Corporations Cases

Marciano v. Nakash (Del. 1987)

Facts: Gasoline, Ltd. was a Delaware corporation, owned in equal parts by the Nakash family and the Marciano family. Gasoline was placed in custodial status because of a deadlock among its board of directors. The Nakashes made $2.5 million in loans to Gasoline. It is undisputed that these were not disinterested transactions. Because of the deadlock, the transactions did not receive majority approval from the directors or shareholders. The Court of Chancery validated the Nakashes' claims in Gasoline's liquidation proceedings, finding that the loans were valid and enforceable debts of Gasoline, despite originating from self-dealing transactions. The Marcianos argued that the loan transactions are voidable regardless of their fairness or the good faith of their participants, and that the Nakashes nonetheless failed to meet their burden of establishing fairness. Holding: Interested director transactions are valid if they are intrinsically fair.

Arnold v. Society for Savings Bankcorp, Inc. (Del. 1994)

Facts: A subsidiary of Bank of Boston Corporation called BBC Connecticut Holding Corporation merged with Society for Savings (Society), a subsidiary of Society for Savings Bancorp, Incorporated. Bancorp shareholder Robert H. Arnold sued BoB, Bancorp, and twelve Bancorp directors in the Court of Chancery for omissions and misrepresentations in the proxy statement issued for the merger. Bancorp included a limitation of directors' liability under Delaware General Corporation Law § 102(b)(7) in Article XIII of its certificate of incorporation. The court concluded that any such errors in the proxy statement were immaterial and did not reach Arnold's other claims. Arnold appealed to the Delaware Supreme Court claiming (1) the omissions and misrepresentations were material, (2) the duties set out in Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), were applicable, and (3) the individual directors could be held liable for disclosure violations. Holding: Under Delaware law, a corporation's directors may not be held liable for disclosure violations if there is a directors' liability limitation in the certificate of incorporation.

Litwin v. Allen (N.Y. 1940)

Facts: Alleghany Corporation held $23,500,000 in unsecured bonds in Missouri Pacific. Alleghany purchased several properties, and in 1930 still owed over $10,000,000 on the purchase price. Alleghany was unable to borrow the money, and instead, on November 18, 1930, sold $10,000,000 in its Missouri Pacific bonds to banking firm J.P. Morgan & Co. for cash at par value, with an option for Alleghany to buy back the bonds within six months for the price at which they were sold to J.P. Morgan. Guaranty Trust Company made a written commitment to J.P. Morgan to participate in the purchase, and Guaranty Company of New York, a subsidiary of Trust Company, agreed to take over the bonds upon expiration of the six month repurchase option, if Alleghany failed to exercise the option. The bonds had already been steadily declining in value in 1930. On November 5, 1930, when the board of directors of Trust Company approved the transaction, the bonds were selling at 102 7/8. On November 18, 1930, when the board of directors of Guaranty Company approved their commitment, the bonds were valued at 98 5/8. On April 16, 1931, when the six month repurchase option expired, the bonds were selling at 86 high and 81 low. Guaranty Company took them over from Trust Company at par and carried them on its books as an investment. Shareholders owning 36 out of 900,000 shares of stock in Trust Company have brought a derivative suit against the directors of Trust Company and Guaranty Company, and members of J.P. Morgan, seeking to impose liability for losses resulting from the transaction. Holding: Directors are liable for negligence in performing their duties, but not for errors of judgment or mistakes if they have acted with reasonable skill and prudence.

Stone v. Ritter (Del. 2006)

Facts: AmSouth Bancorporation was forced to pay $50 million in fines and penalties on account of government investigations about AmSouth employees' failure to file suspicious activity reports that were required by the Bank Secrecy Act and anti-money-laundering regulations. AmSouth's regulatory violations resulted from an AmSouth employee failing to follow the BSA/AML policies and procedures already in place. AmSouth's directors were not penalized. The Federal Reserve and the Alabama Banking Department issued orders requiring AmSouth to improve its BSA/AML practices. The orders also required AmSouth to hire an independent consultant to review AmSouth's BSA/AML procedures. AmSouth hired KPMG Forensic Services to conduct the review. KPMG found that the AmSouth directors had established programs and procedures for BSA/AML compliance, including a BSA officer, a BSA/AML compliance department, a corporate security department, and a suspicious banking activity oversight committee. A group of shareholders brought a derivative suit against AmSouth directors for failure to engage in proper oversight of AmSouth's BSA/AML policies and procedures. The Delaware Court of Chancery deemed the shareholders' allegations as a Caremark claim, which derives from In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (1996). Under Caremark, if a shareholder's claim of directorial liability for corporate loss is based upon ignorance of liability-creating activities within the corporation, then only the board's sustained or systematic failure can establish the lack of good faith that is required for liability. Applying the Caremark standard, the Court of Chancery dismissed the shareholders' complaint. The plaintiffs appealed to the Delaware Supreme Court. Holding: Directors can be liable for failure to engage in proper corporate oversight if they fail to implement any reporting or information system, or having implemented such a system, consciously fail to monitor or oversee its operations.

Galler v. Galler (Illinois 1964)

Facts: Benjamin and Isadore Galler were brothers and equal partners in the Galler Drug Company (GDC). In 1955, they executed an agreement to ensure that after the death of the one of the brothers, the immediate family of the deceased would maintain equal control of GDC. In 1956, Benjamin created a trust with his shares of GDC and named his wife, Emma, as trustee. Benjamin died in December 1957. Prior to Benjamin's death, Isadore, Isadore's wife, Rose, and Isadore's son, Aaron had decided that they were not going to honor the agreement. When Emma presented Benjamin's stock certificates to the defendants to transfer the certificates into her name, the defendants tried to convince Emma to abandon the agreement. Emma refused, but agreed to let Aaron become the president of GDC for one year without interference in exchange for Aaron reissuing Benjamin's stock in Emma's name. Subsequently, Emma demanded enforcement of the terms of the agreement guaranteeing her equal control, dividends each year, and a continuation of Benjamin's salary. The defendants refused and Emma brought suit. The lower court ruled that the agreement was void because "the undue duration, stated purpose and substantial disregard of the provisions of the Corporation Act outweigh any considerations which might call for divisibility" of the agreement. The court thus ruled that the public policy implications of the agreement rendered it void. Emma appealed. Holding: In a close corporation, an agreement as to the management of the corporation agreed to by the directors must be valid where there is no complaining minority interest, no fraud or apparent injury to the public or creditors, and no violation of clearly prohibitory statutory language.

Ramos v. Estrada (Calif. 1992)

Facts: Broadcast Group partnered with another group, Ventura 41, to obtain a permit from the FCC to run a television station. Each group owned 50% of the combined entity, Television, Inc. The Ramoses owned 50%s of Broadcast Group (and thus 25% of Television, Inc.) and Tila Estrada owned 10% of the Broadcast Group (5% of Television, Inc.). The members of Broadcast Group entered into an agreement to vote all of their shares in Television, Inc. the same way, as determined by a majority of the members. The agreement provided that if anyone did not vote with the majority, their shares would be sold to the other members of the Broadcast Group. Mr. Ramos was elected president of Television, Inc. at the first meeting of the combined entity, but after that, Estrada "defected" from the Broadcast Group. She voted with the Ventura 41 members of Television, Inc. to remove Ramos as president and replace him with a member from Ventura 41. The Ramoses sued Estrada for breach of contract, seeking specific performance of the agreement, causing her shares to be sold. The trial court found in favor of the Ramoses and Estrada appealed on the grounds that the agreement constituted a proxy, which expired when Estrada revoked it. Holding: Pooling agreements are valid and may be enforced equitably.

McArthur v. Times Printing Co. (Minn. 1892)

Facts: C.A. Nimocks was a promoter attempting to organize Times Printing Co., a newspaper publisher. On September 12, 1889, Nimocks made a contract on behalf of Times with McArthur. McArthur was to work as an advertising solicitor for a one-year term beginning on October 1, Times' supposed organization date. Times actually organized on October 16, but McArthur worked from October 1, 1889 to April 1890. Times' officers were aware of the contract with McArthur but took no formal action to approve or object to the contract. McArthur sued for breach of contract. The jury found in favor of McArthur. Times appealed to the Minnesota Supreme Court. Holding: Under Minnesota law, a corporation may subsequently adopt a contract made on its behalf before it was formally organized.

In re Caremark Internation, Inc. Derivative Litigation (Del. Chancery Ct. 1996)

Facts: Caremark International, Inc., a health services company, was the subject of a major federal criminal investigation. The company allegedly violated laws that prohibit health care companies from paying doctors to refer Medicare or Medicaid patients to their services. Prior to 1991, Caremark had a regular practice of entering into financial arrangements with referring doctors which were not clearly prohibited but which raised legal questions. However, Caremark's board issued guidelines that attempted to clarify what sort of arrangements were acceptable. After they were notified of the federal investigation, the board announced that it would no longer pay certain types of fees to Medicare and Medicaid doctors. The board also employed an outside auditor to review its practices for business and ethical concerns. The federal investigation resulted in indictments of junior officers in 1994. The officials took plea deals to lesser charges and Caremark paid roughly $250 million in civil and criminal penalties. A group of Caremark shareholders promptly brought derivative suits, alleging that Caremark's directors breached their duty of care by failing to adequately oversee the conduct of Caremark's employees and thereby exposing the company to enormous civil and criminal penalties. The parties negotiated a settlement.. In the settlement, the board did not agree to any monetary penalties; it simply agreed to implement a number of more cautious policies moving forward, such as the creation of a compliance and ethics committee. Holding: The directors of a corporation have a duty to make good-faith efforts to ensure that an adequate internal corporate information and reporting system exists.

Francis v. United Jersey Bank (N.J. 1981)

Facts: Charles, Jr. and William Pritchard were directors of Pritchard & Baird Intermediaries Corp., a reinsurance broker that controlled millions of dollars of client funds in an implied trust. The only other director was their mother, Mrs. Pritchard. The sons siphoned large sums of money from Pritchard & Baird in the form of "loans." Eventually, the corporation went insolvent because of the siphoned funds. During the time the funds were misappropriated, Mrs. Pritchard did nothing in her role as director. She never went to the corporate office; she never received or read financial statements; and she knew nothing of the corporation's business affairs. Her husband, the deceased founder of Pritchard & Baird, had actually warned her to watch out for the sons before he died. Subsequently, Mrs. Pritchard died and the trustee in bankruptcy (representing the interests of many creditors) brought suit against the estate of Mrs. Pritchard to recover the siphoned funds. Holding: A director has a duty to know generally the business affairs of the corporation. This duty includes a basic understanding of what the company does; being informed on how the company is performing; monitoring corporate affairs and policies; attending board meetings regularly; and making inquiries into questionable matters. In the case at bar, Mrs. Pritchard did none of the above. Her failure to keep herself informed breached not only a duty of care to the corporation, but a fiduciary duty to Pritchard & Baird's clients. It would have only taken a brief, non-expert reading of the financial statements to know that something was wrong and money was being misappropriated. Her failure to do so was the proximate cause of the misappropriations of the clients' money not being discovered. Consequently, the estate of Mrs. Pritchard is liable to the clients and the judgment in favor of the trustee in bankruptcy is affirmed.

Clark v. Dodge (N.Y. 1936)

Facts: Clark owned 25 percent of each of two corporations. Dodge owned the other 75 percent of each. Clark was a director and the general manager of Bell & Co., Inc. (Bell), one of the corporations. The corporations manufactured medicinal preparations by secret methods and formulas known only to Clark. Dodge and Clark entered into an agreement that provided that Clark would disclose the secret formula to a son of Dodge and in return, Dodge would vote his stock so that (1) Clark would continue to be a director of Bell; (2) Clark would continue to be the general manager of Bell as long as he was "faithful, efficient and competent;" (3) during his lifetime, Clark would receive ¼ of the net income of the corporations; and (4) no unreasonable salaries would be paid to other officers of the corporations which would reduce the net income. Clark brought suit, claiming that Dodge did not use his stock to maintain Clark as director and general manager and that Dodge hired "incompetent persons at excessive salaries" so as to reduce the portion of net income paid to Clark. The appellate court dismissed the complaint. Clark appealed. Holding: If the enforcement of a contract between directors that are the sole stockholders in a corporation damages no one, not even the public, it is not illegal.

Hefferman v. Pacific Dunlap GNB Co. (7th Cir. 1992)

Facts: Daniel Heffernan was a former director and 6.7 percent shareholder of GNB Holdings, Inc. and its subsidiary GNB, Inc. Pacific Dunlop Holdings, Inc. acquired control of Holdings and GNB pursuant to a stock-purchase agreement (Agreement) among Pacific, Holdings, certain management shareholders, Heffernan, and Allen & Company (Allen). Allen was an investment company at which Heffernan was a vice president. Heffernan sold to Pacific his 6.7 percent interest in Holdings and ceased to be a director of Holdings. Subsequently, Pacific filed suit against Heffernan and Allen, seeking to rescind the Agreement on the ground that the Agreement was materially misleading with regard to the disclosure of Holdings' and GNB's environmental and other liabilities. Heffernan requested indemnification and an advance on his litigation expenses from Holdings and GNB pursuant to § 145 of the Delaware General Corporation Law and the companies' bylaws. Both Holdings and GNB refused. Heffernan then filed suit against Pacific, Holdings, and GNB, seeking to establish his rights to indemnification and a financial advance. The district court dismissed Heffernan's complaint, concluding that he was not entitled to indemnification under § 145 or the companies' bylaws because he had been sued for wrongs that he committed as an individual, not as a director. Heffernan appealed. Holding: Under Delaware law, a corporation may indemnify any person who is a party to any lawsuit by reason of the fact that he is, or was, a director of the corporation.

In re Drive In Development Corp. (7th Cir. 1966)

Facts: Officers of Drive In Development Corporation (debtor) issued a guaranty of payment to National Boulevard Bank of Chicago (creditor) in exchange for a loan. Leo Maranz signed the guaranty as Chairman of Drive In. George Dick, Drive In's Secretary, attested to the guaranty. As part of his secretarial duties, Dick made records of board resolutions and attested to guaranties. Dick presented to the bank a certified copy of a purported resolution of Drive In's board of directors authorizing Maranz to issue the guaranty. However, no such resolution was ever passed by the board. Drive In filed for chapter 11 bankruptcy, and the bank filed a claim. The referee disallowed the bank's claim, finding that Maranz had no authority to bind Drive In to the guaranty. The district court affirmed. The bank appealed. Holding: Statements made by an officer in the course of a transaction in which the corporation is engaged and which are within the scope of the officer's authority are binding upon the corporation.

Matter of Kemp & Beatley, Inc. (N.Y. 1984)

Facts: Dissin and Gardstein held a combined 20.33% of the stock of Kemp & Beatley, Inc., a New York close corporation. Both were long-time employees of Kemp & Beatley and held significant management positions. During their employment they and the other shareholders received either dividends or extra compensation in proportion to their stock holdings each year. Dissin resigned in 1979, and Gardstein was terminated in 1980. After Dissin and Gardstein left, the company began to make its annual distributions on the basis of service rendered to the corporation, rather than stock ownership. As a result, Dissin and Gardstein no longer received annual distributions. Dissin and Gardstein petitioned the court for dissolution of the company, arguing that the controlling shareholders had frozen them out via fraudulent and oppressive conduct. The trial court ordered the company dissolved unless the controlling shareholders bought out the plaintiffs. The appellate court affirmed. Kemp & Beatley appealed to the New York Court of Appeals. Holding: If majority shareholders take actions that substantially defeat the reasonable expectations of minority shareholders, they have engaged in oppressive conduct, and the court may order forced dissolution of the corporation.

Nixon v. Blackwell (Del. 1992)

Facts: E.C. Barton & Co. was a closely-held Delaware corporation. Upon founder E.C. Barton's death, all of the Class A voting stock passed to employees, and only Class B non-voting stock passed to Barton's family. The Corporation offered to repurchase Class B stock through a series of self-tender offers. The Corporation also set up an Employee Stock Ownership Plan (ESOP) that allowed employees to cash out or receive Class B stock on termination or retirement. The Corporation had a right to repurchase Class A stock on an employee's death or retirement. The Corporation also entered agreements with top executives giving it the right to convert their Class A shares to Class B should they leave their roles, so new Class A shares could be issued to their replacements. Further, the Corporation took out life insurance policies on those executives benefiting the company. The Board resolved to use employee life-insurance benefits to repurchase Class B shares from employee estates. Fourteen Class B stockholders sued the Corporation and the directors in the Court of Chancery alleging that the defendants (1) tried to force minority stakeholders to sell by paying only minimal dividends, (2) breached fiduciary duties by approving undue compensation, and (3) breached fiduciary duties by discriminating against non-employee stockholders. The court found the dividends were valid business judgments and the compensation was fair, but the court concluded the directors breached fiduciary duties to minority stockholders by the "inherently unfair" liquidity scheme. The court ordered the Corporation to repurchase Class B stock and to repurchase equal numbers of Class B shares in the future. The defendants appealed to the Delaware Supreme Court. Holding: Under Delaware law, corporate directors owe a fiduciary duty of fair, but not necessarily equal, treatment to all shareholders.

Baatz v. Arrow Bar (S.D. 1990)

Facts: Edmond and LaVella Neuroth formed the Arrow Bar, Inc. The corporation purchased the Arrow Bar business for $155,000 with a $5,000 down payment, and the Neuroths executed a promissory note personally guaranteeing the remaining $150,000. The corporation obtained financing for $145,000 toward the purchase agreement, and the Neuroths again personally guaranteed the corporate debt. Peggy and Kenny Baatz were injured in an automobile accident when the motorcycle they were driving was struck by a vehicle driven by Roland McBride. McBride was uninsured, and Baatz brought suit against Arrow Bar and the Neuroths. The complaint alleges that the Arrow Bar negligently served alcohol to McBride when he was already intoxicated, prior to the accident. Holding: A court may pierce the corporate veil and hold shareholders individually liable where continued recognition of a corporation as a separate legal entity would produce injustices and inequitable consequences.

Hall v. Hall (Missouri 1974)

Facts: Edward H. Hall and Harry L. Hall were equal stockholders and directors of Musselman and Hall Contractors, Inc. Edward died, passing his interest to his wife, Margaret L. Hall. Harry appointed his own wife, Florence E. Hall, director to fill the vacancy created by Edward's death. Harry and Florence then appointed themselves president and vice-president of Musselman. Subsequently, Harry refused to attend shareholders' meetings. Missouri law required the presence of a majority of stockholders to constitute a quorum. Thus, directors could not be elected, and Harry and Florence remained holdover directors. At a later directors' meeting, the sale of unissued capital stock was approved. Margaret made clear that she wanted to exercise her right to purchase half of the stock, but asserted that the action was invalid because Harry and Florence were not legal directors. Margaret petitioned the court for an injunction that would bar Harry from refusing to go to shareholders meetings, bar the setting of a terminal date on Margaret's preemptive purchase rights, and bar Harry and Florence from carrying on as directors and officers. The defendants moved to dismiss for failure to state a claim. The lower court granted the motion. Margaret appealed to the Missouri Court of Appeals. Holding: Under Missouri law, a corporate shareholder may not be compelled to attend or participate in shareholders' meetings.

United States v. Bestfoods (1998)

Facts: From 1957 to 1972, Ott Chemical Company operated a manufacturing plant in Muskegon, Michigan, which polluted the site with hazardous chemicals. In the 1960s, Ott became a wholly-owned subsidiary of CPC International, Inc., since renamed Bestfoods. Ott and CPC had some common directors and officers, and CPC exercised significant control over Ott's general business operations. One CPC employee, G.R.D. Williams, played a large role in dealing with the environmental risks caused by the Muskegon plant; Williams was an employee of CPC only, and not of Ott. In the 1980s, the federal Environmental Protection Agency began to remediate the property and sought contribution from owners and operators pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Ott had dissolved by this time, but CPC was one of several companies sued for contribution. Holding: A parent corporation may not be held liable for a subsidiary's actions under CERCLA unless state law piercing requirements are met, but the parent may be held directly liable if the parent itself exercised significant control over the facility.

Lehrman v. Cohen (Del. 1966)

Facts: Giant Food Inc. was incorporated in Delaware in 1935 by N.M. Cohen and the father of Jacob Lehrman. Cohen acted as president of the Company. The Company's voting stock was equally divided between the Cohen family, who held Class AC common stock, and the Lehrman family, who held Class AL common stock. Each class was entitled to elect two members of the four-member board of directors. To avoid deadlock between the AL and AC stock, a fifth director office was created. The AC and AL stockholders voted unanimously to amend the Company's certificate of incorporation to create an AD class of common stock. The Class AD stock consisted of a single share, and the certificate of incorporation provided that its holder was entitled to vote for and elect one of the five directors, but was not entitled to receive dividends or share in any distribution of corporate assets. The board of directors unanimously issued the share of Class AD stock to Joseph Danzansky, and Danzansky voted his share of AD stock to elect himself as the Company's fifth director. In 1964 a resolution was proposed to give Danzansky an executive employment contract and salary. The AC and AD stockholders voted in favor of the resolution, and the AL stock voted against it. The board of directors elected Danzansky president of the Company, with the AC and AD directors voting in favor, and the AL directors voting in opposition. Danzansky resigned his position as director to begin serving as the Company's president, and a new director was elected to take the vacant position. Lehrman brought suit, claiming that the creation of the Class AD stock was illegal under Delaware law because it is a voting trust that is not limited to a ten year period as required by Delaware's Voting Trust Statute. The lower court granted summary judgment in favor of the defendants, and Lehrman now appeals. Holding: A voting trust exists where: (1) the stock's voting rights are separated from other attributes of stock ownership; (2) the voting rights are irrevocable for a definite period of time; and (3) the principle purpose of granting voting rights is to acquire voting control in the corporation.

Goodwin v. Agassiz (Mass. 1933)

Facts: Goodwin owned stock in Cliff Mining Company. Exploration on some of Cliff's property was undertaken in 1925 in an attempt to find copper deposits. In March 1926, Agassiz and MacNaughton, directors of Cliff, learned of a geologist's theory as to the existence of copper deposits in another part of Cliff's property. The defendants thought that if the geologist's theory was correct, Cliff's stock would go up. Soon thereafter, in May 1926, the initial exploration was stopped because it was unsuccessful. At that time, Goodwin, with no knowledge of the geologist's report, sold his stock in Cliff through a broker. The stock ended up being bought by the defendants. Goodwin brought suit against the defendants on the ground that the defendants' nondisclosure of the geologist's theory to Cliff's stockholders was improper. The nondisclosure did not harm Cliff, but Goodwin claimed that he personally would not have sold his stock if he had known about the geologist's theory. Holding: A corporation's directors do not occupy the position of trustees toward individual stockholders in the corporation.

Aronson v. Lewis (Del. 1984)

Facts: Harry Lewis owns stock in Meyers Parking System, Inc., a Delaware corporation. Leo Fink is a director of Meyers and owns 47 percent of its outstanding stock. Meyers' directors approved a lucrative employment agreement for Fink, and made interest-free loans to him. Lewis brought suit against Meyers and its directors (defendants), alleging that the transactions were only approved because Fink had personally selected the directors of Meyers, and that the transactions had no business purpose and were a waste of corporate assets. The complaint states that no demand was made on the board of directors to address the alleged wrongs, because (1) the directors participated in the wrongdoings; (2) Fink selected the directors and thus controlled the board; and (3) litigation brought by the directors would require them to sue themselves, precluding effective prosecution. Meyers and its directors filed a motion to dismiss based on Lewis's failure to make a demand or to demonstrate that such a demand would be futile. The Court of Chancery denied the motion to dismiss, finding that the allegations in the complaint raised a reasonable inference that the business judgment rule did not protect the directors' actions, and that the board therefore would not have been able to impartially consider and act on any such demand. Meyers and its directors filed an interlocutory appeal, which this court granted. Holding: Stockholders wishing to bring a derivative suit must first make a demand for redress to the board of directors, unless such a demand would be futile.

Donahue v. Rodd Electrotype Co. (Mass. 1975)

Facts: Harry Rodd served for many years as the president and general manager of Rodd Electrotype Co. In 1955, Harry Rodd held 200 of Rodd Electrotype Co.'s 250 shares, representing an 80% stake in the company. Joseph Donahue owned the remaining 50 shares, which passed on his death to his wife Euphemia Donahue and his son. By the end of the 1960s, Harry Rodd had ceded the management of the corporation to his sons Charles and Frederick Rodd, and Harry wished to dispose of his shares. He gave most of them to his children as gifts. Additionally, Charles and Frederick - who controlled the board - caused the corporation to purchase 45 of Harry's shares for $800 per share. When the Donahues learned of the purchase, they offered to sell their shares to the corporation on the same terms given to Harry. The board rejected the offer. Euphemia Donahue sued Harry, Charles, and Frederick Rodd, as well as the third member of the board, for breaching fiduciary duties owed to her as a minority shareholder. She asked the court to rescind the corporation's purchase of Harry Rodd's stock. The trial court found in favor of the defendants, holding that the transaction was inherently fair. The appellate court affirmed. Euphemia Donahue appealed to this court. Holding: Stockholders in close corporations owe one another strict duties of care and loyalty, similar to the duties owed among partners in a partnership.

Ingle v. Glamore Motor Sales, Inc. (N.Y. Ct. App. 1989)

Facts: Ingle was one of four directors and shareholders of Glamore Motor Sales, Inc.; Ingle was also GMS's sales manager. Ingle did not have an employment contract that specified any kind of employment duration. The other three directors/shareholders were James Glamore and his two sons. The four directors entered into an agreement that provided that if "any Stockholder cease[d] to be an employee of the Corporation for any reason," James Glamore would have the option to purchase all the shares owned by that stockholder. Subsequently, Ingle was voted out of his director position and fired from his job at GMS. Ingle brought suit, alleging a breach of fiduciary duty and arguing that as a minority shareholder in a close corporation his employment rights are attached to the fiduciary duties owed to him. The lower courts dismissed the complaint and Ingle appealed. Holding: A minority shareholder in a close corporation, by that status alone, acquires no right from the corporation or majority shareholders against discharge from his employment in the corporation.

Freeman v. Complex Computing Co. (2nd Cir. 1997)

Facts: Jason Glazier was a software developer. In September 1992, Complex Computing Co., Inc. (C3) was incorporated, with Glazier as sole shareholder and Seth Akabas as president. In November, Glazier, Inc., another corporation with Glazier as sole shareholder, entered into a consulting agreement with C3. Under the agreement, Glazier, Inc. served as a contractor, developing and marketing Glazier's software. Although the consulting agreement was between C3 and Glazier, Inc., many provisions referred to Glazier personally. Both Glazier, Inc. and C3 were located at Glazier's apartment, and Glazier was the sole signatory on C3's bank account. In September 1993, C3 entered an agreement with Daniel Freeman (plaintiff), under which Freeman would sell and license C3's software in exchange for commissions. The C3-Freeman agreement included a termination clause and an arbitration clause. In August 1994, C3 and Thomson Investment Software entered into a licensing agreement. Freeman claimed this transaction resulted from his efforts. In October 1994, C3 sent Freeman a termination letter signed by Glazier. In January 1995, Glazier was hired by Thomson. Meanwhile, C3 and Thomson entered into an asset-purchase agreement. As a result, Thomson assumed most of C3's liabilities and obligations under the existing agreements, but expressly excluded the C3-Freeman agreement. In May 1995, Freeman sued in district court, demanding commissions due under the C3-Freeman agreement. The district court held that both C3 and Glazier should be compelled to arbitrate according to the C3-Freeman agreement. Specifically, the district court found that Glazier was subject to the arbitration clause, because he dominated and controlled C3. Glazier appealed on the grounds that veil-piercing should not apply, because he was not C3's shareholder and there was no finding that he used his domination of C3 to wrong Freeman. Holding: A court may not pierce the corporate veil if it finds that a shareholder dominated and controlled a corporation in the absence of a showing that the shareholder control was used to commit a fraud or other wrong.

Lee v. Jenkins Bros. (2d Cir. 1959)

Facts: Jenkins Brothers purchased the Crane Company. Lee was the Crane Company's business manager. Yardley was Jenkins' president and a substantial stockholder. Yardley and Jenkins' vice president met with Lee to convince him to join Jenkins. At the meeting, Yardley agreed orally, on behalf of Jenkins, that Lee would be paid a pension when he reached the age of 60, at an amount not to exceed $1,500 a year, even if he were no longer working for Jenkins at that time. Lee joined Jenkins for 25 years, but was then discharged at the age of 55. Jenkins argued that Yardley did not have the authority to bind Jenkins to the pension agreement. Holding: A corporation's president has authority to bind the company by acts that arise in the usual course of business, but not for contracts that are extraordinary in nature.

Smith v. Van Gorkom (Del. 1985)

Facts: Jerome Van Gorkom, the CEO of Trans Union Corporation, engaged in his own negotiations with a third party for a buyout/merger with Trans Union. Prior to negotiations, Van Gorkom determined the value of Trans Union to be $55 per share and during negotiations agreed in principle on a merger. There is no evidence showing how Van Gorkom came up with this value other than Trans Union's market price at the time of $38 per share. Subsequently, Van Gorkom called a meeting of Trans Union's senior management, followed by a meeting of the board of directors. Senior management reacted very negatively to the idea of the buyout. However, the board of directors approved the buyout at the next meeting, based mostly on an oral presentation by Van Gorkom. The meeting lasted two hours and the board of directors did not have an opportunity to review the merger agreement before or during the meeting. The directors had no documents summarizing the merger, nor did they have justification for the sale price of $55 per share. Smith et al. brought a class action suit against the Trans Union board of directors, alleging that the directors' decision to approve the merger was uninformed. Holding: There is a rebuttable presumption that a business determination made by a corporation's board of directors is fully informed and made in good faith and in the best interests of the corporation.

Hanewald v. Bryan's, Inc. (N.D. 1988)

Facts: Keith and Joan Bryan incorporated Bryan's, Inc. to act as a retail clothing store. The company's articles of incorporation authorized it to issue 100 shares of common stock with a par value of $1,000 per share. Bryan's, Inc. issued 50 shares to Keith, and 50 shares to Joan, but did not receive any payment for the stock that was issued. Bryan's Inc. purchased a dry goods store from Hanewald, for $55,000 in cash and a promissory note for $5,000. The $55,000 payment was made from a bank loan that was personally guaranteed by Keith and Joan Bryan. Bryan's Inc. also leased the store building from Hanewald for five years at $600 per month. Bryan's Inc. operated for four months, and was later dissolved. Bryan's Inc. paid off the $55,000 bank loan, a $10,000 personal loan from the Bryans, and its other creditors. It did not pay the $5,000 promissory note to Hanewald, and attempted to avoid the remainder of its lease. Hanewald sued Bryan's Inc. and the Bryans for breach of the lease and the promissory note, seeking to hold the Bryans personally liable. Holding: Corporate shareholders must pay for their shares of stock as a prerequisite for their limited personal liability.

Timberline Equipment Co. v. Davenport (Oreg. 1973)

Facts: Kenneth L. Davenport, Dr. Gorman, and Dr. Bennett were partners doing business as "Aero-Fabb Co." In January 1970, Bennett submitted defective articles of incorporation. Before the certificate of incorporation was issued in the name of Aero-Fabb Corp. in June, Davenport entered into a rental agreement with Timberline Equipment Co. on behalf of Aero-Fabb. Timberline sued the defendants under the rental agreements. Holding: Under the Oregon Business Corporation Act (OBA), a co-owner will be personally liable for a contract entered into on behalf of the business before a certificate of incorporation is issued.

Diamond v. Oreamuno (N.Y. 1969)

Facts: Management Assistance, Inc. financed computer installations through sale-and-leaseback arrangements. Under the arrangements, MAI would maintain the computers. Due to a lack of capacity, MAI asked the computer manufacturer to maintain the machines. This increased MAI's expenses and reduced its net earnings. This information was not available to the public. Oreamuno and Gonzalez, MAI's chairman and president, respectively, had this information. The defendants sold a large amount of MAI stock before the news came out, and the stock price fell significantly. The defendants had held the securities for more than six months before they sold them. Diamond, a shareholder of MAI, brought a derivative action against Oreamuno and Gonzalez, alleging a breach of fiduciary duties and seeking to compel an accounting for the profits on the sales they realized using their privileged position and inside information. The defendants moved to dismiss the complaint for failure to state a claim, arguing that there was no injury to MAI, and thus the corporation should not recover the profits. The defendants further argued that the federal regulatory scheme preempted state law in this area. The motion was denied. Holding: Officers and directors may be compelled to account for profits realized from insider trading under state law, even without a showing of harm to the corporation.

In re The Walt Disney Co. (Del. 2006)

Facts: Michael Ovitz was hired as the president of The Walt Disney Company . Ovitz was a much respected and well known executive, and in convincing him to leave his lucrative and successful job with Creative Artists Agency, Disney signed Ovitz to a very lucrative contract. The contract was for five years, but if Ovitz were terminated without cause, he would be paid the remaining value of his contract as well as a significant severance package in the form of stock option payouts. The contract was approved by Disney's compensation committee after its consideration of term sheets and other documents indicating the total possible payout to Ovitz if he was fired without cause. The compensation committee then informed Disney's board of directors of the provisions of the contract, including the total possible payout to Ovitz. The board approved the contract and elected Ovitz as president. After Ovitz's first year on the job, it was clear that he was not working out as president and that he was "a poor fit with his fellow executives." However, Disney's CEO and attorneys could not find a way to fire him for any cause, so Disney instead fired him without cause, triggering the severance package in the contract. Ovitz ended up being paid $130 million upon his termination. Disney shareholders brought derivative suits against Disney's directors for failure to exercise due care and good faith in approving the contract and in hiring Ovitz, and, even if the contract was valid, for breaching their fiduciary duties by actually making the exorbitant severance payout to Ovitz. The Delaware Court of Chancery found that although the process of hiring Ovitz and the resulting contract did not constitute corporate "best practices," the Disney directors did not breach any fiduciary duty to the corporation. The Disney shareholders appealed. Holding: The concept of intentional dereliction of duty and a conscious disregard for one's responsibilities is an appropriate standard for determining whether fiduciaries have acted in good faith.

Eisenberg v. Flying Tiger Line, Inc. (2nd Cir. 1971)

Facts: NY law required that a plaintiff in a shareholder suit seeking a judgment in the corporation's favor must post a security for the defendant's litigation costs. Flying Tiger Line, Inc. had been reorganized so that it was a wholly owned subsidiary of another company, Flying Tiger Corporation. Flying Tiger shares were rescinded and replaced with an equivalent number of FTC shares. Flying Tiger continued to carry on its old business, now as a subsidiary. Max Eisenberg contended that this corporate restructuring diluted his ability to vote his shares to influence Flying Tiger's business, and brought suit in federal court to reverse the new structure. Flying Tiger replied that Eisenberg must post a bond in order to institute the suit. Eisenberg replied that he was not bringing a derivative suit, but was instead bringing a representative suit on his own behalf as a shareholder. The district court agreed with Flying Tiger, and dismissed Eisenberg's suit. Eisenberg appealed. Holding: When a corporate shareholder brings a lawsuit based on the direct impact of the corporation's actions on his interest in the corporation, that suit is personal, not derivative.

Northeast Harbor Golf Club, Inc. v. Harris (Maine 1995)

Facts: Nancy Harris was the president of the Northeast Harbor Golf Club. Harris was approached by realtors on two occasions, each offering her the chance to purchase land bordering the Club's golf course. Harris purchased the land in her own name without telling the Club's board of directors about the opportunity before making the purchases. After the purchases, Harris informed the board of directors, but stated that she had no plans to develop the land. Eventually, however, she did develop the land. The Club brought suit, alleging that Harris violated her fiduciary duty to the club by usurping the Club's corporate opportunity to purchase the neighboring properties. The trial court, using the line of business test, found that purchasing real estate was not in the Club's line of business and that the Club was not financially able to make the purchases. Accordingly, the trial court ruled in favor of Harris. The Club appealed. Holding: When the director of a corporation is presented with a business opportunity closely related to a business in which the corporation is engaged, the director must fully disclose the opportunity to the corporation prior to taking advantage of it himself.

A.P. Smith Manufacturing Co. v. Barlow (N.J. 1953)

Facts: New Jersey law was amended in the 1930s to provide that corporations could make charitable contributions to support the community. As long as a donation did not exceed 1 percent of the company's capital stock, the board did not need to give notice to the shareholders of the donation. A.P. Smith Manufacturing Company was a New Jersey corporation, founded in the late nineteenth century, which made a donation to Princeton University. This sort of donation, while mentioned in New Jersey law, was not specifically authorized in A.P. Smith's articles of incorporation. A.P. Smith claimed that, as a corporation, it had a duty to support the public good, and that it was to the company's benefit to make sure that there was an educated public from which to draw future employees. Barlow, a shareholder in A.P. Smith, filed suit seeking declaratory judgment that the company should not have made the donation, and alleging that the application of New Jersey's statute would be unconstitutional. Holding: A corporation may take any action including authorizing contributions as long as it is consistent with state law.

Waltuch v. Conticommodity Services, Inc. (2nd Cir. 1996)

Facts: Norton Waltuch was a silver trader for Conticommodity Services, Inc. When the silver market crashed, silver speculators brought multiple lawsuits against Waltuch and Conti. All of the suits settled with Conti paying the settlements. As a result of Conti's payments, Waltuch was dismissed from the suits with no settlement contribution. However, in defending himself in the suits, Waltuch spent approximately $1.2 million out of his own pocket. In addition to the civil suits, the Commodity Futures Trading Commission (CFTC) brought an enforcement proceeding against Waltuch. That proceeding settled as well, with Waltuch agreeing to a fine and a six-month ban on trading. Waltuch spent an additional $1 million in defending himself in the CFTC proceeding. Waltuch brought suit against Conti, seeking indemnification of his various legal expenses. Waltuch first claimed that a provision in Conti's articles of incorporation categorically required Conti to indemnify him. Conti claimed that a Delaware law barred the claim by allowing indemnification only if the corporate officer acted in good faith, which Waltuch did not establish. Waltuch's second claim was that a different provision of that Delaware law required Conti to indemnify him because he was "successful on the merits or otherwise" in the civil suits (this statute did not apply to the CFTC proceeding). Conti responded that its settlement payments were partially on Waltuch's behalf so he was not actually successful in the suits. U.S. Dist. Ct. for the S.D. of N.Y. agreed with Conti on both claims. Waltuch appealed. Holding: For purposes of indemnification, a defendant is "successful" in defense of the claim against him if he assumes no liability and does not have to pay the settlement.

In re Radom & Niedorff (N.Y. 1954)

Facts: Radom & Neidorff, Inc. was successfully operated by David Radom and his brother-in-law Henry Neidorff, who were the corporation's sole and equal stockholders. Upon Henry's death in 1950, his shares passed to Radom's sister, Anna Neidorff. Several months after Henry's death Radom petitioned the court for dissolution of the corporation under section 103 of New York's General Corporation Law. Radom's petition acknowledged that the corporation was solvent and successful, but alleged that, since Henry's death, Neidorff has refused to cooperate with Radom and had refused to sign Radom's salary checks, and that election of directors at the stockholders' meeting had been impossible due to disagreements between them. The trial court held that Radom's petition showed an irreconcilable conflict between the two stockholders that required dissolution, if the petition's allegations were proven. Neidorff appealed, and the appellate division reversed and dismissed the petition, noting that the corporation's profits had increased; its assets had tripled while the case was pending; and Radom's failure to receive a salary did not frustrate the corporation's business and could be remedied by methods other than dissolution. Radom now appeals. Holding: Courts have the discretion to order a corporate dissolution where competing interests are preventing efficient management and impeding the corporation's purpose, if dissolution would benefit stockholders and not injure the public.

Gashwiler v. Willis (Calif. 1867)

Facts: Rawhide Ranch Gold and Silver Mining Company is a mining corporation. In 1865, a shareholders' meeting was held. All of the shareholders were present and unanimously voted to authorize S.S. Turner, T.N. Willis, and James J. Hodges as Rawhide's trustees to sell company assets to D.W. Barney. The defendants executed the deed as Rawhide's trustees. The plaintiffs attempted to enter the deed into evidence, but the defendants objected on the grounds that the deed (1) was not apparently entered into by Rawhide, (2) was not signed by Rawhide, and (3) was sealed by the trustees instead of rawhide. Holding: Under California law, only a corporation's Board of Trustees is entitled to authorize the sale of corporate property. A majority of the Board must be present, and a majority of those present must vote in favor of an act in order for the corporation to take action. This is the procedure that must be followed in order for the corporation to sell its property. The statute does not give shareholders the right to authorize the sale of corporate property.

Broz v. Cellular Information Systems, Inc. (Del. 1996)

Facts: Robert Broz was a director of Cellular Information Systems, Inc. He was also the president and sole stockholder of RFB Cellular, a competitor of CIS in the cellular telephone service market. At the time in question, CIS had recently undergone financial difficulties and had begun divesting its cellular licenses. Mackinac Cellular Corp., a third party cellular service provider, was seeking to sell one of its licenses. Mackinac thought that RFBC would be a potential buyer and contacted Broz about the possibility. The license was not offered to CIS. Broz spoke informally with other CIS directors, all of whom told him that CIS was not interested in the license and could not afford the license even if it were interested. At about the same time, a fourth service provider, PriCellular, had undergone discussions with CIS about PriCellular purchasing CIS. PriCellular had also been in negotiations with Mackinac about purchasing the license in question. In September 1994, PriCellular agreed on an option contract with Mackinac about purchasing the license. The option was to last until December 15, 1994, but if any competitor offered Mackinac a higher price during that time, Mackinac would be free to sell the license for that higher offer. On November 14, 1994, Broz, on behalf of RFBC, offered Mackinac a higher price for the license and Mackinac agreed to sell to RFBC. Nine days later, PriCellular completed its purchase of CIS. CIS then brought suit against Broz, alleging that Broz breached his fiduciary duties to CIS by purchasing the license for RFBC when the newly formed PriCellular/CIS corporation had had the option open to make the same purchase. Holding: Under the corporate opportunity doctrine, it is not required that the director in question formally present the opportunity to his corporation's board of directors if the corporation does not have an interest in or the financial ability to undertake the opportunity.

Robertson v. Levy (D.C. Court of App. 1964)

Facts: Robertson and Levy entered into an agreement, under which Levy was to form Penn Ave. Record Shack, Inc. to purchase Robertson's business. Levy submitted articles of incorporation for Penn Ave., but they were rejected. Robertson assigned his lease to Levy as president of Penn Ave., and Levy began to operate the business under the same name. Robertson executed a bill of sale disposing of his business assets to Penn Ave. in return for a note providing for installment payments, signed "Penn Ave. Record Shack, Inc. by Eugene M. Levy, President." The certificate of incorporation was later issued to Penn Ave., and one payment was made on the note. Penn Ave. ceased doing business and is now without assets. Robertson sued Levy for the balance due on the note. Holding: Under the Model Business Corporation Act, a corporation only exists after the certificate of incorporation is issued, and individuals who act as a corporation before then are jointly and severally liable.

Cooke v. Oolie (Del. 1997)

Facts: Sam Oolie and Morton Salkind were directors of The Nostalgia Network, Inc. Salkind and Oolie were also creditors of TNN. Oolie and Salkind were in favor of an acquisition proposal known as the USA deal. Cooke and other TNN shareholders claim that Oolie and Salkind were interested in the USA deal, because it safeguarded their position as creditors of TNN. The plaintiffs argue that other acquisition proposals were more valuable to TNN, but that Oolie and Salkind breached their fiduciary duty of loyalty by pursuing the deal that served their personal interests. TNN's two other directors, who had no interest in the deal whatsoever, voted to pursue the USA deal as well. The plaintiffs sued in the Delaware Court of Chancery and were granted discovery on the issue of breach of duty. Oolie and Salkind moved for summary judgment. Holding: When shareholders challenge the fairness of an action taken by interested directors with approval from the disinterested directors after full disclosure, the business judgment rule will apply.

Sinclair Oil Corp. v. Levien (Del. 1971)

Facts: Sinclair Oil Corp. owned about 97 percent of the stock of its subsidiary, Sinclair Venezuelan Oil Company. From 1960 to 1966, Sinclair caused Sinven to pay out $108 million in dividends, which was more than Sinven earned during the time period. The dividends were made in compliance with law on their face, but Sinven contended that Sinclair caused the dividends to be paid out simply because Sinclair was in need of cash at the time. In addition, in 1961 Sinclair caused Sinven to contract with Sinclair International Oil Company, another Sinclair subsidiary created to coordinate Sinclair's foreign business. Under the contract, Sinven agreed to sell its crude oil to International. International, however, consistently made late payments and did not comply with minimum purchase requirements under the contract. Sinven brought suit against its parent, Sinclair, for the damages it sustained as a result of the dividends, as well as breach of the contract with International. Holding: A parent corporation must pass the intrinsic fairness test only when its transactions with its subsidiary constitute self-dealing.

McQuade v. Stoneham (N.Y. 1934)

Facts: Stoneham was the majority owner of National Exhibition Company. McGraw and McQuade each bought 70 shares of Stoneham's stock. As part of the purchase, the three entered into a contract that provided that the parties would "use their best endeavors" to make sure that each would remain directors of NEC. Stoneham became president of the board, McGraw vice-president, and McQuade treasurer. Stoneham selected and controlled the other four directors. McQuade and Stoneham began quarreling about the corporate treasury. At a board meeting at which the position of treasurer was up for election, Stoneham and McGraw did not vote, McQuade voted for himself, and the four other directors voted for a Leo Bondy to succeed McQuade; McQuade thus lost his position as treasurer. At the next board meeting, the board dropped McQuade as a director. McQuade's removal was due to personal conflict with Stoneham, not for any misconduct by McQuade. McQuade brought suit for breach of contract, alleging that Stoneham and McGraw did not use their best efforts to keep him on as a director. The defendants claimed that the contract was void because the duty to act in the best interests of the corporation superseded the contract. Holding: A contract is void if it requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties.

Dodge v. Ford Motor Co. (Mich. 1919)

Facts: The Ford Motor Company was incorporated in 1903, and began selling motor vehicles. Over the course of its first decade, despite the fact that Ford continually lowered the price of its cars, Ford became increasingly profitable. On top of annual dividends of $120,000, Ford paid $10 million or more in special dividends annually in 1913, 1914, and 1915. Then, in 1916, Ford's president and majority shareholder, Henry Ford, announced that there would be no more special dividends, and that all future profits would be invested in lowering the price of the product and growing the company. The board quickly ratified his decision. Henry Ford had often made statements about how he wanted to make sure people were employed, and generally run the company for the benefits of the overall community. The Dodge brothers (plaintiffs), who owned their own motor company, were minority shareholders in Ford, and sued to reinstate the special dividends and stop the building of Ford's proposed smelting plant. Holding: A company cannot take actions that harm its shareholders and are motivated solely by humanitarian concerns, not by business concerns.

Lewis v. S.L. & E, Inc. (2nd Cir. 1980)

Facts: The Lewis family controlled two corporations, S. L. & E., Inc. and Lewis General Tires, Inc.. Donald Lewis owned stock in SLE but not LGT. He held no corporate leadership role. Richard Lewis, Alan Lewis, and Leon Lewis, Jr. were stockholders and directors at both companies and were also officers of LGT. In 1962, Donald, Richard, Alan, Leon, and their two sisters entered into a shareholders' agreement which stated that if any of the six did not own any LGT stock on June 1, 1972, they would convey their SLE shares to LGT at book value. SLE's only significant asset was the property on which LGT operated its business. Under a 10-year lease agreement which expired in 1966, LGT paid $1,200 per month in rent and covered all expenses except real estate taxes, which SLE paid. After the lease expired, LGT continued to occupy the space and pay the $1,200 monthly rent, which totaled $14,400 annually. Prior to 1972, when his SLE shares were to be sold to LGT, Donald determined that SLE's book value was lower than it ought to be. He sought SLE's books and records, but Richard, then SLE's president, refused. Donald brought a derivative action against Richard, Alan, and Leon Jr. for waste of corporate assets in their capacities as SLE directors. Donald argued that the amount SLE received in rent was too low. LGT intervened in the case and demanded specific performance from Donald on the shareholder agreement. At trial, testimony from Richard, Alan, and Leon indicated that they had generally ignored SLE's separate existence and believed SLE existed to benefit LGT. Expert testimony suggested that fair rental was between $20,000 and $35,000 annually. The trial court held that Donald had the burden to show that the lease was unfair, and that he had not carried that burden. The court ruled in favor of Richard, Alan, and Leon, and also in favor of LGT in its claim for specific performance of the shareholder agreement. Donald appealed. Holding: When a corporation enters into a contract in which the corporation's directors have a personal interest, the directors must demonstrate that the contract was fair and reasonable to the corporation.

Grimes v. Donald (Del. 1996)

Facts: The board of directors of DSC Communications approved contracts with DSC's CEO, James Donald, that promised him employment until his seventy-fifth birthday. The contracts provided that if Donald lost his job without cause, he would be entitled to the same salary he would have earned until the contracts would otherwise have expired. The contracts also included further incentive bonuses, lifetime medical coverage for Donald and his family, and other benefits. Grimes demanded that the board abrogate the contracts with Donald. The board refused. Grimes filed a suit alleging that the board abdicated its responsibility to oversee the management of the company. Grimes alleged that by granting Donald contracts that allowed him to collect compensation even if the board chose to reject the course of action he chooses as CEO, the board had given up its responsibility to oversee the future of DSC. Additionally, Grimes alleged that the contracts constituted waste and excessive compensation and were the product of the board's failure to exercise due care. Although Grimes did not raise these issues in his demand to the board, he claimed that demand was excused because it would have been futile. The chancery court dismissed Grimes's complaint for failure to state a claim upon which relief could be granted. Grimes appealed. Holding: (1) An informed business decision made by a board of directors is not an abdication of directorial authority merely because the decision limits the board's freedom of future action. (2) If a shareholder demands that the board of directors take action on a claim allegedly belonging to the corporation, and the demand is refused, the shareholder may not then assert that demand is excused with respect to other legal theories in support of the same claim.

Auerbach v. Bennett (N.Y. 1979)

Facts: The board of directors of General Telephone & Electronics Corporation conducted an investigation and found that General Telephone and its officers had made bribe payments, and that some of the directors had been directly involved in those payments. Auerbach, a shareholder, in connection with other shareholders including Wallenstein, brought a derivative action against the board, General Telephone, and Arthur Anderson & Co., General Telephone's outside auditor. Auerbach's complaint alleged that the board members involved in the transactions and Arthur Anderson were both liable to General Telephone for the money lost through those improper transactions. The board of directors formed a special litigation committee, composed of directors who joined the board after the questionable transactions took place, and asked them to evaluate what General Telephone should do about the litigation Auerbach initiated. The special committee found that the directors had not violated their fiduciary duties, and that the claims were without merit, and that the lawsuit should be dismissed. After this finding, the trial court dismissed the action, and Wallenstein (but not Auerbach) appealed. Holding: When a board of directors delegates its authority to a committee of disinterested members, the official determination of those members will be accorded due deference under the business judgment rule.

Shlensky v. Wrigley (Illinois Ct. App. 1968)

Facts: The first game of night baseball was played in 1935, and since then, every team except the Chicago Cubs began playing night games. Most major league games were night games, except those played on weekends. The Cubs did not play night games. As a result, the Cubs sold fewer tickets and were less profitable than any other major league team. Philip Wrigley , the President of the Chicago National League Ball Club , which owned the Cubs, was opposed to playing night games, claiming that night games would be damaging to the neighborhood in which the Cubs played. Shlensky filed a suit claiming that it would be financially practicable for the Cubs' stadium to install lights and begin playing night games, and would be very profitable in the long run. Shlensky alleged that the only reason the Cubs did not play night games is because Wrigley felt it was somehow against the spirit of baseball. Holding: As long as a corporation's directors can show a valid business purpose for their decision, that decision will be given great deference by the courts.

Ringling Bros. Shows v. Ringling (Del. 1947)

Facts: There were 1000 outstanding shares of Ringling Bros. Shows. Edith Conway Ringling owned 315; Aubrey Ringling Haley owned 315; and John Ringling North owned 370. Mrs. Ringling and Mrs. Haley entered into an agreement which provided that they would always vote their shares jointly and in the same way. The agreement provided that if they could not agree on how to vote their shares, the issue would be submitted to binding arbitration. At a 1946 annual meeting, the women disagreed on whom to elect to one of the Ringling Bros. director positions. They agreed that Mrs. Ringling would vote for herself and her son, and that Mrs. Haley would vote for herself and Mr. Haley. However, they could not agree on a fifth director. The arbitrator directed the women to cast 4/5 of their votes as provided above, but the final 1/5 of their votes in favor of a Mr. Dunn. Instead of doing this, Mr. Haley (as proxy for Mrs. Haley) cast all of Mrs. Haley's votes for himself and Mrs. Haley, omitting Mr. Dunn. Mr. North, meanwhile, voted for himself, a Mr. Woods, and a Mr. Griffin as he was entitled to do since he was not a party to the agreement between Mrs. Ringling and Mrs. Haley. The chairman of the Ringling Bros. board ruled that the following were elected to the seven-member Ringling Bros. board: Mrs. Ringling, her son, Mrs. Haley, Mr. Haley, Mr. Dunn, Mr. North, and Mr. Woods. Thus, Mr. Dunn was elected, and not Mr. Griffin, as would have been the case the way Mrs. Haley voted in violation of the agreement. At the next stockholders' meeting, Mr. Griffin attempted to join in the voting despite the arbitrator's and the chairman's ruling and Mrs. Ringling brought suit, seeking declaratory relief. The Delaware Court of Chancery ruled that the agreement between Mrs. Ringling and Mrs. Haley was valid and binding and ordered a new election to be held before a master to see that the terms of the agreement were followed. Holding: An agreement between two shareholders in a closely held corporation to vote jointly is binding and enforceable as a contract.

WLR Foods v. Tyson Foods (4th Cir. 1995)

Facts: Tyson Foods, Inc. tried to take over WLR Foods, Inc. WLR's board enacted measures designed to block the takeover. Tyson made and later withdrew a tender offer to WLR's shareholders on the grounds that WLR's board had affected the value of WLR stock. Suit was filed in the district court regarding the takeover attempt. The district court concluded that the acts of WLR's board were legitimate. Tyson appealed those findings to the U.S. Ct. of App. for the 4th Cir.. Holding: Under the Virginia Business Judgment Statute (VBJS), courts may only consider whether a corporate director acted in good faith in making a business judgment regarding the best interests of the company without reference to a reasonable person standard.

In re Wheelabrator Technologies, Inc. v. Shareholders Litigation (Del. 1995)

Facts: Waste Management, Inc. owned 22 percent of the shares of Wheelabrator Technologies, Inc. The two companies negotiated a merger agreement, which was approved by WTI's board of directors and shareholders. Certain WTI shareholders brought suit, claiming, among other things, that the board of directors breached its duty of loyalty. The plaintiffs filed a motion for summary judgment, in which they claimed that the entire fairness standard governed the duty of loyalty claim. Holding: Under Delaware law, the business judgment standard applies to a shareholder's duty of loyalty claim related to a merger if the merger does not involve an interested and controlling stockholder.

Wilkes v. Springside Nursing Home, Inc. (Mass. 1976)

Facts: Wilkes, Riche, Quinn, and Connor were the four directors of the Springside Nursing Home, Inc., each owning equal shares and having equal power within the corporation. Eventually the relationship between Wilkes and the other three directors soured. When Springside became profitable, the defendants voted to pay out salaries to themselves, but did not include Wilkes in the group to whom salary would be paid. Then, at an annual meeting, Wilkes was not reelected as director and was informed that he was no longer wanted in the management group of Springside. Over the course of these events, Wilkes faithfully and diligently carried on his duties to the corporation. Wilkes brought suit against the defendants for breach of their fiduciary duty owed to him. The lower court dismissed Wilkes's complaint. He appealed. Holding: Majority shareholders in a close corporation owe minority shareholders a strict duty of the utmost good faith and loyalty, unless a legitimate business purpose can be demonstrated to justify a breach of that duty.

Walkovszky v. Carlton (N.Y. Ct. App. 1966)

Facts: William Carlton (defendant) owned a large taxicab business. Carlton was a controlling shareholder of 10 different corporations, each of which held title to two cabs and no other assets. Each cab carried $10,000 in car liability insurance, which was the minimum required by state law. John Walkovsky alleged that he was struck and injured by a cab owned by Seon Cab Corporation, one of Carlton's entities. Walkovsky sued Carlton, Seon Cab Corporation, and each of Carlton's other cab corporations, arguing that they all functioned as a single enterprise and should be treated accordingly. Carlton moved to dismiss the complaint as to him personally for failure to state a cause of action. Holding: In order to maintain a cause of action for piercing the corporate veil, the plaintiff must allege that a shareholder used the corporate form to conduct business in his individual capacity.

Zapata Corp. v. Maldonado (Del. 1981)

Facts: William Maldonado, a shareholder in Zapata Corporation, brought a derivative action on behalf of Zapata against 10 of Zapata's officers and directors, alleging breach of fiduciary duty. Maldonado had not made a prior demand that the board bring the action and instead argued that demand was futile, because all of the board members were named defendants who allegedly took part in the challenged transactions. After two new outside directors were added to the board, the board as a whole appointed only those two new directors to an investigation committee charged with investigating Maldonado's claims. The committee found that it was in Zapata's best interest that Maldonado's derivative suit be dismissed. The chancery court denied Zapata's motion to dismiss or for summary judgment, and Zapata filed an interlocutory appeal to the Delaware Supreme Court. Holding: In reviewing an independent committee's motion to dismiss a shareholder's derivative lawsuit on the basis that maintaining the lawsuit is not in the corporation's best interest, the chancery court must (1) analyze the committee's independence and good faith and the bases supporting the committee's conclusions; and (2) if satisfied that the committee was independent and acting in good faith, apply the court's own independent business judgment to determine whether the motion should be granted.