Tuesday, February 26, 2013

Perlman v. Feldmann case brief

Perlman v. Feldmann case brief summary
219 F.2d 173

SYNOPSIS: Plaintiffs, minority stockholders, appealed from an order of the United States District Court (New York), which dismissed plaintiffs' complaint for an accounting and restitution of allegedly illegal gains by defendant, majority shareholder.

-Plaintiffs, minority stockholders, brought a derivative action against defendant, a majority shareholder and director, for an accounting and restitution of allegedly illegal gains.
-The lower court entered judgment in defendant's favor dismissing plaintiffs' complaint.
-Plaintiffs appealed. The court reversed the lower court's judgment.

The court held that a director and dominant stockholder stood in a fiduciary relationship to the corporation and to the minority stockholders as beneficiaries.

-Absolute and most scrupulous good faith was the very essence of a director's obligation to his corporation.
-When the sale of a controlling block of stock, as in the present case, necessarily resulted in a sacrifice of the element of corporate good will and resulted in unusual profit to the fiduciary who caused the sacrifice, he was required to account for his gains.

OUTCOME: The court reversed the order and remanded the cause for further proceedings.

-Controlling shareholders of a corporation misappropriated a corporate opportunity by selling their stake to the corporation’s customers.
-The controlling shareholders of Newport improperly appropriated for themselves benefits that might have accrued to the corporation.
-Controlling shareholders breach the fiduciary duty when they “siphon off for personal gain corporate advantages to be derived from a favorable market situation.”
-By selling control of the company to steel consumers, Feldmann and his family members deprived Newport of the opportunity to continue reaping benefits under the Feldmann Plan. Any premium that steel consumers would have paid to Newport for the scarce steel were instead directed to the controlling shareholders in the form of a control premium.

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