Holden v. Construction Machinery Co.

Supreme Court of Iowa · Corporations

Corporationsclosely held corporationsfiduciary dutiesderivative actionsfreeze-outemployment agreementsattorneys' feesinjunctive relief

Facts

Herle Holden owned 49.976 percent of CMC and his brother Warren owned 50.024 percent and controlled management. In 1959, 2000 shares of Chamberlain stock were issued in Warren's name but paid for by a $10,000 CMC check and carried on CMC's books as stock in another corporation until a 1964 entry purported to transfer the stock to Warren on a $10,000 no-interest note. Herle also claimed that after their father's death he and Warren agreed, on behalf of CMC, that in exchange for settling the control dispute and preserving the corporation, Herle would have employment of equal duration and compensation with Warren. From 1964 forward Warren paid himself more, stripped Herle of authority, removed him from office and employment, and effectively froze him out of management.

Issue

Whether Warren breached fiduciary duties to CMC by appropriating the Chamberlain stock transaction for himself, whether Herle's derivative challenge was barred by estoppel or laches, whether the oral equal-employment agreement with CMC was enforceable, and what equitable relief, damages, fees, and indemnification were proper in light of Warren's freeze-out conduct.

Rule

Corporate officers and directors, especially management-controlling directors in closely held corporations, stand in a fiduciary or quasi-fiduciary relation to the corporation and stockholders and must act with utmost good faith, full disclosure, and fairness; when they deal in a conflicting interest transaction, the burden is on them to prove good faith, honesty, and fairness. Estoppel requires false representation or concealment, knowledge and intent that the position be acted on, reliance, and prejudice, proved by clear, convincing, and satisfactory evidence; laches requires unreasonable delay causing disadvantage or prejudice. A permanent or lifetime employment agreement is enforceable if supported by consideration beyond the employee's promise to serve, and a derivative plaintiff whose suit benefits the corporation or therapeutically corrects corporate abuse may recover reasonable attorneys' fees and expenses from the corporation.

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

Prairie Forge, Inc., a closely held corporation in Des Moines, is controlled by its president, Nolan Pierce, who owns 51% of the shares. Nolan caused Prairie Forge to pay $40,000 for supplier stock issued in his own name, later had the company books changed to classify the payment as a personal loan to him, and never sought approval from the minority shareholder, Elena Ruiz, who owns the remaining shares.

If Elena brings a derivative action on behalf of Prairie Forge, which statement best reflects the controlling rule?

Explanation. The majority held that officers and directors, especially management-controlling directors in closely held corporations, occupy a fiduciary or quasi-fiduciary position toward the corporation and stockholders. In a conflicting-interest transaction, they must act with utmost good faith, make full disclosure, obtain consent of all concerned, and bear the burden of establishing the transaction's good faith, honesty, and fairness. (Derived from Holden v. Construction Machinery Co. (n.d.).)