The Tenth Circuit Court of Appeals reviewed a dispute among shareholders of a closely-held corporation in Warren v. Campbell Farming Corporation. It affirmed a district court ruling that the majority shareholder did not breach fiduciary or statutory duties to the corporation by approving a bonus proposal over the minority shareholders’ objections. The court considered arguments relating to conflicts of interest and fairness, the business judgment rule, and the majority shareholder’s fiduciary duty.
Campbell Farming Corporation is a closely-held Montana corporation whose principal place of business is in New Mexico. The plaintiffs, H. Robert Warren and Joan Crocker, were minority shareholders with 49% of the shares, while defendant Stephanie Gately controlled 51%. Warren and Gately served as directors with Gately’s son, Robert Gately, who also served as the president. Stephanie Gately proposed a bonus to her son totalling $1.2 million in cash and company stock, in part to prevent him from leaving the company. Stephanie Gately voted all of her shares in favor of the proposal, so it passed despite Warren and Crocker’s votes in opposition.
Warren and Crocker filed suit in New Mexico federal court, asserting breach of fiduciary duties and various common law claims. The district court ruled in favor of the defendants after a bench trial. It found that, while the bonus met Montana’s definition of a “conflict of interest,” it was permissible under a safe-harbor statute that allowed conflict-of-interest transactions if they were “fair to the corporation.” Mont. Code. Ann. §§ 35-1-461(2), 35-1-462(2)(c). The court also found that the bonus was permitted by the business judgment rule and that the defendants did not breach any fiduciary duties. The plaintiffs appealed to the Tenth Circuit.
The Tenth Circuit certified three questions to the Montana Supreme Court relating to conflict-of-interest transactions, and it applied the court’s answers to its ruling upholding the district court’s verdict.
Safe Harbor Provision
The Montana Supreme Court found that the safe-harbor provision applied to the bonus transaction at issue. The Tenth Circuit considered the elements of determining “fairness,” finding that it should consider the terms an unrelated party, engaged in arms-length negotiations, might have achieved, the impact of the transaction on the corporation’s business activities, and the extent to which the interested director discloses any conflicts. The court held that the transaction was “fair” because it involved a reasonable price, valued the stock fairly, and served the corporation’s interests by preventing its president from resigning.
Business Judgment Rule
The Montana high court held that conflict-of-interest transactions involving corporate directors were not governed by the business judgment rule. This conflicted with the New Mexico district court’s ruling, but since it could have reached the same conclusion via the safe harbor provision, the Tenth Circuit held that it was harmless error.
Breach of Fiduciary Duty
Montana held that its fiduciary duty test identified in Daniels v. Thomas, Dean & Hoskins, Inc., 804 P.2d 359, 365-67 (Mont. 1990), applied to the claims made in the present case. Daniels held that majority shareholders can overcome an allegation of breach of fiduciary duty if they can show that their actions served a legitimate business purpose, and the objecting shareholders cannot identify an alternative that would cause less harm to the company. The Tenth Circuit found that the plaintiffs had not shown a less harmful means of preventing Robert Gately from resigning, so the transaction met the Daniels test.
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