Bangor Punta Operations, Inc. v. Bangor & Aroostook Railroad Co.

Supreme Court of the United States · 1974 · Corporations

Corporationscorporate mismanagementcorporate wasteequitywindfallpiercing the corporate formcontrolling shareholdersuccessor shareholder

Facts

Bangor Punta, through its subsidiary, owned about 98.3% of BAR from 1964 to 1969 and later sold all of that stock to Amoskeag for $5,000,000. In 1971, BAR and its subsidiary sued Bangor Punta and its subsidiary for acts of overcharging, improper stock acquisition, improper dividends, and forgiven interest that allegedly occurred while prior owners controlled BAR. By then Amoskeag owned more than 99% of BAR's stock. Amoskeag did not claim the stock purchase was tainted by fraud or deceit, did not claim it received less than full value, and did not assert any injury from the transaction.

Issue

May a corporation maintain federal and state claims for prior corporate mismanagement against its former controlling shareholder when the present controlling shareholder acquired substantially all the corporation's stock from the alleged wrongdoer after the misconduct, paid a fair price, and suffered no injury, so that any recovery would chiefly benefit that present shareholder?

Rule

A shareholder may not complain of corporate mismanagement if the shareholder acquired shares from those who participated in or acquiesced in the wrongful transactions. Where a controlling purchaser buys all or substantially all of a corporation's shares from the alleged wrongdoer at a fair price and suffers no injury, equity bars the purchaser from obtaining a corporate recovery for prior mismanagement because the recovery would be an unjust windfall; courts may disregard the corporate form and apply that bar to an action brought in the corporation's name. The same principle applies under the federal statutes invoked here and under Maine law.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lake Erie Freight Lines, an Ohio corporation, was controlled by North Harbor Holdings from 2016 to 2020. In 2021, Cedar Vale Capital bought 99.4% of Lake Erie Freight Lines directly from North Harbor at a negotiated price, later admitted it received exactly what it bargained for, and then caused the corporation to sue North Harbor for asset-diverting transactions completed in 2018.

Which is the strongest argument that the suit should be dismissed?

Explanation. The majority held that where a controlling purchaser buys all or substantially all shares from the alleged wrongdoer after the misconduct, pays a fair price, alleges no fraud or underpayment, and suffers no injury, equity bars a corporate recovery because the real beneficiary would receive an unjust windfall. Courts may look through the corporate form to the substance of the action.