Schwartz v. MarienSchwartz v. Marien
Plаintiff-appellant claims that the three defendant directors of Superior Engraving Co., Inc. violated their fiduciary duty to her when they sold shares of treasury stock to themselves and to two corporate employees without at the same timе granting her the opportunity to purchase treasury shares on the same terms in proportion to her stockholding. We conclude that on this record questions of fact are raised which preclude granting plaintiff-appellant’s motion fоr summary judgment.
All of the outstanding stock of the corporation at one time had been owned in equal 50-share lots by Albert Smith, August A. Marien, and Girard Dietrich. Smith died in 1959 and his 50 shares were purchased by the corporation and thereafter held in treasury. Following Mariеn’s death in 1961 his 50 shares were held as follows: 26 by his widow, Clara, and 8 shares each by his sons Robert, Edward, and August, Jr. Just prior to the death of the third founder, Girard Dietrich, on March 15, 1968, there were four members of the board of directors — Dietrich, his daughter Margaret A. Schwartz, Robеrt Marien, and August Marien, Jr.
Following Dietrich’s death, on the admission of his will to probate, letters testamentary were issued to his daughter, here plaintiff-appellant.
August and Edward Marien gave notice of a special meeting of the board of direсtors to be held on May 6, 1968 to fill the vacancy on the board created by Dietrich’s death and to consider the purchase of the Dietrich stock and the sale of treasury stock. At the meeting, by the affirmative votes of Robert and August Marien, Edward Mаrien was elected to fill the Dietrich vacancy on the board. Thereupon after authorizing negotiations for the purchase of the Dietrich stock, with no word of explanation the three Marien directors voted to sell five shares of stock held in treasury, one share each to the three Marien brothers and one share apiece to two long-time corporate employees, Edward L. Kasprzak and Louis A. Zimmerman.
Following oral protest on the day after the special board meeting, plaintiff-appellant’s attorney wrote to the three Marien brothers on May 16 protesting the sales оf the treasury stock as illegal and demanding that they be rescinded. This was followed on May 20 by a second letter containing plaintiff-appellant’s offer to purchase five shares of treasury stock at the same price at which the othеr five treasury shares had been sold. Pursuant to plaintiff-appellant’s demand a second special meeting of the board of directors was held on June 20 to act on her purchase offer. Although her attorney asserted plaintiff-apрellant’s right to purchase five treasury shares to preserve her porportionate stock ownership in the corporation, the board rejected her offer. The only explanation then given for such rejection was that it was "nоt consistent” and not "in the best interests of the corporation” to sell more shares to the Dietrich estate at a time when the estate was negotiating to sell the shares it already held to the corporation. Plaintiff-appellant’s аttorney asserted that failure to enable her to maintain her proportionate position would be a breach of the fiduciary responsibility owed by the directors. Plaintiff-appellant’s related request that the sales of the first five sharеs of treasury stock be rescinded was ruled out of order, and the meeting adjourned.
After her demands were ignored, plaintiff-appellant called a special meeting of the corporate shareholders to be held on July 25, 1968, for the еlection of directors. Thereafter, sensing the numerical predicament she was in, plaintiff-appellant instituted the present action alleging conspiracy and fraud on the part of defendants to deprive the Dietrich estate of its 50% stock ownership position and sought to enjoin the holding of the proposed meeting of shareholders. Her application for injunctive relief was denied and the meeting was held at which Edward Kasprzak was elected to replaсe plaintiff-appellant on the board of directors.
It was not until an examination before trial, three years after the sales of treasury stock to the corporate employees, that mention was first made of Mr. Kasprzak’s desire to purchase stock following Dietrich’s death and of Robert Marien’s purported apprehension that Kasprzak might leave the company’s employ. To his affidavit sworn to March 16, 1972, Edward Marien attached a copy of minutes of a special meeting of. stockholders and directоrs held on December 28, 1955 in which reference was made to a possible stock purchasing plan, concededly abandoned in 1959, in which two of the Marien brothers and Mr. Kasprzak were then listed as prospective beneficiaries.
Suprеme Court denied cross motions for summary judgment, concluding that a trial must be held to resolve material issues of fact. The Appellate Division affirmed with one dissenting Justice disposed to grant summary judgment for plaintiff-appellant. We agree that there is sufficient evidence in this record to raise issues of fact, precluding summary judgment in plaintiff’s favor.
While it is conceded that pre-emptive rights as such do not attach to treasury stock in the absence of specific provision in the certificate of incorporation (Business Corporations Law, § 622, subd [e], par [4]), members of a corporate board of directors nevertheless, owe a fiduciary responsibility to the shareholders in general and to individual shareholders in particular to treat all shareholders fairly and evenly. (Hammer v Werner,
Departure from precisely uniform treatment of stockholders may be justified, of course, where a bona fide business purpose indicates that the best interests of the corporation would be served by such departure. The burden of coming forward with proof of such justification shifts to the directors where, as here, a prima facie case of unequal stockholder treatment is made out. Particularly is this so whеn it appears that members of the board of directors favored themselves individually over the complaining shareholder. Additionally, disturbance of equality of stock ownership in a corporation closely held for several years by thе members of two families calls for special justification in the corporate interest; not only must it be shown that it was sought to achieve a bona fide independent business objective, but as well that such objective could not have been аccomplished substantially as effectively by other means which would not have disturbed proportionate stock ownership. Similarly, should the proof disclose double motivation on the part of the directors, that is, both to advance an indеpendent corporate interest and at the same time to place a complaining shareholder at a disadvantage, the directors could then be absolved, if at all, of breach of fiduciary responsibilities only by accompanying proof that no other means were available appropriate to the accomplishment of the corporate objective.
There is evidence to support plaintiff-appellant’s contention thаt no independent corporate interest was served in the sale of the five shares of treasury stock to the Marien directors and the two long-time employees and that there was here only a
Plaintiffs right to relief does nоt depend on proof of fraud or conspiracy on the part of the Marien members of the board of directors, although this is plaintiffs pleading. (Kavanaugh v Kavanaugh Knitting Co.,
Determinations as to whether the activities of defendants were undertaken in good faith for a legitimate corporate purpose and whether оther means were available depend not only on an analysis of the objective facts but as well in part on an appraisal of defendants’ motives, involving as it will issues of credibility. "Good faith or bad faith as the guide or the test of fiduciary cоnduct is a state or condition of mind — a fact — which can be proved or judged only through evidence.” (Kavanaugh v Kavanaugh Knitting Co., supra, p 198.) Accordingly it is appropriate that this case go before triers of fact.
The order of the Appellate Division should be affirmed аnd the case proceed to trial.
Chief Judge Breitel and Judges Jasen, Gabrielli, Wachtler, Fuchsberg and Cooke concur.
Order affirmed, with costs. Question certified answered in the affirmative.
Notes
These two employees were originally named party defendants but the action was subsequently dismissed on the merits as to each of them.