Failure To Return Shares Subject To Repurchase Right Supports Conversion Claim
Closely held issuers often include a repurchase right in their equity award agreements. I expect that in most cases, shareholders will comply with these provisions. When a shareholder doesn’t, the company’s most obvious cause of action will be for breach of contract. Conversion is a less obvious cause, but according to the California Court of Appeal, a viable claim nonetheless. Applied Medical Corp. v. Thomas, 2017 Cal. App. LEXIS 337 (Apr. 12, 2017).
The case began with the removal of T. Peter Thomas from the board of directors of Applied Medical Corporation. After Mr. Thomas was removed, the company exercised its right to purchase shares awarded to Mr. Thomas as part of the company’s stock incentive plans. The corporation sued Mr. Thomas when he failed to return the shares in a timely manner. The trial court granted summary judgment to the defendants on all of the corporation’s causes of action. The Court of Appeal, in an opinion by Justice Mark B. Simons, held that the lower court had erred with respect to the corporation’s breach of contract, conversion and aiding and abetting conversion causes of action. The Court of Appeal certified for publication its discussion of the conversion claims but not the breach of contract claim.
“Conversion is the wrongful exercise of dominion over the property of another.” Burlesci v. Petersen, 68 Cal. App. 4th 1062, 1066 (1998). In the eyes of the trial court, this precluded a conversion claim because Mr. Thomas had possession and title to the shares when the corporation exercised its buyback rights. The Court of Appeal, however, found that the corporation’s right to possess the shares after exercise of its repurchase rights provided a sufficient basis for a conversion claim. The trial court also found that the corporation’s claim that it automatically regained ownership after exercise of its repurchase price also vitiated the conversion claim because Mr. Thomas “would no longer have any ability to exert dominion over the shares, a required element of conversion”. The Court of Appeal disagreed, reasoning “regardless of whether Applied needed the executed stock assignment form to engage in any transactions related to the shares, there is at least a disputed issue of fact whether Thomas’s conduct actually interfered with Applied’s control over the shares by creating a dispute on the issue of ownership”.