Goodwin v. Agassiz
283 Mass. 358 (1933)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Corporate directors do not owe a general fiduciary duty to individual stockholders to disclose material, non-public information when purchasing stock through an impersonal transaction on a public stock exchange, absent special circumstances of fraud or direct dealing.
Facts:
- Agassiz was the president and a director, and MacNaughton was a director and general manager of the Cliff Mining Company.
- In March 1926, a geologist developed a theory suggesting the possible existence of significant copper deposits on or near the company's property.
- Agassiz and MacNaughton believed the theory had merit and decided to keep it secret while they acquired options on adjacent lands and purchased company stock for themselves.
- The defendants agreed that if the theory were known, the price of Cliff Mining Company stock would likely increase.
- In May 1926, unrelated exploratory operations on the company's property, which had begun in 1925, ended unsuccessfully.
- Goodwin, a stockholder, learned of the end of these exploratory operations from a newspaper article and, believing it to be bad news, immediately sold his 700 shares on the Boston Stock Exchange.
- Unbeknownst to either party, Goodwin's shares were purchased by brokers acting for Agassiz and MacNaughton.
- Goodwin would not have sold his stock had he been aware of the geologist's theory.
Procedural Posture:
- Goodwin, a stockholder, filed suit against Agassiz and MacNaughton, directors of Cliff Mining Company, in a Massachusetts trial court.
- The suit sought relief in the form of an accounting, rescission of the stock sales, or redelivery of the shares.
- The trial judge made findings of fact and entered an order dismissing Goodwin's bill (complaint).
- Goodwin appealed the dismissal to the Supreme Judicial Court of Massachusetts.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate director owe a fiduciary duty to an individual stockholder to disclose unverified, material inside information before purchasing that stockholder's shares on a public stock exchange?
Opinions:
Majority - Bugg, C.J.
No, a corporate director does not owe a fiduciary duty to an individual stockholder to disclose unverified, material inside information before purchasing shares on a public stock exchange. While directors stand in a relation of trust to the corporation itself, Massachusetts law has repeatedly held that this fiduciary duty does not extend to individual stockholders in their personal dealings. The court reasoned that purchases and sales on a stock exchange are impersonal affairs where the identity of the buyer and seller is unknown. To impose a duty of disclosure in such transactions would make it practically impossible for directors to trade in their company's stock. The court distinguished this from situations involving 'special circumstances,' such as a director personally seeking out a stockholder to buy their shares directly, where a duty to disclose might arise. Here, the information was an unproven geological theory, not a confirmed fact, and the defendants engaged in no fraud or misrepresentation. Goodwin acted on his own judgment in an impersonal market transaction.
Analysis:
This case establishes the 'majority rule,' or 'Massachusetts rule,' which holds that directors' fiduciary duties are owed to the corporation as a whole, not to individual shareholders in stock transactions. It creates a significant distinction between direct, face-to-face dealings (where a duty might exist under 'special circumstances') and impersonal stock market transactions. This ruling provided legal protection for corporate insiders trading on non-public information, a practice that would later be heavily regulated by federal securities laws, most notably SEC Rule 10b-5, which created a broader 'disclose or abstain' rule.
Unlock the full brief for Goodwin v. Agassiz