Court Opinion

ID: 5752945
Source: CourtListenerOpinion
Date Created: 2022-01-12 17:00:21.324428+00
Date Added: 2024-06-11T08:41:20.150787
License: Public Domain

Breitel, J. P.
(concurring). I find it necessary to state my reasons separately in concurring in the result reached by the majority.
The case is one of first impression and the question involved is whether two members of a control group in a public corporation may sell their shares to the corporation at a price higher than would have been received by them if negotiated with outsiders. I conclude tjiat, so long as tiñere yras complete disclosure, *322opportunity for other shareholders to accept the same tenders, or to resist the transaction by litigation, or at a stockholders’ meeting, and so long as the price represented fair Value to the corporation, the transaction was not vulnerable.
Realistically, Valentine and Starr were part of the control group, which therefore dealt with itself. Bach of the members of the control group, including Valentine and Starr, were founders of the corporation and directors. While Levy was the dominant figure, this was because of the concurrence of the control group and not because he owned sufficient stock in his own right to exercise control. He was therefore the chosen instrument of the control group, but their instrument, nevertheless, rather than a controlling factor disassociated from and independent of particular 1 ‘ minority ’ ’ members of the control group, as were Valentine and Starr. In consequence, Valentine and Starr owed the corporation, not only as stockholders and directors, but as part of the control group, total and primary loyalty and a duty to forbear from any profit at the expense of the corporation arising from their special relation to the corporation (see, generally, Hill, Sale of Controlling Shares, 70 Harv. L. Rev. 986 and Eerie, “ Control” in Corporate Law, 58 Col. L. Rev. 1212, in which the effect of the sale or purchase of significant amounts to minority stock are recognized as occasionally contributing to “control”, with corresponding fiduciary duties).
Although the experts for both sides agreed that the sale of a noncontrolling block of 1,000,000 shares to outsiders is often accomplished only at a discount from the open market price, this « in no way determines the value, or better, the fairness of the sale price, for the sale between the insiders and the corporation. The large block of shares would just not necessarily have the same value to outsiders, and the size of the block would upset the demand-supply balance of the market. The expert opinions, therefore, as to these hypothetical negotiated sales were relevant as factors to be considered in disclosing the range of values for the stock in question, but not determinative in fixing the fair price for this “inside” transaction. And, of course, as the majority opinion points out, Valentine and Starr owed no duty to sell to such outsiders.
For another reason the negotiations in this case involved special difficulties, and the expert opinions are only suggestive and not conclusive. These were negotiations between btiyers and sellers with special confluent reasons that the corporation, on the one hand, and that Valentine and Starr, on the'other, had, for effecting a sale between them. That confluence of motiva*323tians is difficult to find or hypothesize in assumed but unreal transactions. Yet it is elementary economics that motivation is highly influential, if not controlling, in fixing market values.
The simple fact was that between the corporation and the sellers in this case there were uniquely matching reasons for effecting a sale between them and with no one else. It was, as the trial court found, in the best interests of the corporation to acquire the stock, if indeed it was not essential. At the same time, it was quite important for the sellers to sell, but not necessarily to the corporation and not necessarily over a market-upsetting short period. There was no motive to perpetuate control; the control group would remain in control independently of this acquisition. The sellers could, of course, do better economically, the law permitting, and with good conscience toward their fellow stockholders, if they sold to the corporation than if they put the stock out on the open market.
Under these circumstances, it would have been folly to ignore the opportunity and it would be folly for the law to apply reasons and bases for fixing fair value that do not apply to the actual situation. The only solution was a negotiated price, and if the negotiated price was fair, that is, within reasonable limits, the negotiation accompanied by complete disclosure with opportunity to other stockholders to join in the transactions or to resist it by showing unfairness, none should complain. And, of course, there is no one value or absolute price, only a matter of fair price.
The stock had a relatively high “ intrinsic ” value because of the high value of the corporation’s assets, including real property. The market, however, did not reflect this higher value. Whatever the reason for this may be, the actual market price remains a better indicator of the price at which an intelligent stranger would sell to the corporation or buy from these defendants. For this reason market price is usually preferred to “ intrinsic ” value in most cases requiring a judicial determination of value (1 Bonbright, Valuation of Property [1937], pp. 24-28, esp. p. 28).
Tested by actual market values the price was fair to the corporation. On April 16, 1962 the closing price on the American Stock Exchange was $5.125 per share. Thereafter, on the same day and with knowledge of that price, the corporation’s board of directors (Valentine and Starr not participating) authorized its officers to invite shareholders to tender sale of their shares for $4.875 per share, substantially below the market price. On May 14,1962 the closing price on the American Stock Exchange was $4.625 per share. On that day and with knowledge of that *324closing price the hoard again met (Valentine and Starr not present) and accepted the tenders at $4,875 per share made by various shareholders other than Starr and Valentine. The board also accepted an arrangement that had been negotiated with Starr and Valentine under which payment for their shares would be made over a period of time. Because of this credit given by Starr and Valentine, the trial court found that the effective price received by them for their shares was only $4.59 per share. Thus the price actually received by Starr and Valen, tine was $.035 per share less than actual market price on the date of acceptance, $.285 per share less than the price received by the other tendering shareholders (and thus less than what plaintiff might have received for his shares), and $.535 per share less than actual market value on the date the tender was authorized.
An excellent check on the negotiation of the price was the fact that the control group that was to remain with the corporation was strongly concerned in not diluting the equity of its shares in the corporation by paying a greater price than necessary for the Valentine-iStarr shares. And there has been no suggestion that the ostensible deal was any different from the real deal.
On the other hand, plaintiff would have shown unfairness if he had proven that the corporation could have bought a million shares elsewhere at a lower price, or that it could have mopped-up the shares in suit at a price less than was in fact negotiated after they had been sold on the open market. This is quite different from showing, as plaintiff did, that the sellers could not have obtained the same price on the open market or by private negotiation with outsiders.
If, as the complaint asserts, the sales price to defendants reflected a transfer of control of the corporation, the normal expectation would be that the sales price would actually exceed the market price (e.g., Perlman v. Feldman, 219 F. 2d 173). The fact that the sales price was less than market price is, therefore, an important fact in showing the essential fairness of the transaction.
On this view the corporation did very well indeed, and while the situation required the control group to deal with a part of itself, there was no unfairness, and because the situation was what it was there was no choice for it except to deal with a part of itself. This meant, of course, that the transaction would inevitably remain subject to judicial review — intensive judicial review — for fairness in procedure and in result, but it also meant that it was not prohibited and that the law would not *325require the sellers to sell at a price that would remove all motivation to sell to the corporation rather than to outsiders. (See, e.g., Bosworth v. Allen, 168 N. Y. 157,165-168, but, cf., Levy v. American Beverage Corp., 265 App. Div. 208, 218-219; Sage v. Culver, 147 N. Y. 241, 247; Gerdes v. Reynolds, 28 N. Y. S. 2d 622, 650-652 [Walter, J.]; cf. Restatement, Trusts 2d, § 170, incl. Comments.)
In short, while Valentine and Starr, as parts of the control group, owed all the obligations of a controlling majority to the corporation and its stockholders, those obligations were not breached. They were not breached because the interests of the corporation required the transaction and it was accomplished under conditions of disclosure and fairness consistent with the necessity of effecting the transaction.
Accordingly, I concur and vote to reverse the judgment in favor of plaintiff and to dismiss the amended complaint, on the law and on the facts.
Valente and Stevens, JJ., concur with McNally, J.; Breitel, J. P., concurs in opinion.
Judgment unanimously reversed, on the law and on the facts, with $50 costs to defendants-appellants-respondents, and judgment rendered in favor of defendants-appellants-respondents dismissing the amended complaint, with costs.