Family Lawsuit in the Los Angeles Business Journal

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The Los Angeles Business Journal has an article in its latest issue about a family lawsuit at Reading International, Inc.  The corporation operates movie theaters in the United States, Australia and New Zealand.  The article is another example of how family disputes can turn into corporate litigation during a generational change.

The article starts by noting that “Investors gave Reading International Inc. a standing ovation last week after the West L.A. movie theater operator announced record breaking results for the second quarter.”  However, the excitement over the good results is quickly tempered by a “dramatic family feud over the company’s ownership”.

“The company’s longtime leader, James J. Cotter St., died last year at 76, setting off an ugly battle among his children that has raised concerns from shareholders.  James J. Cotter Jr. took the reins as chief executive about a month before his father died.  But in June, Reading’s board of directors voted to oust him.  His sister, Ellen Marie Cotter, has since taken over as interim chief executive.  But the ousted exec has not gone down without a fight.  He sued Reading and its board–including his other sister, Margaret, who serves as a director–in federal court, claiming a breach of fiduciary duty.”

“Some shareholders are less than amused by the Cotter siblings’ feud.  Last week, shareholders Whitney Tilson and Jonathan Glaser asked the court to prevent Reading and its board from causing further damages to the company’s investors.  ‘While I am pleased that second-quarter earnings were strong, I’m concerned by the actions of the board and the ongoing family dispute,’ Glaser said in a statement.  ‘Both the board and the family must recognize that this is a public company, and as such, they have a duty as fiduciaries to all shareholders.'”

The company’s Form 8-K filing explains the breach of fiduciary duty lawsuit as follows:  “On June 12, 2015, Mr. Cotter, Jr. filed a lawsuit against us and each of our other directors in the District Court of the State of Nevada for Clark County, titled James J. Cotter, Jr., individually and derivatively on behalf of Reading International, Inc. vs. Margaret Cotter, et. al. The lawsuit alleges, among other allegations, that the other directors breached their fiduciary duties in taking the actions to terminate Mr. Cotter, Jr. as President and Chief Executive Officer of the company and that Margaret Cotter and Ellen Cotter aided and abetted the breach of such fiduciary duties of the other directors. The lawsuit seeks damages and other relief, including an injunctive order restraining and enjoining the defendants from taking further action to effectuate or implement the termination of Mr. Cotter, Jr. as President and Chief Executive Officer of the company and a determination that Mr. Cotter, Jr.’s termination as President and Chief Executive Officer is legally ineffectual and of no force or effect. The company believes that numerous of the factual allegations included in the complaint are inaccurate and untrue and intends to vigorously defend against the claims in this action. The company has been informed that the other directors intend to seek indemnification from the Company for any losses arising under the lawsuit, in which case the company will tender a claim under its director and officers liability insurance policy.”

The senior Mr. Cotter’s estate is reportedly the largest shareholder in the corporation (and investor Mark Cuban has announced that he is also a shareholder).

A press release by the Tilson and Glaser corporate litigation law firm described their lawsuit as follows:

“Plaintiffs bring this derivative action to police the behavior of RDI’s board of directors, who have breached their fiduciary duties of due care and loyalty to the shareholders by allowing (1) family disputes between directors Margaret and Ellen Cotter, on the one hand, and their brother James J. Cotter, Jr., on the other hand, to spill over into the boardroom, infecting the corporate governance of this publicly-traded company, imperiling the immediate and long term prospects of the Company; (2) self-dealing by Cotter family members; and (3) corporate waste through excessive compensation for the directors and the payment of personal expenses of Cotter family members from the Company’s treasury,” according to the intervenors’ Complaint, filed in Nevada’s Clark County District Court on August 11, 2015.”

“According to court filings, since the death of James J. Cotter, Sr., the siblings have been embroiled in trust and estate litigation over control of RDI’s Class B voting shares that control the company. James J. Cotter, Jr. alleges that, when he refused to accept a “take-it-or-leave-it” demand by his sisters and certain directors to settle the siblings’ trust and estate litigation, these directors — specifically, Margaret Cotter, Ellen Cotter, Edward Kane, Guy Adams and Douglas McEachern — improperly voted to fire him as President and CEO of RDI on June 12, 2015, and then appointed Ellen Cotter as interim CEO.”

“The derivative lawsuit filed by Tilson and Glaser alleges that the board breached its duties to all shareholders by taking sides in a family dispute. In addition, it alleges that the directors of RDI wasted corporate assets by approving lavish compensation of directors, rubber stamping a “golden coffin” deferred retirement and death plan for James Cotter, Sr. and his estate, and paying expenses for out-of-town family, friends and celebrities to attend and participate in James Cotter, Sr.’s memorial.”

Family litigation over a business is often a result of the passing of the patriarch or matriarch who founded and ran the company for many years.  Like many family business lawsuits, this lawsuit alleges breach of fiduciary duty, corporate waste, and self-dealing.  It also appears that the family members are engaged in trust and estate litigation over their father’s estate.

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