Steelman v. Mallory

Supreme Court of Idaho · 1986 · Corporations

716 P.2d 1282 (1986)

Updated August 22, 2026

Corporationsclosely held corporationsfiduciary dutiesminority shareholder squeeze-outcorporate opportunitydamagesdirect actionderivative suit

Facts

L.D.K., Inc. was a closely held Idaho corporation owned equally by Mallory, Jensen, and Steelman, all of whom were also directors. In 1977, the majority voted to terminate Steelman's employment, raised shareholder hourly compensation, rescinded a prior restriction on Mallory's private business, and discussed selling the corporation's remaining equipment, while Mallory and Jensen thereafter operated competing dry fertilizer businesses. Steelman claimed the majority was squeezing him out and later sued, alleging that Mallory and Jensen diverted the corporation's business and funds to themselves. The trial court found a breach of fiduciary duty and awarded Steelman one-third of the corporation's net operating losses over several years as damages.

Issue

Whether Steelman's claim for breach of fiduciary duty by majority shareholders/directors in a closely held corporation could be maintained as a direct action rather than only as a derivative action, whether the evidence supported a finding of breach of fiduciary duty, and whether the trial court used the correct measure of damages.

Rule

Directors of a closely held corporation owe fiduciary duties to minority shareholders, particularly against squeeze-outs or deprivation of proportionate rights without a just equivalent. Although the business judgment rule protects directors' good-faith acts within corporate powers and honest business judgment, directors breach fiduciary duty by usurping corporate opportunities for personal benefit. The usual measure of damages for such a breach is the profit the director received and the corporation was deprived of by the transaction, not merely the corporation's losses or reduced book value absent proof that those figures reasonably measure actual loss.

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

Prairie Gate Transport, Inc., a closely held Idaho corporation in Boise, has three shareholders: Nora Kim owns 20%, while Eli Voss and Dana Pierce together control the rest and serve as directors. After excluding Nora from management meetings and refusing to let her participate in major decisions, Eli and Dana channel company customers to a side business they own and Nora sues them personally for breaching duties owed to her as a minority owner.

What is the strongest argument that Nora may proceed in a direct action rather than only a derivative suit?

Explanation. The majority opinion treated a suit as direct where the gravamen was squeeze-out of a minority owner and breach of fiduciary duty owed directly to that shareholder in a closely held corporation. It rejected the argument that all such injuries must be pursued only derivatively. The other choices state rules the opinion did not adopt.