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It is a cardinal principle of corporate law that a director cannot, at the expense of the corporation, make an unfair profit from his position. He is precluded from receiving any personal advantage without fullest disclosure to and consent of all those affected. The law zealously regards contracts between corporations with interlocking directorates, carefully scrutinizes all such transactions, and in case of unfair dealing to the detriment of minority stockholders, will grant appropriate relief. Where the transaction greatly benefits one corporation at the expense of another, and especially if it personally benefits the majority directors, it will be set aside. While the transaction is not voidable simply because an interested director participated, it will not be upheld if it is unfair to the minority stockholders. These principles are the law in practically all jurisdictions.
Plaintiff was a brick company and stockholder in defendant manufacturing corporation. Defendants were three related corporations involved in the manufacture and sale of bricks and individual officers, directors, and stockholders. The contracts between the manufacturing companies and the sales corporation transferred to the latter full control over the sales of all products, including promotion of sales, manufactured by the manufacturing companies. The sales corporation agreed to sell all products manufactured by the two manufacturing companies "that it was able to market and sell." The sales corporation agreed to purchase all products manufactured by the manufacturing companies on such conditions and prices as sales corporation should judge to be fair and reasonable. The contract was made irrevocable, except by consent of all parties, for one year. While the word "guaranteed" was used in the contract in reference to payments to be made to the manufacturing companies, it was quite apparent from the entire agreement that the sales corporation was under no obligation to pay for bricks that it did not sell. The action was brought by plaintiff to avoid the contracts, oust corporate directors, and recover fees and profits. The trial court found that the 1949 contracts were unfair to the manufacturing companies, were void, and ordered them cancelled; the trial court did not invalidate the 1948 contracts.
The trial court further held that unless the defendant corporate directors restored the amount of $26,139.60, they shall be removed as directors of the manufacturing companies. The parties appealed.
Under the circumstances, should both 1948 and 1949 contracts have been declared void?
The court held that the unchallenged findings showed the individual defendants used their majority power for their own personal advantage and to the detriment of the minority stockholder. Therefore, the court found all of the contracts were voidable because of the inherent nature of the transactions. But the court refused to oust the directors because the trial court did not abuse its discretion in letting them remain as directors subject to return of the profits.