State Ex Rel. Hayes Oyster Co. v. Keypoint Oyster Co.
391 P.2d 979, 64 Wash. 2d 375, 1964 Wash. LEXIS 345 (1964)
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Rule of Law:
A corporate officer who acquires a personal interest in a transaction to which the corporation is a party has a duty to fully disclose that interest; failure to do so constitutes a breach of fiduciary duty, and any profit gained from the transaction belongs to the corporation.
Facts:
- Verne Hayes was the president, manager, and a director of Coast Oyster Company (Coast).
- Amid financial difficulties at Coast, Hayes proposed selling two of its oyster properties, Allyn and Poulsbo.
- Hayes approached Joseph Engman, a Coast employee, who was interested in purchasing the properties but lacked capital.
- Engman asked Hayes to 'come in' with him on the deal, and Hayes suggested his family company, Hayes Oyster, could assist.
- On Hayes' recommendation, Coast's board approved the sale to a new corporation to be formed by Engman, later named Keypoint Oyster Company.
- To help Engman secure a $15,000 startup loan, Hayes personally co-signed the note.
- In exchange for co-signing the note, Engman agreed to give Hayes Oyster a 50% stock interest in Keypoint.
- Hayes never disclosed his or Hayes Oyster's financial interest in Keypoint to Coast's directors or shareholders during the sale's approval process or when he signed the contract on Coast's behalf.
Procedural Posture:
- Hayes Oyster Company initiated an action in the trial court against Keypoint Oyster Company to compel the transfer of 50% of its stock.
- Keypoint disclaimed ownership and interpleaded Coast Oyster Company, Joseph and Edith Engman, and Verne and Sam Hayes.
- The trial court found that Verne Hayes had not breached any duty to Coast and entered a decree ordering Keypoint to deliver the stock to Hayes Oyster Company.
- Coast Oyster Company, Keypoint Oyster Company, and the Engmans appealed the trial court's decision to the Supreme Court of Washington.
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Issue:
Does a corporate president and director violate their fiduciary duty to the corporation by failing to disclose their personal financial interest in a contract for the sale of corporate assets, even if the corporation does not suffer a loss from the transaction?
Opinions:
Majority - Denney, J.
Yes. A corporate officer violates their fiduciary duty by failing to disclose a personal interest in a corporate transaction. Corporate officers stand in a fiduciary relation to their corporation, demanding undivided loyalty and a standard of conduct above that of the workaday world. While a transaction involving an interested director is not automatically voidable if it is fair to the corporation, nondisclosure by the interested officer is, in itself, unfair. The shareholders and directors were entitled to know that their president might be placed in a position where his personal interests could conflict with the interests of Coast, especially concerning the executory provisions of the sale contract. Because Hayes breached this duty of loyalty by acquiring a secret profit, that profit—the 50% interest in Keypoint—rightfully belongs to Coast.
Analysis:
This decision strongly reaffirms the strict fiduciary duty of loyalty owed by corporate officers and directors. It establishes that nondisclosure of a personal interest in a corporate transaction is an independent breach of duty, separate from the substantive fairness of the transaction itself. The ruling clarifies that the remedy for such a breach is the disgorgement of the secret profit to the corporation, even in the absence of corporate loss. This creates a powerful deterrent against conflicts of interest and emphasizes the paramount importance of transparency and undivided loyalty in corporate governance.
