Schonfeld v. Hilliard

Schonfeld v. Hilliard

Opinion

 [*168]  McLAUGHLIN, Circuit Judge:

BACKGROUND

This case involves a closely-held cable television corporation that imploded just as it was about to launch its flagship channel. In 1988, brothers Russ and Les Hilliard formed International News Network, Inc. ("INN") to [**2]  distribute a British news and information channel in the United States (the "Channel"). Prior to this ambitious venture, the Hilliard brothers owned small mid-western cable television companies with an aggregate of only 66,000 subscribers.

To secure large-scale expertise and prestige, INN brought in Reese Schonfeld, a founder and former President of Cable News Network ("CNN") - initially as a consultant, and later as a shareholder - to help INN negotiate with the British Broadcasting Corporation (the "BBC") for a programming license. INN also retained Daniels & Associates ("Daniels"), the nation's leading financial services company for the cable industry, to prepare a business plan and to drum up investors.

In February 1994, the Hilliards and Schonfeld executed a written Shareholders' Agreement whereby each became a one-third shareholder in INN in return for a $ 10,000 capital contribution. In addition, the Hilliards, who had each already lent $ 300,000 to INN, agreed to lend up to another $ 350,000 to INN if necessary to meet its obligations to the BBC. In lieu of a further cash contribution, Schonfeld agreed to invest his time and effort.

 [*169]  The Shareholders' Agreement confirmed [**3]  the parties' understanding that INN itself would not operate the Channel. Instead, INN would invest in a yet-to-be-formed operating entity. INN's shareholders, if they chose, could increase their personal stakes in the Channel by making additional cash investments in the separate operating entity. The agreement said nothing about the percentage of profits that INN, or any other equity investor, would receive from the Channel's operation.

Although the Shareholders' Agreement provided for a two-member board of directors (one chosen by Schonfeld, the other by the Hilliards), no board members were formally designated. It appears, however, that Schonfeld assumed the three roles of director, President and CEO of INN. Russ Hilliard acted as the other director. Les Hilliard apparently played no role in INN, other than investor.

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