ATTORNEYS FOR APPELLANTS
Gilbert F. Blackmun
Leonard M. Holajter
Karl L. Mulvaney
Candace L. Sage
Samuel T. Miller
ATTORNEYS FOR APPELLEE
Paul A. Rake
Gregory A. Crisman
John P. Twohy
In other words, Indiana has statutorily implemented a strongly pro-management version of the
business judgment rule. A director is not to be held liable for
informed actions taken in good faith and in the exercise of honest judgment
in the lawful and legitimate furtherance of corporate purposes. The rule includes
a presumption that in making a business decision, the directors of a corporation
acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interests of the company.
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds
by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). By statute, negligence
is insufficient to overcome the presumption; recklessness or willful misconduct is required.
Boehm first claims that Goldsmith paid too much for Edgecumbes parts and transferred corporate assets for personal gain. In this case, the shareholders knew of Goldsmiths connection with Edgecumbe and appear to have approved the deals, over Boehms objections. We think ratification by formal vote is not required for a corporation with only a few shareholders, and in which all the shareholders are involved in management and are clearly aware of the material facts over a period of years. Finally, it is irrelevant whether Goldsmiths action as a shareholder is necessary for ratification. Indiana law specifically permits a shareholder-director to vote as a shareholder in his own interest despite any conflict. Ind.Code § 23-1-35-2(d) (1998). The transactions were not voidable solely by reason of Goldsmiths and others interest in the deal. See footnote There remains the question whether a transaction that is not voidable solely by reason of a conflict nevertheless can be the basis of director liability. As the Court observed in Melrose v. Capitol Motor Lodge, Inc., 705 N.E.2d 985, 991 (Ind. 1998), The interrelationship between the conflict of interest statute and the common law of fiduciary duty in close corporations has not been the subject of judicial attention in Indiana. The Court went on to imply that a breach of fiduciary duty claim may nevertheless lie to attack a transaction that has been ratified. In evaluating a claim of breach of duty in a close corporation, the Court upheld the challenged transaction because (1) the material facts of the transaction and [the directors] interest were disclosed or known to [the minority], (2) the requisite corporate formalities necessary to authorize, approve, or ratify the transaction were followed, and (3) the transaction was fair to the corporation. Id. The third requirement, fairness to the corporation, is essential under these circumstances. Put simply, it is a breach of the majority shareholders fiduciary duty to cause the corporation to enter into an unfair transaction to the personal advantage of the majority shareholder. To the extent G & N overpaid for parts, this would state a claim. However, the trial court attributed no damages to this claim, and made no finding that the parts were overpriced. Thus, although this was an issue debated by both parties, it leads nowhere in this case.
Boehm next claims that Goldsmith wasted corporate assets. More specifically, he argues that Goldsmiths salary of $65,000, an amount equivalent to his tax liability, was a waste of corporate assets. The standard of proof in compensation cases requires a plaintiff shareholder to show the compensation is unjust, oppressive, or fraudulent. Krukemeier v. Krukemeier Mach. & Tool Co., 551 N.E.2d 885, 888 (Ind. Ct. App. 1990); Green v. Felton, 42 Ind. App. 675, 688, 84 N.E. 166, 170 (1908). This action was also covered by the business judgment rule. Sixty-five thousand dollars is hardly excessive for the president of a corporation of this size and Boehm offers nothing to overcome the presumption of validity that attaches to a directors actions, or to prove that the compensation is unjust, oppressive, or fraudulent. Thus, we have no evidence that the value of the corporation reflected in the purchase price ordered by the trial court was deflated by excessive salaries. It appears Boehms real complaint is not that Goldsmiths salary was excessive, but rather that his own was cut off.
Boehms final claims involve allegations that Goldsmith refused to find alternate locations for G & N, chose bad accounting and tax policies, and attempted to combine G & N with his other businesses. In this case, the choice of corporate location, accounting procedures, and the attempt to combine G & N with Goldsmiths other businesses were all decisions made by a president and are ultimately the responsibility of the board of directors. Although all involve potential conflicts, none was concealed from the board or the shareholders. The location of G & Ns operations was never questioned by anyone other than Goldsmith himself and appears to have been ratified by the shareholders until the spring of 1995 when the parties began open warfare. The tax and accounting policies all apparently relate to the failed effort to achieve ownership sufficient to consolidate G & N with Goldsmiths other operations. First, no damages flowed from these aborted efforts. Second, in and of itself, attempting to consolidate with a corporation that can provide tax advantages is not improper if it does not otherwise operate to the corporations disadvantage.
It has been suggested that the directors judgment should be given the widest leeway when the subject matter is the operation of the business or the approval of transactions that affect the ownership or structure of the business. Bayless Manning, Reflections and Practical Tips on Life in the Boardroom After Van Gorkom, 41 Bus. Law. 1, 5 (1985). Location of the facilities, salaries of employees, and chain of suppliers all fall in the former, sometimes denominated enterprise issues. The latter, ownership-claim issues, include mergers, sale of assets, and acquisition of control. Indianas Business Corporation Law imposes the same standard of liabilityrecklessness or intentional misconducton both. Nevertheless, we think the judicially-crafted business judgment rule operates to give broadest leeway to judgments that raise enterprise issues, if for no other reason than the self-interest of the directors/controlling shareholders is less directly involved. In and of themselves, these issues present no basis for challenging the judgment of Goldsmith as reckless or intentional wrongdoing because we have no clear evidence that the decisions were not judged to be in the best interest of G & N. The trial court found they were motivated by Goldsmiths objective to reduce his personal exposure on the debt of his other corporations. But this motivation does not necessarily imply that G & N would not also be benefited by increased cash flow from tax-sheltered money and we have no findings on the operational advantages or disadvantages the proposed mergers would entail.
C. Fiduciary Duty to Boehm
Boehm also alleges that Goldsmith violated his fiduciary duties to Boehm as a shareholder. Goldsmith claims that the trial court erred by allowing Boehm to pursue these claims in a direct action because Boehms sole harm was a decrease in stock value that resulted from losses at the corporate level. Insofar as Boehm relies on claims that Goldsmith violated his fiduciary duties to Boehm as a shareholder in a closely held corporation, these are properly asserted in a direct action because they are based upon rights and duties owed to Boehm, not the corporation. See Barth, 659 N.E.2d at 560-61 & n.4.
The standard imposed by a fiduciary duty is the same whether it arises from the capacity of a director, officer, or shareholder in a close corporation. Hartung v. Architects Hartung/Odle/Burke, Inc., 157 Ind. App. 546, 552, 301 N.E.2d 240, 243 (1973). The fiduciary must deal fairly, honestly, and openly with his corporation and fellow stockholders. He must not be distracted from the performance of his official duties by personal interests. Id., 301 N.E.2d at 243; accord W & W Equip. Co. v. Mink, 568 N.E.2d 564, 571 (Ind. Ct. App. 1991), trans. denied. Other states have stated it slightly differently: controlling shareholders must observe accepted standards of business ethics in transactions affecting rights of minority shareholders, and apply a strict good faith standard. Burt v. Burt Boiler Works, Inc., 360 So. 2d 327, 332 (Ala. 1978); Estate of Schroer v. Stamco Supply, Inc., 482 N.E.2d 975, 980 (Ohio Ct. App. 1984) (quoting 2 F. Hodge ONeal, ONeals Close Corporations § 8.07, at 45 (2d ed. 1971)). These states have allowed recovery for excluding the minority shareholder from meaningful participation in the company, Orchard v. Covelli, 590 F. Supp. 1548, 1558 (W.D. Pa. 1984), and for effectively frustrat[ing] the minority stockholders purposes in entering the corporate venture and also deny[ing] him an equal return on his investment, Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976). However, as one court cautioned, there must be a balance struck between the majoritys fiduciary obligations and its rights. Wilkes, 353 N.E.2d at 663. It is also the policy of the law to leave corporate affairs to the control of corporate agencies except in a plain case of fraud, breach of trust, or such maladministration as works a manifest wrong to [the shareholders]. Mink, 568 N.E.2d at 575 (citations omitted).
In this case, Boehm contends that Goldsmith violated his fiduciary duty to Boehm as a fellow shareholder by (1) sending the eviction notice, (2) threatening the viability of the corporation to force other shareholders to sell, (3) reducing Boehm from a plurality shareholder to a minority by wrongly terminating cash distributions, and (4) attempting to buy Boehms shares at an inadequate price. The trial court concluded, correctly, that shareholders in a close corporation owe each other duties analogous to partners in a partnership. Barth, 659 N.E.2d at 561 & n.6.
At first blush, one issue here is whether the fiduciary duty as a majority shareholder extended to use of relationships outside the corporation. Goldsmith had multiple relationships to G & N. He was its officer, director, and landlord. He was also a major shareholder of a critical supplier. He acted in all of those capacities before he became the majority shareholder. After acquiring Gillilands and McCoys shares, he also became the controlling shareholder. Some of Goldsmiths actions that were found wrongful were taken in a capacity other than officer, director, or shareholder of G & N. Specifically, his threat to evict G & N was made in his capacity as an individual landlord. Presumably, if he held no position in G & N this would have been a lawful act on his part. Boehm has not alleged that Goldsmith, as president of G & N, wrongfully exposed G & N to a lease that permitted its eviction, so the only action complained of in this issue is the eviction notice itself, which is an act of the landlord. The obligations of a majority shareholder are sometimes phrased in terms of then Judge Cardozos famous description of the obligation of partners to act with [n]ot honesty alone, but the punctilio of an honor of the most sensitive. Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). Whether this standard imposes duties on majority shareholders in other capacities is an interesting question. However, for the reasons explained below, the relief ordered by the trial court was justified by actions taken as a shareholder, officer, and director, and we need not resolve this issue.
1. Actions Before Goldsmith Acquired Majority Control of G & N
Goldsmith attempted to purchase Boehms shares of G & N for more than $100,000 less than he had previously had the shares appraised for and $50,000 less than his original purchase price. In and of itself, this is not a breach of duty. Absent nondisclosure, fraud, or oppression, a majority shareholder has no duty to pay a fair price for shares. Cf. Joseph v. Shell Oil Co., 482 A.2d 335, 341 (Del. Ch. 1984). However, when Boehm refused his offer, Goldsmith attempted to force Boehm to sell his shares by limiting Boehms role in the management of G & N and cutting off cash distributions from the company. The trial court concluded:
Paul Goldsmith breached his fiduciary duty to the corporation and his fellow shareholders by pursuing his own personal interests at the expense of G & N when he plotted to merge his other corporations with G & N and use G & Ns cash flow to pay off debts of his other businesses and himself.
Paul Goldsmith breached his fiduciary duty to G & N and his fellow shareholders when he communicated his intention to terminate the lease between himself and G & N in order to force other shareholders to sell their stock in G & N to him.
. . . .
Defendant, Paul Goldsmith has, by operating in a manner unfair to other shareholders, being dishonest with other shareholders and through secretly plotting a takeover of G & N and a freeze out of other shareholders, placed himself in a position to continue to violate his fiduciary duty to the shareholders and the corporation . . . .
Goldsmith claims that there can be no breach of a fiduciary duty, or
at least no damages, because he never purchased Boehms shares and therefore Boehm
was not harmed. Although Goldsmiths plan to force Boehm out of the
corporation was not completed, Goldsmith consummated several steps in his effort to acquire
Boehms shares. Notably, he acquired the G & N shares held by
Gilliland and McCoy, which gave him majority control of the corporation. If
he accomplished this by wrongful use of his corporate office, this would plainly
create a cause of action in favor of the selling shareholders.
The first question becomes whether the leverage used to cause the sale was improper use of a position with G & N, or was simply a hardball, but lawful, use of economic power derived from a source other than an office or directorship with G & N. As landlord, Goldsmith was free to charge the rent he wished. As owner of Edgecumbe, he was free to charge whatever price he wanted for its parts. But as director and majority shareholder, he was not free to disregard the interests of G & N. The trial court found, in effect, that the eviction was a sham and Goldsmith knew it. In resigning and reassuming the presidency to lend credence to the threat, Goldsmith abused his office. As events unfolded, the lease eviction was sufficient to coerce Gilliland and McCoy into what the trial court found to be far from . . . an arms length transaction. Moreover, the trial court noted that Paul Goldsmiths plan if neither of the buy out plans were successful [was] to stop purchasing Edgecumbe parts in order to force Gilliland and McCoy to sell their shares of G & N to Paul Goldsmith. This is a finding that Goldsmith planned to facilitate a scheme to threaten economic harm to both G & N and Edgecumbe and thereby coerce a sale of G & N shares owned by minority shareholders of Edgecumbe. The acquisition of majority control was accomplished by a plan that included an intentional misuse of corporate office for personal gain.
To the extent Goldsmith coerced a sale at less than fair value, or, if Edgecumbe had been cut off, to the extent Edgecumbe was damaged, Gilliland and McCoy would have a direct claim (as shareholders of G & N) or a derivative claim (as shareholders of Edgecumbe). Neither has been asserted. Instead, Boehm has sued, claiming that the net result of the Goldsmith/Gilliland/McCoy transactions was to reduce his 34% holding from a plurality to a minority. The trial court correctly concluded that this set of circumstances also provides the basis for a claim by Boehm. These steps alone would not have achieved Goldsmiths stated goal of 100% ownership (or even the 80% we assume he may have coveted). Nevertheless, the acquisitions leading to majority shareholder status were wrongs to Boehm because they were steps in a plan ultimately designed to use Goldsmiths position with G & N not for any proper business purpose of G & N, but rather to squeeze Boehm out. The trial court found his damages to be the reduction in value of Boehms shares due to their status as minority subject to a dominant majority. Because of our resolution of the remedy issue in Part II.C.3, we do not attempt to quantify these damages
2. Actions as Majority Shareholder
After acquiring control of G & N, Goldsmith terminated Boehm and shut off cash distributions, leaving Boehm a shareholder in a Subchapter S corporation receiving taxable income, but no cash to pay the taxes. If this was done for legitimate business reasons, it is protected by the business judgment rule. The trial court found, however, that the motive was to eliminate Boehm as a shareholder to permit Goldsmith to file consolidated tax returns and bail out his other businesses. Specifically, the trial court found that, Paul Goldsmith breached his fiduciary duty to the corporation and his fellow shareholders by pursuing his own personal interests at the expense of G & N when he plotted to merge his corporations with G & N and use G & Ns cash flow to pay off debts of his other businesses and himself. That finding is not clearly erroneous and supports a claim by Boehm against Goldsmith under the Barth doctrine.
3. Remedies Against Goldsmith
a. Judicially Ordered Sale
The trial court concluded that no remedy short of a forced sale was appropriate. We agree. This corporate marriage cried out for dissolution by the time it reached the courts. There was no deadlock that would trigger the receivership provisions of Indiana Code section 23-1-47-1. Damages are ordinarily the proper remedy for a shareholder aggrieved by breach of director duty. However, we think the remedy ordered by the trial court is appropriate here.
The trial court awarded Boehm the buy-out of his stock for $521,319, damages of $173,939 for the amount of undistributed profits for the period of Goldsmiths domination, $175,000 in punitive damages, and attorneys fees. Goldsmith contests all of these awards. First, Goldsmith claims that the judicially ordered sale is improper because the legislature provided dissenters appraisal rights only in the case of a specified corporate action (merger, etc.), none of which are present here. As a preliminary matter, we agree with the trial court that Fleming v. International Pizza Supply Corp., 676 N.E.2d 1051 (Ind. 1997), is not applicable here because there has been no corporate action that gives rise to dissenters rights. See Ind.Code § 23-1-44-8 (1998). Although dissenters rights are the exclusive remedy in cases of merger, sale of substantially all of a corporations assets, and the other listed transactions, the Code does not preclude a court from fashioning appropriate remedies in other situations. As a general proposition, a trial court has full discretion to fashion equitable remedies that are complete and fair to all parties involved. Hammes v. Frank, 579 N.E.2d 1348, 1355 (Ind. Ct. App. 1991). In this case, the trial court ordered Goldsmith to purchase Boehms shares as a remedy for his actions in violation of his fiduciary duties to Boehm in the course of a plan attempting to coerce Boehm into selling his shares. By forcing the other shareholders to sell their shares and limiting Boehms role in the corporation, Goldsmith essentially rendered Boehms shares valueless. It is difficult to imagine who would buy them and Boehm, himself, can receive no benefit from them. The trial courts order for Goldsmith to pay Boehm the fair market value in exchange for his shares is affirmed.
In a number of states, oppressive conduct by the directors or a majority shareholder is a statutory ground for dissolution of the corporation. See generally Robert B. Thompson, The Shareholders Cause of Action for Oppression, 48 Bus. Law. 699, 708-10 (1993). The Indiana Business Corporation Law was enacted at the highwater of concern for excessive ease of takeover of publicly traded companies. A number of its provisions are aimed directly at curbing perceived abuses and the commentary to the BCL includes a number of comments explicitly and implicitly seeking to further that goal. Judicial dissolution for oppressive conduct was intentionally deleted from the remedies available under the Revised Model Act 14.30(2)(ii) because of a concern that it might be abused in a hostile takeover. Ind.CodeAnn. § 23-1-47-1 cmt. (West 1998). Accordingly, if G & N were a publicly traded corporation, this remedy would not be available under Indiana law. However, the reasons for omitting an express remedy of judicial dissolution for oppressive conduct are not relevant in the context of a close corporation. The commentary thus leaves us with the unadorned language of the statute as to the availability of that remedy in a close corporation.
Unlike a number of states, Indiana has no corporate law specifically applicable to close corporations. The shareholder derivative action is a creature of equity. Griffin v. Carmel Bank & Trust Co., 510 N.E.2d 178, 183 (Ind. Ct. App. 1987) (A derivative action is always in equity even though the only relief available is damages and the corporation could have maintained an action at law.), trans. denied. Similarly, a Barth direct action is for breach of a fiduciary duty, which is also a claim in equity. Cf. Ross v. Tavel, 418 N.E.2d 297, 304 (Ind. Ct. App. 1981). In either case, we agree with the trial court that traditional powers of equity courts are available to fashion a remedy for breach of a fiduciary duty in a close corporation. We also agree with the courts that have recognized the need for more flexible remedies in the case of close corporations. Unlike shareholders in a publicly traded corporation, the oppressed minority in a close corporation does not have the option of voting with its feet by selling its shares in a public market for a presumptively fair price.
For essentially the same reasons we recognized the availability of a direct action by a minority shareholder in a close corporation in Barth, we conclude it is appropriate in this context to fashion a remedy that may amount to a forced dissolution or sale of shares. This remedy should be exercised only after careful thought. It amounts to a forced withdrawal of capital from the enterprise if the enterprise itself is the only realistic source of funding the buyout. This can be true if the corporation is the buyer or the funding source for the buying shareholder. If the purchase price is greater than a damage award, the effect may be to force a withdrawal of capital beyond the level of damages owed. Particularly if the business is in a startup mode, a forced liquidation of assets may severely impact it. See generally Edward B. Rock & Michael L. Wachter, Waiting for the Omelet to Set: Match-Specific Assets and Minority Oppression in Close Corporations, 24 J. Corp. L. 913 (1999). Nevertheless, we agree with the Court of Appeals that the remedy fashioned by the trial court in this case was within its discretion. If Boehm had acceded to Goldsmiths tactics and sold for $250,000, he would still have his claim for damages in the amount of the difference between the fair value of his shares and the price they brought in an extorted sale. The remedy here produces essentially the same result. Moreover, the trial court found that G & Ns worth was substantially more than its bank debt and that G & N was profitable. On those findings, the remedy is appropriate.
Goldsmith argues that Boehms shares should be valued at a discount because of their minority status. Typically, minority shares in a two-shareholder corporation will be valued at less than their proportionate ownership. However, the value of the entire corporation is whatever it is. If there is a minority discount, there is also a majority premium. In this case, the majority premium is the result of the extorted acquisition by Goldsmith of the shares owned by Gilliland and McCoy. This again raises the issue of whether those transactions were the result of a misuse of Goldsmiths role as an officer or director of G & N. Because we affirm the trial courts finding that they were the product of wrongful action by Goldsmith as officer and director of G & N, that majority premium should be viewed as a corporate asset. It is inappropriate to give Goldsmith the benefit of a minority discount that was the product of his wrongful acts. The trial court listened to experts from both sides and pointed out problems with each before arriving at $521,319 as the value for Boehms shares. Because that amount is supported by the evidence, we cannot conclude that the trial court erred in its determination.
b. Reimbursement for Omitted Dividends
The trial court further ordered Goldsmith and G & N to pay Boehm the amount he lost in income from 1994 to 1996 as a result of cessation of G & Ns distributions to shareholders. That $173,939 remained in the company instead of being distributed to the shareholders. As such, it increased the value of the shares and was included in the valuation of the shares as of 1996. Payment of both the full value of the shares as of 1996 and also the back dividends produces a double recovery for Boehm. The trial courts judgment awarding $173,939 in back dividends is reversed. As of the date of valuation of the sale ordered by the Court, Boehm should no longer be viewed as an equity participant in G & N and is not entitled to further dividends. The trial court also awarded dividends until the fair value of Boehms shares is paid. As of the date of judgment Boehm is properly viewed as a creditor of Goldsmith entitled to postjudgment interest, but no longer sharing either the upside or downside of G & Ns profitability. This award is also reversed.
c. Punitive Damages
Next, Goldsmith contends that punitive damages are inappropriate. He claims that because there is no basis for compensatory damages, punitive damages may not be awarded. However, as discussed above, Boehm suffered harm from Goldsmiths breaches of his fiduciary duties to Boehm and may be awarded compensatory damages. We agree with the Court of Appeals that punitive damages are also appropriate. As the Court of Appeals put it:
Goldsmith deliberately acted, over a period of time, to relegate Boehm to a minority position and effectively freeze Boehm out through a denial of dividends. . . . In light of this evidence, we cannot say that the trial court erred in concluding that Goldsmiths conduct was oppressive and malicious . . . . Thus, the award of punitive damages in Boehm's favor was proper.
G & N Aircraft, 703 N.E.2d at 680.
d. Attorneys Fees
Goldsmith argues that the award of attorneys fees is contrary to law. The trial court awarded Boehm attorneys fees in this action, but did not specify for what or from whom. The Court of Appeals modified this award to allow for attorneys fees against G & N for the derivative action, but no fees against Goldsmith in the direct action. We agree with the Court of Appeals that Boehm is not entitled to attorneys fees from Goldsmith in his direct action. The United States Rule is that parties bear their own fees in the absence of a statute or a basis in quantum merit for reimbursing a party who has benefited others. The direct action by Boehm fits neither category.
We also conclude that he is not entitled to attorneys fees for any derivative claims. First, as has been seen from the foregoing, we found the direct claims to be the basis of recovery. A shareholder bringing a successful derivative action can recover attorneys fees from the corporation, but in the absence of a fee shifting statute such as the one we find in the antitrust laws, there is no basis for recovery from the defendant. The theory underlying an award of fees in a derivative suit is that the recovery goes to the corporation as a whole, not the individual shareholder. The shareholder who has performed a service for the corporation by bringing the derivative action is entitled to be paid his fees and expenses incurred in conferring that benefit. But recovery in this case by Boehm conferred no benefit on the corporation as a whole. As Barth noted, one effect of allowing direct actions in closely held corporations is that the plaintiff, even if successful, cannot ordinarily look to the corporation for attorneys fees. 659 N.E.2d at 563. We affirm the trial courts judgment that G & N is liable for Boehms attorneys fees and expenses connected with its frivolous counterclaim. The remaining award of attorneys fees was in error and is reversed.