Kamin v. American Express Co.

New York Supreme Court
86 Misc. 809 (1976)

ELI5:

Rule of Law:

Under the business judgment rule, a court will not interfere with a decision made by a corporation's board of directors unless there is a clear showing of fraud, bad faith, self-dealing, or oppressive conduct; mere errors in judgment or decisions that appear unwise in hindsight are not sufficient to establish a breach of fiduciary duty.

Facts:

In 1972, American Express Company acquired 1,954,418 shares of Donaldson, Lufken and Jenrette, Inc. (DLJ) stock for approximately $29.9 million.
By 1975, the market value of the DLJ stock had declined to approximately $4 million, representing a potential capital loss of over $25 million.
On July 28, 1975, the American Express board of directors declared a special dividend to distribute the DLJ shares directly to its own stockholders.
This 'in-kind' distribution prevented American Express from selling the shares on the market, which would have allowed the company to realize the $25 million capital loss and achieve a corporate tax saving of approximately $8 million.
In October 1975, minority stockholders Kamin and another individual demanded that the board rescind the dividend and sell the DLJ stock to capture the tax savings.
On October 17, 1975, the board rejected the stockholders' demand after considering their proposal.
The board's stated reason for rejecting the sale was to avoid the negative impact that reporting a $25 million loss would have on the company's net income figures and stock price.

Procedural Posture:

Two minority stockholders filed a derivative lawsuit against the directors of American Express Company in the Supreme Court of New York County, a trial court.
The complaint sought a declaration that a dividend in kind was a waste of assets and requested an injunction or, alternatively, monetary damages.
The plaintiffs did not seek a temporary injunction before the dividend was paid, rendering the request for an injunction moot.
The defendant directors filed a motion to dismiss the complaint for failure to state a cause of action and, alternatively, for summary judgment.
The trial court is now ruling on the defendants' motion.

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Issue:

Does a board of directors' decision to declare a dividend in kind, rather than sell the underlying asset for a significant tax benefit, constitute an actionable breach of fiduciary duty when there are no allegations of fraud, bad faith, or self-dealing?

Opinions:

Majority - Edward J. Greenfield, J.

No. The board's decision to declare a dividend in kind does not constitute a breach of fiduciary duty because it falls under the protection of the business judgment rule. The court reasoned that decisions regarding dividends are exclusively a matter for the board's discretion, and courts will not interfere absent bad faith or a dishonest purpose. The complaint merely alleged that an alternative course of action would have been more advantageous, which is not a legally sufficient claim. The board was fully aware of the tax implications but weighed them against other business considerations, such as the effect on reported earnings. This deliberation, even if the resulting decision was debatable or ultimately unwise, is the essence of business judgment, and the courtroom is not the appropriate forum for second-guessing such policy decisions. Allegations of mere negligence or imprudence are insufficient to overcome the presumption that the directors acted in good faith.

Analysis:

This case is a foundational application of the business judgment rule, reinforcing the principle of judicial deference to corporate management. It clarifies that a breach of fiduciary duty claim must be based on more than just a poor or unprofitable business decision; there must be evidence of bad faith, fraud, or a conflict of interest. The ruling establishes that directors fulfill their duty by engaging in a deliberative process, even if shareholders or a court might have reached a different conclusion. This precedent creates a high barrier for shareholder derivative suits that challenge substantive business decisions, thereby protecting directors from liability for good-faith errors and encouraging risk-taking.

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