Brief Fact Summary. First Western Bank and Trust Co. (D) (First Western), the trustee of a controlling number of shares in Johnson Corporation, sold those shares to the S.O.F. fund in which Mattison was trustee whom First Western did not scrutinize for past controversial financial practices.
Synopsis of Rule of Law. Controlling shareholders owe a duty to the corporation when selling control in the corporation when they possibly possess knowledge of the likeliness that the purchaser of the controlling shares intends to loot the corporation.
A fiduciary's dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.
View Full Point of LawIssue. Do controlling shareholders owe a duty to the corporation when selling control in the corporation when they can possess knowledge of the likeliness that the purchaser of the controlling shares intends to loot the corporation?
Held. (Thompson, J.) Yes. Controlling shareholders owe a duty to the corporation when selling control in the corporation when they possibly possess knowledge of the likeliness that the purchaser of the controlling shares intends to loot the corporation. The duty of good faith and fairness of a majority stockholder encompasses an obligation of prudency and guard when in possession of questionable facts. First Western (D) placed the corporation and its assets in peril for selling to Mattison. It had duty to both the corporation and minority shareholders. The measure for damages is correct, total damage to the corporation was the sum necessary to restore its net worth, plus the value of its tangible assets, plus its going business value determined with reference to future profits reasonably estimated. Derivative actions are equitable, therefore it was reasonable to frame damages in terms of an obligation dependent upon future contingencies rather than a fixed amount. Affirmed and remanded.
Discussion. Early case law did not recognize duty of the controlling shareholder to minority shareholders in the sale of controlling stock. Since then, it has been recognized that misuse can occur from a majority of shares. The applicable philosophy now is a standard of good faith and fairness from the viewpoint of the corporation and those interested therein. Most looting cases appear to involve investment companies whose principal or sole assets constituted cash and readily marketable securities.