State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co.

Supreme Court of Washington · Corporations

CorporationsFiduciary dutiesCorporate officers and directorsSecret profitsSelf-dealingfiduciary relationundivided loyaltysecret profit

Facts

Hayes was president, manager, and a director of Coast, which decided to sell its Allyn and Poulsbo oyster properties to a new company formed by Engman, a Coast employee. After Coast approved the sale, Hayes secretly agreed with Engman that Hayes or Hayes Oyster would receive a one-half interest in Keypoint in return for Hayes cosigning a bank note that supplied Keypoint's initial operating capital. Hayes then attended Coast's shareholder meeting, voted controlling proxies in favor of the sale, and signed the executory sale contract for Coast without disclosing his interest in Keypoint. Later, the stock issued in Mrs. Engman's name and assigned in blank was claimed by Hayes Oyster, while Coast demanded the stock as a secret profit obtained through Hayes's fiduciary breach.

Issue

When a corporation's president, manager, and director secretly acquires, through a side agreement with the buyer, a one-half interest in the purchaser of corporate assets and then helps approve and execute the sale, may the corporation claim that interest as a secret profit even though it affirms the sale and suffered no proven loss? Also, can Hayes Oyster retain the stock where it acted through Hayes with knowledge of the secrecy?

Rule

Corporate officers and directors stand in a fiduciary relation to the corporation and owe undivided loyalty. They may not directly or indirectly acquire a profit or personal advantage in dealings on behalf of the corporation, and nondisclosure by an interested officer or director is itself unfair. A corporation need not prove fraud, actual injury, or rescind the underlying contract; if it elects to affirm the transaction, it may require the fiduciary, and a knowing affiliate acting through him, to disgorge whatever was acquired by virtue of the fiduciary relation. Ratification of such a breach is effective only upon full and complete disclosure and intentional relinquishment by the corporation.

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

Marina Canning, Inc., a Washington corporation based in Tacoma, decided to sell a waterfront processing site to a new buyer entity in Everett under a ten-year installment contract with ongoing operating covenants. Lena Ortiz, Marina's president and director, secretly arranged with the buyer's founder to receive 40% of the buyer's stock after she voted her shares in favor of the sale and signed the contract for Marina.

If Marina later elects to keep the sale in place but sues to recover Lena's buyer stock, which result is most consistent with the governing rule?

Explanation. The majority rule is that officers and directors owe undivided loyalty and may not directly or indirectly obtain a secret profit or adverse interest in dealings on the corporation's behalf. Nondisclosure itself is unfair. The corporation need not prove actual injury, unfair price, or fraudulent intent, and it may affirm the underlying contract while requiring disgorgement of what the fiduciary acquired by virtue of the fiduciary relation. (Derived from State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co. (n.d.).)