Opinion ID: 2584011
Heading Depth: 1
Heading Rank: 9

Heading: Issue 4: Did the District Court Err in Granting Summary Judgment in Favor of Unison and Bunten on Count IV Alleging Breach of Fiduciary Duty?

Text: In granting defendants' motions for summary judgment on Counts II, III, and IV, the district court noted that all three claims were based upon an intentional tort. The court stated: A mere interference would not be sufficient for the plaintiff to recover, and in these cases I don't think there's any genuine factual dispute but what there was probably some interference going on here and the sale ended up not taking place. But the Court doesn't believe that the interference that took place was tortious interference nor did it rise to the level of a breach of fiduciary duty. The Court concludes from reading all of the papers that have been submitted to me that the actions of the Defendants Bunten and Unison Bancorp, Inc., all bore a relationship to a legitimate business purpose. The directors of Unison Bancorp and the corporation itself had a fiduciary duty, not just to the plaintiffs, but to all of its shareholders and Mr. Bunten, as the president of the corporation had the same obligation and duty. To say that the things that they did and the actions that they took were a tortious interference overstates the evidence in this case. In Count IV, plaintiffs alleged that Unison and Bunten breached their fiduciary duty to plaintiffs. The district court found that the actions of Unison and Bunten were not tortious and did not constitute a breach of fiduciary duty. Defendant Unison argues that it is only the board of directors of a corporation, and not the corporation itself, that owes a fiduciary duty to the shareholders. Therefore, Unison owes no fiduciary duty to plaintiffs as a matter of law. This position is consistent with this court's previous statements regarding corporate fiduciary duty: Kansas imposes a very strict fiduciary duty on officers and directors of a corporation to act in the best interests of the corporation and its stockholders. Miller v. Foulston, Siefkin, Powers & Eberhardt, 246 Kan. 450, 467, 790 P.2d 404 (1990). Directors and officers are liable to the corporation and the stockholders for losses resulting from their malfeasance, misfeasance or their failure or neglect to discharge the duties imposed by their offices. Sampson v. Hunt, 233 Kan. 572, 584, 665 P.2d 743 (1983) (citing 19 Am. Jur. 2d, Corporations § 533). The plaintiffs have not cited any Kansas case in which the court found that a corporation owes a fiduciary duty to its stockholders; rather, it is the corporate management that owes the duty to both the corporation and its stockholders. Nor have the plaintiffs cited any Kansas case holding that a corporation may be held vicariously liable for its directors' breach of fiduciary duty. As other courts have recognized: Directors, in the ordinary course of their service as directors, do not act as agents of the corporation, however. See Restatement (Second) of Agency, § 14C (1958) (`Neither the board of directors nor an individual director of a business is, as such, an agent of the corporation or its members.') An agent acts under the control of the principal. The board of directors of a corporation is charged with the ultimate responsibility to manage or direct the management of the business and affairs of the corporation. 8 Del. C. § 141(a). A board of directors, in fulfilling its fiduciary duty, controls the corporation, not vice versa. It would be an analytical anomaly, therefore, to treat corporate directors as agents of the corporation when they are acting as fiduciaries of the stockholders in managing the business and affairs of the corporation. Holding the corporation vicariously liable for the directors' breach of a fiduciary duty `would be flatly inconsistent with the rationale of vicarious liability since it would shift the cost of the directors' breach from the directors to the corporation and hence to the shareholders, the class harmed by the breach.' Radol v. Thomas, 6th Cir., 772 F.2d 244, 258-259 (1985). Arnold v. Society for Sav. Bancorp, Inc., 678 A.2d 533, 539-40 (Del. 1996). Unison, as a corporation, acts only through the decisions of its board of directors. Although the trial court relied on a different reason for its decision, summary judgment in favor of Unison on Count IV was appropriate. On the other hand, Bunten as an officer and director owed a fiduciary duty to the corporation and its shareholders. Bunten agrees, but contends he was entitled to summary judgment on Count IV because the allegations contained in plaintiffs' petition either failed to state a claim or were not supported by any evidence. At least in part this argument is based upon application of the business judgment rule which the trial court concluded insulated Bunten from liability. This court has previously defined the business judgment rule as follows: `The presumption that in making business decisions not involving direct self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation's best interest. The rule shields directors and officers from liability for unprofitable or harmful corporate transactions if the transactions were made in good faith, with due care, and within the directors' or officers' authority.' Black's Law Dictionary 192 (7th ed. 1999). (Emphasis added.) Unrau v. Kidron Bethel Retirement Services, Inc., 271 Kan. 743, 759, 27 P.3d 1 (2001). As emphasized, this rule applies in business decisions not involving direct self-interest. The Delaware Supreme Court has recognized that boards reacting to takeover issues are dealing with decisions which involve an inherent conflict where an issue of control of the corporation is at stake. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (1985). The concern applies to both inside and outside directors: A takeover of [a] corporation may result in the loss of a job for an inside director, a director who is also employed as an officer of the corporation, while an outside director may be ousted from the board, losing the prestige and privileges attendant to that position. Palm & Kearney, A Primer on the Basics of Directors' Duties in Delaware: The Rules of the Game (Part II), 42 Vill. L. Rev. 1043, 1049 (1997). Inherently there is concern about loss of control and job security for target managers. . . . Johnson & Siegel, Corporate Mergers: Redefining the Role of Target Directors, 136 U. Pa. L. Rev. 315, 318 (1987). Largely because of such concerns, an enhanced standard of review has been applied by the Delaware Supreme Court in situations where the board adopts a poison pill. In Moran v. Household Intern. Inc., 500 A.2d 1246, 1351-52 (Del. 1985), the Delaware Supreme Court recognized the authority for a board of directors to adopt a rights plan but stated that the directors' action would be required to withstand enhanced scrutiny: The business judgment rule is a `presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.' [Citation omitted.] Notwithstanding, in Unocal [ v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)] we held that when the business judgment rule applies to adoption of a defensive mechanism, the initial burden will lie with the directors. The `directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed. . . . [T]hey satisfy that burden by showing good faith and reasonable investigation. . . .' Unocal, 493 A.2d at 955 [citation omitted]. In addition, the directors must show that the defensive mechanism was `reasonable in relation to the threat posed.' Unocal, 493 A.2d at 955. Moran, 500 A.2d at 1356. Professor Gilson of Stanford Law School and Professor Kraakman of Harvard, in an article they co-authored, explained the rationale for requiring enhanced scrutiny: The courts have long struggled with a standard for reviewing management's efforts to deter or defeat hostile takeovers. The usual standards of review in corporate law, the business judgment rule and the intrinsic fairness test, do not seem adequate when courts must evaluate defensive measures that implicate both management's business acumen and its loyalty to shareholder interests. Because evaluating a sale of the company is a complex business decision, management's response to a takeover bid resembles the normal business decisions that the business judgment rule largely insulates from judicial review. At the same time, however, a hostile takeover creates a potential conflict of interest, no matter what response it evokes from management. Target managers who approve an offer may be improperly influenced by post-transaction benefits; target managers who reject an offer may act largely to secure their own positions. From this perspective, responding to a hostile takeover is an interested transaction that calls for judicial review under the intrinsic fairness test. Yet, invoking this rigorous standard would simply condemn most defensive tactics without any justification beyond the standard itself. Gilson & Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247 (1989). There has been much debate about the appropriateness of this test. Compare Gilson, Unocal Fifteen Years Later (and What We Can Do About It), 26 Del. J. Corp. L. 491 (2001), with Lipton & Rowe, Pills, Polls and Professors: A Reply to Professor Gilson, 27 Del. J. Corp. L. 1 (2002), and Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L. Rev. 1037 (2002). After review of the various arguments by academicians and practitioners, we agree with the conclusions of one commentator: [A]n underlying coherent theory explains the Delaware Supreme Court's takeover jurisprudence. This theory is based on two fundamental precepts: that the directors, and not courts, should make business decisions; and that shareholders, and not courts, should voice their disagreement with the substantive decisions by electing different directors. Given the importance of hostile tender offers, and the potential for conflicts of interests when target boards decide to reject such offers, the court has adopted a two-track approach. First, the court has tried to enhance the process of the target board's decision-making to reduce the potential of such conflicts of interest. This is manifested in the inducements provided by Unocal to give the ultimate decision-making power to the independent directors and to have these directors go through an enhanced process of information-gathering. Second, the court has tried to preserve shareholders' ultimate power to effectively override the decision of a target board to reject a tender offer. This is manifested by the strict review under Revlon [ Inc., v. MacAndrews and Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)] of board actions that clearly deprive shareholders of such power. It is also demonstrated by the substantive proportionality review under Unocal of lesser board actions, undertaken in response to a hostile offer, that may substantially interfere with that power. By contrast, if the target board merely preserves the status quo or continues to pursue a pre-existing business plan, board actions are only subject to process review under Unocal. This approach differs from the one advocated by commentators on both sides of the spectrum. Many feel that it gives too much power to management or that it encroaches too much on managerial prerogatives. But, contrary to many claims, this approach is plausible and intelligible. Criticism of the takeover jurisprudence of the Delaware Supreme Court for lack of doctrinal consistency or policy foundation are unwarranted. Kahan, Paramount or Paradox: The Delaware Supreme Court's Takeover Jurisprudence, 19 J. Corp. L. 583, 606 (1994). In addition, we note that despite criticism from outside sources, the Delaware courts, and with rare exceptions other jurisdictions, have continued to apply the Unocal test for over 20 years in a variety of fact patterns. A significant body of case law has developed. As our Court of Appeals has noted, Kansas follows Delaware's basic principles regarding application of the business judgment rule to insulate board decisions from attack. Gray v. Manhattan Medical Center, Inc., 28 Kan. App. 2d 572, 577, 18 P.3d 291 (2001). Consequently, we adopt the Unocal test as refined by its progeny. As explained by the Delaware Supreme in Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995),  Unocal's standard of enhanced judicial scrutiny is proper whenever the record reflects that a board of directors took defensive measures in response to a `perceived threat to corporate policy and effectiveness which touches upon issues of control.' [Citation omitted.] 651 A.2d at 1372. If the action was defensive, the directors, in this case Bunten, have the burden of coming forward to meet the two-prong Unocal test. The court in Unitrin explained that the first prong, the reasonableness test, requires directors of a corporation to demonstrate that, after a reasonable investigation, it determined in good faith, that . . . [the offer] presented a threat . . . that warranted a defensive response. 651 A.2d at 1375. In that regard the court noted: [T]he presence of a majority of outside independent directors will materially enhance such evidence. 651 A.2d at 1375 (citing Unocal, 493 A.2d at 955). However, the outside directors, defined as nonemployee and nonmanagerial directors, will not be seen as independent if the decision-making process is dominated by inside directors or officers. Independence `means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.' Aronson v. Lewis, Del. Supr., 473 A.2d 805, 816 (1984). 651 A.2d at 1375. The court also noted that final determinations regarding domination are usually made after a full trial. 651 A.2d at 1375 n.15. The second prong, the proportionality test, requires only that a court examine whether the defensive measure was draconian, by being either preclusive or coercive and if it was not draconian, whether it was within a range of reasonable responses to the threat posed. 651 A.2d at 1367. If the directors' actions withstand Unocal's reasonableness and proportionality review, the traditional business judgment rule is applied to shield the directors' defensive decision rather than the directors themselves. 651 A.2d at 1374. On the other hand, the directors' failure to carry their initial burden under Unocal does not, ipso facto, invalidate the board's actions. Instead, once the Court of Chancery finds the business judgment rule does not apply, the burden remains on the directors to prove `entire fairness.' 651 A.2d at 1377 n.18. The entire fairness standard is exacting and requires judicial scrutiny regarding both `fair dealing' and `fair price.' 651 A.2d at 1371 n.7. In applying the test as articulated by Delaware, the first issue is whether the various actions of the Unison board were defensive. As previously stated, Delaware applies the Unocal test when the board adopts a poison pill in response to a perceived takeover bid. Moran, 500 A.2d at 1351-52. See In re Unitrin, Inc. Shareholders Litigation, 1994 WL 698483 (Del. Ch. 1994), reversed on other grounds 651 A.2d 1361 (Del. 1995) (applying Unocal in context of a creeping takeover). Although other actions by the board, in isolation, might not be seen as subject to the Unocal test, the Delaware Supreme Court has held that its courts should evaluate the board's overall response, including the justification for each contested defensive measure, and the results achieved thereby. Where all of the target board's defensive actions are inextricably related, the principles of Unocal require that such actions be scrutinized collectively as a unitary response to the perceived threat. Unitrin, 651 A.2d at 1386-87. The parties disagree as to whether the actions were defensive and, thus, raise an issue of fact. If it is determined that the Board acted in defense to a perceived takeover, Bunten has the burden of coming forward and meeting the two-prong test. Issues of fact exist as to both prongs. Plaintiffs focus their argument on whether Bunten had self-interested motives in obstructing their agreements with Gold. As evidence of Bunten's misconduct and self-dealing, plaintiffs point to the testimony of Burcham and Aslin who stated that Bunten requested compensation assurances from them in exchange for favorable consideration of their offers to purchase Unison. Bunten denied having discussed personal compensation with either Burcham or Aslin. However, for purposes of summary judgment we must view the evidence in the light most favorable to the party opposing the motion, the plaintiffs. Furthermore, plaintiffs contend that Bunten orchestrated and directed the board's actions. Again, viewing the evidence in the light most favorable to the plaintiffs the evidence is that, before the board met or took any action, Bunten contacted Dolson and began legal work on developing a mechanism for dealing with a perceived takeover attempt. As to the proportionality test, an issue of fact exists as to whether the actions were proportionate to the threat. Thus, under the new test we adopt today, summary judgment could not be granted because there are issues of fact which must be resolved before determination of whether the business judgment rule should be applied to the various actions taken by Bunten in response to the proposed purchase of shares and perceived takeover attempt of Unison. Therefore, we reverse the trial court's decision to grant summary judgment to Bunten on the claim of breach of fiduciary duty. However, we do note that two of the plaintiffs' allegations do not fall within this analysis. First, there is an allegation that there was a breach of fiduciary duty resulting from the breach of the Stockholders' Agreement. Since we determined there was no breach of the agreement, summary judgment was appropriate as to this allegation. Second, plaintiffs alleged Bunten breached a fiduciary duty by misrepresenting the terms and requirements of the Stockholders' Agreement relative to plaintiffs' contracts. There was no evidence presented of a misrepresentation made by Bunten. Again, as to this allegation summary judgment was appropriate. The other allegations, however, require application of Unocal and its progeny. Issue 5: Did the District Court Err in Granting Summary Judgment in Favor of Unison and Bunten on Count II Alleging Tortious Interference with Plaintiffs' Contract to Sell Their Unison Shares to Gold? In Kansas, a person who, without justification, induces or causes a breach of contract will be answerable for any damages caused thereby. Turner v. Halliburton Co., 240 Kan. 1, 12, 722 P.2d 1106 (1986). `The elements essential to recovery for tortious interference with a contract are: (1) the contract; (2) the wrongdoer's knowledge thereof; (3) his intentional procurement of its breach; (4) the absence of justification; and (5) damages resulting therefrom.' Dickens v. Snodgrass, Dunlap & Co., 255 Kan. 164, 168-69, 872 P.2d 252 (1994) (quoting 45 Am. Jur. 2d, Interference § 39, p. 314). Both defendants argue that the district court's order granting summary judgment on Count II may be upheld on the basis that plaintiffs did not have an enforceable contract with Gold nor did Gold breach that contract. Defendants claim that plaintiffs' letter agreements with Gold are similar to the documents at issue in Noller v. General Motors Corp., 13 Kan. App. 2d 13, 760 P.2d 688 (1988), rev'd in part on other grounds 244 Kan. 612, 772 P.2d 271 (1989). In that case, plaintiff Noller entered into an agreement to purchase Beard's GMC dealership, with the condition precedent that GMC approve Noller's purchase of the franchise. When GMC refused such approval, Noller justifiably abandoned the agreement with Beard and it was never performed. Noller then sued GMC for tortious interference with his contract with Beard. The Court of Appeals ruled that there was no existing, enforceable contract between Noller and Beard; therefore, Noller could not claim tortious interference with a contract. 13 Kan. App. 2d at 27. This case is analogous to Noller. When Gold withdrew its offer or refused to perform under the agreement, it specifically mentioned two conditions to closing: (1) the absence of any material adverse change in Unison and (2) the accuracy of all your representations and warranties as of the closing date. Aslin's letter stated that Unison's adoption of the Rights Plan constituted a material adverse change in Unison and contradicted plaintiffs' representation that there were no contracts or agreements relating to the sale of their shares. Aslin also stated that the actions threatened in the Dolson letter contradicted plaintiffs' representation that there was no action threatened which might delay consummation of the sale. Aslin stated that, because of Unison's actions, the conditions to closing could not be met. As in Noller, plaintiffs in this case cannot maintain an action for tortious interference with a contract because there was no existing, enforceable contract. Summary judgment is appropriate on Count II for this reason, although it is a different reason than the one relied upon by the trial court. See KPERS v. Reimer & Koger Assocs., Inc., 262 Kan. 110, 118, 936 P.2d 714 (1997) (district court's reason for decision is immaterial if ruling is correct for any reason). Issue 6: Did the District Court Err in Granting Summary Judgment in Favor of Unison and Bunten on Count III Alleging Tortious Interference with Plaintiffs' Business Expectancy in the Sale of Their Shares to Gold? Plaintiffs argue that the district court erred in granting summary judgment in favor of Unison and Bunten on Count III. In Count III, plaintiffs alleged that Unison and Bunten tortiously interfered with plaintiffs' business expectancy based upon the same conduct as alleged in Count II. Kansas recognizes a cause of action for tortious interference with a prospective business advantage or relationship. The requirements for this tort are: (1) the existence of a business relationship or expectancy with the probability of future economic benefit to the plaintiff; (2) knowledge of the relationship or expectancy by the defendant; (3) that, except for the conduct of the defendant, plaintiff was reasonably certain to have continued the relationship or realized the expectancy; (4) intentional misconduct by defendant; and (5) damages suffered by plaintiff as a direct or proximate cause of defendant's misconduct. Both tortious interference with a contract and tortious interference with contractual expectations or a prospective business advantage are predicated on malicious conduct by the defendant. While these torts tend to merge somewhat in the ordinary course, the former is aimed at preserving existing contracts and the latter at protecting future or potential contractual relations. Turner, 240 Kan. at 12.