Farber v. Servan Land Co., Inc.

United States Court of Appeals for the Fifth Circuit · Corporations

CorporationsCorporate opportunityFiduciary dutiesDerivative suitsdirector fiduciary dutyofficer fiduciary dutycorporate opportunityreasonable expectancy

Facts

Servan Land Company owned and operated a golf course and had previously acquired adjacent land from James Farquhar, including land later used in connection with a lodge it operated. At the 1968 annual meeting, stockholders discussed Farquhar's willingness to sell 160 adjoining acres suitable for an additional golf course, and the minutes reflected that the possibility should be investigated. A few months later, directors Serianni and Savin purchased that same 160-acre tract in their individual capacities without first presenting the specific opportunity to the corporation for action. In 1973, the corporation's assets and the 160 acres were sold together as a package, and Farber then pursued 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 inaction, later stockholder ratification, or the eventual benefit from a joint sale defeated the derivative claim.

Rule

A director or officer breaches fiduciary duty by taking for himself 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 is one in which the corporation has an interest or reasonable expectancy, and that creates a conflict between the fiduciary's self-interest and the corporation's interest. In this circuit's formulation, the opportunity must fit into the corporation's present activities or an established corporate policy that the acquisition would forward. Interested fiduciaries cannot validate their own wrongful conduct through ratification by votes in which they themselves participate, and later benefit to the corporation from the fiduciaries' conduct does not negate liability for preemption of the opportunity.

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

Blue Mesa Fairways, Inc. operates a golf club outside Denver, Colorado. For years, its directors have discussed buying a neighboring 120-acre tract from the same family from whom the corporation previously bought buffer land, and the board recently agreed the tract should be investigated because it could support a second course; two directors then secretly buy it personally.

In a derivative suit, which is the strongest argument that the tract was a corporate opportunity?

Explanation. The majority applied the corporate opportunity doctrine where the opportunity was financially able to be undertaken, in the line of business, of practical advantage, and one in which the corporation had an interest or reasonable expectancy, and further emphasized that the opportunity must fit the corporation’s present activities or an established corporate policy. Repeated discussions, prior related acquisitions, and suitability for expansion support that conclusion; adjacency alone does not. (Derived from Farber v. Servan Land Co., Inc. (n.d.).)