23 Del. Ch. 255 | Del. | 1939
delivering the opinion of the Court:
In the court below the appellants took the position that, on the facts, the complainant was entitled to no equitable relief whatever. In this court, they seek only a modification of the Chancellor’s decree, not a reversal of it. They now contend that the question is one of equitable adjustment based upon the extent and value of the respective contributions of the appellants and the appellee. This change of
As stated by the appellants, there were certain questions before the Chancellor for determination:
(1) Was Guth at the time the Pepsi-Cola opportunity came to him obligated, in view of his official connection with Loft, to take the opportunity for Loft rather than for himself? On this point the appellants contend no finding was made.
(2) Was Guth, nevertheless, estopped from denying that the opportunity belonged to Loft; and was he rightfully penalized to the extent of his whole interest therein, merely because resources borrowed from Loft had contributed in some measure to its development; and did Loft’s contributions create the whole value behind the interests of Guth and Grace in Pepsi, thereby constituting Loft the equitable owner of those interests? These questions were answered in the affirmative; and because of the answers, the Chancellor, it is said, did not answer the last question before him, that is, upon what theory and to what extent should Loft share in the proceeds of the Pepsi-Cola enterprise?
The appellants offer a comparison of the preliminary draft of a decree, submitted by the complainant as “Finding A,” with the final draft of that finding. Briefly, the substantial difference is, that in the preliminary draft it was stated that the opportunity to acquire the formula, goodwill and business incident to the manufacture and sale of Pepsi-Cola, belonged to the complaint; whereas, in the decree as signed, it was stated that Guth was estopped to deny that he had received the opportunity on behalf of the complainant. The appelants say that strenuous objection was made to the draft submitted by the appellee on the ground that nowhere in the Chancellor’s opinion did it appear that he had found, as a fact, that the opportunity belonged to Loft, and after full consideration, the Chancellor acquiesced, and the modification was made. The appellee contends that the Chancellor did find that the Pepsi-Cola opportunity belonged to it, and that the modification was made for other reasons.
In these circumstances of contention, certain questions suggest themselves for consideration, and some of them for answer: Did the Chancellor make an explicit finding that the Pepsi-Cola opportunity belonged in equity to Loft, and if so, was such finding justifiable in fact and in law? If the
The complainant is not, of course, precluded from making the argument that, upon the law and the facts, the Pepsi-Cola opportunity belonged to it; nor is this court prohibited from so finding.
It is necessary briefly to notice what the Chancellor said with respect to the question of corporate opportunity. As a preliminary to the discussion of the question, the Chancellor stated generally the principles governing officers and directors of a corporation with respect to their fiduciary relation to the corporation and its stockholders, and their liability to account to the corporation for profits and advantages resulting from unlawful acts and breaches of trust done and committed in the promotion of their own interests. He then proceeded to say. that Guth, being not only a director of Loft but its president as well, and dominant in the management of its affairs, the principles and rules governing trustees in their relations with their correlates applied to him with peculiar and exceptional force. He particularly noticed a proposition of law stated by the defendants, that when a business opportunity comes to an officer or director in his individual capacity rather than in his official capacity, and is one which, because of its nature, - is not essential to the corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own. As stated, he found the proposition acceptable in the main; but he observed that the cases cited by the defendant recognized as true also the converse of the proposition, and that in all of them the fundamental fact of good faith was found in favor of the officer
“Now the evidence in the case sub judice does not warrant the view that any one of these features may be affirmed as existing here. The brief review of some of its salient features which I have herein-before made, shows the opposite of every one of them to have been the fact. That Loft had the means to finance and establish the business is clearly demonstrated. In every aspect of essential fact it did so. That Guth did not use his own funds and risk his own resources in acquiring and developing the Pepsi business is equally demonstrated. He was in fact unable to do so. I dismiss from consideration his claim of a paroi contract of guaranty with Loft by which he engaged to save it harmless from any loss it might suffer from its advances. I conclude that no such guaranty was given. Even if it was, it was worthless. That the business of producing Pepsi-Cola syrup was in the line of Loft’s business and of practical and not theoretical interest to it, is shown by the fact that Loft was engaged in manufacturing fountain syrups of numerous kinds to supply its own extensive needs. Indeed the outstanding justification which Guth offers for his utilization of Loft’s resources on the scale he did, was Loft’s need for a constant and reliable supply of Pepsi-Cola syrup. The former directors now allied with Guth, a minority of the former board, offer a like justification for their alleged approval of Guth’s acts in plunging Loft deep into the Pepsi venture. It does not become either Guth or the minority group of directors now associated with him to claim that Pepsi was an enterprise which was foreign to Loft’s purposes and alien to its business interests. The very claim, if accepted, denounces as a shocking breach of their duty as directors their act of agreeing, as they now say they did, to Guth’s free use of Loft’s resources of all kinds to an unlimited extent to promote and develop the enterprise.
“I am of the opinion that under such circumstances as are disclosed in this case, Guth is estopped by what he subsequently caused Loft to do, to deny that when he embraced the Megargel offer he did so in behalf of Loft. The offer cannot be viewed in any light other than an expectancy that was Loft’s. Guth is estopped to contend to the contrary. The case of Bailey v. Jacobs, 325 Pa. 187, 189 A. 320, cited at an earlier point in this opinion, is a pertinent and persuasive authority in support of that view.”
Manifestly, the Chancellor found to exist facts and circumstances from which the conclusion could be reached that the Pepsi-Cola opportunity belonged in equity to Loft.
If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage for himself, the law charges the interest so acquired with a trust for the benefit of the corporation, at its election, while it denies to the betrayer all benefit and profit. The rule, inveterate and uncompromising in its rigidity, does not rest upon the narrow ground of injury or damage to the corporation resulting from a betrayal of confidence, but upon a broader foundation of a wise public policy that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation. Given the relation between the parties, a certain result follows; and a constructive trust is the remedial device through which precedence of self is compelled to give Way to the stern demands of loyalty. Lofland, et al.,
The rule, referred to briefly as the rule of corporate opportunity, is merely one of the manifestations of the general rule that demands of an officer or director the utmost good faith in his relation to the corporation which he represents.
It is true that when a business opportunity comes to a corporate officer or director in his individual capacity rather than in his official capacity, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it, if, of course the officer or director has not wrongfully embarked the corporation’s resources therein. Colorado & Utah Coal Co. v. Harris, et al., 97 Colo. 309, 49 P. 2d 429; Lagarde v. Anniston Lime & Stone Co., 126 Ala. 496, 28 So. 199; Pioneer Oil & Gas Co. v. Anderson, 168 Miss. 334, 151 So. 161; Sandy River R. Co. v. Stubbs, 77 Me. 594, 2 A. 9; Lancaster Loose Leaf Tobacco Co. v. Robinson, 199 Ky. 313, 250 S. W. 997. But, in all of these cases, except, perhaps, in one, there was no infidelity on the part of the corporate officer sought to be charged. In the first case, it was found that the corporation had no practical use for the property acquired by Harris. In the Pioneer Oil & Gas Co. case, Anderson used no funds or assets of the corporation, did not know that the corporation was negotiating for the oil lands and, further, the corporation could not, in any
On the other hand, it is equally true that, if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which
But, there is little profit in a discussion of the, particular cases cited. In none of them are the facts and circumstances comparable to those of the case under consideration. The question is not one to be decided on narrow or technical grounds, but upon broad considerations of corporate duty and loyalty.
As stated in 3 Fletcher Cyclopedia, Corporations, § 862, an authority seemingly relied on by the appellants,
“There is a vast field for individual activity outside the duty of a director, yet well within the general scope of the corporation’s business. The test seems to be whether there was a specific duty, on the part of the officer sought to be held liable, to act or contract in regard to the particular matter as the representative of the corporation—all of which is largely a question of fact.”
Duty and loyalty are inseparably connected. Duty is that which is required by one’s station or occupation; is that which one is bound by legal or moral obligation to do or refrain from doing; and it is with this conception of duty
Prior to May, 1931, Guth became convinced that Loft was being unfairly discriminated against by the Coca-Cola Company of whose syrup it was a large purchaser, in that Loft had been refused a jobber’s discount on the syrup, although others, whose purchases were of far less importance, had been given such discount. He determined to replace Coca-Cola as a beverage at the Loft stores with some other cola drink, if that could be accomplished. So, on May 19, 1931, he suggested an inquiry with respect to desirability of discontinuing the use of Coca-Cola, and replacing it with Pepsi-Cola at a greatly reduced price. Pepsi-Cola was the syrup produced by National Pepsi-Cola Company. As a beverage it had been on the market for over twenty-five years, and while it was not known to consumers in the area of the Loft stores, its formula and trademark were well established. Guth’s purpose was to deliver Loft from the thraldom of the Coca-Cola Company, which practically dominated the field of cola beverages, and, at the same time to gain for Loft a greater margin of profit on its sales of cola beverages. Certainly, the choice of an acceptable substitute for Coca-Cola was not a wide one, and, doubtless,
It is urged by the appellants that Megargel offered the Pepsi-Cola opportunity to Guth personally, and not to him as president of Loft. The Chancellor said that there was no way of knowing the fact, as Megargel was dead, and the benefit of his testimony could not be had; but that it was not important, for the matter of consequence was how Guth received the proposition.
It was incumbent upon Guth to show that his every act in dealing with the opportunity presented was in the exercise of the utmost good faith to Loft; and the burden was cast upon him satisfactorily to prove that the offer was made to him individually. Reasonable inferences, drawn from acknowledged facts and circumstances, are powerful factors in arriving at the truth of a disputed matter, and such inferences are not to be ignored in considering the acts and conduct of Megargel. He had been for years engaged in the manufacture and sale of a cola syrup in com
Leaving aside the manner of the offer of the opportunity, certain other matters are to be considered in determining whether the opportunity, in the circumstances, belonged to Loft; and in this we agree that Guth’s right to appropriate the Pepsi-Cola opportunity to himself depends upon the circumstances existing at the time it presented it
The real issue is whether the opportunity to secure a very substantial stock interest in a corporation to be formed for the purpose of exploiting a cola beverage on a wholesale scale was so closely associated with the existing business activities of Loft, and so essential thereto, as to bring the transaction within that class of cases where the acquisition of the property would throw the corporate officer purchasing it into competition with his company. This is a factual question to be decided by reasonable inferences from objective facts.
It is asserted that, no matter how diversified the scope of Loft’s activities, its primary business was the manufacturing and selling of candy in its own chain of retail stores, and that it never had the idea of turning a subsidiary product into a highly advertised, nation-wide specialty. Therefore it had never initiated any investigation into the possibility of acquiring a stock interest in a corporation to be formed to exploit Pepsi-Cola on the scale envisioned by Megargel, necessitating sales of at least 1,000,000 gallons a year. It is said that the most effective argument against the proposition that Guth was obligated to take the opportunity for Loft is to be found in the complainant’s own assertion that Guth was guilty of an improper exercise of business judgment when he replaced Coca-Cola with Pepsi-Cola at the Loft stores. Assuming that the complainant’s argument in this respect is incompatible with its contention that the Pepsi-Cola opportunity belonged to Loft, it is no more inconsistent than is the position of the appellants on the question. In the court below, the defendants strove strenuously to show, and to have it believed, that the Pepsi-Cola opportunity was presented to Loft by Guth, with a full disclosure by him that if the company did not embrace
The appellants suggest a doubt whether Loft would have been able to finance the project along the lines contemplated by Megargel, viewing the situation as of 1931. The answer to this suggestion is two-fold. The Chancellor found that Loft’s net asset position at that time was amply sufficient to finance the enterprise, and that its plant, equipment, executives, personnel and facilities, supplemented by such expansion for the necessary development of the business as it was well able to provide, were in all respects adequate. The second answer is that Loft’s resources were found to be sufficient, for Guth made use of no other to any important extent.
Next it is contended that the Pepsi-Cola opportunity was not in the line of Loft’s activities which essentially were of a retail nature. It is pointed out that, in 1931, the retail stores operated by Loft were largely located in the congested areas along the Middle Atlantic Seaboard, that its manufacturing operations were centered in its New York factory, and that it was a definitely localized business, and not operated on a national scale; whereas, the Megargel proposition envisaged annual sales of syrup at least a million gallons, which could be accomplished only by a wholesale distribution. Loft, however, had many wholesale activities. Its wholesale business in 1931 amounted to over ' $800,000. It was a large company by any standard. It had
But, the appellants say that the expression, “in the line” of a business, is a phrase so elastic as to furnish no basis for a useful inference. The phrase is not within the field of precise definition, nor is it one that can be bounded by a set formula. It has a flexible meaning, which is to be applied reasonably and sensibly to the facts and circumstances of the particular case. Where a corporation is engaged in a certain business, and an opportunity is presented to it embracing an activity as to which it has fundamental knowledge, practical experience and ability to pursue, which, logically and naturally, is adaptable to its business having regard for its financial position, and is one that is consonant with its reasonable needs and aspirations for expansion, it may be properly said that the opportunity is in the line of the corporation’s business.
The manufacture of syrup was the core of the Pepsi-Cola opportunity. The manufacture of syrups was one of Loft’s not unimportant activities. It had the necessary resources, facilities, equipment, technical and practical knowledge and experience. The tie was close between the business of Loft and the Pepsi-Cola enterprise. Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378; Transvaal Cold Storage Co., Ltd., v. Palmer, [1904] T. S.
It is urged that Loft had no interest or expectancy in the Pepsi-Cola opportunity. That it had no existing property right therein is manifest; but we cannot agree that it had no concern or expectancy in the opportunity within the protection of remedial equity. Loft had a practical and essential concern with respect to some cola syrup with an established formula and trademark. A cola beverage has come to be a business necessity for soft drink establishments ; and it was essential to the success of Loft to serve at its soda fountains an acceptable five cent cola drink in order to attract into its stores the great multitude of people who have formed the habit of drinking cola beverages. When Guth determined to discontinue the sale of Coca-Cola in the Loft stores, it became, by his own act, a matter of urgent necessity for Loft to acquire a constant supply of some satisfactory cola syrup, secure against probable attack, as a replacement; and when the Pepsi-Cola opportunity presented itself, Guth having already considered the availability of the syrup, it became impressed with a Loft interest and expectancy arising out of the circumstances and the urgent and practical need created by him as the directing head of Loft.
As a general proposition it may be said that a corporate officer or director is entirely free to engage in an independent, competitive business, so long as he violates no legal or moral duty with respect to the fiduciary relation that exists between the corporation and himself. The appellants contend that no conflict of interest between Guth and Loft resulted from his acquirement and exploitation of the Pepsi-Cola opportunity. They maintain that the ac
It is useless to pursue the argument. The facts and circumstances demonstrate that Guth’s appropriation of the Pepsi-Cola opportunity to himself placed him in a competitive position with Loft with respect to a commodity es
Although the facts and circumstances disclosed by the voluminous record clearly show gross violations of legal and moral duties by Guth in his dealings with Loft, the appellants make bold to say that no duty was cast upon Guth hence he was guilty of no disloyalty. The fiduciary relation demands something more than the morals of the market place. Meinhard v. Salmon, supra. Guth’s abstractions of Loft’s money and materials are complacently referred to as borrowings. Whether his acts are to be deemed properly cognizable in a civil court at all, we need not inquire, but certain it is that borrowing is not descriptive of them. A borrower presumes a lender acting freely. Guth took without limit or stint from a helpless corporation, in violation of a statute enacted for the protection of corporations against such abuses, and without the knowledge or authority of the corporation’s board of directors. Cunning and craft supplanted sincerity. Frankness gave way to concealment. He did not offer the Pepsi-Cola opportunity to Loft, but captured it for himself. He invested little or no money of his own in the venture, but commandeered for his own benefit and advantage the money, resources and facilities of his corporation and the services of its officials. He thrust upon Loft the hazard, while he reaped the benefit. His time was paid for by Loft. The use of the Grace plant was not essential to the enterprise. In such manner he acquired for himself and Grace ninety-one per cent of the capital stock of Pepsi, now worth many millions. A genius in his line he may be, but the law makes no distinction between the wrong doing genius and the one less endowed.
The Chancellor’s opinion may be said to leave in some doubt whether he found as a fact that the Pepsi-Cola opportunity belonged to Loft. Certain it is that he found all of the elements of a business opportunity to exist. Whether he made use of the word “estopped” as meaning that he found in the facts and circumstances all of the elements of an equitable estoppel, or whether the word was used loosely in the sense that the facts and circumstances were so overwhelming as to render it impossible for Guth to rebut the conclusion that the opportunity belonged to Loft, it is needless to argue. It may be said, however, that we are not at all convinced that the elements of an equitable estoppel may not be found having regard for the dual personalty which Guth assumed.
The decree of the Chancellor is sustained.