Appeal from the United States District Court for the Western District of Washington D.C. No. 2:08-cv-00182-RSL Robert S. Lasnik, Chief District Judge, Presiding.
The opinion of the court was delivered by: Gould, Circuit Judge
Argued and Submitted May 6, 2010 -- Seattle, Washington
Before: Kim McLane Wardlaw and Ronald M. Gould, Circuit Judges, and Richard Mills, Senior District Judge.*fn1
Forrest Quinn appeals the district court's judgment dismissing for lack of standing his diversity derivative action seeking damages from Anvil Corporation ("Anvil"), its board of directors (the "Board"), and others for breach of fiduciary duty, breach of contract, and negligence. During the pendency of Quinn's suit, Anvil proposed an amendment to its articles of incorporation (the "Amendment"), which, among other things, would effect a reverse stock split divesting Quinn of his fifty shares of Anvil stock. The district court denied Quinn's motion preliminarily to enjoin the Amendment. After the Amendment passed, the court denied Quinn's request for further discovery and dismissed Quinn's derivative action because, lacking shares, Quinn lost standing to assert claims derivatively on behalf of the corporation under Federal Rule of Civil Procedure 23.1's continuous ownership requirement. The district court denied Quinn's motion for reconsideration of the dismissal. We have jurisdiction under 28 U.S.C. § 1291, and we affirm.
Anvil is a privately held Washington company that provides engineering services to petroleum companies in the Northwest. Quinn's uncle, Lorren Levorsen, founded Anvil in 1971. Quinn was employed by Anvil in the late 1970s and early 1980s. In 1996, Levorsen established an Employee Stock Ownership Plan ("ESOP") for Anvil employees. In 1997, Levorsen gave his remaining Anvil stock to a family limited-liability company, with equal ownership interests divided among Quinn, Levorsen's niece, and Levorsen's two stepsons. Beginning in 2001, Quinn wrote letters to Levorsen and Anvil's leadership urging the adoption of more aggressive strategies to increase the value of Anvil's stock. Quinn also wrote Anvil's executives to report asserted deficiencies that he perceived in the valuation of Anvil's stock made in connection with the administration of the ESOP.
Beginning in 2003, Quinn initiated a series of related lawsuits against Anvil and its leadership, alleging undervaluation of its stock. Quinn's first lawsuit was dismissed on jurisdictional grounds shortly after being filed in 2003 in California. Quinn's second lawsuit, brought in Washington state court in 2004, was settled in 2007. In February 2008, Quinn filed this derivative shareholder suit in the United States District Court for the Western District of Washington. The only Anvil stock Quinn owned when he filed the suit was fifty shares given to him by his parents before the commencement of this suit. Quinn named as defendants Anvil, the ESOP, several then-current Board members, and others ("Defendants"). Quinn alleged that appraisals used for ESOP valuation were flawed and resulted in undervaluation of Anvil's stock. Quinn sought damages for breach of fiduciary duty, breach of contract, and negligence.
On July 14, 2008, while Quinn's lawsuit was pending, Anvil's Board unanimously adopted a resolution to amend Anvil's articles of incorporation (the "Resolution"). The Resolution stated that the proposed Amendment would "restrict ownership of substantially all of the Company's common stock to employees and the ESOP" and effect a reverse stock split whereby each sixty shares of Class A Common Stock would be automatically converted to one share of common stock. A shareholder with less than sixty shares would not be entitled to receive a fractional share, but would instead receive a cash payment in lieu thereof. Thus the Resolution would eliminate share ownership of those holding less than sixty shares. The Resolution set a shareholder vote on the Amendment for August 5, 2008.
On or about July 15, 2008, Anvil's Board distributed proxy materials to Anvil's shareholders. The proxy materials said that the purpose of the Amendment was to facilitate employee ownership of Anvil, which Anvil considered to be an important part of its culture and also "important to its clients and suppliers." The Amendment would achieve this goal by permitting Anvil to repurchase employees' shares at the end of their employment and by conducting the reverse stock split. The proxy materials explained that, as a result of the reverse stock split, a shareholder with fewer than sixty shares would get cash but would "no longer be an Anvil shareholder." One of the persons with fewer than sixty shares, the Board disclosed, was Quinn. Based on the Board's determination that $120 exceeded the fair value of a share of Class A Common Stock, holders of fractional shares would receive a payment equivalent to the share fraction-the ratio of shares held divided by sixty shares-multiplied by $7,200.*fn2 The materials also stated that a dissenting shareholder "with fewer than 60 shares of Class A Common Stock" had appraisal rights to "obtain payment of the fair value of the shareholder's shares."
On July 18, 2008, Defendants filed with the district court a "Notice of Action that May Leave Plaintiff with no Anvil Shares." The notice told Quinn and the court that an August 5 shareholder meeting had been scheduled to vote on the Amendment, and that the Amendment, if approved, would, among other things, effect a reverse stock split leaving Quinn with no shares and, consequently, no standing to pursue this case. Quinn moved for a temporary restraining order and for a preliminary injunction against the shareholder vote. On August 4, the district court denied the motion and, the next day, the shareholders approved the Amendment with near unanimity. Quinn notified Anvil that he would exercise his appraisal rights.
Thereafter, Defendants filed a supplemental motion to dismiss the action for lack of standing. The district court stayed further discovery pending resolution of the motion. Quinn opposed the motion with declarations and exhibits, and simultaneously moved for leave to conduct discovery, arguing that further discovery was necessary to oppose Defendants' motion. The court granted the supplemental motion to dismiss, reasoning that because Quinn no longer held any shares of Anvil stock, he did not meet Federal Rule of Civil Procedure 23.1's requirement that a plaintiff in a derivative shareholder suit hold shares throughout the litigation. The district court rejected Quinn's argument that the reverse stock split should be unwound due to fraud or procedural irregularity, reasoning that Quinn had no evidence of fraud and that the procedural irregularities asserted by Quinn were unsupported or immaterial. The district court also rejected as without foundation in Ninth Circuit caselaw Quinn's argument that he should be ...