Court Opinion

ID: 9638056
Source: CourtListenerOpinion
Date Created: 2023-08-22 15:31:36.620631+00
Date Added: 2024-06-11T18:10:03.375565
License: Public Domain

Dissenting Opinion by
Mr. Justice Cohen:
The majority agrees that the general rule which permits shareholder’s ratification is subject to the limitation that: “ ‘ “. . . ‘the majority stockholder may not, as against the corporation and minority stockholder, dissipate or waste its funds, or fraudulently dispose of them in any way, either by ratifying the action of the board of directors ... or by any other [similar] act.’ ” Lowman v. Pierce Co., 276 Pa. 382, 396.’ ” (Emphasis supplied).
The Court of Chancery of the State of Delaware, a sophisticated jurisdiction in the determination of corporate issues, has held that: “Plaintiffs correctly state the well-settled rule to be that a waste of corporate assets is incapable of ratification without unanimous stockholder consent.” Saxe v. Brady, 40 Del. Ch. 474, 478, 184 A. 2d 602, 605 (1962). Fletcher Cyclopedia Corporations comments that “ratification does not relieve the directors from the legal consequences of their alleged wrongful acts.” Vol. 2, Ch. 11, §764 (rev. vol. 1954).
The Federal Court of Appeals for the Second Circuit has gone so far as to say that a shareholder’s vote cannot prevent the institution of a derivative suit or annul one once it has been brought. Gottesman v. General Motors Corporation, 268 F. 2d 194, 197 (2d Cir. 1959).
Here the majority brushes aside plaintiff’s complaint as portraying “defendants’ alleged failure to act as [plaintiff] would have had them do, as a failure to exercise wise business judgment.” By this statement the majority finds the conduct, which by defendants’ *339own admission constituted negligence and mismanagement, innocuous.1 Further, the majority holds that plaintiff does not allege any intentional dissipation or waste of corporate funds. I do not so read the complaint. The complaint alleges that the officers and directors of the defendant corporation did not manage the corporation as required by the Act of May 5, 1933, P. L. 364, §401, as amended, 15 P.S. §2852-401. Plaintiff complains that defendants did not exercise any business judgment, good or bad; that there ivas no action taken by the board of directors or officers, but a complete abdication of their obligation to manage and supervise the corporate affairs. The complaint clearly alleges a failure to act, a nonfeasance on the part of the directors, and a resulting loss, waste and dissipation of corporate assets. I would consider these allegations, together with the loss of $650,000, representing 63% of the corporate assets, to be clearly indicative of waste of an aggravated nature.
The majority’s determination severely erodes the policy of Section 408 of the Business Corporation Law, 15 P.S. §2852-408. In reality, by virtue of the majority’s determination, ratification by the shareholders of the actions of the officers and directors is rendered nothing more than an exculpation in which the shareholders assume the role of a board of pardons. The result of the majority opinion is to approve the failure on the part of the officers and directors to manage the business — not their failure to properly manage the business but their failure to even consider the problems of the business — and to relieve the directors of their responsibilities as fiduciaries and to exonerate them *340from all wrongdoing. This determination illustrates the extreme in the breakdown of democratic processes in Pennsylvania corporations and makes the ownership of a minority interest in a Pennsylvania corporation a most hazardous venture.
I dissent.

 The first counter-statement of the questions involved filed by defendants-appellees is as follows: “In the absence of fraud, illegality, waste, or inside profit, negligence and mismanagement by the directors of a business corporation can be ratified by the shareholders?”