Zetlin v. Hanson Holdings, Inc.

New York Court of Appeals · Corporations

Corporationssale of controlcontrol premiumminority shareholderscontrol premiumcontrolling shareholdersale of controlminority shareholders

Facts

Plaintiff Zetlin owned about 2% of the outstanding shares of Gable Industries, Inc. Defendants Hanson Holdings, Inc. and Sylvestri, together with members of the Sylvestri family, owned 44.4% of Gable's shares. Defendants sold that 44.4% block to Flintkote Co. for $15 per share when Gable stock was trading on the open market for $7.38 per share, and it was undisputed that the block conveyed effective control of Gable. Zetlin argued that minority shareholders were entitled to share equally in the premium paid for that controlling interest.

Issue

Whether minority shareholders are entitled to an equal opportunity to share in a premium paid to controlling shareholders for the sale of a controlling block of stock. More specifically, the question was whether controlling shareholders may sell control at a premium without making the same premium available to minority shareholders.

Rule

A controlling stockholder is free to sell, and a purchaser is free to buy, a controlling interest at a premium price, so long as there is no looting of corporate assets, conversion of a corporate opportunity, fraud, or other acts of bad faith. Minority shareholders do not have a general right to share equally in the control premium.

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

In Cleveland, Nora Patel owns 41% of Lakefront Components, a closely held manufacturing corporation, while the remaining shares are widely dispersed among hundreds of investors. She sells her block to Red Mesa Industrial Group for $28 per share when the stock has recently traded at $12, and the block gives Red Mesa effective control. No one alleges looting, fraud, diversion of any corporate opportunity, or other bad faith.

If several minority shareholders sue claiming they were entitled to sell their shares at the same $28 price, how should the court rule?

Explanation. The majority rule is that a controlling stockholder may sell a controlling interest at a premium, and the buyer may purchase it, so long as the transaction does not involve looting of corporate assets, conversion of a corporate opportunity, fraud, or other acts of bad faith. Minority shareholders have no general right to share equally in the control premium merely because the controlling block sold for more than market price. (Derived from Zetlin v. Hanson Holdings, Inc. (n.d.).)