Thursday, December 7, 2017
Under Court of Appeal Decision…
‘Duck Dynasty’ Producers Stripped of Management Powers
Judge’s Application of Contractual Provision Giving Sellers of Majority Share of TV Production Company Continued Control of Day-to-Day Operations Repudiated Given Discharge of Sellers as Co-CEOs
By a MetNews Staff Writer
The Court of Appeal for this district has held that a Los Angeles Superior Court judge abused her discretion in holding, under a literal reading of a contract, that the ousted CEOs of a television production company retained the power to make the day-to-day management decisions for the company.
The partial reversal, late Monday, of Judge Susan Bryant-Deason’s order granting a preliminary injunction is a set-back for Scott Gurney and Deirdre Gurney in their ongoing court battle over management of the company they founded, Gurney Productions, of which they are now minority shareholders.
The Gurneys, who were executive producers of the hit A&E reality show “Duck Dynasty,” in 2012 sold a 61.5 percent share in their company to ITV Studios America for $40 million. The buyer is a subsidiary of ITV plc, a commercial multi-network broadcasting company in the United Kingdom that competes for viewers with the BBC.
There was no dispute over the power of the majority of Gurney Productions’ five-member Board of Managers—of which the Gurneys were members—to fire the Gurneys as co-CEOs, as it did in December 2016. At issue was the effect of a provision in the operating agreement that “without the approval of all Managers, the Gurneys may…manage the day-to-day business and affairs of the Company consistent with past practice of the Gurneys (except as otherwise restricted in this Agreement).”
A March 21 minute order reflects that Bryant-Deason enjoined ITV from attempting to consummate a buy-out of the Gurneys’ remaining interest in Gurney Productions, declaring that its option had expired, and granted a preliminary injunction requiring ITV to allow “the Gurneys as Board Managers to manage the day-to-day business and affairs of Gurney Productions.”
Although the Gurneys were contractually conferred with the power to name two members of the board, and named themselves, the board’s majority had purported to strip them of their membership, citing alleged breaches of fiduciary duties and self-dealing. Bryant-Deason expressed skepticism as to the validity of the allegations against them, saying it was “likely” the Gurneys would show that their expulsions as CEOs were groundless.
She said that irreparable harm would be suffered by them “in their ability to perform their job as they have always done to advance the business of Gurney Productions and ITV and to their reputations if the requested preliminary injunction were not to issue because” they “would not be able to manage and influence the proven performance of Gurney Productions, which they currently have the right to do under the Operating Agreement.”
Presiding Justice Frances Rothschild, of the local appeals court’s Div. One, wrote the opinion bumping the Gurneys from their management roles.
“We agree with plaintiffs and reverse the trial court’s order to the extent that it reinstated the Gurneys to their positions managing the day-to-day operations of the Company,” Rothschild said. “The Gurneys continue as members of the Company’s board of managers, and we affirm the portion of the preliminary injunction barring the Company from impinging on their rights as board members.”
Also undisturbed was the bar on ITV seeking to exercise its expired option.
Rothschild said the “key question in this case is whether the Gurneys retained the right, despite their termination from employment as CEO’s, to continue managing the Company’s day-to-day operations, and she responded, “no,” explaining:
“The operating agreement reserves to the board—by majority, and in some cases unanimous, vote—the authority to manage the Company’s affairs. In context, the language in the operating agreement authorizing the Gurneys to manage the Company without the approval of the other board members serves as an accommodation to the Gurneys to exercise authority as CEO’s, not as an irrevocable grant to continue managing the Company indefinitely.”
Rothschild went on to say:
“Ordinarily, a majority shareholder who has the authority to appoint a majority of the board of directors may make decisions despite the objection of a minority shareholder. If the Gurneys’ interpretation were correct, that rule would be flipped on its head, with essentially no recourse for the majority to assert its authority. Under their interpretation, the Gurneys could never be removed from managing the Company, regardless of any bad behavior on their part or the terms of their employment. Even if the Gurneys had already breached their duty of loyalty by entering into a self-dealing transaction to benefit themselves at the expense of the Company and ITV, the remaining board members would have no means of preventing the Gurneys from continuing indefinitely to operate the Company, except by dissolving the Company.
“If the parties intended the operating agreement to grant the Gurneys, as minority shareholders, this much control regardless of the wishes of the majority shareholder, we would expect to find such authority granted prominently and unequivocally in the text of the document.”
Rothschild said that in light of the conclusion that the Gurneys had no “lifetime jobs as managers of the Company,” it was not necessary to “reach a determination of the other issues the parties have raised in their briefs, including the questions of whether the Gurneys violated their fiduciary duties or otherwise breached their contracts with the Company.”
The conduct Rothschild saw no need to discuss, but Bryant-Deason did, was based on the act of the Gurneys in setting up a new production company.
“Although ITV argued that there was a breach of fiduciary duty by the Gurneys by the formation of a new company, Snake River Productions, which would be in competition with Gurney Productions, a production company which made reality based programs, the evidence which was presented in the Executive Employment Agreement, could be interpreted otherwise. It sets forth that the business activities of Gurney Productions are defined as the development, production, promotion, and marketing of reality-based programs. Snake River was set up to make feature length documentary films, game shows and scripted television.”
The judge noted that after Snake River purchased a property from Gurney Productions, and the Gurneys’ undisclosed ownership of Snake Ridge was unveiled, the Gurneys offered to rescind the deal. However, the other three managers, having derived personal profits from the transaction, opted to decline the offer.
The case is ITV Gurney Holding Inc. v Gurney, 2017 S.O.S. 6018.
Fred A. Rowley Jr., Mark R. Yohalem, John L. Schwab, and Nicholas S. Dufau of Munger, Tolles & Olson joined with Paul B. Salvaty, Megan Dixon, Poopak Nourafchan and Laura M. Groen of Hogan Lovells U.S. in representing ITV on appeal. Philip M. Kelly, Nicholas F. Daum of Kendall Brill & Kelly teamed with Bryan A. Merryman of White & Case and Michael E. Weinstein of Lavely & Singer in arguing for the Gurneys.
Salvaty remarked yesterday:
““We welcome the decision. The Board will meet soon to determine what is in the best interests of the company.”
Despite the appellate court removing the Gurneys’ control over day-to-day management, Weinstein proclaimed victory, commenting:
“The Gurneys are pleased with back to back rulings in their favor. In upholding major portions of the injunction against ITV, the Appellate Court has not only solidified the Gurneys’ position as managing board members, but has also affirmed a lower court finding that the Gurneys are likely to prevail on their substantial claims against ITV.”
“This ruling comes on the heels of another Gurney victory over ITV, in which the lower Court summarily denied ITV’s ‘anti-SLAPP’ motion. In that ruling, the Court correctly characterized the Gurneys’ ouster as part of an ITV ‘ambush,’ and not a privileged act. Despite ITV’s public posturing and misleading statements to the press, the facts in this case and court rulings have ITV running into a legal dead end.”
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