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Zetlin v. Hanson Holdings, Inc.

New York Court of Appeals
48 N.Y.2d 684 (1979)
ELI5:

Rule of Law:

Absent looting of corporate assets, conversion of a corporate opportunity, fraud, or other acts of bad faith, a controlling shareholder is free to sell their controlling interest for a premium price without being required to share that premium with minority shareholders.


Facts:

  • Plaintiff Zetlin owned approximately 2% of the outstanding shares of Gable Industries, Inc.
  • Defendants Hanson Holdings, Inc., and the Sylvestri family collectively owned 44.4% of Gable's shares, which constituted an effective controlling interest.
  • The defendants sold their 44.4% interest to Flintkote Co.
  • The sale price for the defendants' shares was $15 per share.
  • At the time of the sale, Gable's stock was trading on the open market for $7.38 per share.

Procedural Posture:

  • Plaintiff Zetlin sued defendants Hanson Holdings, Inc. and Sylvestri in a New York trial court.
  • The trial court ruled in favor of the defendants (inferred).
  • Zetlin, as appellant, appealed to the Appellate Division, an intermediate appellate court.
  • The Appellate Division affirmed the trial court's decision, ruling in favor of the defendants-appellees.
  • Zetlin, as appellant, appealed that decision to the Court of Appeals of New York, the state's highest court.

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Issue:

Does a controlling shareholder, absent looting, fraud, or other bad faith, have a legal duty to provide minority shareholders with an equal opportunity to sell their shares at the premium price paid for the controlling interest?


Opinions:

Majority - Per Curiam

No. A controlling stockholder is free to sell, and a purchaser is free to buy, a controlling interest at a premium price without any obligation to minority shareholders, provided there is no looting of corporate assets, conversion of a corporate opportunity, fraud, or other bad faith. The court reasoned that it is long-settled law that an investor who acquires a dominant position has the right to control the corporation. The premium paid for control shares is a legitimate payment for the privilege of directly influencing the corporation’s affairs. To require that a control premium be shared with all shareholders would essentially mandate that a controlling interest be transferred only via a tender offer to all stockholders. The court concluded that such a radical change to existing corporate law should be enacted by the Legislature, not judicially imposed.



Analysis:

This case firmly establishes the 'market rule' for the sale of corporate control in New York, explicitly rejecting the 'equal opportunity rule' advocated by the plaintiff. The decision provides legal certainty for corporate transactions, confirming that a controlling block of stock is a distinct asset that can be sold for a premium. This precedent facilitates mergers and acquisitions by allowing acquirers to negotiate directly with controlling shareholders without triggering an obligation to make the same premium offer to all minority holders, so long as the transaction is free from fraud or self-dealing.

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