16. Perlman v. Feldmann United States Court of Appeals, Second Circuit, 1955. 219 F.2d 173.
Facts
As the need for securing steels were heightened due to the Korean War, the buyer Wilport Company proposed to purchase Newport Steel Corporation in order to have power to control the steel industry. C. Russell Feldmann (defendant) who was a director, president and dominant stockholder of Newport thereby sold his controlling interests to Wilport. The minority stockholders (plaintiffs) of Newport instituted derivative action arguing by selling majority of the stocks, the defendant breached fiduciary duty because by selling the compelling shares, the defendant benefited himself in exchange of depriving the corporate goodwill.
Issue
Does it constitute breach of fiduciary duty when a controlling shareholder and director sold his stocks when the corporation was at chance to make more profits in the industry but failed due to the sale of the stocks?
Rules
A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.
Application
The plaintiffs argued that by selling the corporate stocks, the defendant committed breach of fiduciary duty against the company and the minority shareholders because he deprived the corporate opportunity to earn profits. The defendant counters that there was no fraud, no misuse of confidential information, no outright looting of a corporation, the plaintiff cannot establish breach of fiduciary duty. The court agreed that this is not an ordinary breach of fiduciary duty. Yet still, the defendant did not comply with the high standard of fiduciary duty which is commonly expected. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. Here, the defendant committed the breach of fiduciary duty because he was not only a compelling shareholder but also a director, president of the company. This incurs much obligation, stricter fiduciary duty, than a mere shareholder.
Holding
Yes, the act constitutes breach of fiduciary duty.
Conclusion
Reversed and remanded.
Feedback and notes
This case is about receiving a premium. It is a common thing for a controlling shareholder to buy and sell the stocks for his profits. From that aspect, the defendant may be seen as doing nothing wrong. Nevertheless, he is not a mere shareholder. He was director, president of the company. By selling the stocks at a premium, he deprived the corporation’s opportunity for earning unusual massive profits. The situation would have been different if he had sold the stock at a market price or he was not involved with the corporate management. The takeaway of this case is that, even if there was ostensible violation against the fiduciary duty, the directors are always expected to hold highest fiduciary duty to the company and the shareholders.