168 Conn. 201 | Conn. | 1975
This stockholder’s derivative action was brought on behalf of the defendant T. H. Canty and Company, Inc., a Connecticut corporation, by the Katz Corporation, a Delaware corporation and minority stockholder of the defendant corporation. The plaintiff sought relief against the defendants Michael Steinberg, John Keogh, Jr., and Frank N. Robinson, all officers and directors of the defendant corporation, alleging that they had breached their fiduciary duty to the corporation by usurping a corporate opportunity and benefiting personally thereby. The trial court found the issues for the defendants and the plaintiff has appealed to this court.
T. H. Canty and Company, Inc., was formed by merger in 1940 for the principal purpose of conducting a real estate and insurance business. Five thousand shares of no par value stock were authorized and eventually issued. Some time after the merger there was a “loose informal understanding” among some of the directors that if a director learned that any stockholders wished to sell their stock, he would allow the corporation to purchase it instead of purchasing it for himself. Subsequently, many additional directors were elected who were not informed of that informal understanding. Over a thirty-year period, T. H. Canty and Company, Inc., purchased an average of fifty shares per year of its own stock, although there were several years when no pur
In August of 1971, Robert A. Katz, who had served as a director of T. H. Canty and Company, Inc., for seven years, announced that he would not be a candidate for reelection to the board. At that time Katz had access to all information concerning the corporate affairs and he knew the values of all the properties owned by the corporation. The individual defendants, among others, were subsequently elected or reelected to serve as officers and directors on August 17, 1971. Katz then made a contingent offer on behalf of the plaintiff, Katz Corporation, to purchase at least fifty-one percent of the outstanding stock of T. H. Canty and Company, Inc., at $250 per share. The executive committee rejected that offer because it was considered too low. Katz then made an offer of $275 per share which was also rejected. In the fall of 1971, the directors learned that others were considering making offers for the corporation’s stock and it was decided to seek the services of an outsider to make a valuation of the assets and net worth of the company. The outside valuation was deemed unnecessary, however, when the defendant Robinson and another director jointly valued the stock t_d. be worth $380 per share. That figure was later reduced to $360 per share, representing the liquidation value of the corporation not including liquidation expenses.
In October of 1971, the directors decided that any offers for the purchase of company stock should be made by October 29 when the directors would consider them. It was understood that there was no obligation on the part of the corporation or share
At a stockholder’s meeting on November 1, 1971, the stockholders were informed that the stock was initially valued at $380 per share and subsequently reduced to $360 per share before liquidation expenses. The stockholders were further advised that Katz Corporation had made an offer of $300 per share. At that meeting, the shareholders were asked to vote on three options: 2011 shares were voted to sell stock, 1817 were voted to retain stock and continue the company, 259 were voted to liquidate the company and 576 were undecided. By letter dated November 5, 1971, Katz Corporation continued its offer of $300 per share contingent, however, upon acquiring sixty-seven percent of the stock.
In the latter part of November, the defendants learned that a substantial amount of the company’s stock had been turned over to a local bank pursuant to the plaintiff’s tender offer. They believed that a takeover was inevitable unless they could buy
The complaint alleged in substance that the defendants knew, on the basis of inside information, that the stock of T. H. Canty and Company, Inc., had considerably more value than the $325 offered by them to individual stockholders; that they knew of the “prior course of conduct of buying stock for the corporation”; that by purchasing stock for themselves they usurped a corporate opportunity and
The trial court concluded that T. H. Canty and Company, Inc., had no interest in its outstanding stock and that the defendants had not violated their fiduciary duty owed to the corporation.
An officer and director occupies a fiduciary relationship to the corporation and its stockholders. Arrigoni v. Adorno, 129 Conn. 673, 681, 31 A.2d 32. He occupies a position of the highest trust and therefore he is bound to use the utmost good faith and fair dealing in all his relationships with the corporation. General Statutes § 33-323; Osborne v. Locke Steel Chain Co., 153 Conn. 527, 534, 218 A.2d 526; Massoth v. Central Bus Corporation, 104 Conn. 683, 689, 134 A. 236; Mallory v. Mallory Wheeler Co., 61 Conn. 131, 139, 23 A. 708; see Cross, Corporation Law in Connecticut §6.8; 3 Fletcher, Private Corporations (Perm. Ed. Rev. 1975) §§ 838, 850.
The first issue raised by the plaintiff is that the defendants had the burden of proving fairness and “good faith” where their conduct has been challenged as a breach of fiduciary duty. The plaintiff relies on Massoth v. Central Bus Corporation, supra, wherein it was stated that a director has the burden of showing that any personal dealing with the corporation is fair, in good faith, and for adequate consideration. See Osborne v. Locke Steel Chain Co.,
“The doctrine of ‘corporate opportunity’ ... is but one phase of the cardinal rule of ‘undivided loyalty’ on the part of fiduciaries. In other words, one who occupies a fiduciary relationship to a corporation may not acquire, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence.” 3 Fletcher, op. cit. § 861.1, p. 208 ; see Burg v. Horn, 380 F.2d 897, 899 (2d Cir.). In a leading case on the corporate opportunity doctrine the Supreme Court of Delaware stated the rule as follows: “[I^f there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is . . . in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself. And, if,
In this case, the plaintiff contends that it was an avowed business purpose of T. H. Canty and Company, Inc., to acquire all outstanding stock for reduction to treasury; that that course of conduct had been followed for over thirty years; and that the individual defendants should first have presented the opportunity to purchase stock to the corporation by calling a directors’ or shareholders’ meeting. That argument is untenable for two reasons.
First, the plaintiff has failed to establish that the corporation had an avowed business purpose in purchasing its own stock or that it had an interest or reasonable expectancy in so doing. The trial court found that the “informal agreement” among the directors to defer to the corporation when stock became available was obsolete. Many new directors were never informed of that “understanding” and on some occasions the corporation refused to buy its own stock. The primary business purposes of the corporation were real estate and insurance ventures, not the purchase of its own securities. Indeed, § 33-358 of the Gfeneral Statutes limits the ability of a corporation to acquire its own securities. There is no blanket prohibition against an officer or director’s buying securities in his own corporation. See DuPont v. DuPont, 256 F. 129, 132-33 (3d Cir.), cert. denied, 250 U.S. 642, 39 S. Ct. 492, 63 L. Ed. 1185. Ordinarily, a corporation has no interest in
Second, the corporation became aware at the November 1, 1971, stockholders’ meeting that over 2000 stockholders desired to sell their stock. The market price was then the $300 per share offered by the plaintiff. The corporation did not seek to purchase its own stock at that point, however, and for good reason. Its cash on hand and liquid assets were insufficient to enable it to make such a substantial purchase. There can be no expectancy in a transaction unless the corporation is financially able to undertake it. Guth v. Loft, Inc., supra; Hart v. Bell, 222 Minn. 69, 81, 23 N.W.2d 375; Gauger v. Hints, 262 Wis. 333, 352, 55 N.W.2d 426.
The trial court was correct in concluding that T. H. Canty and Company, Inc., had no interest in its outstanding stock or in the dealings between its stockholders.
The complaint also alleges that the individual defendants used inside information for their own profit and gain in their November, 1971, stock purchases from other shareholders of T. H. Canty and Company, Inc. It has been recognized that inside
In the present case, however, the only “inside information” possessed by the defendants was made public at the November 1, 1971, stockholders’ meeting when the $380 and $360 per share stock valuations were disclosed to the stockholders. The defendants also disclosed to the stockholders from whom they purchased stock that they might receive liquidating dividends in excess of the $325 per share that they were offering. Finally, the trial court was unable to ascertain whether the defendants would realize any gain on the shares of stock acquired by them on and after November 24, 1971, since the winding up of the corporation was incomplete and certain contingent liabilities could not be calculated.
The plaintiff failed to prove its allegations that the defendants personally gained or that they traded
There is no error.
In this opinion the other judges concurred.
It was noted by the trial court that an affirmative vote of the holders of two-thirds of the voting power of the outstanding shares of stock is ordinarily required to liquidate or to sell substantially all of the corporation’s assets. General Statutes §§ 33-372 (d), 33-376 (c).
See also §§ 10 (b) and 16 (b) of the Securities Exchange Act of 1931, 15 TJ.S.C. §§ 78j (b) and 78p (b); rule 10b-5 of the Securities and Exchange Commission, 17 CEB § 210.10b-5. In addition, some states have imposed a fiduciary duty on officers and directors to disclose material inside information to the individual shareholders with whom they trade. See, e.g., Jacobsen v. Yaschik, 219 S.C. 577, 155 S.E.2d 601, and other cases collected at note, 7 A.L.K.3d 500.