Remillard Brick Co. v. Remillard-Dandini Co.

California Court of Appeal · 1952 · Corporations

Corporationsfiduciary dutyinterlocking directoratesself-dealingminority shareholdersCorporations Code section 820Corporations Code section 811fairness review

Facts

Stanley and Sturgis were majority directors and officers of two brick-manufacturing companies and also wholly owned a separate sales corporation. While controlling the manufacturing companies through board control, proxies, and a contract to purchase the majority stock, they caused the companies to transfer their exclusive sales functions to their own sales corporation under one-year contracts in 1948 and again in 1949, with the sales corporation using the manufacturers' facilities and equipment. The trial court found that the arrangement was part of a plan for Stanley and Sturgis to obtain profits from sales that ordinarily would have gone to the manufacturing companies, and that nothing done by the sales corporation could not have been done by Stanley and Sturgis as officers of the manufacturers. The 1949 contracts were found unfair and fraudulent as to the manufacturing companies, while the 1948 contracts were found unfair when viewed later but were not invalidated because profits had been speculative when made.

Issue

Does disclosure of interested-director involvement and approval by majority shareholders under Corporations Code section 820 automatically validate contracts between corporations with interlocking directors when the controlling directors use their position to divert corporate functions and profits to a company they own? If not, should the 1948 contracts, like the 1949 contracts, be set aside and restitution ordered, and was the trial court's conditional refusal to remove the directors an abuse of discretion?

Rule

Corporations Code section 820 does not automatically validate a transaction merely because common directorship or financial interest is disclosed and approved by shareholders. Directors and controlling shareholders remain fiduciaries who must act in good faith and in the corporation's interest; if they use their control to obtain an unfair personal advantage or profit at the corporation's expense, the transaction is voidable and equity may require restitution. The relevant inquiry is the inherent fairness of the transaction to the corporation and minority shareholders, not mere technical compliance with disclosure requirements or whether profits were speculative at the outset.

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In Fresno, three directors of Valley Crest Canning, Inc. own all shares of Sierra Harvest Sales, LLC. After fully disclosing their ownership, they obtain written consent from holders of 70% of Valley Crest's voting stock to give Sierra Harvest the exclusive right to market Valley Crest's canned fruit for one year. Sierra Harvest uses Valley Crest's staff and warehouse, performs tasks Valley Crest's officers could have performed themselves, and keeps substantial profits from the sales function.

If a minority shareholder brings a derivative action to void the contract, which is the strongest argument under the governing rule?

Explanation. The majority opinion held that technical compliance with the interested-director statute does not create an absolute safe harbor. Directors and controlling shareholders still owe fiduciary duties of good faith and may not use control to strip the corporation of a valuable function and profit for personal benefit. Where the affiliate performs work the officers could have done for the corporation and captures profits that should have gone to the corporation, the transaction is voidable for unfairness despite disclosure and shareholder approval. (Derived from Remillard Brick Co. v. Remillard-Dandini Co. (1952).)