No. 81-222 INTHE SUPREPlE COURT OF THE STATEOF MONTANA 1982

SKIROUNDTOP, INC., individually and derivativelyonbehalf of SKI YELLOWSTONE INC., Plaintiffand Appellant,

vs. JOHN P. HALL,FREDERICKL. MORGENTHALER and CHARLES

### R. MILLER, JR., Defendantsand Respondents.

Appeal from: DistrictCourt of the Eighteenth JudicialDistrict, In and for theCounty of Gallatin Honorable

### W. W. Lessley,Judgepresiding Counsel of Record: ForAppellant: Gregory 0.Morgan argued, Bozenan, Montana Albert Blakey, I11argued,York,Pa. For Respondents: Landoe,Brown Law Firm,Bozeman,Montana J. Robert Planalp argued, Bozeman,Montana Morrow, Sedivy,Olson & Eck, Bozeman,Montana

Submitted: September 14, 1982 Decided: January 31, 1983Mr. Justlce 

### Fred J. Weber delivered the Oplnlon of the Court.This case is a companion case to Naylor 

### v. Hail (1982), Mont

# . , 651P.2d 1010, 39 St.Rep. 1953. Plaintiffs,minority shareholders in Ski YelPowstone, Inc., appeal from the decision of the Eighteenth Judicial District Court for Gallatin County, denying them relief in this stockholders' derivative action arising from the alleged misconduct of several of the officers and directors of Ski Yellowstone, a Montana corporation. We affirm the DistrlctCourtwith one exception. The following issues are presented to this Court by plaintiffs: (1)Did John Hall breach a duty to minority stockholders, with respect to the 

### "C" and "D" stock issues? (2)After acquiring control of the corporation, did John Ball engage in a course of conduct which was oppressive to minority stockholders? (3)After acquiring control of the corporation, was John Hall guilty of fraud and self-dealing? (4)Was the amendment of the corporation'sArticles of Incorporation, which authorized stock for the "C" and "D" issues,valid under Montana law? (5)What relief is appropriate under all of the circumstances? Ski Yellowstone is a Montana corporation which planned to develop a four-seasons resort inGallatin County. Itwas organized in 1973by stockholders in a Pennsylvania corporation, Ski Roundtop, Inc., which is aminority stockholder in Ski Yellowstone. The events on which this action is based occurred primarily in 1975 and 1976,during which time JohnHall obtained control 

### of Ski Yellowstone. The original stock issue which took place in 1973was 1,45O,OUO shares, $1.00 par value, which were relatively evenly distributed among twenty-one shareholders. The shares were issued at a cost of $1.00 per share, 1,050,000 shares for cash in the amount of $1,050,000, and 400,000 shares for land having a value of $400,000. With the exception of defendant John Hall and his family corporation, J.M.S. Corporation, all of the shareholders were friends and associates oE Irvin S. Naylor, the head of Ski Roundtop and the primary organizer,with Hans Geier, of Ski Yellowstone. Naylor originally was in a controlling position in Ski Yellowstone aswell as in Ski Roundtop. Ski Yellowstone was low on funds by 1974. The issue of the Forest Service use permit to develop a ski area, which was essential to the success of Ski Yellowstone, had been delayed. In order to finance the expense of delay, in November, 1974, $290,000 worth of Series "A"debentures were issued. Thesedebentures earned interest and were convertible into the common stock of Ski Yellowstone at $.20 per share. The dilution of the shares from the original $1.00 per share paid in 1973 was recognized by Naylor, but was deemed necessary toprevent bankruptcy. John Hall purchased his $5,000 pro rata preemptive share of the Series "A" debentures and also purchased by agreement an additional $42,500 worth of overage (debentures offered to but not purchased by other shareholders who were first entitled to purchase). Plaintiffs contend there was a "gentlemen's agreement" that the Series "A" debentures would not be converted into stock unless the company was sold.By 1975Skl Yellowstone againwas shortof capitaland in July, 1975, $200,000 worth of Series "8"debentures were issued to the shareholders of the company. Series "B" debentures earned the same interest rate and had the same conversionprivileges asSeries "A" debentures. John Hall became a director (one of ten) of Ski Yellowstone inJune, 1975. During 1975 and 1976 John Hall obtained greater control of Ski Yellowstone by joining several "allies" in acquiring all unpurchased Series "A" debentures, converting those "A" debentures into stock, tnereby increasing the number of Series "B" debentures he could purchase; subscribing to Series "B" debentures and converting the same into stock. The result of these activities was to create a controlling block of shares. Other shareholders alsoconverted Series "A" and "B" debentures into common stock, with the exception of plaintiffs Naylor and Geier. The new voting majority of stockholders reduced the number of directorsfrom ten toseven, and elected Fred Pack

as chairman of the board in place of Irvin Naylor. The corporation authorized the sale of $200,000 of Series "C" debentures witn the same terms as the "A" and "B" debentures. The success of the issue required a pledge of 80 percent of the issue. The issue failed. John Hall distributed a letter to Ski Yellowstone shareholders expressing general confidence in the venture, but pointing out thatexpenses were likelytobe higher than anticipated. In considering the questioned stock issues, it is Important to keep inmind the following findings of facton the part of the District Court: Ski Yellowstone was formedin 1973by Naylor and Hans Geier,both residents of Pennsylvania. Naylor had extensive experience in obtaining venture type capital for business entities and Geier had twenty years experience in the ski industry, including sixteen in upper-level management. The purpose of Ski Yellowstone was to acquire private lands and the necessary permits to use government land to develop its resort. Naylor simultaneously was chairman of the board of Ski Yellowstone and chief executive officer of Ski Roundtop, which operates ski resort

areas in Pennsylvania. Initially, Naylor represented to shareholders of Ski Yellowstone that within a short time a shareholder could sell his stock for $10 

### a share. Ski Yellowstone purchased land and undertook a series of studies, applied for 

### a Forest Service permit, and filed extensive environmental data in 1973. At that time, the Forest Service changed its approach and decided to process the application in the context of a larger regional study, which led to a series of delays. By 1974 it was obvious that Geier was unable to quickly obtain the Forest Service permit, and Naylor caused John Maples, a plaintiff, to be hired for the purpose of liquidating Ski Yellowstone or selling the corporation. In 1974, John Maples represented to the shareholders that the value of their stock could be



### as low as $.12 per share. Following the offering to the snareholders of Series 

### "C" debentures in 1976, plaintiff Rosenmiller, also a director of Ski Koundtop and a close business associate of Naylor, advised Naylor of the conclusions of his committee that Ski Roundtop should decline to invest in Series "C" debentures because their investments should be made in Ski Roundtop's marketing area,that is the ski business in Pennsylvania, 

### and that Ski Roundtop should - not convert Series "A" and "B" to stock. Because of its insight into the thinking and actions on the part of the plaintiffs, the District Court set forth the Rosenmiller letter of May 18, 1976, to Naylor in its findings as follows: "Ihave concluded my discussions with my Committee relative to the advisability of Ski Roundtop converting its Ski Yellowstone Debentures into Common Stock and subscribing to the forthcoming Series "C" Debenture issue. It is the unanimous opinion of our Committee that we should do the following: "1) We auvise that Ski Roundtop, Inc. honor its commitment under the existing Series "B" Convertible Notes subscription, calling for apayment of $4,843.60. Although this Note offers no return for one year it does provide a $.20 a share conversion feature if it is later determined that the stock is, in fact, worth that or a figure in excess of $.20 a share. Most importantly, this Debenture has been substantially collateralized by valuable real estate which has less demands placed against 

### it due to the recent conversion of the Hall notes. "2) It is the unanimous recommendation thatwe do not convert our Series "A" and Series "B" notes into common stock of Ski Yellowstone, Inc. The only rationale for doing so would be to return the control of the Company into its former hands but the likelihood of this occurring, is remote at best. It is felt by our Group that we may be in a stronger position to allow the new management to go forward and if successful, we can convert at a later date and hopefully realize a return and profit on our investment. If new management is unsuccessful, we will be able to write off the common equity portion of our investment against future earnings, developing a tax shelter which will pay for a portion of the loss incurred. We will further be in a good position to take legal action against the new management in the event they have acted not in the best interest of all shareholders."3) Regarding the proposed $200,000 Series "C" Debenture, we would recommend against any further investment in Ski Yellowstone, Inc. at this time. Our rationale being that our investments should be made in Ski Roundtop's marketing area, advancing that which we do best and profit from most, namely, the ski business and recreation generally here in York and Adams Counties. "Tnis constitutes the recommendations of Jacob A. Barnhart, Dr. Anthony Perlman and 

### W. F. 0. Rosenmiller." 

### As noted by the District Court, the letter points out tne conclusion on thepart of those making their recommendations to Naylor: not to convert stock because of the financial risk; consider conversion at a later date if the new management is successful; if newmanagement is unsuccessful, write off against earnings as a tax shelter; take legal action in the event the new management has not acted in the best interest of shareholders; and finally, recommending against any further investment in Ski Yellowstone. John Hall also circulated a letter dated

### May 21, 1976, to Ski Roundtop's board of directors, suggesting that,while he as an individual could convert his debentures to stock for the good of the company, Ski Roundtop would be "illadvised" to sacrifice the interest on the debentures and speculate by so converting. Ski Roundtop might, Hall said, "open itself to minority shareholder suits," if it chose to convert. Tne "C" Series debenture issue failed, although John Hall subscribed to the number allocated to him, conditional upon tne success of the issue. The Ski Roundtop shareholders did not subscribe. 

### A stockholders' meeting noticed on July 1, 1976, was held July 

### 16, 1976. It was preceded by a directors' meet-ing. At that meeting, over Hall's protests that the move would dilute the stock, Ski Yellowstone directors voted to issue company stock in the amount of $500,000 at $.05 a share. The stockholders also approved the issue. 

### (A$.lo share issue was voted down.) In early August, 1976, a falling out took place between Naylor and Hall, accompanied by a series of acrimonious exchanges personally and by mail, which led Naylor to withdraw his support of the "C" Series issue and to exercise his right to review the issue for sixty days as set forth in the 1973 founders' agreement, thus moving the closing date for subscriptions to October 

### 4, 1976. Naylor's friends, and Hall as well, then also withdrew their subscribed support and the issue, which had until then been

over 80 percent subscribed, appeared doomed to fail. The financial situation of the corporation was desperate; land payments and salaries were due and bank notes overdrawn;

even the company's president, Geier, was convinced Ski Yellowstone would fail. In October, 1976, Hall subscribed to a total of $401,000 worth of "C" shares, notwithstanding his previous indicated intention to subscribe to $100,000 to $150,000 worth of the shares. Four other shareholders subscribed for $10,480 worth of stock. John Maples, a minority shareholder and one of the plaintiffs, wrote Wall a letter stating, "Congratulations--you have saved the corporation.

### " When Hall paid the 25 percent due on the "C" Series subscription in October and assumed ownership of 25percent oi the stock, he became owner of 50.7 percent of the Ski Yellowstone stock outstanding (full payment would have givenhim over 77 percent ownership). Naylor and three associates resigned from the board of directors and were replaced by two personal friendsof Hall who were not shareholders. The

new board made a number of changes, including (1)changing the bylaws to place more power in the chairman, Hall; (2) agreeing to postpone further payments due on the "C" issue, first for one month and then (on January 7, 1977) until needed; (3)adopting a two-tier budget, under which the "C" Series payments would be applied to those long-term financial obligations essential to the survival of the company, and the costs of obtaining the Forest Servicepermit would be funded by a subsequent stock issue. On December 10, 1976, Ski Yellowstone sought to raise $450,000 incash by its offer of the "Dl1Series stock issue of 9,000,000 shares at$.05 per share, with purchase rights to be allocated in proportion to shares owned as of that date. The prospectus notified shareholders of the first postponement of "C" Seriespayments, and the adoption of the two-tier budget suggested by director Morgenthaler. It also informed them that the sixty-day review period would be shorteneddue tothepressing need for cash and would expire

on December 23, 1976. The prospectus stated: "Should it be determined that a shareholder of the Company retains his right toexercisehisrightsafterDecember 23, 1976, the Company may be required to issue additional shares to such shareholders." The subscription to the initial "D" Series attracted virtually no subscribers, only one or two small pledges. One shareholder, John Maples, notifiedJohn Hall thathe refused toreturn hisproxy and waive his sixty-day review right. As

a result, on January 7, 1977, the Ski Yellowstone directorsdecided that the oifering was unsuccesstul, dropped the price of shares to $.01 each, and increased the number of shares offered to45,OU0,000. The amended prospectus indicated the postponement of payments due on the "C" issue until needed, and warned, ashad those for earlier issues, that failure to subscribe would result in substantial dilutionof ownership, should the issue succeed. The number of payments was increased from two to four, the first due February 10, 1977, and the lastthreedue on specifieddates "or thereafter at the call of the Directors." The stated purpose of the amendment was to "promote the success of the offering." The closing date for the offering was extended toFebruary 10, 1977. Only John Hall and defendant Morgenthaler were present attheJanuary 7, 1977meeting. The "D" issue was successful, again because of John Hall's subscription to $400,000 of stock, with $2,725 of stock subscribedby four other stockholders. As a resultof his subscription to the Series "D" issue and his previous subscription tothe Series "C" issue, Hall gained the right to obtain 94 percent stock ownership in the corporation. The plaintiffs point out that he had invested only 37 percent of the money invested inorder toget that share of ownership. A letterdatedMarch 10, 1977, fromJohn Hall to the shareholders indicated thatthe firstpayment on the "D" issuewas sufficienttomeet thepresent needs, and that the further installmentswould be called for asneeded. From autumn of 1976 on, Hall rejected Naylor1s repeated attempts to sell Hall his interest in Ski Yellowstone. Naylor com~nencedthis shareholders' suit in Pennsylvania. The cause was transferred to Montana and afterextensive d~scovery,heard before the Eighteenth Judicial District Court in September, 1981. The District Court denied plaintiffs relief, concluding that the defendants had acted in good faith for the benefit of Ski Yellowstone, and committed no fraudulent, oppressive or illegal acts in the

course of their management of and membership in that corporation. Plaintiffs appeal. Because of the complex facts and a number of nondispositive accusations by the plaintiffs, we will consider a number of these accusations first in order to eliminate the

samebefore proceeding to the substantive issues. Plaintiffs concede that defendant Hall had the legal rlght to convert his 

### "A" and "B" debentures to stock, and that he had the right to purchase unsubscribed debentures and unsubscribed "C" and "D" stock. All shareholders possessed those rights. No shareholder was required to give warning to others of his intent to convert to common stock

or purchase overages. Plaintiffs' arguments sometimes are misleading in seeking to establish that John Hall and his "allies" had gained control of Ski Yellowstone, and thereafter oppressed the other shareholders. Several of such "allies"were more closely associated with Naylor than with defendant Hall. John Hall did not take control of Ski Yellowstone until October 1976 when he became the majority shareholder. This

was several months after the previous majority of shareholders had refused to invest further in Ski Yellowstone and thereby retain their own control. Prior to October, 1976, Hall was just another minority shareholder and director, whose vote did not control, and whose responsibility toother shareholders was significantly less than that of a majority shareholder. The record does not establish that Hall's acrimonious exchanges with other shareholders are significant in considering the question of oppression. The District Court found such letters to be "juvenile and unworthy of all letter writers." The exchanges were frequentlymutual. The ylaintiffs as well as Hall were a sophisticated lot, knowledgeable in their fields, and unlikely to abandon an enterprise to their detriment because of a few caustic exchanges with other shareholders. Plaintiffs protest the issuance of shares of Ski Yellowstone to a number of stockholders, including the defendants Miller and Morgenthaler, and also Hall's wife, for services to the corporation. Section 35-1-606, 

### MCA, provides that labor or services actually performed may serve as consideration for shares issued and that "in the absence of fraud in the transaction, the judgment of the board of directors or the shareholders, as the casemay be, as to the value of consideration received for shares shall be conclusive." We find no evidence of fraud in these transactions. Tliere has been shown no impropriety in the transfer of the stock to these parties. It may be noted that prior to the gaining of control by Hall, the board of directors headed by Naylor had issued stock for services to other parties. Plaintiffs' claim in that regard iswithoutmerit.

I Did John Hall breach a duty to minority stockholders with respect to the "C"and "DM stock issues? This is theprincipal issue urged by the plaintiffs. An extensive detailed written prospectus was prepared in connection with both the 

### "C" and "D" stock issues. Each of theprospectuses

was well drafted and contained all of the information reasonably necessary on the part of the shareholders in order to evaluate each of the stock issues. Each of the stockholders received copies of the prospectuses and there is no dispute in that regard. It is also important to keep in mind that John Ball was not the controlling stockholder or director or officer until October 1976. Up to that time he was at most one of seven directors and of nineteen individual stockholders plus two corporate stockholders. Plaintiffs contend that John Hall breached his duties to the minority stockholders by actions designed to alienate them and to facilitate his acquisition of control. We have previously disposed of the acrimonious correspondence as not being significant. The District Court did not find any 

### limitation on the contractual rights of the defendants to convert their shares. No evidence is referred to which raises any question as to the sufficiency of such converslons. We therefore have concluded that the stock conversions by the defendants were proper. The plaintiffs argue that the failure of John Hall to advise other stockholders oi his plans to support the 

### "C" issuewas misleading. There is no evidence to support that contention. As previously indicated, the primary plaintiffs alreadyhad concluded they would not support the "C" issue. We find that all information reasonably needed by theminority stockholders in order that theymight conclude whether or not to convert their "A"

or "B" debentures, or to purchase 

### "C" or "D" stock issueswas furnishedtothem and thattherewas no breach of duties with regard tothe alienationof stockholder interestinthe company. Plaintiffs contend that John Hall breached his fiduciarydutiestominority stockholdersby purchasing stock in "C" on terms not available toothers, and by authorizing the "D" issue when that issue was unnecessary. As mentioned, the prospectus for the "C" issue and for the "D" issue set forth all of the pertinent details needed by the stockholders. The change intheamount of interesttobe paid by John Hallwillbe discussed later. In connection with the proposed "D" issue, the directors, including John Hall, adopted a two-tier budget. Under this budget, long-term obligations essential to the survival of the company were tobe paid out of theproceeds of the "C" issue. The second tier related to items to be paid in order to meet the costs of obtaining the Forest Servicepermit, and theplanwas thatsuch second tierwould be paid out of the proceeds of the "D" issue. Plaintiffs argue that the "D" issuewould not have been needed if Hall had paid for all of the "C" issue. There is substantial evidencecontradicting thisassertionintherecord. The District Court found that the actions of the directors and Hall were to be measured by the "business judgment rule." We approve the statement of this rule contained inNursing Home Building Corp. v. DeHart (1975), i3Wash.App. 489, 535P.2d 137, 143-144, asfollows: 

# ".

. 

# . The 'business judgment rule' immunizes management from liability ina corporate transaction undertaken within both thepower of thecorporation and the authority of management where there is a reasonable basis to indicate that thetransaction was made 

### in good faith. An excellent statement of the 'business judgment rule' is found in W. Fletcher 51039 atpages 621-25: "'Itis toowellsettledtoadmit of controversy that ordinarily neither the directors nor the other officers of a corporation are liable for mere mistake or errors of judgment, either of law or fact. In other words, directors of a commercial corporation may take cnances, the same kind of chances thataman would take in his own business. Because they are given this wide latitude, the law wiilnot hold directors liablefor honest errors, for mistakes of judgment, when they act without corrupt motive and in good faith, that is, for mistakes which may properly be classifiedunder thehead of honest mistakes. And that is true zven though the errors may be so gross that they may demonstrate the unfitness of the directors tomanage the corporate affairs. This rule is commonly referred toasthe "businessjudgment rule."'

It(E'ootnotes omitted.) See also H. Henn, Law of Corporations S242 (1970)." The actions of theboard of directors inthiscase are to be rneasureu by the business judgment rule. While it is clearly arguable that the two-tier budget might not have been tile perfect solution to the financial needs of the corporation, we find ample evidence in the record, as pointed out by the District Court, demonstrating that this financial analysis contained in the two-tier budget was a reasonable tneory for the directors and officers to adopt. The record does not show any corrupt or fraudulent motives. Of particular significance is the absence in the record of facts showing an actual mistake of judgment inthe adoption

or the two-tier budget and the issue of the "Dl' stock as well as the "C" stock. Following the subscription to the "U" issue, for the firsttimeSkiYellowstonewas inan adequate financial posture tomeet current operating expensesand long-range development expenses. It is lnteresclng to note that the plaintiffs, who concluded that it was bad business judgment on their own part to invest additional funds in this corporation, now contend that the "Dlt issue



### was unnecessary and was oniy a device to obtain control ot the corporation. As mentioned previously, the plaintiffs haa the option to purchase the stock in tne same manner and at the same price and terms as the defendants, and in particular John Hall. As determined by the District Court, the record contains substantial evidence to support the business need for tne "D" issue. We approve the "DMissue following the "C" issue under the buslness judgment rule, as tne plaintiffs have failed to prove any basis tor setting the same aside. Plaintitfs also argue that the reduction in price of the "0" issue from $.05 to $.01 was an improper sale of the stock at less than its value. The record demonstrates that all of the shareholdershad the opportunity to purchase the "DMissue at $.US but failed to do so. The directors then reduced the prlce from $.05 to $.01 per share,again giving tile opportunity to ail shareholders to purchase the "D" issue at S.01 per share. Only John Hall and a few other stockholaers purchased. The plaintiffs did not choose to do so. Complete information was furnished under the prosp2ctus to ail of the stockholciers so that no one was misled. Plaintiffs argue that the issue should have been held open at the $.05 price for sixtydays as required under the founders' agreement. In the prospectus, all of the stockholderswere advised of the tnirteen-day period within which a decision was required on the $.05 price, and were also advisea that there was 

### a sixty-day provision which ~rlightgive stockholders an opportunity to purchase at the$.05 prlce for a longer period. Having found that no one desired to purchase at $.05, the directors reduced the oLferlng price to $.01 an6 gave the tull sixty-day period within which topurchase ats.01. Again, it is tobe noted tnat theplaintiffs did not attempt topurchase or offer to purchase atthe $.01 price. Further, there was substantial evidence to support the conclusion of the District Court that the price of $.01 was the fair market value of the stock. The claim astothepurchase price of the "D" issue is without foundation. We therefore conclude that there was a legitimate business purpose in the adoption by the board of directors of the two-tier budget, and inthemaking of the "D" issue,

as well as the reduction in the subscription price for the "D" shares from $.O5 to V.01. Such actions are approved under thebusiness judgment rule. The District Court prepared extensive and detailed findings of fact, supported by a memorandum analyzing the factsand rules of law. We willnot substituteour judgment for that of the trier of fact. As stated in Jensen v. Jensen (19bl), Nont

# . , 629 P.2d 765, 768, 38

"ThisCourt willnot substitute itsjudgment for that of the trier of fact. We will consider only whetner substantial credible evidence supports the findings and conclusions. Findings will not be overturned unless there is a clear preponderance of evidence against them, recognizing that evidence may be weak or conflicting, yet still support the findings. Phennicie v. Phennicie (1979), Mont., 604 P.2d 787, 790, 36 St.Rep. 2378, 2381. The judgment of the trial court ispresumed correct, and

### tnlsCourt will draw every legitimate inference to support thatpresumption. Marta v. Smith (196l), Mont., 622 P.2d 1011, 1015, 38 St.Rep. 28, 32; Madison Fork Ranch v. L & B Lodge, Etc. (1980), Mont., 615 P.2d 900, 905-906, 37 St.Rep. 1468, 1473." On the key questionsof the "C" and "D" issues, there

### is substantial credible evidence supporting the findingsand conclusions of the court. We therefore affirm such conclusions on thatbasis aswell. Plaintiffs also contend that John Hall breached his fiduciary duties to stockholders when he failed to pay the balance of thepurchase price on the series "C" issue in the time required under the prospectus. We find that this failure to pay did deprive the corporation of the purchase price of the stock, as a result of which the corporation suffered a loss equivalent to the income which it would have earned if Hall had paid for the "C" stock on the same basis

as that offered to all shareholders. We thereforehold that the District Court shall determine the interest to be paid by John Hall to the corporation, which shall run from the due date for the payment of the balance of the purchase price on the "C" 

### issue as contained in the offering to the date onwhich itwas actuallypaid.

I1 

### After acquiring control of the corporation, did John Hall engage in a course of conduct which was oppressive to minority stockholders and which justifies liquidation of the corporation? Plaintiffs contend that there is oppression sufficient to qualify for liquidation of the corporation pursuant to section 35-1-921, 

### MCA, which provides in pertinent part: "Power of court to liauidate assets and business of corporation

## -- venue. (1 ) 

### The district courts shall have fullpower - 

### to liquidate the assets and business of 

### a corporation: "(a) in an action by a shareholder when it is established that:"(ii) the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent

# ..."

We refer to Skierka v. Skierka Bros., Inc. (1981), Mont

# . , 629 P.2d 214, 38 St.Rep. 754, and Fox v. 7L Bar Ranch Co. (1982), Mont. 

## , 645 P.2d 929, 39 St.Rep. 862. These cases discuss at length the rationale behind the liquidation of a corporation because of illegal, oppressive or fraudulent acts. In the Skierka case, we quoted from the case of Fix v. Fix Material Co., Inc. (Mo.App. 1976), 538 S.W.2d 351, inwhich thecourtmakes the following observationsparticularlyapplicablehere: "'The Illinoiscourtsmade it clear, when construing the Illinois Statute (the Model for S 351.485 [the Missouri statute]), that "oppression" is, in and of itself, an independent ground for relief not requiring a showing of fraud, illegality, mismanagement, wasting of assets, nor deadlock, though these factorsare frequentlypresent

# . .

# . "'It has often been stated that oppression suggests

# . .. "a visibledeparture from the standardsof fairdealing, and a violation of fair play on which every shareholder who entrusts his money to a company 

### is entitled torely." 

### "

# .. . Such definitions are suggested perimeters of the broad term rather than narrow definitions which would tend to rob the term of its useful flexibility. As we read the statute, it is intended the courts will proceed on a case-by-case basis. "I" ~kierka,629 P.2d at 221, 38 St.Rep. at764. It should be noted that both Skierka and - Fox involve closely-held family corporations. In contrast, aspointed outby theDistrictCourt, thepresent case involves approximately twenty businessmen with extensive financial and investment backgrounds. The plaintiffs argue that, after gaining control in1976, John Hall ran a one-man show with limited meetings of the executive committee and board of directors. They also argue that the firing of Geier indicated such type of conduct, ignoring the finding by the District Court that Geier had improperly transferred company funds toa private account of hisown inorder tocover hisretirement fund in anticipationof the collapse of the corporation. Reference is alsomade tothepurchase of theproperty towhich Naylor claimed title. That is the subjectof thecompanion case of Naylor v. Hall, previously cited, and is not appropriate here. The District Court analyzed these facts in detail, and set forth examples in a number of paragraphs in its findings, showing how the conduct of the defendants was proper and for the benefit of the corporation. Ultimately, the DistrictCourt concluded: "The defendants acted in good faith for the benefit of the corporation, Ski Yellowstone, Inc. "The defendants committed no fraudulent, oppressive, or illegalactsinthecourse of theirmanagement and membership of and with SkiYellowstone, Inc." Aspreviously stated inJenson, we willconsider only whether substantial credible evidence supports the findings and conclusions of the court and the findings will not be overturned unless there 

### is a clearpreponderanceof evidence against them. We find no basis infact for an overturning of the findingsand conclusions.

1x1 After acquiring control of the corporation, was John Hallguiltyof fraudand self-dealing?This contention on thepart of theplaintiffsagain is based on section 35-1-921, MCA, which is above quoted. The basic controlling rule of law is also quoted in Skierka, above.Plaintiffs contend that by the postponement of the making of payments on the "C" issue, Hall engaged in inappropriate self-deallng. That issuehasbeen resolved by the interest requirement previously set forth in this opinion. In a similar manner, the contention is made that the improper purchase of the Naylor lot was significant, but that has alsobeen resolved in the case of Naylor v. Hall, above. Plaintiffs additionally refer to a number of relatively insignificant actions by Hall as a basis for selfdealing. These contentions are answered by thefindingsand conclusionsof the District Court described, with which the plaintiffsdonot take issue. Plaintiffs contend that the issuance of corporate creditsfor serviceswas improper. The District Court found that this action was not improper, and was similar to the acrionson thepartof some of theplaintiffswhen theywere incontrol. Again, we find that there 

### is substantial credibie evidence supporting the findings and conclusions of the DistrictCourt thattherewas neither fraud nor self-dealing

on thepartof John Hall.

IV Was the amendment of the corporation's Articles of Incorporation, which authorized stock for the "C" and "D" issuesvalid under Montana law? Plaintiffsargue thatthese

### issues must be rolled back because of the failure to give the statutory notice of the stockholders1meeting at which the stockholders approved the amendment of articles to increase the authorized shares. We hold that the plaintiffs are equitably estopped from asserting the invalidity of the amendment. Section 35-1-207, MCA, as then in effect, provided that thirty days written notice of a shareholders1meeting must be given if the meeting will consider a vote on a proposed amendment of articles to increase shares. Here, notice of shareholders1meeting to be held on July 12, 1976, was given by a letter dated July 1, 1976, which indicates substantially less than the statutory thirtydays. The date of themeeting subsequently was changed to July 16, 1976,by

an undated subsequent notice. That notice announced that the purpose of the meeting was to amend the Articles of Incorporation in order to draw up the par value and to increase the number of authorized shares from 6,000,000 shares to a number to be determined at the meeting. The significance of themeeting was stressed. The effectiveness of the notice is demonstrated by the vote cast at the meeting where 2,513,000 shares were represented out of 

### a total of 2,614,200 shares outstanding, making over 96 percent of the voting stock present in person or by proxy. The vote at the meeting was unanimous in adopting the recommendation of the directors to amend the Articles to increase the number of shares to 60,000,000 shares and to drop the par value of the shares to $.01. In reliance upon the validity of the amendment,JohnHall alone subscribed to

a substantial number of Series "C" stock, a subscriptionwhich assured the success of the issue. As indicated 

### by the District Court, this saved the corporation from failure. In addition, John Hall alone subscribed to a substantial portion of the "D" issue after the failure of other shareholders to join in that subscription. Again John Hall's subscription saved the issue from failure. That subscription

was clearly a high-risk adventure which funded the second tier of the two-tier budget and assured the future financial viability of the corporation. Wow, years later, when the issuance of the Forest Service permit seems assured, and the

success of the corporation seems likely, the courts are asked to invalidate the amendment of the corporation Artlcles and roll back the stock issues. Obviously this is directed almost exclusively 

### at John Hall. The plaintiffs making this request include several of the directors who approved the amendment and particularly Mr. Naylor, who was present and abstained from voting, as well as a large number ok the minority shareholders who actually voted their approval of the amendment. All of the plaintiff shareholders have benefited from thepurchase by John Hall of the "C"and "D" stock. The present action is a stockholders' derivative suit which is an invention of the courts of equity and is recognlzable only in equity. Noble 

### v. Farmers Union Trading Co. (1950)r 123 Iqont. 518, 529, 216 P.2d 925, 

### 930. This Court previously has recognized the flexibility required of courts of equity in resolving disputes. See, Skierka and Fox, cited above. We hold that itwould be inequitable to allow the plaintiffs to assert the invalidity of the amendment of the Articles because of their involvement and acceptance of benefits.

### v Wnat relief is appropriate under all the circumstances? Plaintiffs urge us not to view this suit asmerely the outcome of a corporatepower struggle betweenNaylor and Hall. The record demonstrates that the root of the conflict

was sucn a power struggle, and that the effect of Wall's actions was less disastrous than had he failed. The record discloses that Hall's actions were taken primarily to preserve and promote Ski Yellowstone, regardless of the very substantial risk to himself. He converted interest-bearing debentures into stock, reducing the financial obligation of the financially-strained corporation, and assumed the risk that the $.20 per share value of the stock would decrease (as it did), and, incidentally, gained more voting power. He twice subscribed to sufficient stock in the company to insure the success of a subscription which was otherwise certain to fail. He legitimately gained ownership of the vast majority of Ski Yellowstone stock. Naylor, on the other hand, sought to maintain control of Ski Yellowstone by means which placed himself and Ski Roundtop in the most secure financial situation, but threatened the viability of Ski Yellowstone. He originally indicated his willingness to invest $200,000, assuring prospective investors that their $1.00 per share would shortly be worth $10.00, but then only invested $50,000 hiinself. After his arguments with Hall, he withdrew his support for the "C" Series and persuaded many of his associates to do the same despite the company's dire need for cash. He did not risk converting his own debentures to stock, and invested no more capital in the corporation afterthe summer of 1976. Indeed, very few of theminority stockholders chose torisk further investments inSkiYellowstone after the "0" debentures. They ventured a total of $10,480 in the "C" offering and less than that inthe 'ID" offering. Plaintiffs' statement that for 37 percent of the investment capital, John Hall obtained over 94 percent of the stock, sounds much less significant when we realize that without the almost $900,000 which Hall invested, the company would have foundered. The bulk of the evidence supports the conclusion that theshareholderswithdrew their supportfrom SkiYellowstone primarily because of their unwillingness to extend themselves further in a risky investment. Wehave found there

was sufficientevidencetosupport thetrialcourt's conclusionthat the "D" issueprovided funding for the second tier of thebudget and that thereduction inthe priceof the "D" shares from $.05 to$.01 was not unreasonableor improper. We agreewith theDistrictCourt's conclusionthatthe bottom line is really thatplaintiffs chose not toparticipate and not to invest further in the Ski Yellowstone venture, and the remedies sought against thedefendants are not warranted. We conclude that the record adequately supports the trial court's findings that the defendants' actions, while not totally blameless, were neither fraudulent, oppressive, nor illegal, but were taken ingood faith for thebenefit of thecorporation. Therefore, except for our finding that John Hall is liable to Ski Yellowstone for interest arising from his delayed payments on the "C" Series subscription, we affirm the District Court in allrespects. We remand thecause totheDistrict Court for a determination of the amount of the interestdue fromMr. Hall.

/

We concur: 

# ~&we_S t

# $&$&,,& Chief ~ustice

DistrictJudg tting in place of Mr. ce Gene B. DalyMr. JusticeFrank B. Morrison,Jr., dissenting: I respectfully dissent: Both theDistrict Courtand the majority of this Court defeated the claim ofminority shareholders because the actions of JohnHall salvagedSkiYellowstone from the throes of financialruin. Whether JohnHall saved the "corporatebacon" isnot the issue in this case. Indeterminingwhether the "D"stock issuewas proper, the majority rely upon the "business judgment" rule. The "business judgment" rule is notapplicable to this case. However, thisCourt'sreliance upon the rule indicates that themajority simplydid notunderstand the essence of plaintiff's constructive fraud allegation. The "business judgment" rule is employed to immunize corporate officersand directorswhere they act ingood faith,but, as amatter of hindsight, it canbe determined that they did not take the course of action which hindsight shows to havebeen thebest selection. The rule simplyhas

no application in this case. Herewemust determine whether the desired corporate objective of obtainingmuch needed

revenue could have been achievedwithout "watering" the stock ofminority shareholders. If the revenue could have been raised without diluting their interests, then the means Hall employed constituted a "constructivefraud"within the meaning of Montana law. JohnHall decided to pay forhis subscribed stock under the "C"issue throughadeferred payment plan instead of paying cash as hewas supposed to do under the original offering. Thiswas justifiedby relianceon a two-tier budget. Hall claimed itwasunnecessary topay cash for the stock as therewere not sufficient immediate cash needs of 

### the corporation to require a cash subscription. Then, without firstpaying for the 

### "C"issue,Hall caused a "D"issue. As I hereafter point out, thiswas a constructive fraud. To compound the constructive fraud committed in the issuance of the "D" stock,Hall and his board of directors furtherdiluted the interest of theminority shareholdersby replacing the original five cent "D" issue with penny stock. Of course,thismaneuver did not enable the corporationto raisemoremoney, it simply gave Hallmore shares of stock. The corporate interestwas notbeing further enhanced by Hall's maneuvering; rather,the minority stockholders' interests were being further "watered." Thisagain constituted a constructive fraud. Corporate directors, in issuing additional shares of stock,owe a fiduciaryduty to minority stockholders. See Condec Corporationv. LunkenheimerCompany (Del.1967), 230 Atl.2d 769. Where a fiduciary relationshipadheres,the law of "constructivefraud" controls. Constructive fraud involves "any breach of dutywhich,without an actually fraudulent intent,gains an advantage to the person in faultor anyone claiming under him bymisleading another tohis prejudice



# . .

# ." Section 28-2-406(1), MCA. Where a fiduciary duty is involved, the trustee isbound to act in the highestgood faith. Section 72-20-201,MCA. If a transaction is challenged, the burden is upon a corporate officer or a corporate director to prove that thequestioned actionswere fair and in good faith. FirstStateBank of Hilgerv. Lang (1918), 55Mont. 146, 174Pac. 597. It is clear from the evidence in this record thatthe financing technology employed by Hallbenefited Hall at the expense ofminority shareholders. Of course, it is no defense to argue thatHallbenefited the corporation because the samecorporate funds could have been realizedwithout unnecessarily diluting the interestsofminority shareholders.

### œ he majority seems to grasp atdefendants' argument that minority shareholderswere offered the sameprice Hallpaid for all stock issues. This rationale makes very bad corporate lawand greatly erodes theprotection previously afforded those benefiting froma fiduciary relationship. Under the law articulated in themajority opinion,minority shareholders

can nowbe coerced intopurchasing additional shares ina corporation inwhich theywill have novoice. Further, unless the minority shareholdersarewilling to participate under such adverse circumstances,theywillbe denied standing to claima breach of the fiduciaryduty owed. If they have

nomoney to invest inadditional shares,theywill be totally helpless. There is an old adage that "bad facts make bad law.'' I

can think of no better example than this case. Themajority is rewardingJohnHall forrescuing SkiYellowstonewhen it

was at the verge of bankruptcy. I certainly understand the equity in thatposition. However, indoing so, the majority has emasculated the lawof constructive fraud. In enacting the laws on constructive fraud,the legislature soughtto prevent theweak from becoming prey of the strong. The statutory law of this Statewhich soughtto advance the legislature's laudable objectivegained added significance with its application in Skierkav. SkierkaBrothers, Inc. Mont. (1981) 

## , 629P.2d 214, 38 St.Rep. 

### 754. I can only conclude from themajority decision in this case, that the lawof constructive fraudas itexists inMontanawill be applied on an ad hoc basis. Iwish to point out to thosewho attemptto rely upon this case in the future,that it isnothing but an "aberration" in the law. Misplaced relianceon the "business judgment" ruleand refusal to apply the lawof constructive fraudresulted from the facts whichwere here at issue. JohnHall saved this corporation frombankruptcy. All 

### of the investors in this casewerehighly-experienced businesspersons. Hall carefullymade all investment opportunities available to thosewith whom he occupiedaposition of trust. These factors have permitted him toprevail here,notwithstanding clear legal principleswhich shouldmandate plaintiff's

success. Iwould rollback the "D" issue as amatter of law becauseunder theundisputed evidence in the record, the issue caused a constructive fraud onminority shareholders.

Mr. Justice John C. Sheehy,dissenting: I join in the dissent of Mr. JusticeMorrison.