Court Opinion

ID: 6762402
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:32:54.604484+00
Date Added: 2024-06-11T16:02:37.752699
License: Public Domain

Holmes, J.,
concurring. I concur in the syllabus and judgment of the majority. However, I write separately in order to more fully develop what I perceive as the essentials needed in order to bring and maintain a breach of fiduciary action.
In Ohio, as in every other state, the long-established principle is that directors of a corporation have an obligation *12to the corporation which ,is in the nature of that of a fiduciary. A director’s obligation to the corporation includes two separate duties: loyalty and care. See ALI, Principles of Corporate Governance: Analysis and Recommendations, Introductory Note (Tent. Draft No. 4, Apr. 12,1985), Part IV, at 4 (quoting the A.B.A.’s Corporate Director’s Guidebook [1978], 33 Bus. Law. 1591, 1599-1600, on the distinction between the duty of loyalty and the duty of care). The formation of these duties is codified in R.C. 1701.59(B),2 and under the duty of loyalty, a “director shall perform his [or her] duties as a director * * * in good faith, in a manner he [or she] reasonably believes to be in the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.” In evaluating a director’s compliance with the duty of care, Ohio courts follow the “business judgment rule,”3 and will *13not usually inquire into the wisdom of actions taken by the director in the absence of fraud, bad faith or abuse of discretion. See Radol v. Thomas (C.A.6, 1985), 772 F. 2d 244, certiorari denied (1986), 477 U.S. 903; Ohio Natl. Life Ins. Co. v. Struble (1948), 82 Ohio App. 480, 485, 81 N.E. 2d 622, 625, appeal dismissed (1948), 150 Ohio St. 409, 82 N.E. 2d 856; see, also, Worth v. Huntington Bancshares, Inc. (1989), 43 Ohio St. 3d 192, 540 N.E. 2d 249. Furthermore, R.C. 1701.59(B) and (C) provide in part that a director shall not be liable for a breach of fiduciary duty unless a party can show that the director failed to act in good faith, in a manner he or she reasonably believed to be in the best interests of the corporation, or with the care that an ordinarily prudent person in a like position would have used under similar circumstances. See, also, Apicella v. PAF Corp. (1984), 17 Ohio App. 3d 245, 247, 17 OBR 512, 515, 479 N.E. 2d 315, 318; Gruber v. Chesapeake & Ohio Ry. Co. (N.D. Ohio 1957), 158 F. Supp. 593, 603 (“In the absence of usurpation, fraud, or gross negligence, courts of equity will not interfere at the suit of a dissatisfied minority of shareholders, merely to overrule and control discretion of the directors on questions of corporate management, policy or business.”); Norlin Corp. v. Rooney, Pace, Inc. (C.A.2, 1984), 744 F. 2d 255, 264-265; see, generally, 3A Fletcher, Cyclopedia of the Law of Private Corporations (1986 Rev.) 45-46, Section 1039. See Worth v. Huntington Bancshares, Inc., supra.
In 1986, the General Assembly enacted amendments to R.C. 1701.59 and 1701.60 in order to significantly increase the protection afforded to corporate directors. The purpose behind the adoption of these amendments was “to make it clear that a director has the benefit of a presumption that he [or she] is acting in good faith and in a manner he [or she] reasonably believes is in (or not opposed to) the best interests of the corporation in all cases, including those affecting or involving a change in control or a termination of his [or her] services. It is believed that the changes are necessary because of the adoption by some courts, notably those of Delaware, of the view that, in such cases, the director becomes an interested party and, as a result, loses the benefit of the business judgment rule.” 1986 Commentary, OSBA Corporation Law Committee (quoted in Burton & Rich, Ohio Corporation Law & Practice [1989] 109, Section 6.4).
As the majority opinion points out, a director is not shielded by the business judgment rule where fraud, ultra vires acts, illegality and breach of fiduciary duties are alleged and proven. This court held in Armstrong v. Marathon Oil Co. (1987), 32 Ohio St. 3d 397, 422, 513 N.E. 2d 776, 798, that “the statutory proceeding under R.C. 1701.85 is the sole means for determining the value of a dissenter’s shares * * *, this is not to say that causes of action which seek compensation other than the value of a dissenter’s shares of stock are not maintainable. Provable injury under whatever theory utilized is compensable so long as it does not seek to overturn or modify the fair cash value determined.”
In discussing who are the proper parties to an appraisal proceeding, the federal district court’s analysis in *14Radol v. Thomas (May 17, 1983), S.D. Ohio No. C-1-82-13, unreported, for same case on appeal, see (C.A. 6, 1985), 772 F. 2d 244, certiorari denied (1986), 477 U.S. 903, correctly noted the difference between actions brought by dissenting shareholders (i.e., shareholders dissatisfied with the outcome of the merger vote) and those actions where injured parties are “seeking relief simply as shareholders * * * [of] a company, whose directors, they allege, breached their duty to all shareholders * * Essentially, the distinction is between challenges to the structure of the transaction and dissent from the merger vote itself. The appraisal remedy is exclusive only with respect to the latter. Thus, where a director occupies a fiduciary position in connection with the structuring of a transaction, appraisal -under certain circumstances may not be the exclusive remedy for the aggrieved shareholders. Id. at 16-17.
It is well recognized that directors of a corporation occupy a fiduciary relationship to the corporation and its shareholders and are held strictly accountable and even liable if corporate property or funds are wasted or mismanaged due to their inattention to the duties of their trust. Consequently, “[w]hen a director breaches his duty of trust and benefits at the expense of the corporation, under Ohio law the director is liable for any profits he received. It matters not that the director acted absent actual fraudulent intent; as long as the director places himself in a position of conflicting loyalties and subsequently violates his primary obligation to the corporation, liability attaches.” (Emphasis added.) Ohio Drill & Tool Co. v. Johnson (C.A.6, 1980), 625 F. 2d 738, 742; see, also, Ohio Drill & Tool Co. v. Johnson (C.A.6, 1974), 498 F. 2d 186, 191-192; Seagrave Corp. v. Mount (C.A.6, 1954), 212 F. 2d 389, 397; Neinaber v. Katz (1942), 69 Ohio App. 153, 43 N.E. 2d 322.
In shareholder actions alleging the breach of fiduciary duties, “the general rule * * * [is] that directors carry the burden of showing that a transaction is fair and in the best interests of shareholders only after the plaintiff [or aggrieved shareholder] has made a prima facie case showing that the directors have acted in bad faith or without the requisite objectivity.” Radol v. Thomas, supra (772 F. 2d), at 257; Norlin Corp. v. Rooney, Pace, Inc., supra, at 264; ALI, Principles of Corporate Governance, supra, at 6,11, Section 4.01 (protections of business judgment rule removed only if a challenging party can sustain his burden of showing the director was not acting in good faith or with disinterest, or was not informed as to the subject of his business judgment).
Under Ohio law, directors may not, in breach of their fiduciary duties, act unfairly to the disadvantage of their corporation or its shareholders. Accordingly, within the bidding process of a corporate takeover or merger, the directors may not rig, control or stifle such bidding to their own advantage. However, unlike one of the arguments of the complaining shareholder here, the directors are not held to a duty to the shareholders to obtain, like an auctioneer, the highest price possible for their shares of the corporation. The law of the state of Delaware to that effect as pronounced in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Del. 1986), 506 A. 2d 173, is not applicable in Ohio.
In addressing the facts in the case sub judice, I conclude that Stepak has sufficiently stated a cause of action for breach of fiduciary duties by the appellants. However, I believe that Stepak’s untimeliness in asserting cer*15tain claims and his failure to request the proper remedy as to other claims precludes his recovery.
As noted previously, in Armstrong, this court stated in the opinion that there could be separate actions filed by dissenting shareholders in addition to that provided under R.C. 1701.85(C), which section provides for the determination of “fair cash value.” Among the remedies outside R.C. 1701.85 available to an aggrieved shareholder who brings an action for breach of fiduciary duties is the disgorgement of any profits resulting from the breach.4 See Ohio Drill & Tool Co., supra (625 F. 2d), at 742; Ohio Drill & Tool Co., supra (498 F. 2d), at 191. Another conceivable action available to the aggrieved shareholder prior to the proposed merger would be an action to enjoin the merger, with an attendant claim for any damages suffered by the shareholder. Here, there was no such action filed by the complaining shareholder. Also, subsequent to the merger, an action for rescission of the merger and/or appropriate damages may be brought by the shareholder if the merger, and acts of the officers and directors leading to such, were unlawful, ultra vires, or fraudulent as to the corporation or its shareholders, and where there has been nondisclosure of pertinent facts concerning the merger. Here, the complaint does not allege that the merger was unlawful or ultra vires, nor are there allegations sufficient to establish actual fraud or non-disclosure of facts pertinent to the merger.
The allegations of the amended complaint, in the main, allege a breach of fiduciary duties by the officers and directors of Scott & Fetzer to the corporation and its shareholders. Any such action brought by the shareholder against the corporation and its officers and directors should only be countenanced prior to the consummation of the merger. Such an action, as here, does in fact seek more than a determination of the fair cash value as provided in R.C. 1701.85(C), and as construed by the court in Armstrong. However, to allow an action claiming breach of fiduciary duty, subsequent to a merger, where there has been no prior action to enjoin a merger nor a proceeding pursuant to R.C. 1701.85, nor a showing of unlawfulness, ultra vires acts, fraud, or non-disclosure would result in defeating the statutory purpose and intent of Ohio’s corporate takeover and merger chapter. Therefore, I would concur in the syllabus and judgment of this opinion.
Wright, J., concurs in the foregoing concurring opinion.

 R.C. 1701.59(B) was amended in 1986 after the activities complained of in this action took place; therefore, former R.C. 1701.59(B) has been construed.
R.C. 1701.59(B) was amended to give directors even greater deference in their corporate transactions, as evidenced by the language of the statute:
“A director shall perform his duties as a director, including his duties as a member of any committee of the directors upon which he may serve, in good faith, in a manner he reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In performing his duties, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, that are prepared or presented by:
“(1) One or more directors, officers, or employees of the corporation who the director reasonably believes are reliable and competent in the matters prepared or presented;
“(2) Counsel, public accountants, or other persons as to matters that the director reasonably believes are within the person’s professional or expert competence;
“(3) A committee, of the directors upon which he does not serve, duly established in accordance with a provision of the articles or the regulations, as to matters within its designated authority, which committee the director reasonably believes to merit confidence.” (Emphasis added.)

 Essentially, the business judgment rule allows for a noninterested director, exercising reasonable care and good faith judgment, to be protected from liability by deeming such decisions to be business judgments, not to be examined by the courts. See Committee on Corporate Laws, Section of Corporation, Banking and Business Law, American Bar Association, Corporate Director’s Guidebook (1978), 33 Bus. Law. 1591, 1603-1604. The business judgment rule has also been recognized in Ohio case law. See, e.g., Apicella v. PAF Corp. (1984), 17 Ohio App. 3d 245, 247, 17 OBR 512, 515, 479 N.E. 2d 315, 318; Gruber v. Chesapeake & Ohio Ry. Co. (N.D. Ohio 1957), 158 F. Supp. 593, 603.
In addressing the business judgment rule in the context of “lock-up options,” there is no question that outside the scope of contest for corporate control, the board of directors of an Ohio corporation has the authority to grant an option to acquire either the company’s stock or any of the company’s assets. See Mobil Corp. v. Marathon Oil Co. (S.D. Ohio Dec. 7, 1981), Fed. Sec. L. Rep. (CCH), Paragraph 98,375, at 92,284, reversed on other grounds (C.A.6, 1981), 669 F. 2d 336; Cottle v. Storer Communication, Inc. (C.A.11, 1988), 849 F. 2d 570, 574 (the Eleventh Circuit Court of Appeals held that under Ohio law the board’s decisions to enter into a merger agreement and to grant an asset lock-up option were protected by the business judgment rule in the absence of a showing of fraud, bad faith or an abuse of discretion on the part of the directors). Both Cottle and Mobil illustrate the general proposition that lock-ups in a takeover *13situation are not, per se, ultra vires. However, lock-ups may be deemed unlawful if it can be shown that in granting such options, a target company’s directors failed to exercise due care after reasonable investigation or acted in pursuit of their own self-interest rather than that of the corporation and its shareholders.

 R.C. 1701.59(D) now provides that unless the corporation’s articles or regulations specifically provide that subsection (D) does not apply to the corporation, monetary damáges will not be imposed upon a director unless there is clear and convincing proof that the director’s act or omission to act was undertaken with deliberate intent to cause injury to the corporation or with a reckless disregard for the best interests of the corporation.