Opinion ID: 1834809
Heading Depth: 1
Heading Rank: 4

Heading: did the chancellor err in failing to find a breach of fiduciary duty?

Text: Dispute exists in the record as to whether Morris and Fought agreed that the corporation could not purchase Peyton's stock. More to the point, however, the record is clear that Fought offered to purchase his pro-rata share and that Morris offered to purchase all of Peyton's shares. The evidence indicates that Morris' intent in offering to purchase all Peyton's shares was to freeze out Fought. As we discussed above, directors and officers of a corporation stand in a fiduciary relationship to the corporation and its stockholders. These duties include exercising the utmost good faith and loyalty in discharge of the corporate office. Gibson v. Manuel, 534 So.2d 199 (Miss. 1988); Ellzey v. Fyr-Pruf, Inc., et al., 376 So.2d 1328, 1332 (Miss. 1979); American Empire Life Ins. Co. v. McAdory, 319 So.2d 237 (Miss. 1975); Cooper v. Mississippi Land Co., 220 So.2d 302 (Miss. 1969); Knox Glass Bottle Co. v. Underwood, 228 Miss. 699, 89 So.2d 799 (1956). Knox Glass, supra, set out the following rule: Since the directors and other officers of a corporation, whatever their relation may be technically, occupy a fiduciary or quasi trust relation toward the corporation and the stockholders collectively, it is thoroughly well settled that they cannot, either directly or indirectly, in their dealings on behalf of the corporation with others, or in any other transaction in which they are under a duty to guard the interests of the corporation, make any profit, or acquire any other personal benefit or advantage, not also enjoyed by the other stockholders, and, if they do so, they may be compelled to account therefore to the corporation in an appropriate action. 89 So.2d at 814-15 (citing 3 Fletcher, Sec. 884). The chancellor found that Morris won in the scramble between Fought and Morris for Peyton's stock. However, at the inception of the corporation the four stockholders entered into a Stock Redemption Agreement to prevent such a scramble. Section 2 of the agreement provided in pertinent part that: In the event that any stockholder should desire to dispose of any of his stock in the Company during his lifetime, he shall first offer to sell all of this stock to the Company... . Any share not purchased by the Company within thirty days after receipt of such offer shall be offered to the other stockholders, each of whom shall have the right to purchase such portion of the stock offered for sale as the number of shares owned by him at such date shall bear to the total number of shares owned by all the other stockholders provided, however, that if any stockholder does not purchase his full proportionate share of the stock, the unaccepted stock may be purchased by the other stockholders.... (Emphasis added). This agreement insured that stock in the corporation always would be offered to the corporation, or in the alternative, each shareholder would have a right to purchase a pro-rata share. A Stock Redemption Agreement in one guide for corporate policy, which may restrain the transferability of stock. Shareholders in a close corporation have an interest in maintaining a balance of power that frequently is protected by such agreements. See 2 O'Neal, Close Corporations § 7.05 (1987); Walderbaum, Buy-Sell Agreements, The Practical Accountant 17 (May/June, 1976); Zidell v. Zidell, 277 Or. 423, 560 P.2d 1091, 1094 (1977). Generally, a director violates no duty by dealing in his own stock on his own account. This rule is not applicable, however, when there is a showing that a closely-held corporation has a practice of purchasing its own stock, or that it ever contemplated doing so, as evidenced by a stock redemption agreement, in order to maintain proportionate control of the corporation. Zidell, 560 P.2d at 1092-93; See, Faraclas v. City Vending Co., 232 Md. 457, 194 A.2d 298 (1963). In the case sub judice the stockholders had entered into an agreement which constituted corporate policy. This policy was adhered to when Strong sold his stock. However, the record reveals that Morris was unhappy with Fought. When Peyton decided to sell his stock, Morris saw a way to take control, as evidenced by his statement that he would undertake to relieve Peyton from liability on the bank note only if he could purchase all of Peyton's stock. The court below failed to perceive Morris' fiduciary duty, as an officer and director of Vicksburg Mold and Die, Inc., to conduct his office with prudence and all good fidelity. Morris' intended exclusion of Fought from the purchase of Peyton's shares was a breach of the Stock Redemption Agreement and bylaws, and, therefore, a breach of his fiduciary duty as an officer, a director and a stockholder under the good faith standard we adopt today. See, Gibson, supra . We hold, therefore, that Morris breached his fiduciary duty in purchasing all of Peyton's stock, contrary to the Stock Redemption Agreement.