Jane Perlman v. C. Russell Feldmann, Newport Steel Corporation

SWAN, Circuit Judge

(dissenting).

With the general principles enunciated in the majority opinion as to the duties of fiduciaries I am, of course, in thorough accord. But, as Mr. Justice Frankfurter stated in Securities and Exchange Comm. v. Chenery Corp., 318 U.S. 80, 85 , 63 S.Ct. 454, 458 , 87 L.Ed. 626 , “to say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations ?” My brothers’ opinion does not specify precisely what fiduciary duty Feldmann is held to have violated or whether it was a duty imposed upon him as the dominant stockholder or as a director of Newport. Without such specification I think that both the legal profession and the business world will find the decision confusing and will be unable to foretell the extent of its impact upon customary practices in the sale of stock.

The power to control the management of a corporation, that is, to elect direc *179 tors to manage its affairs, is an inseparable incident to the ownership of a majority of its stock, or sometimes, as in the present instance, to the ownership of enough shares, less than a majority, to control an election. Concededly a majority or dominant shareholder is ordinarily privileged to sell his stock at the best price obtainable from the purchaser. In so doing he acts on his own behalf, not as an agent of the corporation. If he knows or has reason to believe that the purchaser intends to exercise to the detriment of the corporation the power of management acquired by the purchase, such knowledge or reasonable suspicion will terminate the dominant shareholder’s privilege to sell and will create a duty not to transfer the power of management to such purchaser. The duty seems to me to resemble the obligation which everyone is under not to assist another to commit a tort rather than the obligation of a fiduciary. But whatever the nature of the duty, a violation of it will subject the violator to liability for damages sustained by the corporation. Judge Hincks found that Feldmann had no reason to think that Wilport would use the power of management it would acquire by the purchase to injure Newport, and that there was no proof that it ever was so used. Feld-mann did know, it is true, that the reason Wilport wanted the stock was to put in a board of directors who would be likely to permit Wilport’s members to purchase more of Newport’s steel than they might otherwise be able to get. But there is nothing illegal in a dominant shareholder purchasing from his own corporation at the same prices it offers to other customers. That is what the members of Wilport did, and there is no proof that Newport suffered any detriment therefrom.

My brothers say that “the consideration paid for the Stock included compensation for the sale of a corporate asset”, which they describe as “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.” The implications of this are not clear to me. If it means that when market conditions are such as to induce users of a corporation’s product to wish to buy a controlling block of stock in order to be able to purchase part of the corporation’s output at the same mill list prices as are offered to other customers, the dominant stockholder is under a fiduciary duty not to sell his stock, I cannot agree. For reasons already stated, in my opinion Feldmann was not proved to be under any fiduciary duty as a stockholder not to sell the stock he controlled.

Feldmann was also a director of Newport. Perhaps the quoted statement means that as a director he violated his fiduciary duty in voting to elect Wil-port’s nominees to fill the vacancies created by the resignations of the former directors of Newport. As a director Feldmann was under a fiduciary duty to use an honest judgment in acting on the corporation’s behalf. A director is privileged to resign, but so long as he remains a director he must be faithful to his fiduciary duties and must not make a personal gain from performing them. Consequently, if the price paid for Feld-mann’s stock included a payment for voting to elect the new directors, he must account to the corporation for such payment, even though he honestly believed that the men he voted to elect were well qualified to serve as directors. He can not take pay for performing his fiduciary duty. There is no suggestion that he did do so, unless the price paid for his stock was more than its value. So it seems to me that decision must turn on whether finding 120 and conclusion 5 of the district judge are supportable on the evidence. They are set out in the margin. 1

*180 Judge Hincks went into the matter of valuation of the stock with his customary care and thoroughness. He made no error of law in applying the principles relating to valuation of stock. Concededly a controlling block of stock has greater sale value than a small lot. While the spread between $10 per share for small lots and $20 per share for the controlling block seems rather extraordinarily wide, the $20 valuation was supported by the expert testimony of Dr. Badger, whom the district judge said he could not find to be wrong. I see no justification for upsetting the valuation as clearly erroneous. Nor can I agree with my brothers that the $20 valuation “was limited” by the last sentence in finding 120. The controlling block could not by any possibility be shorn of its appurtenant power to elect directors and through them to control distribution of the corporate product. It is this “appurtenant power” which gives a controlling block its value as such block. What evidence could be adduced to show the value of the block “if shorn” of such appurtenant power, I cannot conceive, for it cannot be shorn of it.

The opinion also asserts that the burden of proving a lesser value than $20 per share was not upon the plaintiffs but the burden was upon the defendants to prove that the stock was worth that value. Assuming that this might be true as to the defendants who were directors of Newport, they did show it, unless finding 120 be set aside. Furthermore, not all the defendants were directors; upon what theory the plaintiffs should be relieved from the burden of proof as to defendants who were not directors, the opinion does not explain.

The final conclusion of my brothers is that the plaintiffs are entitled to recover in their own right instead of in the right of the corporation. This appears to be

completely inconsistent with the theory advanced at the outset of the opinion, namely, that the price of the stock “included compensation for the sale of a corporate asset.” If a corporate asset was sold, surely the corporation should recover the compensation received for it by the defendants. Moreover, if the plaintiffs were suing in their own right, Newport was not a proper party. The case of Southern Pacific Co. v. Bogert, 250 U.S. 483 , 39 S.Ct. 533 , 63 L.Ed. 1099 , relied upon as authority for the conclusion that the plaintiffs are entitled to recover in their own right, relates to a situation so different that the decision appears to me to be inapposite.

I would affirm the judgment on appeal.

. “120. The 398,927 shares of Newport stock sold to Wilport as of August 31, 1950, had a fair value as a control block of $20 per share. What value the block *180 ■would have had if shorn of its appurtenant power to control distribution of the corporate product, the evidence does not show.”

“5. Even if Feldmann’s conduct in cooperating to accomplish a transfer of control to Wilport immediately upon the sale constituted a breach of a fiduciary duty to Newport, no part of the moneys received by the defendants in connection with the sale constituted profits for which they were accountable to Newport.”