Supremes: Cobb EMC violated deal with disgruntled members
Cobb Electric Membership Corp. violated a 2008 settlement with unhappy members who accused some co-op leaders of enriching themselves at members’ expense, the Georgia Supreme Court ruled today.
Dissident members hoped to unseat board members and then-CEO Dwight Brown, but a scheduled 2009 election was never held after the EMC’s leadership voted in secret to allow proxy voting by mail. The high court ruled the board may not unilaterally change the method by which its members are chosen.
A Cobb grand jury indicted Brown in January on 31 counts of racketeering and theft. A judge threw out the indictment two months later on a technicality — the limited access to the courtroom in which it was read publicly.
Here is court public information officer Jane O. Hansen’s summary of today’s decision:
The Georgia Supreme Court has partially upheld a Georgia Court of Appeals decision, concluding that the president and directors of the Cobb Electric Membership Corporation violated an agreement with co-op members by amending the bylaws to allow voting by proxy.
“Although the Court of Appeals did err in certain aspects of its analysis, it reached the correct result and we thus affirm in part pursuant to the right for any reason rule,” Chief Justice Carol Hunstein writes in today’s 6-to-1 opinion.
According to briefs filed in this high-profile Cobb County case, the Cobb EMC was created in 1938 as a depression-era electric cooperative. The original purpose of EMCs was to provide electricity in rural areas through a maze of small member-owned cooperatives. Today Cobb’s EMC serves nearly 200,000 members in four metro-Atlanta counties and is among the largest in the nation.
In 2007, Edgar Pounds and other members of the cooperative sued the local electric company’s officers and some members of the board of directors, including CEO and President Dwight Brown and David McGinnis. They alleged that the officers had breached their fiduciary duties by secretly creating a separate for-profit entity called Cobb Energy Management Corporation into which they transferred millions in assets without EMC members’ knowledge. In October 2008, the parties entered into a Settlement Agreement, which did a number of things, including transferring back to the EMC $112 million in assets from the for-profit entity. It also set a schedule for 2009 elections that would allow co-op members to elect new board members, if they so chose.
At issue in this appeal was the agreement’s provision that stated co-op members would “seek an amendment to the by-laws at the next meeting of Cobb EMC members. … Such amendment will seek to allow members the right to vote for directors by mail-in ballots subject to the development and implementation of appropriate security measures.” The trial court approved the agreement in an order. Less than two weeks later, without notifying the members, the Cobb EMC Board of Directors voted to amend the bylaws to allow proxy voting at any member meeting at which the election of directors was not on the agenda, including the upcoming meeting provided for in the agreement. Previously, Cobb EMC members had conducted all business in person at the member meetings, and proxy voting had not been used by Cobb EMC since its creation. The members filed an emergency motion to enforce the settlement agreement. In a January 2009 order, a special master wrote that the change to proxy voting “is directly related to the election of directors,” and therefore illegal. He concluded that the change violated the agreement because the bylaw amendment was not addressed “at the next meeting.” The officers appealed to the trial court, which reversed the order, ruling that the Board’s proxy voting amendment was legal. EMC members then appealed to the Court of Appeals, which partially reversed the trial court, finding that the bylaw amendment violated the agreement because it failed to give members an opportunity to vote “at” the special meeting. Brown, McGinnis and other EMC directors then appealed to the state Supreme Court. They argued that the Court of Appeals made three legal errors. First, it refused to give deference to the trial court which had overseen and approved the settlement agreement after months of contentious litigation.
In today’s opinion, however, the majority states that argument “provides no basis for reversal.” “Although the Court of Appeals mischaracterized the nature of the issue on appeal, it did utilize the correct standard for reviewing the trial court’s legal conclusions…,” the opinion says. The EMC directors also argued that the Court of Appeals was wrong to conclude that the bylaw amendment violated the settlement agreement because proxy votes are cast before a meeting occurs and the agreement requires voting “at” a meeting. “While we agree with the conclusion that the Board’s proxy voting bylaw amendment violates the terms of the Agreement … the Court of Appeals’ reasoning is not the basis upon which our conclusion rests,” the opinion says. The proxy representing the member “casts the proxy vote at the meeting.”
“Nevertheless, the Board’s proxy voting bylaw amendment violates the trial court order approving the Agreement because it significantly changes the conditions under which the parties’ agreed-upon plan for proposing the option of proxy voting to the Cobb EMC members is implemented,” the majority states. State law and the EMC bylaws “provide that the Board does not have the power to amend existing bylaws or adopt new bylaws ‘directly relating to the election of the board of directors.” In essence, the amendment “allows the Board to unilaterally change the method of voting on the issue of the method of voting for directors, which was a core issue addressed by the Agreement. It follows that the Board’s proxy voting bylaw amendment violates the spirit, if not the letter, of the Agreement.”
Finally, Brown and the others argued the Court of Appeals erred by ruling that the Cobb EMC failed to cooperate with them by not giving them notice that it had adopted the bylaw change.
“Because the trial court’s May 14, 2009 order finding the Board’s proxy voting bylaw amendment to be valid did not address the ‘full cooperation’ requirement of its previous order, the Court of Appeals erred by considering the issue,” the majority opinion says. “For this reason, we reverse the Court of Appeals in part and remand this case for action not inconsistent with this opinion.”
In his dissent, Justice Harold Melton writes that nothing in the amendment to the bylaws violates the settlement agreement. “To the contrary, the amendment, which increases the ability of EMC Cobb’s members to take part in special meetings, supports the settlement agreement’s goal of increasing the transparency of EMC Cobb’s corporate structure.”
The amendment is in the same spirit of encouraging membership participation as the proposed amendment to allow members to vote by mail-in ballots, the dissent says. “Therefore, rather than contradicting the parties’ settlement agreement, this provision enhances it. More members who either cannot or do not wish to attend a special meeting may have their voices heard by proxy on the issue of whether directors may be elected by mail-in ballot.”
“Therefore, it is the majority’s analysis, not the bylaw amendment, which undermines both the letter and spirit of the settlement agreement between these parties,” the dissent says.