Corporationsfiduciary dutiescorporate opportunitystockholders' derivative suitsfiduciary dutyderivative suitofficer and directorself-dealing
Facts
KRC, a Delaware corporation, was seeking a more desirable location for its business. Kritzer, KRC's president, director, and 50% shareholder, personally purchased the Ebertt Tract and later the adjoining Bulaw Tract, allegedly to solve KRC's housing problem, while payments on those properties were made from KRC funds; he sold the Ebertt Tract at a substantial personal profit and retained title to the Bulaw Tract. In 1956 UNARCO approached KRC about selling its heating division to KRC, and after KRC's officers decided to purchase it, Kritzer organized Batavia-Kritzer, Inc. and held all its stock. KRC paid almost all of the purchase price of the assets sold by UNARCO to BK as rental for equipment and machinery and also paid rental on the leased premises, but title was never acquired by KRC.
Issue
Whether the facts and circumstances presented a corporate opportunity belonging to KRC and whether Kritzer, as a corporate officer and director, improperly seized that opportunity for his own benefit. Also, whether the appellate court exceeded its authority in affirming the decree entered against Kritzer.
Rule
Where the facts and circumstances present a corporate opportunity, a corporate officer or director may not take that opportunity for personal benefit consistent with the fiduciary duty owed to the corporation.
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10 practice questions + 4 AI-graded essays on this case
One of 10 multiple-choice questions for this case. Pick an answer to see why.
Summit Thermal Systems, a closely held Delaware corporation operating in Cleveland, has been searching for a larger production site. Its president and director, Owen Mercer, buys a suitable warehouse parcel in his own name after discussing the company’s relocation needs at board meetings, and the corporation’s account is used to make the down payment and two monthly installments, which Owen later labels as personal advances. He then resells the parcel at a profit and keeps the proceeds.
In a shareholder derivative action on behalf of Summit Thermal Systems, what is the strongest argument for requiring Owen to account to the corporation for the profit?
Explanation. The governing rule is that where the facts and circumstances present a corporate opportunity, a corporate officer or director may not take that opportunity for personal benefit consistent with the fiduciary duty owed to the corporation. Here, the company was seeking a new site, the parcel fit that need, and corporate funds were used in the purchase. Those facts strongly support requiring Owen to account for the profit. (Derived from Paulman v. Kritzer (1967).)