Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation's business.
Defendants were majority shareholders of the corporation, in which plaintiff was a minority shareholder. Defendants created a second corporation and offered certain defendants an exchange of corporate stock. After the exchanges, the second corporation owned 85 percent of the first corporation's outstanding shares: thus, defendants became the majority shareholders of the new corporation and continued to control the original corporation's stock. The new corporation made its first public offering based primarily on book value attributed to the first corporation and enjoyed a rapid rise in stock trading and share value increase in which the first corporation did not share. The second corporation offered to purchase individual shares of the first corporation for a price under book value. When the first corporation's shareholders refused, the second corporation terminated the first corporation's dividends. The first corporation's shareholders refused a proposed stock exchange and filed suit. Judgment of dismissal was entered by the Superior Court of Los Angeles County after an order sustaining certain of defendants' general and special demurrers without leave to amend. Plaintiff appealed, and defendants filed a protective cross-appeal from the part of the judgment that overruled other demurrers with respect to laches, insufficiency of plaintiff's designation of the class she purported to represent, and her failure to state separately her multiple cause of action.
Did the lower court err in its decision to dismiss the plaintiff’s complaint?
The Court held that the plaintiff had sufficiently stated a claim for injury to herself, as such, sustaining the defendant’s demurrer and consequently, dismissing the plaintiff’s complaint was improper. The Court posited that California no longer follows the rule recognizing the right of majority stockholders to dispose of their stock without the slightest regard to the wishes or knowledge of the minority. The prevailing rule, according to the Court, is that of inherent fairness from the viewpoint of the corporation and of those interested therein, and majority stockholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Therefore, the Court concluded that defendant controlling shareholders had a fiduciary duty not to abuse their power to control a corporation to the detriment of the minority shareholders.