Perlman v. Feldmann
219 F.2d 173 (1955)
Rule of Law:
A majority stockholder, acting as a director and officer, breaches their fiduciary duty to the minority stockholders when they sell their controlling shares for a premium that is attributable to the sale of a corporate asset or opportunity, such as the power to control the allocation of corporate products in a time of shortage.
Facts:
- C. Russell Feldmann was the president, chairman of the board, and controlling stockholder of Newport Steel Corporation ('Newport'), an Indiana steel producer.
- During the Korean War, there was a significant steel shortage, which placed Newport in a highly favorable market position.
- Newport had previously leveraged this market position through a strategy known as the 'Feldmann Plan,' where it obtained interest-free loans from customers in exchange for guaranteed future steel allocations.
- A syndicate of steel end-users, organized as Wilport Company ('Wilport'), sought to acquire a controlling interest in Newport to secure a stable supply of steel for themselves.
- Feldmann and his associates sold their controlling block of shares (approximately 37% of Newport's stock) to Wilport for $20 per share.
- The over-the-counter market price for Newport stock had not exceeded $12 per share, and its book value was approximately $17 per share.
- Immediately upon the sale, Feldmann secured the resignation of Newport's existing board of directors, who were then replaced by Wilport's nominees.
Procedural Posture:
- Minority stockholders of Newport Steel Corporation filed a derivative lawsuit against C. Russell Feldmann and other controlling stockholders in the United States District Court.
- Jurisdiction was based on diversity of citizenship, and three separate stockholder actions were consolidated.
- The district court (trial court) ruled in favor of the defendants, Feldmann et al., holding that they acted within their rights as majority shareholders and dismissed the plaintiffs' complaint.
- The plaintiffs (minority stockholders), as appellants, appealed the district court's judgment to the United States Court of Appeals for the Second Circuit.
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 controlling stockholder and director breach their fiduciary duty to the corporation and its minority stockholders by selling their controlling block of stock for a price that includes a premium paid specifically for the power to control the allocation of the corporation's product during a market shortage?
Opinions:
Majority - Clark, C.J.
Yes, a controlling stockholder breaches their fiduciary duty by selling their shares for a premium paid for control over a corporate asset. Feldmann, as a director and dominant stockholder, stood in a fiduciary relationship to Newport and its minority stockholders, a duty that required him to dedicate his uncorrupted business judgment for the sole benefit of the corporation. The power to allocate steel in a time of shortage was a corporate asset, and the premium Wilport paid was compensation for this power, not just for the stock's intrinsic value. By appropriating this premium for himself, Feldmann siphoned off a corporate advantage for personal gain, violating the high standard of undivided loyalty required of a fiduciary. The burden of proving the fairness of the transaction rests on the fiduciary, and the defendants failed to negate the possibility of corporate gain had this opportunity not been sold. Therefore, Feldmann and his co-defendants must account to the minority stockholders for the premium they received.
Dissenting - Swan, C.J.
No, a controlling stockholder does not breach a fiduciary duty simply by selling their stock at the best price obtainable. The power to control a corporation is an inseparable incident of owning a controlling block of stock, and such a block is ordinarily worth more per share than a minority interest. Feldmann acted on his own behalf, not as an agent of the corporation, and he had no reason to believe the purchasers would loot or otherwise mismanage the company. The premium paid was for the value of the control block itself, not for a separate 'corporate asset.' There was no proof Newport suffered any detriment, as Wilport paid the same price for steel as other customers. The majority's holding is confusing and its remedy—a direct payment to plaintiffs rather than the corporation—is inconsistent with its own theory that a corporate asset was sold.
Analysis:
This case is a landmark decision in corporate law that significantly expanded the fiduciary duties of controlling shareholders. It established the principle that a control premium is not always the seller's to keep; if the premium reflects payment for a corporate asset or opportunity, it may belong to the corporation or its minority shareholders. The decision forces courts to scrutinize the source of a control premium, moving beyond a simple inquiry into fraud or looting. It has had a lasting impact on mergers and acquisitions, creating a cause of action for minority shareholders when a change of control involves the transfer of a unique corporate advantage, particularly in times of unusual market conditions.
Gunnerbot
AI-powered case assistant
Loaded: Perlman v. Feldmann (1955)
Try: "What was the holding?" or "Explain the dissent"