Schwartz v. Marien, 37 N.Y.2d 487 (1975)
Corporate directors owe a fiduciary duty to treat all shareholders fairly and evenly, and any departure from uniform treatment requires a bona fide business purpose that outweighs the shareholder’s interest, especially in closely held corporations.
Summary
Plaintiff, a shareholder in a closely held corporation, sued the defendant directors for breach of fiduciary duty after they sold treasury stock to themselves and other employees without offering her the opportunity to purchase shares proportionally. The court held that while preemptive rights do not automatically apply to treasury stock, directors still owe a fiduciary duty to treat all shareholders fairly. The court found sufficient evidence to raise issues of fact regarding whether the stock sale served a legitimate corporate purpose or unfairly disadvantaged the plaintiff, precluding summary judgment.
Facts
Superior Engraving Co., Inc. was initially owned equally by three individuals: Smith, Marien, and Dietrich. Smith died, and the corporation bought back his shares, holding them in treasury. After Marien’s death, his shares were divided among his widow and sons. Following Dietrich’s death, his daughter, Schwartz (the plaintiff), inherited his shares. The Marien brothers, acting as directors, then sold five shares of treasury stock to themselves and two long-time employees, effectively securing control of the corporation by a single share. Schwartz was not offered the chance to buy shares. She offered to buy five shares at the same price, but her offer was rejected.
Procedural History
Schwartz sued to enjoin a shareholders meeting and alleged conspiracy and fraud. The Supreme Court denied cross-motions for summary judgment. The Appellate Division affirmed, with one dissenting Justice. The New York Court of Appeals affirmed the Appellate Division’s decision, holding that issues of fact existed that required a trial.
Issue(s)
Whether the defendant directors breached their fiduciary duty to the plaintiff shareholder by selling treasury stock to themselves and other employees without offering the plaintiff a proportional opportunity to purchase, thereby shifting corporate control.
Holding
No, because the existing record raises questions of fact as to whether the directors acted in good faith and for a legitimate corporate purpose, necessitating a trial to resolve these issues. The Court of Appeals answered the certified question in the affirmative, affirming the lower court’s decision.
Court’s Reasoning
The court emphasized that directors owe a fiduciary duty to shareholders, requiring fair and even treatment. While preemptive rights to treasury stock may not exist by statute, the fiduciary duty remains. The court cited Hammer v Werner, 239 App Div 38 and Kavanaugh v Kavanaugh Knitting Co., 226 NY 185. The court stated, “Apart from any preemptive or preferential rights which stockholders may have, they have additional rights with respect to the issuance of authorized but unissued stock and to shares which the corporation has acquired and carries in its treasury, which arise out of the fiduciary or trust relation which directors and officers sustain to stockholders”. A departure from uniform treatment is permissible only if justified by a bona fide business purpose that serves the corporation’s best interests. The burden of proving such justification lies with the directors, especially when they benefit themselves. The court noted that the disturbance of equality of stock ownership in a closely held corporation requires special justification. “Good faith or bad faith as the guide or the test of fiduciary conduct is a state or condition of mind — a fact — which can be proved or judged only through evidence”. The court determined that the case should proceed to trial to determine the directors’ motives and whether a legitimate corporate purpose existed.