Warren v. Campbell Farming Corp.
2011 MT 325, 271 P.3d 36, 363 Mont. 190 (2011)
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Rule of Law:
A corporate transaction that lacks legal consideration can still be reviewed for fairness under the statutory safe harbor for director conflict-of-interest transactions. The business judgment rule does not apply to such transactions, and claims for breach of fiduciary duty by a controlling shareholder remain distinct and are analyzed under the Daniels test, even if arising from the same facts.
Facts:
- Campbell Farming Corporation (Campbell) is a closely-held Montana corporation.
- Stephanie Gately controlled 51% of Campbell's shares, while H. Robert Warren and Joan Crocker controlled the remaining 49%.
- The company's three directors were Stephanie Gately, her son Robert Gately, and Warren. Robert Gately also served as the company's president.
- In her capacity as a director, Stephanie Gately proposed awarding a bonus of company stock and cash valued at $1.2 million to her son, Robert.
- The stated purposes of the bonus were to compensate Robert for past service and to prevent him from resigning.
- Robert was not required to sign an employment agreement or fulfill any future conditions to receive the bonus.
- The bonus proposal was put to a shareholder vote, where Stephanie Gately used her 51% controlling interest to approve it over the dissenting votes of Warren and Crocker.
Procedural Posture:
- H. Robert Warren and Joan Crocker filed a derivative and direct action suit against Campbell Farming Corporation, Stephanie Gately, and Robert Gately in the U.S. District Court for the District of New Mexico.
- Plaintiffs alleged breach of statutory and fiduciary duties, waste of corporate assets, and other common law claims.
- Following a bench trial, the District Court entered a judgment in favor of the Defendants (Gatelys and Campbell).
- The District Court ruled that the bonus was valid under the 'fairness' prong of the statutory safe harbor, that the directors' actions were protected by the business judgment rule, and that there was no breach of fiduciary duty under the Daniels test.
- Warren and Crocker, as Plaintiffs-Appellants, appealed the judgment to the U.S. Court of Appeals for the Tenth Circuit.
- Finding that the appeal involved dispositive issues of first impression under Montana law, the Tenth Circuit certified three questions of law to the Supreme Court of the State of Montana.
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Issue:
This case addresses three certified questions from the Tenth Circuit Court of Appeals concerning corporate governance in Montana: 1) Does the statutory safe harbor for a director's conflicting interest transaction apply to a bonus that lacks legal consideration? 2) Does the business judgment rule apply to a director's conflicting interest transaction? 3) Does the Daniels test for breach of a controlling shareholder's fiduciary duty apply to a transaction that also involves a director's conflict of interest?
Opinions:
Majority - Justice Jim Rice
In response to the certified questions: 1) Yes, the safe harbor provision can be extended to cover a conflict-of-interest transaction involving a bonus that lacks consideration. The Montana Business Corporation Act (MBCA) uses the term 'transaction' more broadly than 'contract.' The statute's text distinguishes transactions made 'pursuant to contract' from other transactions, implying not all must have consideration. The bonus, intended to retain a key employee, qualifies as a 'consensual bilateral arrangement' and is therefore a 'transaction' subject to a fairness review under the safe harbor provision, § 35-1-462(2)(c), MCA. 2) No, the business judgment rule does not apply to situations involving a director’s conflict-of-interest transaction. The business judgment rule is a defense against claims for breach of the duty of care (e.g., honest mistakes in judgment). It does not shield directors from claims involving a breach of the duty of loyalty, such as self-dealing or conflict-of-interest transactions, which are governed exclusively by the specific safe harbor statutes. 3) The applicability of the Daniels test is bifurcated. No, the Daniels test does not apply to a claim specifically challenging a director's conflict-of-interest transaction, as such claims are resolved exclusively under the MBCA's safe harbor provisions. However, Yes, the Daniels test does apply to a separate common law claim alleging that a controlling shareholder breached their fiduciary duty to minority shareholders. The safe harbor statutes for director conflicts do not preclude separate actions against a majority shareholder for oppressive conduct or breach of their unique fiduciary duties, even if the claims arise from the same set of facts.
Analysis:
This decision provides critical clarification on the distinct legal frameworks governing disputes within closely-held corporations in Montana. It establishes that the statutory safe harbor is the exclusive analytical tool for director conflict-of-interest claims, but it does not displace separate common law claims for breach of a majority shareholder's fiduciary duty. This creates parallel but separate avenues of litigation, meaning a transaction might survive a 'fairness' review under the conflict-of-interest statute but still lead to liability for the majority shareholder under the Daniels test for shareholder oppression. The opinion reinforces the separation between the duties of a director and the duties of a controlling shareholder, providing a clear roadmap for litigating self-dealing and minority squeeze-out claims.
