Strong v. Repide
29 S. Ct. 521, 1909 U.S. LEXIS 1883, 213 U.S. 419 (1909)
Rule of Law:
While ordinary director-shareholder relations may not impose a fiduciary duty, a director purchasing stock from a shareholder has a duty to disclose special facts, not publicly known, that materially affect the value of the company's stock, particularly when the director's unique position and control give them an informational advantage.
Facts:
- Mrs. Strong owned shares in a Philippine corporation that owned valuable friar lands.
- Repide was a director, the owner of three-fourths of the corporation's stock, and the administrator general of the company with extensive powers.
- Repide was actively engaged in secret negotiations with the Philippine Government to sell the corporation's lands (its sole valuable asset) at a price that would significantly increase the stock's value.
- Repide employed an agent to purchase Mrs. Strong's stock without disclosing his own identity or his knowledge of the ongoing, material negotiations.
- Mrs. Strong's agent, unaware of Repide's identity and the negotiations, sold her stock at a price far below its actual value.
- After purchasing Mrs. Strong's stock, Repide continued and successfully concluded the negotiations, selling the company's lands to the government.
- Mrs. Strong contended that her agent was not authorized to sell the stock, but the court found that he was.
- The value of the shares was almost entirely dependent on the sale price of the friar lands.
Procedural Posture:
- Mrs. Strong sued Repide in the Court of First Instance at Manila, alleging that the sale of her stock was invalid due to her agent's lack of authority and Repide's fraud.
- The Court of First Instance at Manila entered judgment in favor of Mrs. Strong, finding both that her agent lacked authority and that Repide had committed fraud.
- Repide appealed this judgment to the Supreme Court of the Philippine Islands.
- The Supreme Court of the Philippine Islands affirmed the Court of First Instance's judgment (by a divided court) on the ground of the agent's lack of authority, but not on the ground of fraud.
- A motion for a new trial was granted due to newly discovered evidence (a second power of attorney).
- Upon reconsideration with the new evidence, the Supreme Court of the Philippine Islands reversed its prior judgment and dismissed Mrs. Strong's complaint, holding that her agent had sufficient authority to sell the stock and that Repide had not committed fraud.
- Mrs. Strong appealed the judgment of the Supreme Court of the Philippine Islands to the Supreme Court of the United States.
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Issue:
Does a director of a corporation owe a duty to disclose special facts, not publicly known, that materially affect the value of the company's stock, when purchasing shares from an individual shareholder, thereby making concealment of such facts a form of deceit?
Opinions:
Majority - Mr. Justice Peckham
Yes, a director of a corporation has a duty to disclose special facts, not publicly known, that materially affect the value of the company's stock, when purchasing shares from an individual shareholder, and the concealment of such facts constitutes deceit. The Court affirmed the judgment of the Court of First Instance, finding that Repide's actions constituted fraud. While generally the relationship between directors and shareholders is not inherently fiduciary for individual stock transactions, the 'special facts' of this case created such a duty. Repide was not merely a director but was the owner of three-fourths of the company's stock, its administrator general, and the chief negotiator for the sale of the company's sole valuable asset (the lands), acting substantially as an agent for all shareholders due to his control and their acquiescence. This unique position gave him exclusive knowledge about the imminent sale of the lands and its probable impact on stock value. His concealment of his identity and the status of the negotiations, which were highly material facts, constituted 'deceit' under Article 1269 of the Civil Code of the Philippine Islands, which defines deceit as obtaining consent by 'insidious machinations' or by concealing material facts with intent to deceive, inducing a contract that would not otherwise have been made. This principle is also consistent with common law regarding a duty to disclose when circumstances require good faith. The concealment of his identity was strong evidence of a fraudulent and intentional omission designed to obtain the stock at a lower price without revealing crucial information. The Court found ample evidence to sustain the finding of fraud by the Court of First Instance, despite the Supreme Court of the Philippine Islands' reversal on this point.
Analysis:
This case is highly significant for establishing the 'special facts' doctrine, an important precursor to modern insider trading laws, which expanded the fiduciary duties of corporate directors. It clarified that while directors generally don't owe an individual fiduciary duty to shareholders in stock transactions, exceptional circumstances can create such a duty, compelling disclosure of material, non-public information. This ruling underscores that unique access to critical information, coupled with active concealment, can be legally equivalent to affirmative misrepresentation, holding insiders accountable for their informational advantage in personal dealings.
