A director and dominant stockholder stands in a fiduciary relationship to the corporation and to the minority stockholders as beneficiaries thereof.
Plaintiffs, Jane Perlman and other minority stockholders of Newport Steel Corporation, brought an action to compel accounting for, and restitution of, allegedly illegal gains which accrued to defendants (a majority shareholder and director of the Corporation) as a result of the corporation’s sale to Wilport Company in August, 1950, of their controlling interest in the corporation. The principal defendant, C. Russell Feldmann, who represented and acted for the others, members of his family, was at that time not only the dominant stockholder, but also the chairman of the board of directors and the president of the corporation. Plaintiffs contend that the consideration paid for the stock included compensation for the sale of a corporate asset, a power held in trust for the corporation by Feldmann as its fiduciary. This power was the ability to control the allocation of the corporate product in a time of short supply, through control of the board of directors; and it was effectively transferred in this sale by having Feldmann procure the resignation of his own board and the election of Wilport's nominees immediately upon consummation of the sale. According to the plaintiffs, the defendants must account to the non-participating minority stockholders for that share of their profit which is attributable to the sale of the corporate power. The district court judge denied the validity of the premise, holding that the rights involved in the sale were only those normally incident to the possession of a controlling block of shares, with which a dominant stockholder, in the absence of fraud or foreseeable looting, was entitled to deal according to his own best interests. Furthermore, the district court judge held that plaintiffs had failed to satisfy their burden of proving that the sales price was not a fair price for the stock per se. Plaintiffs appealed from these rulings of law which resulted in the dismissal of their complaint.
Did the district court err in its decision to dismiss the plaintiffs’ complaint on the grounds that the rights involved in the sale were only those normally incident to the possession of a controlling block of shares?
The Court reversed the lower court's judgment and held that a director and dominant stockholder stood in a fiduciary relationship to the corporation and to the minority stockholders as beneficiaries. According to the Court, absolute and most scrupulous good faith was the very essence of a director's obligation to his corporation. The Court held that when the sale of a controlling block of stock, as in the present case, necessarily resulted in a sacrifice of the element of corporate good will and resulted in unusual profit to the fiduciary who caused the sacrifice, he was required to account for his gains.