219 F.2d 173 (2d Cir. 1954)
In August 1950, C. Russell Feldmann and members of his family sold their controlling interest in Newport Steel Corporation to Wilport Company for $20 per share.1 The controlling interest consisted of 33 percent of the outstanding stock held by Feldmann's family and personal corporations, together with 55,552 additional shares held by friends and associates, for a total of 37 percent of Newport stock.2 Feldmann, who was chairman of the board of directors and president of Newport, procured the resignation of his board and the election of Wilport's nominees immediately upon consummation of the sale.3
Newport operated mills for the production of steel sheets in Kentucky and Ohio.4 Wilport was a syndicate of end-users of steel interested in securing a source of supply during the Korean War market shortage.5 Newport had previously used the Feldmann Plan of securing interest-free advances from prospective purchasers in return for commitments from future production to finance plant improvements.6
The over-the-counter market price for Newport shares had not exceeded $12 per share, while book value was $17.03 per share.7 Plaintiffs, minority stockholders of Newport, brought consolidated derivative actions against Feldmann and his co-defendants seeking an accounting for gains from the sale.8 Jurisdiction was based on diversity of citizenship.9
The district court, through Judge Hincks, found that $20 per share was a fair price for the control block but noted that the evidence did not show the value of the block if shorn of its appurtenant power to control distribution of the corporate product.10 The court dismissed the complaint after finding that plaintiffs had failed to satisfy their burden of proving that the sales price was not fair.11 The case came to the Second Circuit on plaintiffs' appeal from the dismissal.12
Whether a dominant stockholder who is also chairman and president of a steel corporation must account to minority stockholders for any premium received in the sale of his controlling block that is attributable to the transfer of the power to control allocation of the corporation's product during a period of short supply?13
A dominant stockholder and director stands in a fiduciary relationship to the corporation and minority stockholders, requiring dedication of uncorrupted business judgment solely for the corporation's benefit and prohibiting appropriation of corporate opportunities such as control over product allocation in a shortage for personal gain, with the burden on the fiduciary to prove fairness under precedents such as Pepper v. Litton.14
Yes.
Upon the sale in August 1950, C. Russell Feldmann and his family transferred their controlling interest in Newport Steel Corporation to the Wilport syndicate for $20 per share.15
Newport was a steel producer with mills in Kentucky and Ohio that had relied on the Feldmann Plan to obtain interest-free advances from buyers in exchange for future production commitments, using the funds for plant improvements and expansion during times of tight supply like the Korean War.16
The market price for Newport shares had been no higher than $12, with book value at $17.03, yet the $20 price for the control block reflected the additional value of being able to direct steel allocations to Wilport's members.17 Minority stockholders initiated derivative suits to recover the premium as an illegal gain from the fiduciary's sale of corporate power.18
The district court dismissed the actions, finding the price fair for the stock and placing the burden on plaintiffs to show otherwise, leading to this appeal where the Second Circuit reviewed the fiduciary obligations and burden allocation.19 Applying the fiduciary rule to these facts, the premium paid by Wilport was for the power to control the allocation of Newport's steel output in a time of shortage.20 This power was a corporate opportunity that Feldmann misappropriated for personal gain by transferring control.21 The corporation could have used the Feldmann Plan to secure funds for expansion or to build patronage. Therefore, Feldmann must account for that portion of the $20 price attributable to the control power.
The defendants must account to the minority stockholders for the premium attributable to the sale of the corporate power to control allocation of the product.22
Related opinions on this issue
Circuit Judge Swan agreed with the general principles of fiduciary duties enunciated in the majority opinion.23 He concluded that a dominant shareholder is ordinarily privileged to sell his stock at the best price obtainable unless he knows or has reason to believe that the purchaser intends to injure the corporation.24 Since there was no proof that Wilport would use the power to injure Newport and Wilport purchased at the same prices as other customers without detriment, he would have affirmed the district court's judgment.25
Whether the defendants or the plaintiffs bear the burden of proving the value of the controlling stock absent its appurtenant power to influence distribution of the corporate product?26
Fiduciaries have the burden of proof in establishing the fairness of their dealings with trust property and must negate any possibility of corporate gain from the opportunity in question.27
Defendants. The district court placed the burden on plaintiffs to prove a lesser value for the stock shorn of its power, but the correct application of fiduciary principles places that burden on the defendants.28 The facts show that Judge Hincks noted the evidence did not establish the value without the appurtenant power to control distribution, yet this finding cannot help the defendants because they bore the obligation to prove fairness and the absence of any corporate opportunity. On remand the defendants must therefore demonstrate the stock's value without the control element.
The defendants bear the burden of proving the value of the controlling stock absent its appurtenant power to influence distribution of the corporate product.29
Related opinions on this issue
Whether minority stockholders bringing a derivative action based on such a sale are entitled to recover directly in their own right rather than for the benefit of the corporation?32
Where recovery for the corporation would permit the wrongdoers or their successors in interest to share in the judgment, minority stockholders may recover directly in their own right to the extent of their respective stock interests.33
Yes. The established facts show that plaintiffs are minority stockholders who brought consolidated derivative actions after the sale of control to Wilport.34 Because Wilport and its successors should not share in any recovery for the misappropriated premium, the plaintiffs are entitled to judgment in their own right rather than in the right of the corporation, thereby preventing the beneficiaries of the breach from profiting from it.35
The minority stockholders are entitled to recover directly in their own right rather than for the benefit of the corporation.36
Related opinions on this issue
Circuit Judge Swan dissented from the conclusion that plaintiffs may recover in their own right, arguing that if a corporate asset was sold the corporation should recover the compensation received for it by the defendants.37 He added that Southern Pacific Co. v. Bogert is inapposite to the situation and that Newport would not be a proper party if the plaintiffs sued in their own right.38