Fender v. Prescott, 101 A.D.2d 418 (N.Y. App. Div. 1984)

The execution of a buy-sell agreement does not automatically release a shareholder, officer, or director of a close corporation from their fiduciary duty not to usurp a viable corporate opportunity of which they became aware in their corporate capacity.

Summary

This case addresses whether a buy-sell agreement automatically releases a corporate fiduciary from the duty not to usurp corporate opportunities. Prescott, a shareholder, officer, and director of National Cold Storage Co., sought summary judgment, arguing that a buy-sell agreement with Fender absolved him of liability for allegedly taking corporate opportunities. The court held that the buy-sell agreement did not automatically release Prescott from his fiduciary duty. The court found triable issues of fact existed regarding the viability of National’s potential acquisition of Merchant’s Refrigerating Co. and Prescott’s acquisition of National Gypsum Company’s Gold Bond Division.

Facts

Prescott was a shareholder, officer, and director of National Cold Storage Co. (National). While serving in that capacity, he became aware of potential acquisition opportunities for National, specifically Merchant’s Refrigerating Co. and National Gypsum Company’s Gold Bond Division. Fender and Prescott entered into a buy-sell agreement regarding the stock of National. Prior to the execution of the buy-sell agreement, Prescott acquired National Gypsum Company’s Gold Bond Division. After the buy-sell agreement, it was alleged that Prescott co-opted the opportunity to acquire Merchant’s Refrigerating Co.

Procedural History

The trial court denied Prescott’s motion for summary judgment. Prescott appealed to the Appellate Division of the Supreme Court, which affirmed the trial court’s decision.

Issue(s)

1. Whether the execution of a buy-sell agreement between shareholders of a close corporation automatically releases a shareholder, officer, and director from their fiduciary duty not to usurp a viable corporate opportunity of which they became aware in such capacities.

2. Whether National Cold Storage Co.’s primary business of purchasing and operating cold storage facilities precluded it from entering into other fields, thus negating a corporate opportunity regarding the acquisition of National Gypsum Company’s Gold Bond Division.

Holding

1. No, because the buy-sell agreement does not automatically release a corporate fiduciary from the obligation not to co-opt a viable corporate opportunity of which they became aware in their corporate capacity. There was a triable issue of fact as to the viability of National’s negotiations for acquiring Merchant’s Refrigerating Co.

2. No, because the affidavits established that National negotiated for the acquisition of businesses widely diverse from cold storage. Therefore, triable issues of fact existed as to that acquisition as well.

Court’s Reasoning

The court reasoned that a buy-sell agreement, while defining the terms of stock transfer, does not inherently waive the fiduciary duties owed by officers, directors, and shareholders in a close corporation, particularly concerning the corporate opportunity doctrine. The court emphasized that the duty not to co-opt corporate opportunities continues until explicitly waived. The court stated, “Execution of a buy-sell agreement between plaintiff and defendant with respect to the stock of National Cold Storage Co., Inc., did not automatically release defendant from his obligation as a shareholder, officer and director of that close corporation not to co-opt a viable corporate opportunity of which he became aware in such capacities.”

Regarding the acquisition of National Gypsum Company’s Gold Bond Division, the court found that National’s business was not so narrowly defined as to preclude it from pursuing other acquisitions. The court highlighted that National had engaged in negotiations for businesses diverse from cold storage, which created a triable issue of fact regarding whether the Gold Bond Division acquisition constituted a corporate opportunity. This suggests the scope of a corporation’s business activities, for corporate opportunity purposes, is determined by what it actually does and what it credibly plans to do. The court reasoned that just because the company engaged in purchasing and operating cold storage facilities does not preclude its entry into other fields.