Opinion ID: 2064965
Heading Depth: 1
Heading Rank: 5

Heading: effect of policyholder approval of the bulk reinsurance contract

Text: Did the vote of a majority of the policyholders approving the reinsurance contract ratify voidable acts of the directors and absolve them from liability? The issue of whether stockholders may absolve corporate directors from liability for their actions is one upon which there is relatively little agreement. Some of the competing policies and interests involved are: (1) It should be possible for a majority of the stockholders to make an informed decision to stay out of court, and (2) litigation is not always the ideal solution to void or voidable behavior on the part of the directors; however, (3) dissenting stockholders have a property interest in the corporation, and our system has not favored the elimination of property interests by majority vote, (4) it is all too easy for directors to obtain sufficient proxies for ratification of what are often technical and complex ventures, and (5) the courts are not sympathetic to any sort of validation of violations of fiduciary duties. See generally Leavell, The Shareholders as Judges of Alleged Wrongs by Directors, 35 Tulane L.Rev. 331; Comment, Shareholder Validation of Directors' Frauds: The Non-Ratification Rule v. The Business Judgment Rule, 58 Northwestern L.Rev. 807. The principle which governs under the facts in this case is that a ratification by shareholders (in this instance, policyholders) arises from their approving vote only when all the material facts are disclosed to them. Hudson v. American Founders Life Ins. Co. of Denver, 151 Colo. 54, 377 P.2d 391. See, also, First Nat. Bank of Omaha v. East Omaha Box Co., 2 Neb. (Unoff.) 820, 90 N.W. 223; Henn, Law of Corporations (2d Ed., 1970), § 194, p. 379. When there has been a full disclosure, the courts of this country have adopted various positions as to what may be ratified and in what manner. Here, however, we need not go beyond the principles and facts applicable to the case before us. When we compare the information contained in the proxy statement with the facts earlier recited, we find there was clearly incomplete disclosure as well as deception. We list the following. (1) The reasons for the sale as recited in the proxy statement were false and deceptive. It recited: The Board of Directors. . . of Union have been concerned for some time about the Company's continued ability to achieve favorable results. It then recites reasons for the expressed concern, to wit, inability to attract and retain executive personnel, inability to compete viably with opposition insurance companies, and inability to get necessary additional capital because the mutual form of the company makes it impossible to sell stock and additional capital can come only by retention of earnings. The above is contradicted by the following: The statement that the board of directors had been concerned for some time is simply not true. The clouds on the horizon were seen only by Gerleman. The board had made no investigation of any kind relative to future prospects. The claim of inability to attract executive personnel seems spurious, since it was contemplated from the beginning that the officers of Old Union would be the officers of New Union. In fact, the record establishes that Berkley offered Gerleman a 5-year contract at $50,000 a year. When the sale was consummated, the officers of Old Union became the officers of New Union. The only evidence introduced on the question of ability to compete contradicts the pessimistic note of the forecast. As to ability to attract capital, it is true that because of the mutual form, Old Union could not sell additional shares. It is to be observed, however, that New Union was to have capital and surplus of only $3,500,000 compared with the policyholders' statutory surplus in Old Union which, on December 31, 1972, was $7,994,280 and which represented an increase of almost a million dollars in 1 year. The record establishes that Old Union was a healthy company, founded in 1886 and having a long history of profitability. The stated reasons for the necessity of the sale are also undercut by the fact that, without any doubt whatever, the driving force behind the transaction was Gerleman and he was motivated by self-interest. The fact he was originally to acquire an equity interest in New Union never was disclosed to the policyholders. Had they been so informed, their views might have been quite different. (2) The proxy statement says: After numerous discussions and a great deal of investigation, the Board of Directors on December 21, 1972, authorized Management to seriously pursue a possible affiliation with Finevest Services, Inc. The fact is there was no investigation by the board of directors and the only discussion was the one which occurred at the meeting of December 21, 1972, which resulted in a resolution to investigate feasibility. Although the general outline of the plan had by then been well formed, no significant disclosure of the plan had been made to the directors. (3) The proxy statement recites: New Union would pay to Union a ceding commission equal to the Policyholders' equity in the unearned premium reserve as of December 31, 1972. Whether the ceding commission was fairly valued was the subject of a great deal of evidence. It was a matter to which the board gave no consideration whatever. The evidence rather clearly supports the conclusion there was enough additional equity in this item alone to account for the $700,000 ownership equity which Gerleman was to acquire. (4) The proxy statement recites that from the dividend would be deducted costs incurred in the preparation of the Bulk Reinsurance Agreement and the preparation and mailing of this proxy solicitation material. These costs are estimated to be less than $200,000.00. Any unused balance was to go to the shareholders. The evidence shows that items other than those listed were paid and intended to be paid from that reserve. Some of them were, in fact, incurred or paid before the policyholders' meeting and even before the proxy statements were mailed. These include an undetermined portion of the fee of Touche Ross' audit, which portion was unnecessary to the sale but required to enable Finevest Services, Inc., to go public; traveling, housing, and other expenses of Finevest officers incurred during the selling of the plan to the agents; legal fees for the incorporation of New Union, which fees obviously should have been paid by owners of New Union; and legal fees of Wilkie, Farr, and Gallagher for initial defense of this action. A credit-back adjustment of $13,000 to the $200,000 reserve was later made, but its nature is not shown. (5) The proxy statement gives the impression the board approval was unanimous when it was not. The dissents of Ellis and Head are not noted and, of course, the reasons for their dissent are not declared. We find that a complete disclosure of all material facts was not made to the shareholders and for that reason policyholder approval did not operate as a ratification under the particular facts of this case.