Farber v. Servan Land Company

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

CorporationsCorporate opportunityFiduciary dutiesShareholder derivative suitsRatificationcorporate opportunityfiduciary dutydirector self-dealing

Facts

Servan Land Company owned and operated a golf course and had previously acquired additional adjoining acreage from James Farquhar and operated a lodge on part of that land. At the 1968 annual meeting, shareholders discussed Farquhar's offer to sell 160 adjoining acres suitable for an additional golf course, and the minutes reflected that the possibility should be investigated and could be made feasible through refinancing. A few months later, directors Serianni and Savin negotiated to buy that same 160-acre tract in their individual capacities and closed in 1969 without first giving the corporation a chance to act. In 1973, they sold their tract together with the corporation's assets as a package, allocating part of the total price to themselves and part to the corporation.

Issue

Whether the 160-acre tract was a corporate opportunity that the directors breached their fiduciary duties by taking for themselves. Also, whether the corporation had declined the opportunity, whether a later shareholder vote ratified the directors' purchase, and whether the corporation's later benefit from a joint sale eliminated liability.

Rule

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, of practical advantage to it, and one 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. An opportunity fits the doctrine when it fits the corporation's present activities or an established corporate policy that the acquisition would further. A corporation's inaction does not amount to rejection when the fiduciary responsible for acting on its behalf fails to pursue the opportunity, interested fiduciaries cannot validate their own breach through ratification by counting their own shares, and later benefit to the corporation from a joint sale does not erase the initial usurpation; profits from the usurped opportunity 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.

Pine Harbor Leisure, a Florida corporation, owns a resort and tennis complex outside Naples. For years, its shareholders have repeatedly discussed acquiring the neighboring parcel for additional courts and parking, and the corporation previously bought a nearby tract from the same family seller for resort use. Before presenting a current offer to the board, president Nolan Pierce buys the neighboring parcel personally.

If a shareholder brings a derivative suit, which is the strongest argument that the parcel was a corporate opportunity?

Explanation. A corporate opportunity exists when the corporation is financially able to undertake it, it is in the line of the corporation’s business, of practical advantage, and one in which the corporation has an interest or reasonable expectancy, such that the fiduciary’s self-interest conflicts with the corporation’s. The majority emphasized that adjacency alone is insufficient, but adjacency plus repeated corporate discussion, prior similar acquisitions, and fit with present corporate purposes shows a protected opportunity. (Derived from Farber v. Servan Land Company (n.d.).)