Strong v. Repide

Supreme Court of the United States · Corporations

CorporationsCorporate fiduciary dutiesFraudStock transactionsdirector-shareholder transactionsspecial facts doctrineduty to discloseconcealment

Facts

Defendant was not merely a director of the corporation; he owned about three-fourths of its stock, served as administrator general with large powers, and was conducting negotiations for the sale of the corporation's lands, its only valuable asset, to the Government at a price that would greatly increase the stock's value. Before those negotiations were completed, he used an agent to buy plaintiff's shares while concealing both his identity and his knowledge of the status and probable success of the negotiations. Plaintiff's agent was ignorant of those negotiations and would not have sold at the price given had he known the true state of affairs and that defendant was the purchaser. Defendant continued the negotiations and later completed the land sale.

Issue

Whether, under the special circumstances of this case, the defendant's concealment of his identity and of material facts about pending negotiations affecting the value of the stock constituted deceit or fraud that invalidated the stock purchase. More specifically, the question was whether the defendant had a duty, acting in good faith, to disclose those facts before buying the plaintiff's shares.

Rule

Even if the ordinary director-shareholder relationship does not generally require a director to disclose all information he has about share value before purchasing stock, such a duty arises when special circumstances make disclosure necessary. Deceit exists where a party obtains consent by concealing or omitting material facts with intent to deceive, and where, under all the circumstances, good faith required disclosure; in such cases concealment is equivalent to misrepresentation.

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

Pine Mesa Minerals, a closely held Nevada corporation, owns one copper tract outside Reno and little else of value. Leo Maren, who owns 72% of the shares, serves as executive manager and is personally conducting advanced negotiations to sell that tract to a regional utility at a price likely to triple the company’s value; before the deal is announced, he privately buys shares from Nina Ortiz without mentioning the negotiations.

If Nina seeks to rescind the sale, which is the strongest argument in her favor?

Explanation. The majority recognized no universal duty requiring every director to disclose all information before buying stock. But a duty arises under special circumstances, including control, agency-like authority, and possession of material nonpublic information gained through ongoing negotiations over the corporation’s only valuable asset. In that setting, concealment can constitute deceit even without express misstatements. (Derived from Strong v. Repide (n.d.).)