Stanley and Sturgis were the
majority shareholders, managers, and directors of the Remillard-Dandini
corporation and its subsidiary, San Jose Brick & Tile. In their
capacity as managers, they made a decision sell all the products (bricks)
made by these two companies to a third company called Remillard-Dandini
Sales Corp.
Coincidentally, Stanley and
Sturgis just so happen to also independently own the Sales Corp.
Minority shareholders of
Remillard-Dandini filed a derivative lawsuit against Stanley and Sturgis.
The shareholders argued that
Stanley and Sturgis had breached their duty of loyalty by self-dealing. Basically, they were personally profiting by
having the corporation sell bricks to their Sales Corp. at what was most
likely below market values.
Stanley and Sturgis argued
that they had fully informed all the shareholders to what was going on
and the shareholders approved of the contract, so there was no conflict
of interest.
Technically since Stanley
and Sturgis were majority shareholders, the vote approving the contract
was meaningless.
The Trial Court found for the
shareholders.
The Trial Court found that
directors are fiduciaries. They owe a duty to all stockholders,
including the minority stockholders.
That's known as the duty
of loyalty.
The Court found that a
director cannot, at the expense of the corporation make an unfair profit
from his position. Where a transaction greatly benefits one corporation
at the expense of another, and especially if it personally benefits the
majority directors, it will and should be set aside.
This case explained the duty
of loyalty, which basically says that
a director cannot use his position to benefit himself at the expense of
the corporation, even if he is the majority shareholder.
"While a transaction is
not voidable simply because an interested director participated, it will
not be upheld if it is unfair to the minority stockholders."
After this decision,
California amended their laws to disqualify shares voted by interested
directors. That meant that in the future if people like Stanley and
Sturgis wanted the corporation to contract with another business they
owned, they would have to get a majority of the minority shareholders to
agree that was a good deal.
