Theodora Holding Corp. v. Henderson

Delaware Court of Chancery · 1969 · Corporations

Corporationscharitable giftsreasonablenessself-dealingbusiness judgment ruleliquidating receiversolvent corporationfiduciary duty

Facts

Plaintiff held 11,000 shares of common stock of Alexander Dawson, Inc., while Theodora G. Henderson also held substantial preferred shares and continued to receive dividends. Girard B. Henderson controlled the corporation and caused it to make a 1967 gift of corporate stock worth about $528,000 to the Alexander Dawson Foundation, a charitable trust he controlled, and had earlier used $120,000 of corporate funds in connection with purchasing a New York Stock Exchange seat in his own name. The corporation was a personal holding company whose assets had grown greatly in value, largely because of Avon Products stock, and the plaintiff argued that Henderson's conduct showed gross mismanagement and justified liquidation. The court considered whether Henderson had to account for profits from the seat, whether the charitable gift was valid, and whether a liquidating receiver should be appointed.

Issue

Whether Henderson had to account to the corporation for profits and commissions from the Exchange seat acquired with improperly borrowed corporate funds; whether the 1967 charitable gift to the Alexander Dawson Foundation was a valid corporate donation under Delaware law; and whether the complained-of conduct justified appointment of a liquidating receiver for a solvent corporation.

Rule

A controlling corporate fiduciary may not place his own interest above that of the corporation or enrich himself through the use of corporate funds; when he does so, he is not protected by the business judgment rule and must account for resulting profits. Under 8 Del. C. § 122(9), a corporate charitable gift is valid if it is reasonable in amount and purpose, and federal tax deduction limits may serve as a helpful guide to reasonableness. A court will order liquidation of a solvent corporation only upon a showing of failure of corporate purpose, fraudulent disregard of minority rights, or imminent danger of great loss resulting from fraudulent or absolute mismanagement.

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

Red Mesa Holdings, a Delaware corporation based in Santa Fe, let its controlling president, Nolan Pierce, draw $300,000 from corporate funds so he could buy a commodities trading license in his own name. He later sold the license at a gain and argues he should keep the profit because he used the license to generate business opportunities for the corporation while he held it.

In a derivative suit by a minority stockholder, which is the strongest argument for requiring Nolan to account to the corporation for the gain?

Explanation. A controlling fiduciary may not enrich himself through the use of corporate funds or place his own interest above that of the corporation. When he does so, business judgment deference does not apply, and he must account for resulting profits. The key is personal enrichment through corporate money, not whether the fiduciary can point to some incidental corporate benefit. (Derived from Theodora Holding Corp. v. Henderson (1969).)