Of the District of Massachusetts, sitting by designation. *

United States Court of Appeals

For the First Circuit

Nos. 08-2588, 09-1017 

ALEXANDER G. BALDWIN,

Plaintiff, Appellant/Cross-Appellee,

v.

JOHN W. BADER; STEVEN P. BOULET; MICHAEL L. BROUSSEAU;

SCOTT F. HALL; ROGER H. POULIN; JOHN A. POWELL,

Defendants, Appellees/Cross-Appellants.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. D. Brock Hornby, U.S. District Judge]

[Hon. John H. Rich III, U.S. Magistrate Judge]

Before

 Torruella and Boudin, Circuit Judges,

and Saris, District Judge. *

George J. Marcus with whom David C. Johnson and Marcus, Clegg

& Mistretta, P.A. were on brief for plaintiff, appellant/crossappellee.

Paul McDonald with whom Theodore A. Small and Bernstein Shur

were on brief for defendants, appellees/cross-appellants.

October 19, 2009
The six are John W. Bader, Steven P. Boulet, Michael L. 1

Brousseau, Scott F. Hall, Roger H. Poulin and John A. Powell. They

were the defendants in the law suit and the only directors of the

company at the time the suit began; we refer to them as "the

directors."

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BOUDIN, Circuit Judge. This case arises from two

transactions in which WahlcoMetroflex, Inc. ("WMI" or "the

company") issued equity shares as compensation for agreements made

by most of its shareholders to guaranty personally loans made to

WMI. Alexander Baldwin, one of seven shareholders and founders of

WMI, filed suit alleging that WMI's directors breached their

fiduciary duties to him by issuing the two sets of shares, each of

which diluted his stake in WMI. The district court ruled on

summary judgment that WMI's directors were liable to Baldwin on the

second transaction but not the first, and both sides now appeal. 

WMI is a Delaware corporation based in Lewiston, Maine,

that manufactures emissions control equipment used in power

generation and other industries. The company was formed in 2001

after Baldwin and six other investors acquired the assets of a 1

predecessor company in a bankruptcy proceeding. All made capital

contributions to WMI in the amount of approximately $14,285 each,

and, in exchange, received the company's shares in equal amounts

(14.28 percent each). The seven shareholders also comprised WMI's

board of directors for much of its existence, and Baldwin served as

chairman and president until 2004, when he resigned his positions

in management and on the board.
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At the outset, WMI's operations were financed primarily

by Wells Fargo Business Credit ("Wells Fargo"), which provided both

a loan of $365,000 to fund the acquisition of assets from the

bankrupt predecessor and a line of credit up to $3,385,000 for

future operations. These loans were backed not only by WMI's

assets, but also by personal guaranties from all seven founders:

Baldwin and one of the other directors, John W. Bader, provided

unlimited guaranties while the remaining shareholders provided

limited guaranties capped at 14.28 percent of any outstanding

principal and interest due. No compensation was provided to any of

the seven for giving the guaranties.

The Wells Fargo financing contained several limitations

unfavorable to WMI. The bank, for example, agreed to advance

funding based only on the value of existing assets and not on works

in process, which in practice limited WMI to drawing only about

half of the line of credit's face value. Needing more funding, WMI

in early 2001 borrowed roughly $900,000 from the Finance Authority

of Maine, the Androscoggin Valley Council of Governments ("AVCOG"),

and Coastal Enterprises, Inc. These loans too were backed by the

shareholders' personal guaranties, again without compensation. 

Despite these additional loans, WMI operated at a net

loss in each of its first three years and during this period its

management and board sought either to sell the company or find new

investors, and also to replace Wells Fargo as its bank lender. By
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early 2005, Poulin, who acted as Director of Materials, told Bader

that WMI needed at least $200,000 to fund an additional project for

a customer--without which WMI would have to cease its operations.

AVCOG provided a loan of $205,000, conditioned on guaranties from

all of the shareholders; but, the company being now precarious,

three of them balked at providing uncompensated guaranties absent

a commitment from all to do so.

Lacking cash to pay for guaranties, the board acting

with legal advice determined at a March 2005 meeting that

shareholders that guarantied the AVCOG or any future financing

would be issued WMI common shares equaling 5 percent of the

company's outstanding equity for each $100,000 of corporate debt

guarantied. The six directors later provided unlimited personal

guaranties for the AVCOG financing, and AVCOG made the loan without

a guaranty from Baldwin, which Baldwin had declined to provide.

Because of counsel's concern that Baldwin might have had

insufficient notice or information, however, no compensatory shares

were issued to anyone for the AVCOG transaction. 

Even after the AVCOG loan, the company continued to incur

losses and, by the beginning of August 2005, WMI had $303,641 in

accounts payable over 60 days past due and liabilities in excess of

assets by more than $846,000. Concluding that it was on the verge

of forced liquidation, the company in the same month secured a

commitment from Androscoggin Savings Bank ("ASB") to provide
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approximately $3.6 million in financing, partly in loans and partly

in a line of credit, to extinguish the company's existing bank debt

and--by contrast to the Wells Fargo loan terms--effectively allow

limited draws on the line of credit based on works in process.

However, ASB required personal guaranties from WMI's shareholders,

and because of the large and more flexible line of credit, these

guaranties carried greater risk for the guarantors.

On August 10, 2005, Powell--who had succeeded Baldwin as

president--sent Baldwin a letter outlining the general terms of the

ASB refinancing, including the guaranties required, and informing

him that, under the formula earlier adopted, his equity in WMI

would be diluted if he chose not to provide a guaranty. Baldwin

objected to the short five-day period allowed to him to decide, so

the ASB refinancing went ahead on August 18 with compensation for

the guaranties being deferred. The refinancing repaid Wells Fargo

and extinguished the earlier guaranties of Baldwin and the others

to Wells Fargo.

The board deferred issuing compensatory shares while

Baldwin pondered whether to provide a guaranty and, when he failed

to meet a year-end deadline, the board on January 19, 2006, voted

unanimously to issue compensatory shares to themselves in exchange

for having guarantied the ASB financing. The board used the same

formula as had previously been adopted for the more modest $205,000

loan from AVCOG but not then utilized. As a result of the share
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issuance, Baldwin's stake in WMI was diluted from 14.28 percent to

5.04 percent. This is the first of the two transactions later

challenged by Baldwin's law suit. 

WMI's financial condition began to improve after the 2005

refinancing. It earned a profit in 2006 and was now able to

finance more and bigger projects, and it soon drew down nearly all

of the available line of credit. The board then unanimously voted

in late 2006 to increase by $1,000,000 WMI's revolving line of

credit with ASB and to increase by $100,000 a preexisting term

loan. ASB again asked for personal guaranties from WMI's

shareholders, and on December 26, 2006, Baldwin was advised that

his guaranty would be required to receive new compensatory shares.

Although provided current financial information about the company,

Baldwin eventually declined to guaranty the new loan.

The 2007 ASB financing closed on January 18, 2007, with

all WMI shareholders except Baldwin providing unlimited personal

guaranties. On January 19, 2007, the board voted to issue

themselves compensatory shares; although the company's prospects

had substantially improved, the board used the original 5 percent

per $100,000 formula in determining compensation. The new shares

were issued on February 1, 2007, and their issuance further diluted

Baldwin's equity interest in WMI from 5.04 percent to 3.25 percent;

had Baldwin instead provided a guaranty, his interest would have

increased from 5.04 percent to 8.32 percent. The directors, in
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their capacity as six of the seven shareholders of WMI, later

ratified the issuance of the new shares at an April 12, 2007,

shareholder meeting.

Baldwin filed suit in the federal district court in Maine

in March 2007. He claimed that both issuances of compensatory

shares comprised a breach by the directors of their fiduciary

duties as directors and shareholders, and he asked for damages and

that the shares be voided. Baldwin then moved for summary judgment

as to both transactions, and the directors cross-moved for summary

judgment as to the first of the two. Based on a recommendation by

the magistrate judge, the district judge in September 2008 granted

the directors summary judgment on the first transaction and Baldwin

summary judgment as to liability on the second.

Each side now appeals from the judgment so far as it

favored the other. Although the district court's decision did not

determine the relief to be afforded to Baldwin on the second

transaction, the parties thereafter arrived at an agreement as to

the relief, roughly $70,000, if the judgment of the district court

were affirmed. Because both transactions were disposed of on

summary judgment, our review on all issues presented on this appeal

is de novo. 

The parties agree that Delaware law applies to the

transaction--WMI was incorporated in that state--and the pertinent

precepts are familiar: that in the ordinary case there is a
Gilbert v. El Paso Co., 575 A.2d 1131, 1146 (Del. 1990); H-M 2

Wexford LLC v. Encorp, Inc., 832 A.2d 129, 150-51 (Del. Ch. 2003);

Shields v. Shields, 498 A.2d 161, 170 (Del. Ch. 1985); cf. Unocal

Corp. v. Mesa Petroleum Co., 493 A.2d 946, 957-58 (Del. 1985).

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presumption that the directors have acted properly and the

"business judgment" rule provides substantial latitude for the

directors' judgment, Cede & Co. v. Technicolor, Inc., 634 A.2d 345,

360-61 (Del. 1993); that directors owe a triad of fiduciary duties

(good faith, loyalty and care), id. at 361; Emerald Partners v.

Berlin, 787 A.2d 85, 90 (Del. 2001); that a breach of duty can

displace the business judgment rule's protection, Emerald Partners,

787 A.2d at 91; and that even a breach of duty is not fatal if the

directors can show that a transaction was fair, id.; see also

Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).

But Delaware law also provides more ambiguous guidance

about how fairness is determined and the relationship of fair price

to other fairness factors, see Weinberger, 457 A.2d at 711; and it

gives weight depending on the circumstances to such variables as

emergency conditions, id.; cf. In re NVF Co. Litig., 1989 Del. Ch.

LEXIS 167, at *23-24 (Nov. 21, 1989) (unpublished), and to the fact

that benefits accruing to the directors as shareholders are also

made available to other shareholders on equal terms.2

Our case turns on two concepts--requisite care and

fairness. Nothing in the facts provides a triable issue on the

charge that the directors acted in bad faith as to either
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transaction or that they were disloyal in their duty to foster the

best interests of the company and its shareholders. Patently, both

issuances of shares were actions by the board that benefitted the

board members as principal shareholders; but the company needed

funding in each instance and the opportunity to acquire the same

shares on the same terms was provided to the only remaining

shareholder, Baldwin.

Nor, as events transpired, did the directors discriminate

unfairly against Baldwin by giving him too little time or too

little information. Admittedly, Baldwin (being no longer an inside

figure) was at a disadvantage in assessing the terms offered. But

the initial deadlines for the first transaction were extended, and

Baldwin's brief does not effectively argue that necessary

information that he sought was withheld from him in either case.

Given the incentives to secure his guaranty and to avoid

litigation, the other directors had good reason to accommodate

Baldwin as to both time and information and appear to have done so.

Nevertheless, in issuing shares to themselves as

compensation for their guaranties, the directors had a duty of care

to seek a fair valuation; true, Baldwin had the same opportunity to

acquire shares. Yet he was not obliged to take it up while the

directors remained obliged to avoid overpaying and thereby diluting

unnecessarily other stockholders' interests. It is not clear that

the directors dispute that they had this duty. In all events, we
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agree with them that--in the first instance--Baldwin had the burden

of showing that the directors were careless in setting the formula

for each of the challenged transactions.

As to the first one, no refinement of the duty of care is

needed in order to acquit the directors of liability. By early

2005, the company was in serious trouble: it had a record of

losses, restrictive bank credit, and a looming prospect of failure

even after the initial modest $205,000 loan from AVCOG. The offer

from ASB in August 2005 thus created a major opportunity to

refinance on terms that would allow growth of the business. But

the opportunity was juxtaposed with a lender demand for shareholder

guaranties--this time guaranties made more risky by the large line

of credit, which might entail greater personal liability if the

shareholders ever had to pay.

Certainly rescuing the company provided prospects of

rewards in the future, but those would accrue to all shareholders.

To provide incentives for individual shareholders to give the

guaranties, added shares for those who cooperated were proper: the

only issue is whether reasonable terms were fixed. Ordinarily, one

would try to calculate the current value of the company and the

value of the guaranties, and then price the compensation in shares

accordingly; but, based on Bader's advice as Chief Financial

Officer and the directors' own knowledge, the board had a basis for
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fearing that WMI was insolvent and had a negative forced

liquidation value. 

There was no easy way to determine a perfect compensation

formula but the one adopted at the March 2005 board meeting--a 5

percent grant of shares for each $100,000 of corporate debt

guarantied--was not (quite) plucked out of the air. In late 2004

or early 2005, negotiations had occurred between WMI and CEI, a

potential investor. CEI never made a formal offer for WMI's shares

but the directors came to believe that offering CEI up to a 10

percent ownership stake in WMI might have been sufficient to entice

it to invest $200,000 in WMI--roughly the amount that WMI

ultimately secured from AVCOG. The 5 percent formula adopted at

the March 2005 meeting conformed to this belief but, as the

directors have conceded, the formula was also "the only number that

all guarantors could agree upon"--a market test although not very

reliable because of the built-in incentive to be generous.

In theory, the board could have hired an outside

consultant, but consultants cost money, the company was operating

on a shoestring, and time was of the essence. If all the

shareholders gave guaranties, there would be no dilution and

pricing would not matter; and at the time, the directors had no

assurance that the loan would be provided unless all of the

existing shareholders signed guaranties. When AVCOG relented and

made the loan without Baldwin's guaranty, it was because the
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current directors had all agreed to go along, knowing that everyone

on the board would share in the risk. Some compensation for doing

so while Baldwin held out was reasonable.

It is true that the shares were not issued until later

and the company's fortunes were now improving. But the extra time

was provided so that Baldwin, now with an extended option provided

to no one else, could review data and reflect. The other directors

had signed on specific terms, and it would hardly have been fair,

even if the company's prospects improved between March and December

2005, to deprive them of their bargain for the original risk. Nor

is it clear how a much better estimate of fair compensation could

have been achieved--at least without spending money to secure it.

Even without the business judgment rule, no jury could reasonably

find that the directors in emergency conditions breached their duty

of care as to the first transaction.

The second transaction poses a harder problem for the

directors. By late 2006, when they voted to increase their loan

and substantially increase their line of credit, the company's

prospects were much improved. It was on its way to completing its

first year of achieving net profit rather than a year-end loss; it

had a book of business that had almost exhausted its line of

credit; and it had sufficient promise of more business to seek

additional financing. The company was no longer on the verge of

collapse. So, when the directors proceeded with the new loan
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arrangements and issuance of shares, the circumstances were quite

different.

On December 26, 2006, the directors advised Baldwin that

he would be required to provide a guaranty in order to receive

compensatory shares for the enlarged loan and line of credit; he

declined several days later. The loan closed on January 18, 2007,

all other shareholders providing unlimited personal guaranties; and

on January 19, 2007, the board voted to issue themselves

compensatory shares, thus diluting Baldwin's proportionate

ownership even further. The original compensation formula, 5

percent of WMI's equity for each $100,000, was again employed. The

directors were entitled to some compensation; the question is

whether they exercised due care in determining the amount. 

Seemingly, the directors made no documented effort to

determine whether the old formula was justified under current

conditions, and that is the opening problem for them. Worse still,

at this point the board had available a valuation study that the

company had commissioned for insurance purposes in early 2006.

This valuation report, which was written by WMI's accounting firm

Purdy Powers and released in June 2006, estimated that the fair

market value of 100 percent of the common equity interest in WMI

was $2,470,000. By the end of the same year, when the new

financing was secured, the situation might well have looked even

better for reasons already described.
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It is difficult to value the equity in a closely-held

company; but it cannot easily be argued that 5 percent of WMI's

equity at the end of 2006 was worth no more than an equivalent

percentage of the same company in 2005 when it appeared on the

verge of collapse. Further, the new financing surely did not need

to be achieved on so tight a time-table as the previous

transaction, and, in any case, the directors could have agreed to

provide personal guaranties at once with fair compensation to be

fixed after a more careful study. This time the directors were

giving guaranties as an investment in what would likely be future

profits and faced a reduced threat that the guaranties would be

triggered by a company default.

Under Delaware law, the directors were not freed from any

duty to value the compensation fairly merely because the offer was

made to all shareholders. See Smith v. Van Gorkom, 488 A.2d 858,

872 (Del. 1985). This is so even ignoring the fact that when the

loan was finally secured and compensation fixed in early 2007, the

directors knew that Baldwin was not going to participate. Arguably

some deference is still accorded to the directors' judgment despite

their self-interest--the case law points in this direction, Kaplan

v. Goldsamt, 380 A.2d 556, 568 (Del. Ch. 1977)--but the selfinterest may temper the extent of deference. Anyway, fine-tuning

is not necessary: the directors do not seriously argue that in the

second transaction due care was exercised.
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Instead, they say that a lack of due care merely shifts

to them the burden of proving that the transaction was fair, that

the district court did not fully appreciate the dimensions of the

fairness test, and that they were entitled to a trial in which the

issue of fairness could be fully tested. The first of these

propositions is correct: although Delaware law could go directly

from a lack of due care to the question of relief, it provides

instead that the directors can still avoid liability if the

transaction was shown to be fair. Emerald Partners, 787 A.2d at

91. This avoids, among other things, a mechanical right to relief,

such as the voiding of shares.

Still, bearing the burden of showing fairness, the

directors were obliged--by the rules governing Baldwin's motion for

summary judgment--to show that the evidence raised a material issue

of fact for a jury. See Triangle Trading Co. v. Robroy Indus.,

Inc., 200 F.3d 1, 2 (1st Cir. 1999). Putting to one side for a

moment the relevance of other factors bearing on fairness, the

value of the shares and the value of the guaranties were both

critical issues in determining whether the 5 percent per $100,000

formula was fair as of early 2007. What evidence, then, was

proffered or pointed to by the directors to create a factual issue?

The directors did develop expert testimony relating to

the fairness of the price but it was excluded in a Daubert hearing,
The defendants' expert, John T. Gurley, used a substitution 3

method to price the guaranties in which he assumed that they

carried a similar risk to an equity investment and valued them

accordingly. See Baldwin v. Bader, No. 07-46-P-H, 2008 U.S. Dist.

LEXIS 56236, at *20 (D. Me. July 23, 2008). The lower court,

however, found that the treatises cited by Gurley failed to support

this (relatively novel) methodology; and, in any event, Gurley had

never before valued a personal guaranty. Id. at 26-27. 

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see Daubert v. Merrill Dow Pharm., 509 U.S. 579 (1993), and the 3

directors do not challenge (or even explain) this exclusion on

appeal. Instead, they make two arguments: first, that the

fairness of the price could be shown by facts in the record other

than the excluded expert testimony; second, that consideration of

"entire fairness"--a concept they say that the district court

short-changed--could have led the fact-finder at trial to conclude

that non-price factors demonstrated that the transaction was fair.

The claim that the district court misunderstood Delaware

law on "entire fairness" is doubtful. The charge turns on the

district court's statement that the fairness of the price is the

most critical concern; the directors say that the Delaware case

quoted involved a distinguishable context. It is hard not to give

price a central position when the ultimate challenge is to the

extent of compensation. Cf. Delaware Open MRI Radiology Assocs.,

P.A., v. Kessler, 898 A.2d 290 (Del. Ch. 2006). But what the

district court thought does not matter because our review on

summary judgment is de novo. And, doubtless, on some facts a price
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could be deemed fair based largely on non-price circumstances (the

first transaction in this case could be an example of that).

So we accept that under Delaware law the fairness of the

second transaction is properly judged by both price and non-price

considerations and, further, that their cumulative support could be

greater than either factor taken separately. Also, under summary

judgment standards it is enough for the directors merely to show

that the evidence creates a material issue warranting a full trial.

Triangle Trading Co., 200 F.3d at 2. But--and this is critical--

there must still be enough evidence of fairness proffered in

opposing summary judgment to permit a reasonable fact finder to

decide in their favor. See Celotex Corp. v. Catrett, 477 U.S. 317,

322-23 (1986); In re Spigel, 260 F.3d 27, 31 (1st Cir. 2001).

That evidence is hard to find. As to price, the

directors point to the unconsummated 2004 negotiations for an

investment by CEI that bolstered the original formula and the

assertion that that formula was the least the directors would

accept for the second transaction. But the 2004 negotiations never

led to a formal offer in the amount specified, the June 2006 study

done for insurance showed that the company was more valuable

already, and the year-end net gain and works in progress bear this

out. As for the claim that the board members would not accept
Indeed, there is no evidence suggesting that the directors 4

revisited the pricing formula after its creation in March 2005;

this is not surprising, as the formula provided that it would apply

not only to the initial AVCOG loan but also to "any additional

future financing." But this does not excuse the failure to revisit

the issue in new circumstances. See Brehm v. Eisner, 746 A.2d 244,

259 (Del. 2000).

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less, the basis for the assertion appears thin, and, unlike the 4

company's earlier do-or-die situation in August 2005, nothing in

late 2006 compelled the company to acquiesce. 

Understandably, the directors place their main stress on

the non-price evidence of fairness, which (they assert) includes

the following: the company's legitimate need for more financing;

the use of a formula developed earlier on the basis of then

available information; the offer of an equal opportunity to

Baldwin; the supply to him of information about the company's 2006

financial status; and the advice of counsel. The problem is not

that any of these is irrelevant in principle but rather that,

examined closely, most do not weigh in the company's favor on the

present facts.

The need for financing and the earlier formula are almost

beside the point: the pressure the second time around was far less

urgent than in the original transaction. The basis for the

original formula depended far more on urgency and the lack of

better information; in fact, the original formula did not have much

substantive support but it did assure that those who took on more

risk in a desperate situation got some reward and created an
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incentive for all to do so. The contrast between the two time

periods does more to underscore the lack of care in early 2007 than

to support a claim of fairness.

The provision of an equal opportunity to Baldwin, given

that information was supplied to him, did provide a measure of

procedural fairness, but--as we read Delaware law--merely providing

an opportunity for all to participate does not itself vindicate a

self-interested management. See Van Gorkom, 488 A.2d at 872.

Management is still not allowed to overpay itself where, as here,

it had better information and more time but merely copied an

outworn formula which was not binding. Delaware law could easily

be explained by the inherent disadvantage suffered by nonmanagement stockholders; but in any event we are bound by it.

This leaves the excuse of advice of counsel. Reliance

upon legal counsel, as the directors note, can evidence "'good

faith and the overall fairness of the process.'" Cinerama, Inc. v.

Technicolor, Inc., 663 A.2d 1156, 1175 (Del. 1995) (quoting

Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1142 (Del. Ch.

1994)). But it is only one factor in the analysis--"a 'relevant

but not dominant consideration.'" Id. (citation omitted); see also

Valent Pharm. Int'l v. Jerney, 921 A.2d 732, 751 (Del. Ch. 2007).

And while counsel advised on the original formula it is far from

clear that counsel advised on the use of the same formula long

afterwards and in quite different circumstances.
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In short, the directors have provided very little, either

in price or non-price evidence, to show that using the old

compensation formula was fair in 2007. Even well after the event

a financial expert could have offered a supported retrospective

judgment as to what in early 2007 would have been the fair value of

a 5 percent share of the company and compared it with the

corresponding estimated value of the new guaranty. If the two

figures were within sight of one another, the absence of any

admissible expert evidence to that effect is hard to explain and,

without it, a fact finder could not on the very thin evidence

available rationally conclude that the directors had carried their

burden of proof to show fairness.

None of this reflects upon the good faith of the

directors, nor is it obvious that the just outcome--even if

liability were established--should necessarily result in anything

more than the directors restoring to the company any excess

compensation over value or providing Baldwin directly his share of

that excess. It appears that comparatively modest damages have

already been settled by stipulation, assuming affirmance. Given

the cost of further litigation, this was presumptively a good

resolution for which counsel on both sides likely deserve credit.

The judgment of the district court is affirmed. Each

side shall bear its own costs on this appeal.

It is so ordered.