Johnston v. Greene

Supreme Court of Delaware · Corporations

CorporationsCorporate opportunityFiduciary dutiesInterested-director transactionscorporate opportunityfiduciary dutydominant directorfairness

Facts

Airfleets was a Delaware corporation that, by late 1951, had largely liquidated its original aircraft-related assets and held substantial cash and marketable securities while generally seeking profitable investments without a defined business focus. Odium, Airfleets' president and dominating director, was personally approached through a friend about acquiring the Nutt-Shel business, which manufactured self-locking nuts and had no close relation to Airfleets' prior business. After investigating the deal, Odium caused Airfleets to buy the Nutt-Shel stock but not the patents, based on concerns about putting too much of Airfleets' assets into one venture and about possible disallowance of royalty payments if stock and patents were held together. Odium arranged for the patents to be purchased by numerous third parties and retained only about a 7.5% interest, which he testified he had expected to sell.

Issue

Did the opportunity to acquire the Nutt-Shel patents belong to Airfleets so that Odium breached his fiduciary duty by diverting it? If not, was Airfleets' decision, made through its dominating director, to reject the patents while acquiring the stock nevertheless unfair to the corporation?

Rule

A corporate opportunity exists when a business opportunity presented to a corporate officer or director is one the corporation is financially able to undertake, is in the line of the corporation's business and of practical advantage to it, is one in which the corporation has an interest or reasonable expectancy, and the officer's self-interest would conflict with the corporation's interest if he took it. A corporation's mere possession of funds and general desire to invest does not create a specific equitable interest in every opportunity that comes personally to a director; there must be some tie between the property and the nature of the corporate business or special circumstances making personal retention unfair. Separately, a transaction between a dominating director and his corporation is subject to strict scrutiny, and the director has the burden to prove fairness.

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

Red Mesa Holdings, a Delaware corporation based in Phoenix, sold off its original logistics assets and now holds mostly cash and marketable securities. Its president, Evan Mercer, who also serves several other investment-oriented entities, is personally approached in Denver by a former classmate about buying a chain of boutique bakeries in Oregon, a business unrelated to anything Red Mesa has ever done.

If Mercer buys the bakery chain for himself without first offering it to Red Mesa, which is the strongest argument that he did not usurp a corporate opportunity?

Explanation. The majority held that a corporation's mere possession of funds and general search for investments is not enough to make every deal reaching a director or officer a corporate opportunity. There must be a specific tie to the corporation's business, interest, expectancy, or other special circumstances making personal retention unfair. Here, the bakery deal came to Mercer personally and is unrelated to Red Mesa's business. (Derived from Johnston v. Greene (n.d.).)