New York Law Review

Tag: breach of duty

  • Abrams v. Donati, 66 N.Y.2d 951 (1985): Distinguishing Individual vs. Derivative Claims in Shareholder Lawsuits

    Abrams v. Donati, 66 N.Y.2d 951 (1985)

    A shareholder does not have an individual cause of action for wrongs against a corporation, even if they lose the value of their investment, unless the wrongdoer breached a duty owed to the shareholder independent of any duty to the corporation.

    Summary

    This case clarifies the distinction between individual and derivative claims in shareholder lawsuits. The plaintiff, a shareholder and former president of Donrico, Inc., sued the defendants, alleging a conspiracy to terminate his employment and depress the value of his stock. The court held that the plaintiff’s claims were primarily derivative, alleging harm to the corporation, not individual harm distinct from that suffered by other shareholders. Because the plaintiff did not demonstrate a breach of duty owed directly to him, his individual cause of action was properly dismissed.

    Facts

    Plaintiff Abrams was a shareholder and the president of Donrico, Inc.
    The defendants allegedly conspired to terminate Abrams’ employment as president.
    The alleged conspiracy also aimed to depress the value of Donrico’s stock.
    The purpose of depressing the stock value was to allow the corporation to acquire the stock at a depreciated price under a shareholders’ agreement.
    Abrams alleged that the defendants diverted corporate assets by padding expenses and fraudulently reducing the price of Donrico’s products to a corporate purchaser owned by one of the conspirators.

    Procedural History

    Abrams brought an action against the defendants alleging individual and derivative claims.
    Abrams discontinued his second cause of action which sought damages for wrongful termination of his employment contract.
    The lower court dismissed Abrams’ first cause of action.
    The Appellate Division affirmed the dismissal, and the Court of Appeals affirmed the Appellate Division’s judgment.

    Issue(s)

    Whether a shareholder can bring an individual cause of action for wrongs allegedly done to the corporation, where the shareholder claims the wrongs resulted in the termination of their employment and a depression in the value of their stock.

    Holding

    No, because the allegations of mismanagement and diversion of assets primarily plead a wrong to the corporation, for which a shareholder may sue derivatively but not individually, unless the wrongdoer breached a duty owed to the shareholder independent of any duty owing to the corporation.

    Court’s Reasoning

    The court relied on the established principle that a shareholder generally lacks an individual cause of action for wrongs done to the corporation. The court cited Citibank v. Plapinger, noting a shareholder has no individual cause of action for a wrong against a corporation, even if he loses the value of his investment.
    The Court acknowledged exceptions where the wrongdoer breached a duty owed to the shareholder independent of any duty owing to the corporation, citing General Rubber Co. v. Benedict and Hammer v. Werner as examples.
    The court emphasized that allegations of mismanagement or diversion of assets, without more, plead a wrong to the corporation, requiring a derivative suit. The court stated, “[A]llegations of mismanagement or diversion of assets by officers or directors to their own enrichment, without more, plead a wrong to the corporation only, for which a shareholder may sue derivatively but not individually.”
    The court found that Abrams’ complaint confused derivative and individual rights, warranting dismissal. The court explained that there was “no claim that plaintiff sustained a loss disproportionate to that sustained by Donrico, or that defendants breached an independent duty owed plaintiff…”
    The court also considered the fact that Abrams had discontinued his second cause of action, which sought damages for the wrongful termination of his employment contract. The court noted that the Appellate Division’s failure to grant leave to replead was appropriate, especially since the claim against Houbigant, Inc., had already been dismissed on the ground that it alleged wrongs to Donrico resulting in a proportionate decrease in the value of plaintiff’s stock, which afforded him no right to individual relief. This highlights the court’s focus on whether the harm was primarily to the corporation or distinctly to the shareholder.

  • Matter of General Host Corporation, 30 N.Y.2d 262 (1972): Validity of Corporate Elections and Shareholder Rights

    Matter of General Host Corporation, 30 N.Y.2d 262 (1972)

    A corporate election will not be overturned due to an individual wrong to a shareholder unless it is shown that the outcome of the election would have been different had the wrong not occurred; mere misrepresentations are insufficient.

    Summary

    This case addresses whether a corporate election should be invalidated when a significant shareholder (Goldfield) was denied the opportunity to vote due to a breach of duty by the corporation (General Host) acting as a pledgee, and when other shareholders received incorrect information about the voting rights of those shares. The court held that while General Host may have wronged Goldfield, the election was valid because there was no evidence that the outcome would have been different had the wrong not occurred, or that other shareholders were materially misled.

    Facts

    Goldfield beneficially owned 16.7% of General Host’s outstanding common stock, which was pledged to Union Bank of Los Angeles. General Host acquired the notes secured by the pledge. General Host transferred the shares into its name as pledgee after Goldfield allegedly defaulted, but did not notify Goldfield of this transfer. As a result, Goldfield did not receive notice of the annual meeting. Proxy materials indicated that Goldfield’s shares were pledged and might not be voted if a default was called or an option to purchase was exercised. General Host later sent a notice of default to Goldfield and informed shareholders that Goldfield’s shares could not be voted, without disclosing the earlier transfer of record title. Goldfield attended the meeting but was not allowed to participate as a representative.

    Procedural History

    Goldfield petitioned to annul the corporate meeting and set aside the election of directors. The Supreme Court initially heard the case. The Appellate Division’s order, presumably affirming the lower court’s decision upholding the election, was appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the corporate election should be annulled because Goldfield, a beneficial owner of a substantial number of shares, was not given notice of the meeting.

    2. Whether the corporate election should be annulled because proxy materials contained misrepresentations about Goldfield’s right to vote its shares.

    3. Whether General Host’s breach of duty to Goldfield as a pledgee warrants overturning the election, even if the misrepresentations did not affect shareholders at large.

    Holding

    1. No, because Goldfield was not the owner of record on the record date and therefore was not entitled to notice.

    2. No, because other shareholders were not misled by the alleged misrepresentation; Goldfield made no attempt to solicit proxies or propose an alternative slate of directors.

    3. No, because despite the wrong done to Goldfield, there was no possibility of a different result in the election.

    Court’s Reasoning

    The court reasoned that while failure to provide proper notice generally renders an election void, Goldfield was not the record owner on the record date and therefore wasn’t entitled to notice. The court acknowledged that it *could* look beyond record ownership in some cases, but not here. The court emphasized that an election will not be overturned for just *any* misrepresentation. Instead, courts should consider the materiality of the misrepresentation, the completeness of other available information, and the likelihood that shareholders might have voted differently. The court quoted Matter of Hoe & Co. stating, “Even assuming there were misstatements or concealments, the election may not be set aside unless the court concludes further that the result would have been different had no such improprieties been injected into the proxy campaign, or that an inequitable result has been thereby produced”.

    Even though General Host wronged Goldfield by failing to notify them of the record transfer (preventing Goldfield from obtaining a proxy), this individual wrong did not justify a new election. Goldfield never attempted to solicit proxies or propose an alternative slate of directors. Management controlled 60% of the vote by the meeting date. The court noted, “There being no possibility of a different result, whatever wrong was done to Goldfield as an individual shareholder does not justify holding a new election, with all the practical problems entailed.” The court referenced the pledgee’s duty to issue a proxy to the pledgor upon demand (Business Corporation Law, § 609, subd. [d]). However, this duty did not change the outcome because of Goldfield’s inaction and management’s control of the vote.