Opinion ID: 1776404
Heading Depth: 1
Heading Rank: 5

Heading: the acquisition of mti

Text: The trial court made the following findings of fact and conclusions of law: The testimony and exhibits admitted into evidence at trial establish that the MTI opportunity was presented to Kevin Donovan in his corporate capacity as a director and employee of Disctronics Limited, and, director of DMI. This conclusion is premised upon the long-standing relationship which existed between Mitsubishi and Donovan in his capacity as a representative for the Disctronics Group, which was exploited during his tenure as a formal and de facto director of DMI. Contrary to plaintiffs' assertion that the first mention of the MTI opportunity came from Cal Roberts, DMI's Executive Vice-President for Sales, in his report of November 18, 1989, the MTI opportunity resulted from Disctronics Limited's first contacts with Mitsubishi in the middle and latter months of 1986. Although this nexus was born of an attempt by Disctronics Limited to purchase mastering equipment for its Braeside plant, the relationship quickly blossomed into much more. By November 1986 Kevin Donovan had nurtured the contacts to the point where Mitsubishi and Disctronics Limited embarked upon a partnership designed to `develop their global strategy for the benefit of all ... partners [and to] use their best endeavors to further the extent of their collaboration and mutual support as rapidly as possible.' Donovan testified that Disctronics Limited and Mitsubishi had been in continuous contact regarding their partnership as embodied in the Memorandum of Understanding since November of 1986. Disctronics Limited's first contacts with Mitsubishi regarding the possibility of acquiring MTI occurred on July 28, 1987, just shortly after Disctronics Limited opened negotiation with Quixote for the purchase of LaserVideo. Disctronics Limited's negotiations for the purchase of the MTI and LaserVideo facilities paralleled each other until October 1987 when Mitsubishi rejected Disctronics Limited's final purchase offer. An agreement regarding the Laser-Video acquisition was reached on November 22, 1987, and the transaction was closed on January 15, 1988. Although Disctronics Limited had acquired a facility to meet its immediate needs, defendants never completely ceased discussions with Mitsubishi regarding their American operations. Because of Donovan's long-standing relationship with Mitsubishi on behalf of Disctronics Limited, he was in a position to inquire about the status of the MTI plant when rumors regarding problems in Mitsubishi's joint venture with ElectroSound surfaced. Between May and July of 1987, Donovan continuously inquired about Mitsubishi's desire to sell MTI. Donovan's persistence on behalf of Disctronics Limited finally paid off on December 14, 1989, when Mitsubishi entered into discussions with Tom Fry (controller for Disctronics Limited and DMI) and Doug Adams (Donovan's stand-in on the DMI board) regarding the sale of MTI.  From this course of events, it is clear that Kevin Donovan, on behalf of Disctronics Limited, initiated and nurtured an on-going relationship with Mitsubishi, which existed at least seven months before Quixote and DMI came upon the scene. Throughout this relationship, Donovan was either actively negotiating for the purchase of MTI, seeking negotiations for the purchase of MTI, or making general inquiries into the status of Mitsubishi's world-wide and American operations. Donovan's persistent concern about the Mitsubishi operation, particularly MTI, opened the door to the presentation of the MTI acquisition opportunity.  (Emphasis supplied). As stated before, Guth, the seminal case regarding corporate opportunity, held that in determining whether the duty of loyalty has been breached, it is important to determine (1) the circumstances at the time of the offer and (2) the offeror's expectations. See Guth, 23 Del.Ch. at 278, 5 A.2d at 513. Under the facts recited above, it is clear that the trial court found that the opportunity grew from the relationship established by Donovan for the benefit of the Disctronics Group and that Mitsubishi preferred to do business with the Disctronics Group. The issue on appeal, therefore, comes down to whether, given those circumstances, a fiduciary duty of loyalty was owed to DMI and/or Quixote. We hold that it was not.
The opportunity presented by MTI was created by the Disctronics Group's relationship with Mitsubishi that had been established long before the Disctronics Group even began negotiations to buy DMI. Also, with the exception of the period governed by the Work-Out Agreement, DMI was a wholly owned subsidiary of the Disctronics Group, and no fiduciary duty of loyalty in the context of corporate opportunity is owed by a parent to a wholly owned subsidiary. See Anadarko Petroleum Corp., 545 A.2d at 1174. Also, under the terms of the Work-Out Agreement, at the end of the option period either the Disctronics Group would control DMI as a wholly owned subsidiary or they would have no interest in the company. Under either scenario, no fiduciary duty of loyalty was owed.
Quixote claims the Disctronics Group owed it a fiduciary duty, but the Disctronics Group never owed Quixote, a competitor, a fiduciary duty of loyalty. Quixote cites several cases for the proposition that stock pledgees are owed fiduciary duties. See In re Pittsburgh & L.E.R.R., 543 F.2d 1058, 1067 (3d Cir.1976); FDIC v. Kerr, 637 F.Supp. 828, 840-41 (W.D.N.C. 1986); Weingard v. Atlantic Savings & Loan Ass'n, 1 Cal.3d 806, 83 Cal.Rptr. 650, 464 P.2d 106, 112 (1970); Gibson v. Manuel, 534 So.2d 199, 201-02 (Miss.1988); Gustafson v. Gustafson, 47 Wash.App. 272, 734 P.2d 949, 953-54 (1987), review denied, 109 Wash.2d 1024 (1988). After examining those cases, we find that they concerned alleged breaches of the duty of care owed by the corporation, as well as causes of actions based upon the stock pledge agreement. In re Pittsburgh & L.E.R.R., 543 F.2d at 1067 (action brought to challenge settlement agreements in other shareholder derivative suits that dissipated assets of corporation); Kerr, 637 F.Supp. at 838 (pledgee could maintain action involving claims under RICO and claims of corporate waste and fraudulent liquidation when the defendant was alleged to have breached his duty to refrain from doing anything which might injure the value of FDIC's collateral); Weingard, 1 Cal.3d at 818, 83 Cal.Rptr. at 656, 464 P.2d at 112 (pledgee of stock has an interest in the stock sufficient to entitle him to bring an action alleging fraudulent conveyance that affects the preservation and protection of the assets and property of the corporation); Gibson, 534 So.2d at 202, 203 (a pledgor of corporate stock when in control of the corporation has the affirmative duty to preserve the corporate assets for the benefit of the pledgee; duty of the pledgor was to conduct his office with ordinary prudence and with all good fidelity to the end that the value of its shares be maintained); Gustafson, 47 Wash.App. at 276-78, 734 P.2d at 952-54 (in an action regarding wrongful disposition of corporate property, a stock pledgee has standing to maintain a derivative action in order to protect her security interest); see also Giblin v. Murphy, 97 A.D.2d 668, 469 N.Y.S.2d 211, 215 (1983) (directors owe a duty of care to protect the stock interest of pledgees, and that duty is breached by willful, wanton negligence with respect to its assets); Ashburn v. Wicker, 95 N.C.App. 162, 165, 381 S.E.2d 876, 878 (1989) (a pledgee of corporate stock has a sufficient beneficial interest to have standing to sue the corporation derivatively for mismanagement), overruled on other grounds by Alford v. Shaw, 327 N.C. 526, 398 S.E.2d 445 (1990). We find these aforementioned cases, cited by Quixote, unpersuasive. Quixote also argues that, because it owned 49% of the stock in DMI at the time the Disctronics Group executed the purchase agreement, it can claim that the opportunity presented by MTI belonged to DMI, and therefore, to it as a stockholder. This argument, while facially appealing, fails to examine the realities of the situation. Quixote, in the Work-Out Agreement, stated that the purpose of the agreement was to secure the assets and to prevent bankruptcy by DMI in order to ensure payment of DMI's indebtedness to Quixote. The agreement provided that at the end of the option period, barring extensions, either Quixote or the Disctronics Group would own all of DMI. Also, and we think this important, the agreement stated that the agreement created no relationship such as partnership or joint venture between the Disctronics Group and Quixote. Under the facts as found by the trial court, Quixote never became a party to be protected from the excesses of the majority shareholder, the Disctronics Group. The opportunity allegedly usurped from DMI was never DMI's opportunity and could not logically be so characterized, given the facts of the creation of the opportunity and the relationship of the concerned parties. Thus, we hold that Quixote and DMI cannot, as a matter of law, maintain an action for usurpation of the corporate opportunity represented by the Disctronics Group's acquisition of MTI. We hold that the trial court erred in granting Quixote and DMI a preliminary injunction. Therefore, we reverse the order of the trial court and remand this action for further proceedings in accordance with this opinion. REVERSED AND REMANDED. ADAMS, HOUSTON, STEAGALL and KENNEDY, JJ., concur. MADDOX, J., dissents.