noting that “[i]t is axiomatic that the officers and directors of a corporation owe a fiduciary duty to the corporation and to its shareholders.”
How later courts described this case
- noting that “[i]t is axiomatic that the officers and directors of a corporation owe a fiduciary duty to the corporation and to its shareholders.”
- describing the fiduciary duty owed in the corporate context
Written by the judges who cited it.
The opinion
ORDER DENYING PETITION FOR REHEARING
CANTRELL, Presiding Judge, M.S.
The defendants have filed a thoughtful and respectful Petition to Rehear in this case, arguing that we erred by reversing the summary judgment in their favor on the plaintiffs’ claims that the defendants breached their fiduciary duty. We have considered their arguments, and we have concluded that our opinion was not in error.
I. MILANO’S ARGUMENT
The first argument, presented on behalf of defendant Milano Corporation, is that as the majority shareholder in Elk Manufacturing Company, it may have owed a fiduciary duty to the minority shareholders of that corporation, but it did not owe such a duty to the corporation itself. They contend that since the minority shareholders brought a derivative action on behalf of the corporation, and not on their own behalf, if we accept Milano’s argument, we are obligated to affirm the summary judgment for Milano.
Milano notes that we cited the case of Intertherm, Inc. v. Olympic Homes Systems, 569 S.W.2d 467 (Tenn.Ct.App.1978) several times in our opinion, and contends that the Intertherm case is not on point, because it involved a suit against the defendant corporation brought by some of its creditors, rather than a derivative suit brought on behalf of the corporation by its minority shareholders.
Despite the factual differences between the Intertherm case and the one before us, however, we believe that the principle of fiduciary duty stated in both cases is the *741 same. The Intertherm Court relied upon a leading United States Supreme Court case, Pepper v. Litton, 308 U.S. 295 , 60 S.Ct. 238 , 84 L.Ed. 281 (1939) when it said,
“... courts will closely scrutinize the transactions of a majority, dominant, or controlling shareholder with his corporation, and will place the burden of proof upon the shareholder when the good faith and fairness of such a transaction is challenged .... [i]t is obvious that the reason for applying the rule to a [dominant, majority or controlling] shareholder is the same as the reason for applying it to an officer or director, that is, that he occupies a fiduciary position with regard to the corporation, and those interested in it.”
569 S.W.2d at 472 .
Milano’s argument is without merit.
II. THE ARGUMENTS OF THE INDIVIDUAL DEFENDANTS
The individual defendants in this case, Walter Marianelh, David Manning, Edwin S. Pyle and the estate of Andrew Maria-nelli argue that our resolution of the conflict of interest question should also conclusively resolve the question of breach of fiduciary duty in their favor.
Their argument relies entirely upon the provisions of Kentucky’s conflict of interest law, Ky.Rev.Stat. § 271B.8-310. Under that statute, a director’s direct or indirect interest in a pending transaction with his corporation will not necessarily make the transaction voidable. If the material facts of the transaction are disclosed or known to the Board of Directors, and if a majority of the disinterested directors also vote for it, then the transaction shall be considered authorized, approved or ratified. Ky.Rev. Stat. § 271B.8-310(1).
Another section of the same statute says that a vote cast by a director with an interest in a proposed transaction which was authorized, approved, or ratified as described above will not affect the validity of the action taken. Ky.Rev.Stat. § 271B.8-310(3). The defendants read these two sections of the statute together to conclude that their actions could not constitute a breach of fiduciary duty, because their votes had no legal effect on the outcome of the resolution before them.
Such an argument shifts the focus away from the question of whether they were guilty of breach of their fiduciary duty to the corporation they served, and towards the question of causation. In other words, they are saying that even if the M.S.A. damaged Elk Brand’s bottom line and the value of its stock, the Board’s decision to ratify the agreement cannot be held against them because their votes were of no legal consequence.
It appears to us, however, that the purpose of Ky.Rev.Stat. § 271B.8-310 is to create a framework within which corporations can enter into binding agreements, even where conflicts of interest arise from such agreements, not to shield corporate directors from liability for breaches of their fiduciary duties.
The standard of conduct required of corporate directors is described in Ky.Rev. Stat. § 271B.8-300 as follows:
(1) A director shall discharge his duties as a director, including his duties as a member of a committee:
(a) In good faith;
(b) On an informed basis; and
(c) In a manner he honestly believes to be in the best interests of the corporation.
It appears to us that the plaintiffs have raised genuine questions of fact as to whether in formulating, investigating and acting upon the MSA, the individual defendants have conducted themselves in accor *742 dance with the above-quoted statute. We are not saying that they have not, but simply that they are not entitled to summary judgment on that question, and that the plaintiffs are entitled to their day in court.
The Petition to Rehear is denied.