Globe Woolen Co. v. Utica Gas & Electric Co.

New York Court of Appeals · Corporations

CorporationsInterested director transactionsFiduciary dutiescommon directordual fiduciaryinterested directorabstentiondominating influence

Facts

John F. Maynard was the plaintiff corporation's chief stockholder, president, and director, and also a director and chairman of the defendant corporation's executive committee. He and Greenidge, a subordinate employee of the defendant, negotiated and closed two electricity supply contracts for the plaintiff's mills, including guarantees of monthly savings and, in one contract, provisions covering extensions and service preference; the executive committee later ratified them while Maynard presided but did not vote. The contracts turned out to be extremely unfavorable to the defendant because the guarantees were not limited by operating conditions and exposed the defendant to large and continuing losses as the plaintiff's business conditions changed. After several years of mounting losses, the defendant rescinded, and the lower courts annulled the contracts.

Issue

Can a corporation avoid contracts negotiated by a person who was fiduciary to both contracting corporations when that person did not vote on ratification but exercised a dominating influence in procuring the contracts, and the contracts were unfair and oppressive? More specifically, does abstention from voting cleanse a transaction otherwise infected by conflicting fiduciary influence and unfairness?

Rule

A trustee or director owing duties to a corporation may not retain the benefit of a contract procured through a relation of trust, influence, superior knowledge, and dependence unless the transaction is fair and just. Abstention from voting does not automatically nullify a dominating influence exerted without a vote; if the fiduciary gains an improvident or oppressive bargain through such influence, he has a duty to warn, protest, and renounce rather than remain silent. Such transactions are voidable at the election of the corporation affected.

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In Columbus, Nora Patel sits on the boards of Lakeview Textiles and Buckeye Power Systems. Acting for Lakeview, she privately negotiates a ten-year energy contract with Buckeye's operations manager, then presents the signed deal to Buckeye's board, presides over the meeting, and abstains from voting. The contract guarantees Lakeview fixed monthly savings without any limit tied to output, fuel prices, or future expansion, and it soon produces major losses for Buckeye.

If Buckeye seeks to avoid the contract in equity, what is the strongest argument under the governing rule?

Explanation. A fiduciary with conflicting loyalties cannot preserve a transaction merely by abstaining from the vote if she exercised potent influence in negotiating and presenting it. Where the contract was procured through a relation of trust, influence, and unequal knowledge, and its terms are oppressive or improvident, the affected corporation may elect to avoid it. The rule does not make all common-director transactions automatically void, but it does make this one voidable because abstention is only a matter of form when unfair influence remains. (Derived from Globe Woolen Co. v. Utica Gas & Electric Co. (n.d.).)