Court Opinion

ID: 9565245
Source: CourtListenerOpinion
Date Created: 2023-08-21 19:17:19.122733+00
Date Added: 2024-06-11T09:19:29.241867
License: Public Domain

ROSE, Justice,
dissenting, with whom THOMAS, Chief Justice, joins.
I cannot join in Part II of the majority opinion which excuses Eunice Lynch from liability in this case. As a voting member of the board of directors, she approved a series of transactions which destroyed the corporation while enhancing the value of a competing partnership composed of her husband and son. Conduct this egregious violates the duty of care imposed upon all directors by the Wyoming Business Corporation Act (§§ 17-1-101 through 17-1-1011, W.S.1977), regardless of whether she personally benefited from her actions. The fact that she voted to funnel corporate funds to directors other than herself cannot, as the majority hold, release her from liability where the duty and breach are clearly established.
DUTY OF CARE
Section 17-l-133(b), W.S.1977,1984 Cum. Supp., requires that a director of a corporation perform his or her duties:
“ * * * with such care as an ordinarily prudent person in a like position would use under similar circumstances. In performing his duties, a director may rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:
“(i) One (1) or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;
“(ii) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the person’s professional or expert competence; or
“(iii) A committee of the board upon which he does not serve, duly designated in accordance with a provision of the articles of incorporation or the bylaws, as to matters within its designated authority, which committee the director reasonably believes to merit confidence, but he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A person who so performs his duties has no liability by reason of being or having been a director of the corporation.” (Emphasis added.)
We held directors to this same standard of care prior to the adoption of the Wyoming Business Corporation Act, Smith v. Stone, 21 Wyo. 62, 128 P. 612 (1912), and it represents the majority position. Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, 35 L.Ed. 662 (1891); Selheimer v. Manganese Corporation of America, 423 Pa. 563, 224 A.2d 634 (1966). See The American Law Institute, Principles of Corporate Governance: Analysis and Recommendations, Tentative Draft No. 4 (April 12, 1985), § 4.01. Under this standard, courts will not interfere in questions of corporate management or policy, unless the complainant establishes fraud or its equivalent. Smith v. Stone, 128 P. at 619-620. In other words, directors are personally responsible to stockholders for losses result-*1138tag from fraud, illegality or unfair self-dealing, but they will not be held liable for honest mistakes of judgment which are fairly related to some rational business purpose. Selheimer v. Manganese Corporation of America, supra, 224 A.2d at 641, citing Spering’s Appeal, 71 Pa. 11, 10 Am. Rep. 684 (1872).
Courts will step in, however, where the directors have wasted the corporate assets and no rational business purpose justifies such conduct. New York Credit Men’s Adjustment Bureau, Inc. v. Weiss, 305 N.Y. 1, 110 N.E.2d 397 (1953). In Selheimer v. Manganese Corporation of America, supra, the directors of Manganese poured corporate funds into a plant known to be unsuitable for production and failed to use an available plant where profitable production was possible. The actions of the directors led to the corporation’s insolvency, and the Pennsylvania Supreme Court held them personally liable in a stockholders’ derivative action:
“Defendants’ actions in respect to the Colwyn plant were not the result of errors in judgment or a calculated business risk nor can such actions be classified as mere negligence. With the knowledge which defendants had of the unsuitability of the Paterson plant for profitable production, the pouring of Manganese’s funds into this plant defies explanation; in fact, the defendants have failed to give any satisfactory explanation or advance any justification for such expenditures.

“This record indicates clearly that these defendants, as the controlling directors and officers, wasted and dissipated Manganese’s assets. Their actions constituted negligence such as was inimical to the corporation and the other stockholders of this corporation. Whether their conduct as directors and officers be measured by the yardstick provided in Section 408 of the Business Corporation Law * * *, or by common law,[1] their conduct offended their fiduciary relationship to this corporation in such manner as to justify the imposition upon them of personal liability for such conduct.” 224 A.2d at 646.
In the instant case, Eunice Lynch, as one of the three directors of LCS, approved the payment of management fees to a competing partnership composed of her husband and son. The board of directors continued payment of these fees on a monthly basis while the partnership performed consulting jobs and the income of the corporation declined. The directors voted unanimously to deplete the corporate assets through officers’ salaries, directors’ fees, and the sale of corporate property at a loss. While any one of these last actions might not be sufficient to hold a director liable, the complete pattern of conduct evidences a program of corporate destruction and violates the duty of care imposed on corporate directors by § 17-l-133(b). Such behavior cannot be attributed to errors in judgment or calculated business risks.
The Superior Court of New Jersey faced a similar situation in Francis v. United Jersey Bank, 162 N.J.Super. 355, 392 A.2d 1233 (1978), affirmed 171 N.J.Super. 34, 407 A.2d 1253 (1979), cert. granted 82 N.J. 285, 412 A.2d 791 (1980), affirmed 87 N.J. 15, 432 A.2d 814 (1981). There, the wife of the principal stockholder and leader of Pritchard & Baird sat as a director of that corporation while it unlawfully paid substantial sums of money to members of her family. The court held Mrs. Pritchard liable for the negligent performance of her duties as a director of the corporation:
“It has been urged in this case that Mrs. Pritchard should not be held responsible for what happened while she was a director of Pritchard & Baird because she was a simple housewife who served as a director as an accommodation to her husband and sons. Let me start by saying that I reject the sexism which is unintended but which is implicit in such an argument. There is no reason why the average housewife could not adequately *1139discharge the functions of a director of a corporation such as Pritchard & Baird, despite a lack of business career experience, if she gave some reasonable attention to what she was supposed to be doing. The problem is not that Mrs. Pritchard was a simple housewife. The problem is that she was a person who took a job which necessarily entailed certain responsibilities and she then failed to make any effort whatever to discharge those responsibilities. The ultimate insult to the fundamental dignity and equality of women would be to treat a grown woman as though she were a child not responsible for her acts and omissions.” 392 A.2d at 1241.
A recent decision by the Supreme Court of Delaware also bears on our deliberations here. In Smith v. Van Gorkom, Del., 488 A.2d 858 (1985), the Delaware court held that corporate directors had breached their fiduciary duty of care by failing to inform themselves of reasonably available and relevant data prior to entering into a merger agreement. The directors, in agreeing to accept a premium of $17 per share over the market price, had lacked valuation information, had failed to obtain details of the transaction from its proponent, and had reached their decision after only two hours’ deliberation. 488 A.2d at 874. Nothing in the record indicated that the directors had benefited personally from their conduct. In assessing liability, the court ruled that directors who attempt to exercise their business judgment without obtaining adequate information violate their duty of care to the corporation.
Section 17-l-133(b)(i), permits a director to rely on information supplied by other officers or employees of the corporation. Eunice Lynch offered no evidence that she voted as she did in reliance on this type of information. In any event, I doubt that such reliance would have been reasonable under the facts of this case. To afford protection to a director, reports by corporate officials must “be entitled to good faith, not blind, reliance.” Smith v. Van Gorkom, 488 A.2d at 875.
I would have held that Eunice Lynch, as a voting member of the board of directors, breached the duty of care owed to the corporation and is, therefore, jointly and severally liable with the other directors for damages proved at trial. Direct recovery by Patterson is consistent with a finding of liability on the part of Eunice Lynch, since she participated as a director in the dissipation of his 30 percent share in the corporation. Pro-rata recovery simply prevents the complaining stockholder’s award from reverting to the control of the three directors who misused the corporate funds in the first place.

. Section 17 — 1—133(b) of the Wyoming Business Corporation Act reflects the common-law duty of care imposed upon corporate directors.