again, quoting the Supreme Court: “There can be no question that the decisive weight of American authority recognizes the common-law right of the shareholder, for proper purposes and under reasonable regulations as to place and time, to inspect the books of a corporation of which he is a member”(Guthrie v. Hartness, 1905). The right of inspection must be requested by a written demand. In the interest of completeness the demand should provide a statement of purpose and a description of the requested documents. The corporation may have a duty to assemble the requested documents in one reasonable location. The shareholder may conduct the inspection in person or by an agent such as an accountant or attorney. What constitutes corporate records is interpreted broadly. In a 1920 decision the Kansas Supreme Court allowed a minority shareholder to inspect correspondence regarding corporate affairs between its nonresident president, who was the majority shareholder, and its active manager (Otis-Hidden Co. v. Sheirich, 1920). In 2010 the New Jersey appellate court interpreted the term “minutes” in the New Jersey inspection statute to include board meetings and executive committee minutes and not just shareholder meeting minutes (Cain v. Merck & Co., Inc. 2010). However, a Georgia appellate court in 1972 held that a catch-all clause in an inspection demand, “all other corporate books, records, and files pertaining in any way to business or the financial status of the corporation at any time since the inception of the corporation,” was overly broad and not allowable under either common law or statutory rights (Master Mortgage Corp. v. Craven, 1972). There is no prohibition prohibiting the inspection of documents that the corporation may consider trade secrets, confidential, or privileged. In such a situation a court will review the proper purpose or motive of the shareholder requesting the inspection. The Alabama Supreme Court wrote in 1972: “the fact of mere confidentially of the books or records sought” will not defeat the right of inspection (Bank of Heflin v. Miles, 1975). In like manner a New York court stated: “The financial condition of a corporation cannot be considered confidential when a stockholder is concerned. It is when the stockholder attempts to misuse the financial information to the detriment of the corporation that his actions will be limited” (Apple v. Careerco, Inc. 1975). The Oklahoma Supreme Court stated : “’[The] fact that the information sought by a stockholder under the statute involved is of a confidential nature is not enough, in itself, to deny the statutory right of examination of records and making extracts or abstracts therefrom” (Fears v. Cattlemen’s Investment Co.., 1971). This diversity of opinions indicates the well-established and broad based nature of the right of inspection for a proper purpose. The records inspection must be germane to the shareholder’s legitimate interests. The Florida Supreme Court held that a shareholder “is entitled to any information affecting the financial
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status of the corporation but he is not entitled to be placed in possession of trade secrets and confidential communications unless they affect the financial status or the value of his stock in some way” (News-Journal v State ex rel. Gore, 1939). The Texas Supreme Court held that inspection may be denied when the purpose is to obtain a “competitive advantage” over the corporation (Uvalde Rock Asphalt Co. v. Loughridge, 1968). This danger must be real and not speculative. “Many legal rights may be the subjects of abuse, but cannot be denied for that reason. …The possibility of the abuse of a legal right affords no ground for its denial” (Guthrie v. Harkness, 1905). Inspection has been denied of monthly tentative balance sheets (State ex rel. Jones v. Ralston Purina Co., 1962) and an interim corporate financial statement (Bitters v. Milcut, Inc. , 1983) on the grounds that they were not included in the statutory word” books.” As an attorney representing the corporation does not owe any direct duty to the shareholders, the right of inspection does not extend to documents subject to the attorney-client privilege (See, e.g. Henshaw v. American Cement Corp., 1969). Corporations cannot assert the Fifth Amendment to deny shareholder inspections of records (See, e.g. Stone v. Martin, 1982). Litigation discovery rules do not apply to inspection requests (Burton v. Crovey, 1988). However, when the shareholder is involved in litigation against the corporation, a demand for inspection cannot be used as “back-door discovery”(Henshaw v. American Cement Co., 1969). Statutes and judicial decisions require that the request for inspection be for a proper purpose. This is one reasonably related to the shareholder’s interest as a shareholder and the protection of the corporation that indirectly impacts the shareholder (See, e.g. Tatko v. Tatko Brothers Slate Co., Inc. , 1991). Determining the minority shareholder’s stock value is certainly a proper purpose for an inspection (Chavco Investment Co. v. Pybus, 1981). Obtaining a shareholder list in order to communicate with other shareholders in like manner is a proper purpose. However, the shareholder cannot obtain this information if the underlying purpose is improper (See. E.g. Skoglund v. Ormand Industry, Inc. , 1976). An inspection being granted may properly require the shareholder to agree to a confidentially agreement (Pershing Square, L.P. v. Ceredian Corp., 2007). A corporation cannot assert attorney-client privilege to deny an inspection (Moore Business Forms., Inc. v. Cordant Holdings, Corp., 1996). Without further belaboring the point, it is apparent that a minority shareholder has broad based inspection rights that cannot arbitrarily be denied. Ownership creates access rights.
SHAREHOLDER OPPRESSION ACTIONS
Shareholders in public corporations have a ready market for selling their shares and numerous statutory and regulatory protections. Minority shareholders in closely held corporations lack these advantages. Consequently minority shareholders are much more vulnerable to squeeze-outs and general unfairness imposed by the majority shareholders. Traditionally the only remedy for improper conduct by the majority was to request a receivership but in order to obtain that the improper actions had to be extreme. Starting in the mid-1970s courts began to craft a shareholder oppression remedy. This remedy is unique in several ways. Its foundation involves a duty of loyalty among shareholders. It may be directly asserted by a shareholder on her behalf and is not derivative of the corporation’s rights. The standard of conduct is somewhat subjective and may consist of a collection of individual actions that taken individually are not oppressive. The typical remedy for
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oppression is a forced buyout based upon the fair value of the stock and not a calculated loss. Fair value may not be the same as actual cash value. Lastly, the shareholder oppression action is subject to established concepts of majority rule and the business judgment rule. One line of legal thought is that the minority shareholders in a closed corporation are similar to those in a general partnership where duties between partners are higher. Another approach imposes fiduciary duties on the majority shareholders like those imposed upon directors. The general partnership approach is illustrated by the Massachusetts Supreme Court. “Because of the fundamental resemblance of the close corporation to the partnership, the trust and confidence which are essential to this scale and manner of enterprise, and the inherent danger to minority interests in the close corporation, we hold that shareholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe each other” (Donahue v. Rodd Electrotype Co., 1975). In this reasoning, the shareholders owe one another utmost good faith. The difficulty of the partnership approach is that it imposes partnership duties in some corporations and not others. Additionally, the foundational concept of limited liability found in the corporation does not exist in the general partnership. Partnerships are chosen as business entities for different reasons than corporations. Delaware courts derive minority shareholders claims not from a partnership analogy but from the corporate fiduciary duties of loyalty, care, and good faith. Claims of minority shareholders may be asserted through the “entire fairness test, correctly applied and articulated” (Nixon v. Blackwell, 1993). Under Delaware law, directors owe fiduciary duties to both the corporation and directly to the shareholders (Aronson v. Lewis, 1984). Some states, such as Texas, do not impose a fiduciary duty upon directors toward individual shareholders absence a contract or other special relationship (Redmon v. Griffith, 1984). In Texas, shareholders do not owe a fiduciary duty toward one another (Pabich v. Kellar, 2002). However, sometimes “in certain limited circumstances a majority shareholder who exercises dominance and control over the business may owe such a [fiduciary] duty to minority shareholders” (Patton v. Nicholas, 1955). One possible harmonization of these contradictory positions is to say that minority shareholders are analogous to the beneficiaries of a trust. The Texas Supreme Court stated that a corporation “is a trustee for the interests of its shareholders, and is under the obligation to preserve its trust for their benefit. Its possession is friendly, and not adverse, and the shareholders is entitled to rely upon its not attempting to impair his interest” (McAlister v. Eclipse Oil Co., 1936). The trustee approach is a third way, beyond partnership and fiduciary comparisons, to allow a shareholder oppression cause of action. Another method of allowing shareholder oppression cause of action is to simply look at who controls the corporation. Under this approach several shareholders, no one of which has majority ownership, who band together to dominate the corporation have control. Minority shareholders have reasonable expectations of fair treatment. Oppression then would consist of conduct that substantially defeats these reasonable expectations. While somewhat subjective, this approach is straightforward and does not attempt to force an analogy between the shareholder’s oppression and some preexisting legal doctrine. A foundational reasonable expectation would be good faith and fair dealing. Other expectations might include the right of secure ownership, the right to vote and be heard, the right to information, a right to equality and neutrality of treatment, and the right to expect an economic return. When these expectations are violated by a controlling group, a shareholder oppression action exists.
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What proof is required to establish shareholder oppression? Foundationally, one must be a shareholder. Perhaps there is an unperformed agreement to issue shares. This might be the case when an employee is promised a path to ownership that is not fulfilled. The transfer of shares may be a contractual matter. One may be a shareholder without possessing a physical stock certificate. A related problem, especially in close corporations, is that the stock certificates remain unissued in a corporate record book and share ownership is not recorded. Ownership is a factual determination for a judge or jury. A pattern of inequitable distributions, such as occurs when there is excessive compensation for work performed, provides evidence of oppression. A shareholder might be denied participation in management by not receiving notice of meetings, being removed from a corporate office, being denied information, or other acts that effective shut out the minority shareholder. Certainly violation of express contracts or attempts by the dominate shareholder to change the terms of contracts, is clear evidence of oppressive conduct. Some courts will create a quasi- contract to protect the reasonable expectations of a minority shareholder. A related concept involves a finding the dominant shareholder disregarded standards of good faith and fair dealing. Maliciously suppressing dividends is a classical squeeze-out technique.
DEFENSES TO A SHAREHOLDER OPPRESSION LAWSUIT
Defenses to an allegation of oppressive conduct essentially challenge every step the plaintiff seeks to prove. A mere dissatisfaction does not create oppressive conduct. Rather the shareholder’s expectations must be objectively reasonable, central to the decision to participate in the venture, and substantially defeated by the actions of the majority. The first step in defending may be to deny that the plaintiff is in fact a shareholder. Perhaps there was no consideration given in exchange for the shares. Stock cannot be validly issued without consideration as the classic cases of watered stock illustrate. Nor may a corporation after the fact ratify the issuance of this stock. Denying that the minority plaintiff is a shareholder may backfire before a jury who may conclude that the very denial is additional proof of oppressive conduct. The business judgment rule may be used as a defense. Complaints that amount to policy disagreements are not in themselves proof of oppression. Acquiescence is a defense if the minority shareholder participated in the corporate meetings where the policies and decisions at issue were created. The U.S. Supreme Court has stated that a “stockholder has no standing if he or his vendor participated or acquiesced in the wrong.” (Bangor Punta Operations, Inc. v. Bangor & Aroostock RR Co., 1974). This is related to the equitable doctrine of clean hands. Another defense for the defendant is reliance upon professional advice such as provided by a CPA or attorney. This should be adequately documented. Additionally the defense is limited to the specific actions that the advice addressed. It is not a blanket defense.
SHAREHOLDER OPPRESSION REMEDIES
The classic remedy is the appointment of a receiver where the actions of the controlling defendants are illegal, oppressive, or fraudulent. Typically there is a three year limitation on continuing the receivership, at which time there must be an application for an extension. Overall
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receiverships are limited to eight years. (See, e.g. Texas Practice and Remedies Code Sec. 64.072). A receiver may be granted authority over the entire corporation or only a specified number of assets. Jurisdictional issues exist where the assets are scattered among many states or foreign nations. A special form of receivership is the rehabilitative receiver. Since receivership is an equitable remedy the court has broad discretionary authority. Ultimately a liquidating receiver might be appointed. Receivership is seen as hash and radical remedy. Certainly the expenses involved are a form of economic waste. Consequently, statutes typically require specific findings before receivership, especially a liquidating receivership, may be undertaken. Short of receivership, a court may order a buy-out of the minority shareholder at fair market value. This may be especially appropriate in a closed corporation. However, the determination of fair value is difficult when there is no existing market for the shares. Some courts make a careful distinction between “fair value” and “fair market value.” The Alaska Supreme Court noted that fair value should be “a price to be determined according to a specified formula or at a price determined by the court to be a fair and reasonable price.”(Alaska Plastics, Inc. v. Coppock, 1980). Additionally the court wrote that a fair price should be one that the defendant would be able to show was fair if the transaction were challenged as a breach of fiduciary duties. In addressing fair price the New Mexico Supreme Court indicated that one should consider the net asset value, the market value, and the investment or earnings value, among other factors including the nature and history of the corporation, the corporation’s dividend paying capacity, and the size of the block of stock being valued. (McCaulry v. Tom McCau ley & Son, Inc., 1986). A controversial issue in determining fair value is the application of discounts for minority status and lack of marketability. The purchaser would have no power to compel the payment of a dividend. The valuation must consider a discount for undertaking these risks. Fair value looks at the entity as a going concern. A related term that some courts use is “enterprise value.” Monetary damages may be awarded for breach of fiduciary duty. These include out-of- pocket expenses and lost profits if these can be proven with reasonable certainty. The equitable remedies of constructive trust and disgorgement may be utilized to deprive the wrongdoers of ill- gotten gains. If there is a wrongful termination of employment, a separate set of damages may also be available. However, if the employment is in the name of the corporation, only the corporation would be liable in damages. Potentially punitive damages are available and would be included in an equitable remedy.
DERIVATIVE ACTIONS
Derivative actions consider damages to the corporation and consequently this recovery goes to the corporation and not individual shareholders. The plaintiff shareholder sues in a representative capacity on behalf of the corporation. This may be undertaken when the board of directors or corporate officers has failed to act. In order to have standing, the plaintiff must have been a shareholder at the time of the wrongful act or omission. One who becomes a shareholder by operation of law, such as inheritance, may relate the claim back to the prior shareholder. Additionally the plaintiff must fairly and accurately represent the corporation in enforcing the rights of the corporation. To satisfy the continuous ownership requirement the plaintiff must prove that he owned stock in the corporation at the time of the action complained of, he has continued to own stock at the time the
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suit has been brought, and that he will continue to own stock through the duration of the lawsuit. Relinquishing share ownership deprives the plaintiff of standing. If a shareholder is cashed out by means of cash-out merger she loses shareholder status. Courts will apply equitable exceptions to prevent a corporate freeze-out tactic as a defense. Voluntariness is the key to relinquishing ownership. Some state statutes clearly state that a merger will not terminate a shareholder’s standing. (see, e.g., Texas Business Organizations Code Sec. 21.552 as amended in 2005; however this provision was repealed in 2011). Beneficial owners such as those whose shares are held in a voting trust are considered shareholders. Likewise, pledgees also qualify as shareholders. Adequacy of representation considers factors such as conflicts of interest or personal factors that might preclude a vigorous prosecution of the claim. If there is a sole dissenting shareholder in a close corporation, this individual may bring the claim. Prior to bringing a derivative suit, a demand for action must be made upon the corporation or board of directors unless a court determines that this demand would be futile. Demand could be made by someone representing the shareholder, such as an attorney, but the shareholder must be named in the demand. The act or omission complained of must be specifically stated. The demand must identify the wrongdoer, describe the factual basis of the claim, describe the injury to the corporation, and indicate the requested remedial action. Some jurisdictions also require a showing of why the business judgment rule does not shield the transaction. Frequently after the demand is made there is a ninety day waiting period unless the demand has been previously rejected by the corporation or the corporation is suffering irreparable injury. Potentially the corporation might request a court to appoint disinterested individuals to determine how the corporation should respond to the demand. After the suit has been filed the corporation may request a stay if requested in good faith. The court may be required to make factual determinations that the corporation is conducting an active review and is acting in good faith. While the length of the stay is uncertain, sixty days is typical with the possibility of renewal at sixty day intervals. Good faith is defined as honesty of belief or purpose, faithfulness to one’s duty or obligation, and the absence of intent to defraud or seek an unconscionable advantage. Many courts simply quote the definition contained in Black’s Law Dictionary. Any dismissal or settlement of the lawsuit requires court approval with the burden of proof on the proponents of the settlement. This prevents the use of the derivative suit as a quick means of extortion to the detriment of the corporation and remaining shareholders. While the recovery is typically payable to the corporation, the court may create a prorated recovery to individual shareholders so that wrongdoers do not participate in the recovery. (See, e.g., Atkinson v. Marquart, 1975). A special set of rules may apply to derivative actions involving closely held corporations. In situations with less than 35 shareholders and no national stock exchange listing, shareholders may be able to bring claims in their own names. However, there may be a double taxation issue at the corporate and individual shareholder level.
DERIVATIVE ACTIONS AND SHAREHOLDER OPPRESSION
A lawsuit against one who has injured the corporation belongs to the corporation and not an individual shareholder. A corporate shareholder cannot recover personally for injuries done to the corporation even though the shareholder may suffer injury as a result of that wrong. Consequently an allegation of a breach of fiduciary duty by directors or officers must be asserted on behalf of the corporation. The concept is that the duty of care and loyalty run to the
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corporation and not to an individual shareholder. An action to recover the premium obtained by certain shareholders from the sale of the corporation is a derivative action but the benefit of any recovery will only go to the minority shareholders. More problematic are claims for fraud, breach of confidential relationship, and conspiracy. The question becomes if the injury were suffered by the corporation or by the individual shareholder. Consequently a pattern of oppressive conduct may give rise to both a derivative action and/or a shareholder oppression lawsuit. Where there is a personal or corporate bankruptcy, the courts may allow the action to shift between a derivative action or shareholder oppression action. Actions such as looting the corporation may give rise to both claims. Self-dealing may be shareholder oppression as well as an injury suffered by the corporation. Attorney dual representation of the corporation and the directors is inevitably an inappropriate conflict of interest. An early case to address this issue occurred in 1963. (Lewis v. Shaffer Stores Co., 1963). The Court wrote: “The interests of the officer, director and majority shareholder defendants in this action are clearly adverse, on the face of the complaint, to the interests of the shareholders of [the corporation] and other defendants. I have no doubt that [the attorneys] believe in good faith that there is no merit in this action. Plaintiff, of course, vigorously contends to the contrary. The court cannot and should not attempt to pass on the merits at this stage. Under all the circumstances, including the nature of the charges, and the vigor with which they are apparently being pressed and defended, I believe that it would be wise for the corporation to retain independent counsel who has no previous connection with the corporation, to advise it as to the position it should take in this controversy.” Arguably there is also a conflict in bringing both a derivate action and a shareholder oppression action simultaneously. Courts see this potential as more “theoretical than real.” (First American Bank & Trust v. Frogel, 1989). Consequently it is possible to have both a derivative action and a shareholder oppression action simultaneously in the same lawsuit. An attorney, however, may have a conflict of interest in this dual status.
CONCLUSION
Whether or not one thinks of two bites of the apple, a shareholder oppression cause of action and a derivative cause of action may arise from the same facts. This is not unremarkable if one realizes that majority shareholder conduct may damage both the corporation and individual shareholders. Like a multi-car collision, there may be multiple damage claimants. Limiting or restricting the ability of multiple parties, the corporation and minority shareholders, to sue would not be good public policy. One goal of litigation is to deter future wrongdoing. This is a realistic and worthy goal in these actions.
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REFERENCES
Alaska Plastics Inc. v. Coppock, 621 P.2d 270 (Alaska 1980) Apple v. Careerco, Inc., 370 N.Y.S.2d 289 (NY Sup. Ct. 1974) Aronson v. Lewis, 473 A.2d 805 (Del. 1984) Atkinson v. Marquart, 541 P.2d 556 (Ariz. 1975) Bair v. Purcell, 500 F.Supp.2d 468 (M.D. Pa. 2007) Bangor Punta Operations Inc. v. Bangor & Aroostook RR Co., 417 U.S. 703 (1974) Bank of Heflin v. Miles, 318 So.2d 697 (Ala. 1975) Bitters v. Milcut, Inc. 543 N.W.2d 418 (Wis. 1983) Blaustein v. Lord Baltimore Capital Corp., 2013 WL 1810956 Del. Ch. 2013) Burton v. Crovey, 759 S.W.2d 160 (Tex. App. 1988) CCBN.Com, Inc. v. Thomson Finance Inc., 270 F. Supp. 2d 146 (D. Mass. 2003) Cain v. Merck & Co. Inc., 1 A.3d. 834 (N.J. App. 2010) Chavco Investment Co., Inc. v. Pybus, 613 S.W.2d 806 Tex. Civ. App. 1981) Donahue v. Rodd Electrotype Co. 328 N.E. 2d 505 (Mass. 1975 Estate of Townes v. Townes, 867 S.W.2d. 414 (Tex. App. 1993) Fears v. Cattlemen’s Investment Co., 483 P.2d 724 (Okla. 1971) First American Bank & Trust v. Frogel, 726 F.Supp. 1292 (S.D. Fla. 1989) Frank v. Elgamal, 2012 WL 1096090 (Del. Ch. 2012) Guthrie v. Harkness, 199 U.S. 148 (1905) Henshaw v. American Cement Corp., 252 A.2d. 125 (Del. Ch. 1969) In. re Synthes, Inc. Shareholder Litigation, 50 A.3d 1022 (Del. Ch. 2012) Lewis v. Shaffer Stores Co., 218 F.Supp. 238 (S.D.N.Y. 1963) Master mortgage Corp. v. Craven, 193 S.E.2d 567 (Ga. App. 1972) McAlister v. Eclipse Oil Co., 98 S.W.2d 171 (Tex. 1936) McCauley v. Tom McCaulety & Son, Inc. 621 P.2d 276 (Alaska 1980) Miller v. miller, 700 S.W.2d 941 (Tex. App. 1985) Moore Business Forms, Inc. v. Cordant Holdings Corp. 1996 WL 307444 (Del. Ch. 1996) News-Journal Corp. v. state ex. Rel. Loughridge, 425 S.W.2d 818 (Tex. 1968) Nixon v. Blackwell, 626 A.2d. 1366 (Del. 1996) Otis-Hidden Co. v. Sheirich, 219 S.W. 191 (Kan. 1920) Pabich v. Kellar, 71 S.W. 3d 500 (Tex. App. 2002) Patton v. Nicholas, 279 S.W.2d 848 (Tex. 1955) Perry v. Perry Brothers, Inc., 753 S.W.2d 773 (Tex. App. 1988) Persing Square, LP v. Ceridan Corp., 923 A.2d 810 (Del. Ch. 2007) Radol v. Thomas, 772 F.2d 244 (6th Cir. 1985) Redmond v. Griffith, 202 S.W. 3d 225 (Tex. App. 2006) Schauttet v. Chester State Bank, 707 F. Supp. 885 (E.D. Tex. 1988) Skoglund v. Ormand Industries, Inc. 372 A.2d 204 (Del. Ch. 1976) State ex rel Jones v. Ralston Purina Co., 358 S.W.2d 772 (Mo. 1962) Stone v. Martin, 289 S.E.2d 898 (N.C. App. 1962) Tatko v. Tauko Brothers slate Co., Inc., 569 NYS2d 783 N.Y.A.D. 1991) Tigrett v. Pointer, 580 S.W.2d 375 (Tex. App. 1978)
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TEX. BUS. ORG. CODE Sec. 11.401 TEX. CIV. PRAC. & REM. CODE Sec. 64.072 US Airways Group Inc. v. British Airways PLC, 989 F. Supp. 482 (S.D.N.Y. 1997) Ward v. Succession of Freeman, 854 F.2d 780 (5th Cir. 1988)
CORRESPONDING AUTHOR *Professor Brad Reid may be reached at [email protected]
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