Thorpe by Castleman v. Cerbco, Inc.
1996 WL 189276, 1996 Del. LEXIS 144, 676 A.2d 436 (1996)
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Rule of Law:
A director's fiduciary duty of loyalty requires them to present a corporate opportunity to the corporation before pursuing it themselves. While a controlling shareholder has a statutory right to veto a sale of substantially all corporate assets, this right does not excuse a breach of the duty of loyalty, and the director remains liable for any profits gained or damages caused by that breach, even if transactional damages for the lost opportunity are unavailable.
Facts:
- George and Robert Erikson were directors and the controlling shareholders of CERBCO, Inc., a holding company.
- CERBCO's most valuable asset was its controlling interest in a profitable subsidiary, Insituform East, Inc. ('East').
- Insituform of North America, Inc. ('INA') approached the Eriksons, in their capacities as directors of CERBCO, to express interest in purchasing CERBCO's stake in East.
- Instead of presenting INA's offer to the CERBCO board, the Eriksons made a counterproposal for INA to purchase their personal controlling shares of CERBCO.
- The Eriksons did not inform CERBCO's outside directors of INA's original offer and later denied that such an offer had been made.
- The Eriksons used CERBCO's resources, including access to corporate records and legal counsel, to facilitate their personal negotiations with INA.
- The Eriksons and INA signed a letter of intent for the sale of the Eriksons' stock, and INA paid the Eriksons $75,000 to extend this agreement.
- The private sale between the Eriksons and INA was never consummated.
Procedural Posture:
- Merle Thorpe, a shareholder, filed a derivative suit against the Eriksons in the Delaware Court of Chancery.
- The complaint alleged that the Eriksons had usurped a corporate opportunity belonging to CERBCO.
- The Court of Chancery denied the Eriksons' motions to dismiss and for summary judgment.
- After a trial, the Chancellor found that the Eriksons had breached their duty of loyalty.
- However, the Chancellor held that CERBCO was not entitled to damages because the Eriksons, as controlling shareholders, could have lawfully vetoed the corporate transaction under 8 Del. C. § 271.
- Thorpe, the plaintiff, appealed the denial of damages to the Delaware Supreme Court.
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Issue:
Does a controlling shareholder's statutory right to veto a sale of substantially all corporate assets under 8 Del. C. § 271 absolve them from liability for breaching their fiduciary duty of loyalty by usurping the corporate opportunity related to that potential sale?
Opinions:
Majority - Walsh, Justice
No. A controlling shareholder's statutory right to veto a sale of substantially all corporate assets does not absolve them from liability for breaching their fiduciary duty of loyalty. The Eriksons were approached in their capacities as directors, and their duty of loyalty required them to present the opportunity to purchase East to the CERBCO board. Their failure to do so, and their subsequent negotiations for their own benefit, constituted a clear breach of this duty. While the sale of East would have constituted a sale of 'substantially all' of CERBCO's assets, triggering the Eriksons' statutory right as shareholders to veto the transaction under § 271, this right does not retroactively cleanse their initial breach of loyalty. Therefore, while CERBCO cannot recover transactional damages for the lost sale (as the Eriksons' veto, not their breach, was the proximate cause of the non-consummation), the Eriksons are liable for damages incidental to their breach. They must disgorge any profits they received, such as the $75,000 payment from INA, and reimburse CERBCO for corporate expenses incurred in furtherance of their personal deal.
Analysis:
This decision clarifies the distinct roles and duties of individuals who are both directors and controlling shareholders. It establishes that statutory shareholder rights, such as the right to veto a major asset sale, cannot be used as a shield to protect fiduciaries from liability for a breach of the duty of loyalty. The case creates a crucial distinction between 'transactional damages' (which were denied) and damages stemming directly from the act of disloyalty (which were awarded). This reinforces the uncompromising nature of the duty of loyalty in Delaware corporate law, ensuring that fiduciaries cannot profit from a breach, even if the corporation could not have ultimately realized the opportunity.
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