Court Opinion

ID: 9339214
Source: CourtListenerOpinion
Date Created: 2022-12-16 17:45:47.461522+00
Date Added: 2024-06-11T17:15:18.147239
License: Public Domain

BUTZNER, Circuit Judge,
dissenting:
The dismissal of the minority shareholders’ complaint for failure to state a claim upon which relief can be granted departs from sound precedent governing both the procedural and substantive aspects of this action. The complaint was dismissed pursuant to Fed.R.Civ.P. 12(b)(6) on the bare pleadings without consideration of any evidence presented by either affidavit or discovery. Under these circumstances the allegations must be accepted as true and construed favorably to the complainant. A motion to dismiss must be denied “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). “The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). Since the motion to dismiss did not satisfy these exacting standards, it should have been denied. I base this conclusion on the following principles of substantive law.
I
Contrary to the appellees’ contention, the district court quite properly recognized that when the harm done to minority shareholders is distinct from the harm done to the corporation, the minority are not relegated to bringing a derivative action on behalf of the corporation. The allegation of discriminatory treatment charged a harm peculiar to the minority shareholders. It permeates all their claims and distinguishes this case from those involving only corporate injury on which the appellees rely. See Jones v. H. F. Ahmanson & Co., 1 Cal.3d 592, 81 Cal.Rptr. 592, 597-99, 460 P.2d 464, 469-71 (1969) ; 13 Fletcher, Cyclopedia of Corporations § 5913 (1970).
The district court also correctly recognized that majority stockholders have a fiduciary obligation to the minority when they transfer control of a corporation to outsiders. Their fiduciary status places them under a duty not to proceed with the transfer if the circumstances surrounding the transaction would awaken the suspicions of a prudent businessman. Then, the majority stockholders must make a reasonably adequate investigation and refrain from the transfer unless they can reasonably conclude that no fraud is intended or likely to result. See Swinney v. Keebler Co., 480 F.2d 573, 578 (4th Cir. 1973); 13 Fletcher, Cyclopedia of Corporations § 5805 (1970) .
If my analysis of this case is correct, the district court erred by holding that the complaint alleged no suspicious circumstances that would obligate the majority stockholder to make the investigation that the rule requires. The district court reached this conclusion by erroneously construing the allegations against, rather than in favor of, the complainants in violation of the familiar principles reiterated in Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) and Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
In Insuranshares Corp. of Delaware v. Northern Fiscal Corp., 35 F.Supp. 22 (E.D.Pa.1940), the leading case dealing with the fiduciary obligations of majority stockholders upon transfer of control of a corporation, the court pointed out that a suspicious circumstance was the inflated price or premium paid for control. The district court distinguished Insuranshares on the ground that it involved an investment corporation while the instant case concerns the sale of a race track. It then construed the allegation concerning the 400 percent premium over market value paid by the purchasers of the *1266stock against the complainants by concluding that the allegedly excessive payment was simply “a price paid for the element of control.”
No allegation of the complaint supports the court’s assumption about the value placed on control. The court’s conclusion might ultimately be sustained by the evidence, but I find no warrant for presently holding — without any proof whatsoever— that this is the only inference that can be drawn from the payment of such an excessive premium. To the contrary, it might well reflect the real value of the stock, especially if assets carried at cost have increased in value. A reasonably astute businessman should at least investigate the likelihood that the purchasers were willing to pay such a large premium so they could convert corporate assets to their own use, as they allegedly did here. Moreover, the conclusion that the premium simply reflected the price of control is dispelled by the allegation that the majority stockholder insisted that the purchasers acquire the stock of certain favored minority stockholders. Other stockholders, including the appellants, were not even told of the proposed transaction. The use of such leverage to favor one group of minority stockholders over another justifies the inference, at least at this stage of the proceedings, that the majority accurately foresaw that disaster was likely to befall the corporation. These allegations, in my view, provide a sufficient basis for the minority stockholders’ claim that the majority breached its fiduciary duty by transferring control without taking the precaution of investigating the purchasers. For this reason alone I would vacate the order of dismissal.
II
Another aspect of the case warrants vacating the order of dismissal and remanding for disclosure of all the facts about the transfer of control. The minority stockholders do not complain simply that they were denied an equal opportunity to sell on the same terms as the majority. Their complaint also alleges that the majority breached its fiduciary duty by causing the purchasers to offer a premium price to certain minority stockholders who were selected by the majority, but not to other minority stockholders. The minority’s reliance on state law rather than the federal securities acts does not defeat their claim that the majority had a duty to refrain from discriminating among minority stockholders. Their possible lack of standing to assert a federal cause of action because they neither bought nor sold stock in reliance on the transfer of control has no bearing on this state-based claim.
It is generally recognized that holders of the same class of stock are to be treated equally by the corporation and its management. Hagerstown Furniture Company v. Baker, 155 Md. 549, 142 A. 885 (1928). Persons in control of a corporation are similarly obligated not to use the power of control to discriminate among different holders of the same class of stock. I have found no case in Maryland or in any other jurisdiction holding that persons in control of a corporation have an unqualified right to discriminate or to abet discrimination among different holders of the same class of corporate stock.
The only case that appears to have dealt with this situation is Ferraioli v. Cantor, 281 F.Supp. 354 (S.D.N.Y.1968). There the court said:
In view of plaintiff’s claim that the defendants offered to some stockholders the opportunity to sell their General Baking stock to Goldfield at a premium and did not make the same offer to others, including the plaintiff, defendants are not entitled to summary judgment dismissing plaintiff’s complaint. 281 F.Supp. at 356.
Ferraioli has been criticized as an example of the application of the equal opportunity theory, but apart from that, observant commentators have noted the issue that it raises when the minority stockholders are treated unequally. See 6 L.Loss, Securities Regulations 3615 (1969); Kaplan, Fiduciary Responsibility in the Management of the Corporation, 31 The Business Lawyer 883, 908-09 (1975); Schiff, Sale of Control, 32 *1267The Business Lawyer 507, 514-15 (1977); Schwartz, The Sale of Control and the 1934 Act: New Directions for Federal Corporation Law, 15 New York Law Forum 674, 694 (1969).
I believe that the minority stockholders’ allegation that the majority used its leverage to favor some minority stockholders over others states a claim that is sufficient to survive a motion to dismiss under Rule 12(b). A thorough exposition of the facts may, of course, disclose that the majority and the preferred minority were in fact a unit — such as the members of the corporation’s management and their families or business associates who acquired the stock as a joint venture. See 2 L.Loss, Securities Regulations 779 (1961); Kaplan, Fiduciary Responsibility in the Management of the Corporation, 31 The Business Lawyer 883, 909 (1975). At this stage of the proceedings, however, the record does not suggest such a unitary relationship. It therefore seems to me that the disadvantaged shareholders should be allowed to present proof that the majority breached its duty to all minority stockholders by unjustifiably preferring one group over another.
Ill
A third reason for vacating the order of dismissal is based on the corporation’s unique status as a racetrack licensee. Insu-ranshares suggests that the nature of the corporation’s business is a factor to be considered in assessing the majority stockholder’s duty to investigate the persons who wish to acquire control. 35 F.Supp. at 26. I think that this factor is particularly relevant to this case. The complaint alleges that the corporation operated a racetrack pursuant to a license granted by the Maryland Racing Commission. This license, of course, was one of the most valuable assets of the corporation, for without it no races could be run.
The importance that Maryland places upon the integrity and competency of persons controlling a licensee is indicated by the requirement that the names of its stockholders be disclosed and by the authority of the commission to suspend or revoke a license “for any cause whatsoever which the Commission may, in its discretion, deem sufficient.” 7A Md. Code Ann. Art. 78B §§ 10 and 13(c)(1) (1975 Repl.Vol. and 1977 Supp.). Since the competency and integrity of new owners will have an important bearing on the future of the corporation, it seems to me that majority stockholders who sell control of a race track have a fiduciary obligation to make a sufficient investigation to assure the minority that the license will not be placed in jeopardy by the new owners. The majority are bound to know that if the new management is corrupt or incompetent, the commission can suspend or revoke the track’s license. See Southern Maryland Agricultural Assoc. v. Magruder, 198 Md. 274, 81 A.2d 592 (1951).
In short, the peculiar nature of this corporation’s business is another reason for concluding that reasonably prudent business practices required an investigation of the purchasers.
No Maryland case addresses the fiduciary obligations of majority shareholders who sell their interest in a corporation licensed to conduct a race track, and quite understandably, the appellants did not press this point in argument. Nevertheless, the allegations of the complaint are sufficient to raise it. Moreover, I am confident that if the question were presented in a state forum, the Court of Appeals would consider the importance of having Maryland race tracks controlled by honest, competent persons to be one of the factors bearing on the scope of the fiduciary obligation of majority shareholders.
Consequently, for the three reasons which I have mentioned, or any one of them, I think the complaint should not have been dismissed for failure to state a claim. I respectfully dissent.