610
Chapter 40
Corporate
Directors, Officers, and
Shareholders
Case 40.1
5 A.2d 503
GUTH v. LOFT, INC.
Del., 1939
Supreme Court of Delaware.
GUTH et al.
v.
LOFT, Inc.
April 11, 1939.
*257 LAYTON, C. J., RICHARDS, RODNEY, SPEAKMAN, and TERRY, JJ., sitting.
Caleb S. Layton, of Wilmington, and George Wharton Pepper, of Philadelphia, Pa. (Richards, Layton & Finger, of Wilmington, and
John Sailer, James A. Montgomery, Jr., and Pepper, Bodine, Stokes & Schoch, all of Philadelphia, Pa., of counsel), for appellants.
Clarence A. Southerland, of Wilmington (David L. Podell, Hays, Podell & Shulman, and Levien, Singer & Neuburger, all of New
York City, of counsel), for appellee.
Supreme Court, January Term, 1939. Appeal from the Court of Chancery.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 611
For convenience, Loft Incorporated, will be referred to as Loft; the Grace Company, Inc., of Delaware, as Grace; and Pepsi-Cola
Company, a corporation of Delaware, as Pepsi.
Loft filed a bill in the Court of Chancery against Charles G. Guth, Grace and Pepsi seeking to impress a trust *258 in favor of the
The essential facts, admitted or found by the Chancellor, briefly stated, are these: Loft was, and is, a corporation engaged in the
manufacturing and selling of candies, syrups, beverages and foodstuffs, having its executive offices and main plant at Long Island
City, New York. In 1931 Loft operated 115 stores largely located in the congested centers of population along the Middle Atlantic
seaboard. While its operations chiefly were of a retail nature, its wholesale activities were not unimportant, amounting in 1931 to
over $800,000. It had the equipment and the personnel to carry on syrup making operations, and was engaged in manufacturing
fountain syrups to supply its own extensive needs. It had assets exceeding $9,000,000 in value, excluding goodwill; and from 1931
to 1935, it had sufficient working capital for its own cash requirements.
Guth, a man of long experience in the candy, chocolate and soft drink business, became Vice President of Loft in August, 1929,
and its president in March 1930.
Grace was owned by Guth and his family. It owned a plant in Baltimore, Maryland, where it was engaged in *259 the manufacture
of syrups for soft drinks, and it had been supplying Loft with ‘Lady Grace Chocolate Syrup’.
In 1931, Coca-Cola was dispensed at all of the Loft Stores, and of the Coca-Cola syrup Loft made large purchases, averaging over
30,000 gallons annually. The cost of the syrup was $1.48 per gallon. Guth requested the Coca-Cola Company to give Loft a job-
ber’s discount in view of its large requirements of syrups which exceeded greatly the purchases of some other users of the syrup to
whom such discount had been granted. After many conferences, the Coca-Cola Company refused to give the discount. Guth be-
came incensed, and contemplated the replacement of the Coca-Cola beverage with some other cola drink. On May 19, 1931, he
addressed a memorandum to V. O. Robertson, Loft’s vice-president, asking ‘Why are we paying a full price for Coca-Cola? Can
you handle this, or would you suggest our buying Pebsaco (Pepsi-Cola) at about $1.00 per gallon?’To this Robertson replied that
612 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
the trustee in bankruptcy of National Pepsi-Cola Company, and its capital stock was distributed as agreed, except that 100,000
shares were placed in the name of Grace.
*261 At this time Megargel could give no financial assistance to the venture directly or indirectly. Grace, upon a comparison of its
assets with its liabilities, was insolvent. Only $13,000 of Pepsi’s treasury stock was ever sold. Guth was heavily indebted to Loft,
and, generally, he was in most serious financial straits, and was entirely unable to finance the enterprise. On the other hand, Loft
was well able to finance it.
Guth, during the years 1931 to 1935 dominated Loft through his control of the Board of Directors. He has completely controlled
Pepsi. Without the knowledge or consent of Loft’s Board of Directors he drew upon Loft without limit to further the Pepsi enterprise
having at one time almost the entire working capital of Loft engaged therein. He used Loft’s plant facilities, materials, credit, execu-
tives and employees as he willed. Pepsi’s payroll sheets were a part of Loft’s and a single Loft check was drawn for both.
An attempt was made to keep an account of the time spent by Loft’s workmen on Pepsi’s enterprises, and in 1935, when Pepsi had
available profits, the account was paid; but no charge was made by Loft as against Pepsi for the services rendered by Loft’s execu-
tives, higher ranking office employees or chemist, nor for the use of its plant and facilities.
**507 All the while Guth was carrying forward his plan to replace Coca-Cola with Pepsi-Cola at all of the Loft stores. Loft spent at
least $20,000 in advertising the beverage, whereas it never had to advertise Coca-Cola. Loft, also, suffered large losses of profits
at its stores resulting from the discarding of Coca-Cola. These losses were estimated at $300,000. They undoubtedly were large.
When Pepsi was organized in 1931, 100,000 shares of its stock were transferred to Grace. At that time Guth, in his own name, had
no shares at all. Sometime in or after August, 1933, a settlement was made of Megargel’s claim against Pepsi for arrearages due
him under the contract hereinbefore mentioned. That settlement called for the payment of $35,000 in cash by Pepsi. Guth provided
$500, Loft $34,500. In the settlement, 97,500 shares of Pepsi stock owned by Megargel were received by Pepsi and left with Loft
as security for the advance, as the defendants claimed. These shares came into Guth’s possession. Guth claimed that, at the Jan-
uary, 1934, meeting of the Loft Board of Directors, the Megargel settlement, Loft’s advance of $34,500 and Pepsi’s receipt of the
Megargel stock were reported to the Board, and that the directors authorized the continuance of Loft’s unlimited financing of Pepsi,
but no record of the authorization exists.
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 613
Reference is made to the opinion of the Chancellor (2 A.2d 225) for a more detailed statement of the facts.
By the decree entered the Chancellor found, inter alia, that Guth was estopped to deny that opportunity of acquiring the Pepsi-Cola
trademark and formula was received by him on behalf of Loft, and that the opportunity was wrongfully appropriated by Guth to him-
self; that the value inhering in and represented by the 97,500 shares of Pepsi *265 stock standing in the name of Guth and the
140,000 shares standing in the name of Grace, were, in equity, the property of Loft; that the dividends declared and paid on the
shares of stock were, and had been, the property of Loft; and that for all practical purposes Guth and Grace were one.
The Chancellor ordered Guth and Grace to transfer the shares of stock to Loft; the sequestrator to pay to Loft certain money repre-
senting dividends declared on the stock for the year 1936; Grace and Guth to pay to Loft certain money, representing dividends
declared and paid for the same year; Guth to account for and pay over to Loft any other dividends, profits, gains, etc., attributable
or allocable to the 97,500 shares of Pepsi stock standing in his name; Grace to do likewise with respect to the 140,000 shares
standing in its name; Guth to pay to Loft all salary or compensation paid him by Pepsi prior to October 21, 1935; and all salary paid
by Pepsi to him subsequent to October 21, 1935, in excess of what should be determined to be reasonable; Guth and Grace to be
credited with such sums of money as may be found due them from Loft of from Pepsi in respect of matters set forth in the bill of
complaint; and a master to be appointed to take and state the accounts.
Assignments of error, thirty in number, were filed, covering practically all of the essential findings and conclusions of the Chancel-
lor.
614 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
In these circumstances of contention, certain questions suggest themselves for consideration, and some of them for answer: Did
the Chancellor make an explicit finding that the Pepsi-Cola opportunity belonged in equity to Loft, and if so, was such finding justi-
fiable in fact and in law? If the *268 Chancellor made no such explicit finding, should he have done so, or should this Court make
such finding? Assuming that the Chancellor made no explicit finding and that this Court should not feel justified in making such
finding, was, and is, the doctrine of estoppel properly invocable in favor of the complainant?
The complainant is not, of course, precluded from making the argument that, upon the law and the facts, the Pepsi-Cola opportuni-
ty belonged to it; nor is this Court prohibited from so finding.
It is necessary briefly to notice what the Chancellor said with respect to the question of corporate opportunity. As a preliminary to
the discussion of the question, the Chancellor stated generally the principles governing officers and directors of a corporation with
respect to their fiduciary relation to the corporation and its stockholders, and their liability to account to the corporation for profits
and advantages resulting from unlawful acts and breaches of trust done and committed in the promotion of their own interests. He
then proceeded to say that Guth, being not only a director of Loft but its president as well, and dominant in the management of its
affairs, the principles and rules governing trustees in their relations with their correlates applied to him with peculiar and exception-
al force. He particularly noticed a proposition of law stated by the defendants, that when a business opportunity comes to an officer
or director in his individual capacity rather than in his official capacity, and is one which, because of its nature, is not essential to
the corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his
own. As stated, he found the proposition acceptable in the main; but he observed that the cases cited by the defendant recognized
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 615
vate interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A public poli-
cy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a
rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not
only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that
would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to
enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to
the corporation demands that there shall be no conflict between duty and self-interest. The occasions for the determination of hon-
esty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is
measured by no fixed scale.
[6] If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage for himself, the law charges
the interest so acquired with a trust for the benefit of the corporation, at its election, while it denies to the betrayer all benefit and
profit. The rule, inveterate and uncompromising in its rigidity, does not rest upon the narrow ground of injury or damage to the cor-
poration resulting from a betrayal of confidence, but upon a broader foundation of a wise public policy that, for the purpose of re-
moving all temptation, extinguishes all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation.
Given the relation between the parties, a certain result follows; and a constructive trust is the remedial device through which prec-
616 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
to be whether there was a specific duty, on the part of the officer sought to be held liable, to act or contract in regard to the particu-
lar matter as the representative of the corporation-all of which is largely a question of fact’.
Duty and loyalty are inseparably connected. Duty is that which is required by one’s station or occupation; is that which one is
bound by legal or moral obligation to do or refrain from doing; and it is with **512 this conception of duty *274 as the underlying
basis of the principle applicable to the situation disclosed, that the conduct and acts of Guth with respect to his acquisition of the
Pepsi-Cola enterprise will be scrutinized. Guth was not merely a director and the president of Loft. He was its master. It is admitted
that Guth manifested some of the qualities of a dictator. The directors were selected by him. Some of them held salaried positions
in the company. All of them held their positions at his favor. Whether they were supine merely, or for sufficient reasons entirely
subservient to Guth, it is not profitable to inquire. It is sufficient to say that they either wilfully or negligently allowed Guth absolute
freedom of action in the management of Loft’s activities, and theirs is an unenviable position whether testifying for or against the
appellants.
Prior to May, 1931, Guth became convinced that Loft was being unfairly discriminated against by the Coca-Cola Company of
whose syrup it was a large purchaser, in that Loft had been refused a jobber’s discount on the syrup, although others, whose pur-
chases were of far less importance, had been given such discount. He determined to replace Coca-Cola as a beverage at the Loft
stores with some other cola drink, if that could be accomplished. So, on May 19, 1931, he suggested an inquiry with respect to
desirability of discontinuing the use of Coca-Cola, and replacing it with Pepsi-Cola at a greatly reduced price. Pepsi-Cola was the
syrup produced by National Pepsi-Cola Company. As a beverage it had been on the market for over twenty-five years, and while it
was not known to consumers in the area of the Loft stores, its formula and trademark were well established. Guth’s purpose was to
deliver Loft from the thraldom of the Coca-Cola Company, which practically dominated the field of cola beverages, and, at the
same time, to gain for Loft a greater margin of profit on its sales of cola beverages. Certainly, the choice of an acceptable substi-
tute for Coca-Cola was not a wide one, and, doubtless, *275 his experience in the field of bottled beverages convinced him that it
was necessary for him to obtain a cola syrup whose formula and trademark were secure against attack. Although the difficulties
and dangers were great, he concluded to make the change. Almost simultaneously, National Pepsi-Cola Company, in which
Megargel was predominant and whom Guth knew, went into bankruptcy; and Guth was informed that the long established Pepsi–
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 617
to himself depends upon the circumstances existing at the time it presented itself*277 to him without regard to subsequent events,
and that due weight should be given to character of the opportunity which Megargel envisioned and brought to Guth’s door.
The real issue is whether the opportunity to secure a very substantial stock interest in a corporation to be formed for the purpose of
exploiting a cola beverage on a wholesale scale was so closely associated with the existing business activities of Loft, and so es-
sential thereto, as to bring the transaction within that class of cases where the acquisition of the property would throw the corporate
officer purchasing it into competition with his company. This is a factual question to be decided by reasonable inferences from ob-
jective facts.
It is asserted that, no matter how diversified the scope of Loft’s activities, its primary business was the manufacturing and selling of
candy in its own chain of retail stores, and that it never had the idea of turning a subsidiary product into a highly advertised, nation–
wide specialty. Therefore, it had never initiated any investigation into the possibility of acquiring a stock interest in a corporation to
be formed to exploit Pepsi-Cola on the scale envisioned by Megargel, necessitating sales of at least 1,000,000 gallons a year. It is
said that the most effective argument against the proposition that Guth was obligated to take the opportunity for Loft is to be found
in the complainant’s own assertion that Guth was guilty of an improper exercise of business judgment when he replaced Coca-
Cola with Pepsi-Cola at the Loft Stores. Assuming that the complainant’s argument in this respect is incompatible with its conten-
tion that the Pepsi-Cola opportunity belonged to Loft, it is no more inconsistent than is the position of the appellants on the ques-
tion. In the Court below, the defendants strove strenuously to show, and to have it believed, that the Pepsi-Cola opportunity was
presented to Loft by Guth, with a full disclosure by him that if the company did not embrace *278 it, he would. This, manifestly, was
a recognition of the necessity for his showing complete good faith on his part as a corporate officer of Loft. In this Court, the Chan-
cellor having found as a fact that Guth did not offer the opportunity to his corporation, it is asserted that no question of good faith is
involved for the reason that the opportunity was of such character that Guth, although Loft’s president, was entirely free to embrace
it for himself. The issue is not to be enmeshed in the cobwebs of sophistry. It rises far above inconsistencies in argument.
618 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
deny this would be to deny the history of industrial development.
It is urged that Loft had no interest or expectancy in the Pepsi-Cola opportunity. That it had no existing property right therein is
manifest; but we cannot agree that it had no concern or expectancy in the opportunity within the protection of remedial equity. Loft
had a practical and essential concern with respect to some cola syrup with an established formula and trademark. A cola beverage
has come to be a business necessity for soft drink establishments; and it was essential to the success of Loft to serve at its soda
fountains an acceptible five cent cola drink in order to attract into its stores the great multitude of people who have formed the habit
of drinking cola beverages. When Guth determined to discontinue the sale of Coca-Cola in the Loft stores, it became, by his own
act, a matter of urgent necessity for Loft to acquire a constant supply of some satisfactory cola syrup, secure against probable at-
tack, as a replacement; and when the Pepsi-Cola opportunity presented itself, Guth having already considered the availability of
the syrup, it became impressed with a Loft interest and expectancy arising out of the circumstances and the urgent and practical
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 619
by Guth in his dealings with Loft, the appellants make bold to say that no duty was cast upon Guth, hence he was guilty of no dis-
loyalty. The fiduciary relation demands something more than the morals of the market place. Meinhard v. Salmon, supra.Guth’s
abstractions of Loft’s money and materials are complacently referred to as borrowings. Whether his acts are to be deemed proper-
ly cognizable in a civil court at all, we need not inquire, but certain it is that borrowing is not descriptive of them. A borrower pre-
sumes a lender acting freely. Guth took without limit or stint from a helpless corporation, in violation of a statute enacted for the
protection of corporations against such abuses, and without the knowledge or authority of the corporation’s Board of Directors.
Cunning and craft supplanted sincerity. Frankness gave way to concealment. He did not offer the Pepsi-Cola opportunity to Loft,
but captured it for himself. He invested little or no money of his own in the venture, but commandeered for his own benefit and ad-
vantage the money, resources and facilities of his corporation and the services of its officials. He thrust upon Loft the hazard, while
he reaped the benefit. His time was paid for by Loft. The use of the Grace plant was not essential to the enterprise. In such manner
he acquired for himself and Grace ninety one percent of the capital stock of Pepsi, now worth many millions. A genius in his line he
may be, but the law makes no distinction between the wrong doing genius and the one less endowed.
*283 Upon a consideration of all the facts and circumstances as disclosed we are convinced that the opportunity to acquire the
Pepsi-Cola trademark and formula, goodwill and business belonged to the complainant, and that Guth, as its President, had no
right to appropriate the opportunity to himself.
Case 40.2
Cal.App. 1 Dist.,2010.
Bezirdjian v. O’Reilly
183 Cal.App.4th 316, 107 Cal.Rptr.3d 384, 10 Cal. Daily Op. Serv. 3931, 2010 Daily Journal
D.A.R. 4724
FN1. “Because a corporation exists as a separate legal entity, the shareholders have no direct cause of action or right of
recovery against those who have harmed it. The shareholders may, however, bring a derivative suit to enforce the corpo-
ration’s rights and redress its injuries when the board of directors fails or refuses to do so. When a derivative suit is
brought to litigate the rights of the corporation, the corporation is an indispensable party and must be joined as a nominal
defendant.” (
Grosset v. Wenaas
(2008) 42 Cal.4th 1100, 1108, 72 Cal.Rptr.3d 129, 175 P.3d 1184.)
FN2. The record on appeal does not include a copy of the demurrer or plaintiff’s opposition to the demurrer.
On August 20, 2008, the trial court overruled the demurrer but advised the parties that it would entertain a motion to dismiss.
On January 7, 2009, Chevron filed a motion for judgment on the pleadings. In its motion, Chevron sought to make a prima facie
showing that the directors who comprised the Committee were independent, and that they acted reasonably and in good faith in
declining to pursue the underlying lawsuit. Chevron also asked the court to take judicial notice of certain court records, Chevron’s
FN3. We note in passing that Code of Civil Procedure section 438, subdivision (f)(2), provides that a motion for judgment
on the pleadings may be made by a defendant if “the defendant has already filed his or her answer to the complaint and
the time for the defendant to demur to the complaint has expired.” It appears no defendants have filed answers in this ac-
tion. We need not address this apparent conflict with the statutory requirements, however, as neither party has invoked
this provision.
III. Delaware Law on Derivative Actions
[12][13] Before proceeding to plaintiff’s contentions, we review some basic principles regarding shareholder derivative actions.
Chevron is incorporated in the state of Delaware, and both parties agree that Delaware law applies this lawsuit. “A basic principle
of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and af-
fairs of the corporation. [Citations.] ‘The exercise of this managerial power is tempered by fundamental fiduciary obligations owed
FN4. Delaware Chancery Court Rules, rule 23.1(a) provides, in part: “The complaint shall … allege with particularity the
efforts, if any, … to obtain the action the plaintiff desires from the directors … and the reasons for the plaintiff’s failure to
obtain the action or for not making the effort.”
FN5. California law is similar to that of Delaware. Corporations Code section 800, subdivision (b)(2) requires that the
plaintiff in a shareholder derivative suit “allege[ ] in the complaint with particularity plaintiff’s efforts to secure from the
board such action as plaintiff desires, or the reasons for not making such effort, and allege[ ] further that plaintiff has either
informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or de-
livered to the corporation or the board a true copy of the complaint which plaintiff proposes to file.”
(
Scattered Corp. v. Chicago Stock Exch.
(Del.1997) 701 A.2d 70, 73 (
Scattered
).) Mere conclusory allegations are insufficient.
622 CASE PRINTOUTS TO ACCOMPANY BUSINESS LAW
(
Levine v. Smith
(Del.1991) 591 A.2d 194, 211 (
Levine
).) “If there is reason to doubt that the board acted independently or with
due care in responding to the demand, the stockholder may have the basis
ex post
to claim wrongful refusal. The stockholder then
has the right to bring the underlying action with the same standing which the stockholder would have had,
ex ante,
if demand had
to pursue the claims asserted herein.” Further, a letter from Chevron’s counsel, dated June 11, 2008, and incorporated into plain-
tiff’s complaint as an exhibit, states: “The committee investigated the allegations in your client’s demand. It retained the firm of Ve-
nable, LLP to represent it as its outside counsel. The committee and its counsel interviewed 34 individuals, reviewed over 150,000
pages of documents, and performed such other analyses as they deemed appropriate.” We also note plaintiff stipulated to facts
demonstrating on their face that the three Board members who comprised the Committee were appointed to the Board after the
alleged wrongful conduct had occurred.FN6 The trial court’s decision simply recites these facts as the basis for its ruling and does
not contain any references to extrinsic evidence.FN7
FN7. While the June 11, 2008 letter indicates that the Committee concluded plaintiff’s substantive allegations lacked mer-
(1995) 40 Cal.App.4th 1, 46 Cal.Rptr.2d 683 is inapposite. In
Saltarelli,
a law firm had filed a lawsuit against a former client for un-
paid fees and costs. (
Id.
at pp. 3-4, 46 Cal.Rptr.2d 683.) The client then filed a petition for bankruptcy, and the debt to the law firm
was discharged. The client filed a motion to dismiss the complaint on the ground that it was barred by the discharge, relying on a
declaration from his attorney and several exhibits. (
Id.
at p. 4, 46 Cal.Rptr.2d 683.) The action was dismissed with prejudice and
the law firm appealed. (
Ibid.
) Before reaching the merits, the appellate court observed: “The procedure of moving to dismiss an
FN8. Plaintiff does not challenge the court’s denial of leave to amend. We note in passing that “Denial of leave to amend
after granting a motion for judgment on the pleadings is reviewed for abuse of discretion.” (
Ott v. Alfa-Laval Agri, Inc.
(1995) 31 Cal.App.4th 1439, 1448, 37 Cal.Rptr.2d 790.)
V. The Complaint does not State a Valid Cause of Action
[23] Plaintiff contends that his complaint states a valid cause of action under Delaware law. Certainly, the allegations in his com-
plaint with respect to Chevron’s alleged payments to Saddam Hussein suggest corporate wrongdoing. Nevertheless, as we have
FN9. Under the first prong of this test, plaintiffs may raise a reasonable doubt as to whether the directors are disinterested
and independent. (
Aronson, supra,
473 A.2d 805, 814.) The Sixth District Court of Appeal recently addressed the
Aronson
test in a case involving demand futility. (See
Bader v. Anderson
(2009) 179 Cal.App.4th 775, 799, 101 Cal.Rptr.3d 821.)
FN10. There are many reasons why a corporation might decline to pursue a lawsuit other than a desire to sanction corpo-
rate wrongdoing: “A board may in good faith refuse a shareholder demand to begin litigation even if there is a substantial
basis to conclude that the lawsuit would eventually be successful on the merits. It is within the bounds of business judg-
ment to conclude that a lawsuit, even if legitimate, would be excessively costly to the corporation or harm its long-term
strategic interests.” (
In re infoUSA, Inc. Shareholders Litigation
(Del.Ch. Aug.13, 2007) 2007 WL 2419611, at *13.)
787.) As the Delaware Supreme Court has observed: “The rationale for allowing discovery in a demand excused–
Zapata
context
FN11. Plaintiff’s reliance on
In re Oracle Deriv. Litig.
(Del.Ch.2003) 824 A.2d 917, 926 is similarly misplaced.
Plaintiff also relies on
Young v. Klaassan
(Del.Ch.2008) 948 A.2d 1152 and
Fleischman v. Huang
(Del.Ch. Aug.22, 2007) 2007 WL
2410386. Again, these cases are not on point. In
Fleischman,
the defendants sought an interlocutory appeal of an order granting
limited discovery to the plaintiff. (
Fleischman, supra,
at p. 1.) The Court of Chancery had granted the plaintiff’s discovery request
4-5.) Similarly, in
Young,
the defendants’ motion “expressly and repeatedly rel[ied] on the reportedly favorable findings of the spe–
cial board committee that investigated the matters alleged in the complaint.” (
Young, supra,
at p. 1153.)
In the present case, while Chevron does not concede liability, it has not raised any substantive challenge to the causes of action
alleged in plaintiff’s complaint. Rather, Chevron has challenged plaintiff’s failure to allege that its decision to forgo pursuing this
litigation falls outside of the presumption created by the business judgment rule. Absent a specific allegation in the complaint as to
Case 40.3
S.C.App.,2009.
Mazloom v. Mazloom
382 S.C. 307, 675 S.E.2d 746
FN1. It is unclear exactly what position Iraj held. While Iraj is named Secretary on many of AMBI’s documents, a corpo-
rate letter from 1996 states Iraj’s position was Secretary-Treasurer. This distinction, however, does not change our analy-
sis.
Iraj worked as an employee of AMBI from 1980 until 1996. In October 1996, Ahmad sent a letter to Iraj informing him of an
2002.FN2 The Articles of Amendment stated that upon AMBI’s dissolution, AMA received all of AMBI’s assets and good will and
that AMBI shareholders were to retain their respective shares of stock in AMA as they had in AMBI. The Articles went on to
state:
FN2. Manooch and Aboli signed the Articles of Amendment twice because the first draft was defective in form.
That in the organization of AMA, LLC through inadvertence or mistake, Iraj Mazloom was not transferred over as a shareholder
of stock from AMBI, Inc. to AMA, LLC which would have been correct, proper and was the intent of the original shareholders.
That this amendment is to correct this error and respectfully acknowledge that Iraj Mazloom owns 25% (or 1/4) shares *315 of
stock in AMA, LLC. That Iraj Mazloom shall be acknowledged by [AMA] as a 25% holder of shares in [AMA] and that this
in July 2004. The complaint was subsequently amended and filed in August 2005, asserting claims for an accounting, judicial
dissolution or repurchase due to oppression, breach of fiduciary duty of care and loyalty, and breach of good faith and fair deal-
ing. The brothers answered the complaint with defenses and counterclaims. As part of their defense of equitable estoppel, the
brothers alleged that at the time AMBI transferred its **751 assets to AMA, Iraj did not have any shares in AMBI because he had
assigned his shares and interest to a third party nearly twenty years prior.
pellate court has jurisdiction to find facts in accordance with its view of the preponderance of the evidence. Townes Assocs., Ltd.
v. City of Greenville, 266 S.C. 81, 86, 221 S.E.2d 773, 775 (1976). On the other hand, when reviewing an action at law, on appeal
of a case tried without a jury, the appellate court’s jurisdiction is limited to correction of errors at law, and the appellate court will
not disturb the judge’s findings of fact as long as they are reasonably supported by the evidence. Epworth Children’s Home v.
Beasley, 365 S.C. 157, 164, 616 S.E.2d 710, 714 (2005).
the preponderance of the evidence. Keane, 372 S.C. at 143, 641 S.E.2d at 57. We need not, however, “disregard the findings of
the master who saw and heard the witnesses and was in a better position to evaluate their credibility.” Peoples Fed. Sav. & Loan
Ass’n v. Myrtle Beach Golf & Yacht Club, 310 S.C. 132, 140, 425 S.E.2d 764, 769 (Ct.App.1992).
It is undisputed that when AMBI was incorporated, Iraj held a 25% ownership interest in the corporation. The brothers alleged,
however, that in October 1985, Iraj conveyed his interest in AMBI to Niece in order to protect his interests prior to his upcoming
marriage. The brothers claimed Niece later transferred this interest to Aboli. While Iraj acknowledged that his intention at the
time was to transfer his interest to Niece,FN3 he testified that he did not believe he ever signed the papers to make that transfer.
FN3. In lieu of a prenuptial agreement, Iraj testified that he planned to transfer “everything in [his] name” to members of
his family. This included his interest in his mother’s home and the surrounding land as well as his interest in AMBI. Iraj
testified that while he did transfer his interest in the home and land, his attorney told him it was unnecessary to transfer
his interest in the corporation, so those documents were never signed.
No document purporting to transfer any ownership interest was entered into evidence with Iraj’s signature on it. In fact, the only
FN4. We additionally note that it is a crime for a person to “sign [ ] a document he knows is false in any material respect
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 627
… with intent that the document be delivered to the Secretary of State for filing.” S.C.Code Ann. § 33-1-290(a) (2006).
[7][8][9][10] Further, we find the brothers are estopped from denying the facts set forth in the document. “The doctrine of estop-
pel applies if a person, by his actions, conduct, words, or silence which amounts to a representation, or a concealment of material
therefore, not seek the help of an attorney to secure his interest in the business. Iraj did in fact rely on this representation and took
no further legal actions. Thus, the brothers are estopped to deny Iraj held a 25% ownership interest in AMA.
II. Timeliness of the Actions
Finding Iraj owned a 25% interest in AMA, we must address the timeliness of this action. The brothers claim Iraj’s actions for
corporate dissolution and an accounting are barred as untimely by the equitable doctrine of laches. The brothers also argue the
equity will ordinarily refuse to enforce those rights.” Id.“The party asserting laches has the burden of showing negligence, the
opportunity to act sooner, and material prejudice.” Richey v. Dickinson, 359 S.C. 609, 612, 598 S.E.2d 307, 309 (Ct.App.2004).
This Court has wide discretion to determine what constitutes an unreasonable delay. Chambers of S.C., Inc., 315 S.C. at 421, 434
S.E.2d at 280. However, “[d]elay *320 alone in the assertion of a right, without injury to the adversary, does not constitute lach-
es.” Gibbs v. Kimbrell, 311 S.C. 261, 269, 428 S.E.2d 725, 730 (Ct.App.1993).
port a finding that Iraj is entitled to $91,031.28 for his 25% interest in the proceeds of the sale of AMA; and (2) the evidence does
not support an award of lost cash distributions to Iraj. We agree in part.
[16][17] The master has considerable discretion regarding the amount of damages, both actual and punitive. Collins Entm’t Corp.
v. Coats & Coats Rental Amusement, 355 S.C. 125, 138, 584 S.E.2d 120, 127 (Ct.App.2003). If evidence in the record supports
the award for actual damages, this Court will only review the award for errors of law. Austin v. Specialty Transp. Servs., Inc., 358
willing seller, neither being under compulsion to buy or sell….”); Reid v. Reid, 280 S.C. 367, 373, 312 S.E.2d 724, 727
(Ct.App.1984) (stating the generally accepted definition of fair market value is the amount a willing but not obligated buyer
would pay to a willing but not obligated seller). As to a business interest, “[t]he fair market value … can often be determined
simply by examining its market price.” Estate of Godley v. C.I.R., 286 F.3d 210, 214 (4th Cir.2002). When a business does not
have a ready market for its shares or a sale has yet to take place, courts will generally consider and weigh multiple factors such as
“inventory, accounts payable and receivable, and other legitimate assets or liabilities.”**754 Brandi, 302 S.C. at 357, 396 S.E.2d
at 126. In the current case, however, the business has already been sold in an arm’s length transaction.
At trial, different values of AMA were presented. It was shown that the brothers purchased a 1/3 interest in AMA from Ahmad
for $120,000. Prior to selling AMA’s assets to Ganesh, the property was listed for $447,500. Ganesh later purchased the property
for $345,000. From these various values, the master determined AMA’s fair market value to be $396,250, which was the average
between the listing price and the sale price. We find this valuation improper.
ducted from the business’ value, there was insubstantial evidence presented to support this claim. In fact, the master noted that
there were no promissory notes, receipts, or cancelled checks showing loans by the brothers to AMA. Therefore, the master found
the only deduction to be taken amounted to $32,124.89, of which $8,031.22 was allocated to Iraj for his 25% interest in the busi-
ness. This deduction brings Iraj’s interest to $78,218.78. Because we find only the master’s valuation of AMA to be improper, we
affirm the master’s award of damages but modify the amount to reflect the fair market value of Iraj’s ownership interest as
Based on these two figures, Rawl calculated AMA’s unreported sales to be $280,803. The master then found Iraj was entitled to
25% of these unreported sales, which amounted to $70,200.75.
[22] Additionally, Iraj testified it had been the business practice of AMBI for each shareholder to take approximately $180 per
day from the business as “pick–up” money. To support the contention that this practice continued with AMA, Rawl examined
AMA’s sales and expense summaries from 2003. Rawl noted that while sales and purchases were similar to past years, in 2003
CHAPTER 40: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 629
without Iraj’s knowledge or consent in May 2003. Iraj then filed his initial complaint in July 2004 and his amended complaint in
August 2005. Because the act of selling the business to a third party was the main basis for the master’s finding of a breach of
fiduciary duty, we find the claim was filed in a timely manner.
[24][25][26] An action for breach of fiduciary duty is an action at law. Jordan, 362 S.C. at 205, 608 S.E.2d at 131. Consequently,
this Court must uphold the master’s findings unless they are without evidentiary support. Id. An award of punitive*324 damages
is left almost completely to the discretion of the jury and trial judge because the trial judge was able to hear all of the evidence
(1) defendant’s degree of culpability; (2) duration of the conduct; (3) defendant’s awareness or concealment; (4) the existence of
similar past conduct; (5) likelihood the award will deter the defendant or others from like conduct; (6) whether the award is rea-
sonably related to the harm likely to result from such conduct; (7) defendant’s ability to pay; and finally, (8) … other factors
FN5. We additionally note a party may be personally liable for false statements made in filed records pursuant to
S.C.Code Ann. § 33-44-209 (2006) which states: “If a record authorized … to be filed under this chapter contains a false
statement, one who suffers loss by reliance on the statement may recover damages for the loss from a person who signed
the record … and knew the statement to be false at the time the record was signed.”
Additionally, the master properly considered the Gamble factors when determining the appropriate amount to be awarded, and the