Farber v. Servan Land Co.

United States Court of Appeals for the Fifth Circuit · 1981 · Corporations

CorporationsCorporate opportunityFiduciary dutiesDerivative suitsdirectorsofficersfiduciary dutycorporate opportunity

Facts

Servan Land Company owned and operated a golf course and had previously acquired adjoining land from James Farquhar, including land later used for a lodge through a wholly owned subsidiary. At the 1968 annual meeting, a director informed the stockholders that Farquhar was willing to sell 160 additional adjoining acres suitable for use as an additional golf course, and the stockholders indicated that the possibility should be investigated. A few months later, President Charles Serianni and Vice President A.I. Savin negotiated for and purchased that same 160-acre tract in their individual capacities without first presenting the specific opportunity to the corporation. In 1973, they sold their tract together with the corporation's assets as a package, allocating part of the total price to themselves, after which Farber brought this derivative suit.

Issue

Whether the 160-acre tract was a corporate opportunity that Serianni and Savin breached their fiduciary duties by taking for themselves, and if so, whether the corporation's prior inaction, a later stockholder vote, or the later joint sale's benefit to the corporation barred Farber's derivative recovery.

Rule

Under Florida law, a corporate officer or director may not seize for personal benefit a business opportunity that the corporation is financially able to undertake, that is in the line of the corporation's business and of practical advantage to it, that fits into the corporation's present activities or established corporate policy, and in which the corporation has an interest or reasonable expectancy, where taking it would place the fiduciary's self-interest in conflict with the corporation's. A fiduciary cannot convert his own inaction into a corporate rejection of such an opportunity, interested directors cannot validate their own breach through ratification, and later benefits to the corporation do not eliminate liability for preempting a corporate opportunity; the profits must be held in trust for the corporation.

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

Red Mesa Equestrian Club, a Florida corporation in Ocala, operates a horse-training facility. For years, its board has discussed acquiring a neighboring 70-acre tract used for overflow stables, and at the latest annual meeting the shareholders agreed the idea should be investigated if financing could be arranged; two months later, the president bought that same tract personally after learning the seller's terms.

In a derivative suit by a minority shareholder, which is the strongest argument that the president usurped a corporate opportunity?

Explanation. Under the majority opinion, an opportunity is corporate if the corporation is financially able to undertake it, it is in the line of the corporation's business and of practical advantage, it fits present activities or established corporate policy, the corporation has an interest or reasonable expectancy in it, and taking it creates a conflict. The rule does not require that land acquisition be the corporation's exclusive original purpose, does not make all adjacent land automatically a corporate opportunity, and does not require the property to be essential to survival.