Melrose v. Capitol City Motor Lodge - 705 N.E.2d 985 (Ind. 1998)

Rule:

Transactions between an interested director and the corporation are not automatically void or voidable merely because of a director's interest, as long as one of the conditions set forth in the subdivisions is met, Ind. Code. 23-1-35-2(a), (b), (c). Subdivisions (1) and (2) provide that either the board of directors or shareholders entitled to vote may authorize a transaction where all material facts and the director's interest are disclosed, Ind. Code § 23-1-35-2(a)(1), (2). Subdivision (3) provides that a conflict of interest transaction may stand if the transaction is fair to the corporation, Ind. Code § 23-1-35-2(a)(3).

Facts:

Three shareholders owned all of the issued and outstanding shares of a corporation and were also the sole directors of the corporation. They authorized a buy-sell agreement to purchase all of the shares owned by a shareholder in the event of that shareholder's death. The agreement required the corporation to purchase life insurance on its shareholders. After a decision was made to liquidate, the directors were instructed to sell the assets and to wind up the business. Appellee director shareholder sought to purchase corporate-owned insurance policies on his life for their cash surrender value. Appellant objected and brought suit. The trial court held that the appellee’s purchase did not violate his statutory or fiduciary duties to the corporation, and granted summary judgment in favor of appellee. The appellant director shareholder sought review of the order. 

Issue:

Did the appellee’s purchase of the corporate-owned insurance policies on his life violate his statutory or fiduciary duties to the corporation, thereby making the grant of summary judgment in favor of appellee an error? 

Answer:

No.

Conclusion:

The appellate court held that material facts of the transaction and appellee's interest were disclosed or known to appellant, the requisite corporate formalities necessary to authorize, approve, or ratify the transaction were followed. The court also held that the transaction was fair to the corporation, so that the requirements of Business Corporation Law, Ind. Code § 23-1-35-2, and common law of fiduciary duty were satisfied, and summary judgment in favor of appellee was properly granted.