Opinion ID: 556686
Heading Depth: 1
Heading Rank: 2

Heading: State Law Fiduciary Claim

Text: 12 In our earlier opinion, we asked the District Court to consider plaintiffs' state law breach of fiduciary duty claims. On remand, the District Court concluded that no fiduciary duty could have been violated by Nationwide Corp. or Nationwide Mutual, the majority shareholder, because of the extraordinary procedural steps taken to safeguard the interests of the public shareholders of Nationwide Corp. The District Court therefore granted summary judgment for defendants. 13 Plaintiffs did not sue the directors of Nationwide Corp. for breach of fiduciary duty, only the corporate entity itself. Because such a fiduciary claim must be made against a corporation's directors, and may not be maintained against the corporation itself under a theory of vicarious liability, see, e.g., Radol v. Thomas, 772 F.2d 244, 258 (6th Cir.1985), cert. denied, 477 U.S. 903, 106 S.Ct. 3272, 91 L.Ed.2d 562 (1986), plaintiffs' only arguable claim is against Nationwide Mutual in its capacity as majority shareholder of Nationwide Corp. 14 On appeal, plaintiffs argue that Nationwide Mutual, as majority shareholder, had a strong fiduciary duty to pay a fair price and to make full disclosure, fiduciary duties they claim Nationwide Mutual breached. 15 Traditionally, shareholders did not owe any fiduciary obligations to each other; any shareholder voting its own shares presumably could act solely in its own self-interest. Recently, however, courts have come to recognize that a majority shareholder can control the corporation for its own benefit, sometimes to the detriment of the minority shareholders, through the election of directors who favor its interests. Although courts acknowledge this potential conflict, the majority shareholder fiduciary duty that has developed is less stringent than the duty owed by a trustee under traditional notions of trust law. State courts, including the courts of Ohio whose law is applicable, have had difficulty establishing a workable standard defining the fiduciary duties of a majority shareholder that acquires the stock of public shareholders in a freeze-out merger. The normal principles of complete loyalty owed by a trustee to a beneficiary do not work because a majority shareholder in such situations has a built-in conflict of interest with the minority shareholders. Regular trustees, under normal principles of fiduciary duty, may not engage in self-dealing, purchase the assets of the trust or have personal interests in trust transactions that could affect their judgment. Restatement (Second) of Trusts Sec. 170(1) comments a-c (1959). These same principles normally apply to other fiduciaries like guardians, lawyers, agents, officers and directors. Restatement of Restitution Sec. 190 (1937). Going private transactions between majority and minority shareholders violate all these principles. 16 In deriving an appropriate fiduciary duty for majority shareholders, it may be helpful to think of fiduciary duties as enforcement devices for implementing the intent of the minority and majority shareholders as to what benefits and risks the parties would agree ex ante to share. See Hetherington, Defining the Scope of Controlling Shareholders' Fiduciary Responsibilities, 13 Canada-United States L.J. 103, 110 (1988). As commentators have noted, majority and minority shareholders would almost never agree to a traditional trust relationship because such a relationship would not be in either's economic interest. See id. at 126-27; see also, Easterbrook & Fischel, Corporate Control Transactions, 91 Yale L.J. 698, 726 (1982). Buyers of stock in a corporation usually purchase the stock for the profits the company generates, whether paid out or retained, subject to the possibility that, lacking a controlling interest, the shareholder will be forced at any time to sell at a fair price. So long as the minority shareholders are paid a fair price for their shares in the cash out merger, and statistics uniformly suggest that minority shareholders in such transactions are paid a substantial premium to the prevailing market price, there is no reason to expect ex ante that minority shareholders would want to limit the majority shareholder's ability to force minority shareholders to sell their shares, or, for that matter, to prevent the majority shareholder from receiving a premium for its shares. See Heatherington, Defining the Scope of Controlling Shareholders' Fiduciary Responsibilities, 13 Canada-United States L.J. 103, 126-27 (1988). 17 In accord with this rationale, the general rule that has developed regarding the majority shareholder's fiduciary duty is that a majority shareholder may cash out the minority shareholders for any reason, so long as the majority shareholder pays a fair price and fully discloses relevant facts about the value of the corporation whose stock it is buying. See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701 (Del.1983). The Ohio Supreme Court seems to follow this general rule imposing a fiduciary duty on majority shareholders. See, e.g., Armstrong v. Marathon Oil Co., 32 Ohio St.3d 397, 513 N.E.2d 776, 798 (1987); see also Crosby v. Beam, 47 Ohio St.3d 105, 548 N.E.2d 217, 220 (1989) (discussing somewhat analogous situation of controlling shareholder's duty in close corporation). On appeal, plaintiffs assert as one component of their breach of duty claim that, where a majority shareholder controls both sides of the transaction, the burden is on the majority shareholder to demonstrate the entire fairness of the transaction to minority shareholders. This argument follows the law of Delaware and other states. See, e.g., Weinberger, 457 A.2d 701. 18 Ohio law, while recognizing that a majority shareholder must pay minority shareholders a fair price for their shares, nonetheless limits recovery in almost every situation 3 to recovery under the state's appraisal statute, Ohio Rev.Code Ann. Sec. 1701.85 (Supp.1989). See Armstrong, 513 N.E.2d 776, 798; see also Stepak v. Schey, 51 Ohio St.3d 8, 553 N.E.2d 1072 (1990). In Armstrong, minority shareholders asked the Ohio Supreme Court to adopt Delaware law and to inquire (as Delaware courts do) into the entire fairness of a cash out transaction. Such an inquiry would have allowed minority shareholders to present evidence (under the theory of breach of fiduciary duty) that the cash out price paid to them was unfair. 513 N.E.2d at 797-98. The Ohio Supreme Court rejected this argument, noting that a statutory proceeding is the sole means of determining the value of shares sold by minority shareholders in a cash out merger. Id. Because Ohio law as set forth in Armstrong dictates otherwise, plaintiffs' argument on appeal, that the district court applying Ohio law should have inquired into the entire fairness of the transaction, must fail. 19 Plaintiffs also contend that Nationwide Mutual did not disclose material facts concerning the merger price in its proxy statement. As to this issue, we find that summary judgment should not have been granted. Following the general statement of a majority shareholder's fiduciary duty, Ohio courts seem to acknowledge that a majority shareholder owes minority shareholders a fiduciary duty to disclose pertinent facts concerning the merger. Stepak, 553 N.E.2d at 1078 (Holmes, J., concurring); see also Armstrong, 513 N.E.2d at 798 (acknowledging that other causes of action may be available under breach of fiduciary duty claim so long as not seeking additional compensation under theory of inadequate price). 20 As we determined in Section I of this opinion, plaintiffs have presented evidence that defendants omitted material information in their proxy statement that is required by Rule 13e-3. On appeal, plaintiffs contend that the omission of this same information (required by Rule 13e-3) constitutes a violation of Nationwide Mutual's majority shareholder fiduciary duty. Because Ohio law seemingly permits limited recovery on the narrow ground that full disclosure was not made in the majority shareholder's proxy statement, the district court on remand should try this state law claim. 21 In effect, plaintiffs have only one claim (although stated alternatively as a legal claim for a violation of Rule 13e-3 and as an equitable claim for a violation of the majority shareholders fiduciary duty): that non-fraudulent, material omissions concerning the fairness of the cash out price were made in the proxy statement. Because plaintiffs do not claim in the briefs on appeal that Nationwide Mutual, the majority shareholder, failed to disclose specific information other than that required by Rule 13e-3, we do not reach the question whether, under Ohio law, a majority shareholder has additional disclosure burdens beyond those required by federal law. Accordingly, because of the limited claim plaintiffs make, we expect that proof of material omissions and resulting damages, if applicable, will be similar under either theory (Rule 13e-3 or state law fiduciary duty claim). In any event, plaintiffs may recover, if at all, only once because their injury is the same whether they proceed under state or federal law. 22 We have reviewed all of plaintiffs' claims on appeal and conclude that the District Court erred in granting summary judgment on plaintiffs' Rule 13e-3 claim, as described above, and on plaintiffs' claim under Ohio law that Nationwide Mutual breached its fiduciary duty as majority shareholder to disclose the information specified under Item 8 of Rule 13e-3. Accordingly, to this extent, the judgment of the District Court is reversed and the case remanded for trial on the two remaining issues. 23