Globe Woolen Co. v. Utica Gas & Electric

New York Court of Appeals · Corporations

CorporationsInterested directorsFiduciary dutyCorporate contractsSpecific performancecommon directordual fiduciaryvoidable contract

Facts

The plaintiff mill company and the defendant electric company shared John F. Maynard as a director; he was the plaintiff's chief stockholder and president, and also a director of the defendant and chairman of its executive committee. Maynard and Greenidge, a subordinate employee of the defendant, negotiated and framed contracts under which the defendant guaranteed the plaintiff monthly savings from switching to electric power, and the contracts were later ratified by the defendant's executive committee while Maynard presided but did not vote. The second contract also covered current for extensions or additions to the mills and gave the plaintiff service preference over other customers except the city. After the plaintiff spent over $21,000 converting its mills, the contracts proved heavily loss-making for the defendant because the guarantees were not limited by operating conditions and the defendant eventually rescinded.

Issue

Whether contracts between two corporations are voidable when a common director did not vote on their ratification but exercised a dominating influence in procuring them, and the contracts were unfair and oppressive to the corporation he also served. More specifically, does abstention from voting eliminate the fiduciary taint of a bargain won through influence, silence, and superior knowledge?

Rule

A trustee or fiduciary who deals with a beneficiary through a relation of trust, influence, superior knowledge, and dependence may not retain a contract unless its terms are fair and just. Abstaining from voting does not automatically cleanse a transaction if the fiduciary's dominating influence procured it; the fiduciary must not seek harsh advantage and must warn, protest, or renounce if the bargain is improvident, oppressive, or unfair, whether the danger is apparent on the surface or visible only to the fiduciary's practiced eye.

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

In Rochester, Nora Benton sat on the boards of both Iron Vale Textiles and Lakefront Power Cooperative. Acting for Iron Vale, she worked with Lakefront's junior pricing manager to draft a 7-year energy contract that guaranteed Iron Vale fixed monthly operating savings regardless of future production changes. When Lakefront's executive committee later approved the agreement, Nora chaired the meeting but abstained from the vote.

If the agreement later proves severely one-sided against Lakefront, which is the best analysis?

Explanation. The majority rule is that abstention from voting gives a transaction only the form and presumption of propriety. It does not nullify a common director's dominating influence if that influence helped procure the agreement and the bargain is unfair or oppressive to the corporation affected. The contract is not automatically void merely because of overlapping directorships, but it is voidable when influence and unfairness are shown. (Derived from Globe Woolen Co. v. Utica Gas & Electric (n.d.).)