Corwin v. British American Tobacco PLC
251 N.C. App. 45
| N.C. Ct. App. | 2016Background
- Reynolds American (RAI) merged with Lorillard in a transaction partly financed by British American Tobacco plc (BAT), which purchased additional RAI shares to fund the cash portion and thereby maintained a ~42% stake.
- BAT was the largest shareholder (42%); the next largest block was ~5%. BAT and RAI were bound by a 2004 Governance Agreement that (among other things) limited BAT to designating 5 of 13 directors, imposed a ten‑year standstill (until July 30, 2014), and gave BAT contractual rights (vetoes) over certain equity issuances, IP transfers, charter/by‑law amendments, and other governance matters.
- During merger negotiations, BAT conditioned its support on terms that would allow it to preserve its 42% ownership; the Board’s non‑BAT directors (the “Other Directors”) discussed alternative allocations of post‑transaction equity but ultimately approved terms that preserved BAT’s stake.
- BAT bought RAI shares for $60.16 per share as part of the financing; at closing RAI traded at $72, producing a disproportionate profit for BAT (≈$920M) not enjoyed by other shareholders.
- Plaintiff (Dr. Corwin, Trustee) filed a class complaint alleging BAT was a controlling shareholder who breached fiduciary duties (Fairness Claims) and that the RAI directors breached duties and failed to disclose material facts (Disclosure Claims); Disclosure Claims were settled, Fairness Claims survived in part on appeal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a minority shareholder (BAT) can be a "controlling shareholder" owing fiduciary duties | BAT’s size (42%), contractual veto rights, role as sole equity financier, and the Other Directors’ acquiescence amount to actual control over the Transaction | A minority stake alone cannot create control; Governance Agreement limits BAT’s power (restricted director designations, voting constraints, standstill), so BAT was not a controller | A minority shareholder may be a controller if actual control is pled; here plaintiff pleaded a "nexus of facts" supporting a reasonable inference BAT exercised actual control — reversed as to BAT |
| Whether a shareholder may bring a direct claim against the board for loss of share value and diluted voting power | Corwin: dilution and underpayment for shares are individual injuries sufficient for direct suit against directors | Defendants: injuries are corporate injuries (diminution of value) and must be asserted derivatively; dilution/value loss not "peculiar or personal" | Dilution/value loss alone is not a sufficient individualized injury for direct standing; plaintiff lacked standing to bring direct claims against RAI directors — affirmed |
| Whether a claim for aiding and abetting breach of fiduciary duty lies against the corporation based on its board’s conduct | Corwin: RAI aided and abetted directors’ breach and is liable | Defendants: without a viable underlying claim against directors, aiding/abetting fails; also question whether aiding/abetting exists against a corporation for its own directors | Because plaintiff lacks standing/underlying claim against directors, aiding and abetting claim against RAI fails — affirmed |
Key Cases Cited
- Gaines v. Long Mfg. Co., 234 N.C. 340 (N.C. 1951) (majority stockholders exercising control stand in fiduciary relation to minority)
- White v. Kincaid, 149 N.C. 415 (N.C. 1908) (directors and controlling stockholders treated as trustees with fiduciary obligations)
- Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994) (minority holder with ~43% ownership exercised actual control and owed fiduciary duties)
- Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53 (Del. 1989) (minority ownership alone does not create control; actual domination must be alleged)
- Barger v. McCoy Hillard & Parks, 346 N.C. 650 (N.C. 1997) (shareholder cannot sue third parties directly for corporate injuries absent special duty or individualized injury)
- Kaplan v. O.K. Techs., LLC, 196 N.C. App. 469 (N.C. Ct. App. 2009) (controlling‑member duty in LLC context; minority financier alone insufficient to prove control)