48 N.Y.2d 684 (1979)

Absent looting, conversion of a corporate opportunity, fraud, or bad faith, a controlling stockholder can sell their controlling interest at a premium, without necessarily sharing that premium with minority shareholders.

Summary

Zetlin, a minority shareholder in Gable Industries, sued Hanson Holdings, which owned a controlling share (44.4%), for selling their shares to Flintkote at a premium. Zetlin argued minority shareholders were entitled to share in the premium. The court ruled that controlling shareholders are generally free to sell their shares at a premium, absent evidence of corporate looting, conversion, fraud, or bad faith. The court reasoned that imposing a requirement to share premiums would fundamentally alter corporate control transfers, essentially mandating tender offers, a change best left to the legislature.

Facts

Plaintiff Zetlin owned about 2% of Gable Industries’ shares. Defendants Hanson Holdings and Sylvestri owned 44.4% of Gable’s shares, representing effective control. The defendants sold their shares to Flintkote Co. for $15 per share. At the time of the sale, Gable stock traded on the open market for $7.38 per share. The 44.4% stake acquired by Flintkote represented effective control of Gable.

Procedural History

The lower courts ruled in favor of the defendants, upholding the right of the controlling shareholder to sell their shares at a premium. The case reached the New York Court of Appeals, which affirmed the lower court’s decision.

Issue(s)

Whether minority shareholders are entitled to an opportunity to share equally in any premium paid for a controlling interest in the corporation.

Holding

No, because controlling shareholders have a right to sell their shares at a premium, absent looting, conversion of a corporate opportunity, fraud, or other acts of bad faith. This right stems from the inherent value of controlling the corporation’s direction.

Court’s Reasoning

The court based its decision on the principle that those who invest to acquire a dominant ownership position have the right to control the corporation. The court stated, “Recognizing that those who invest the capital necessary to acquire a dominant position in the ownership of a corporation have the right of controlling that corporation, it has long been settled law that, absent looting of corporate assets, conversion of a corporate opportunity, fraud or other acts of bad faith, a controlling stockholder is free to sell, and a purchaser is free to buy, that controlling interest at a premium price.” The court acknowledged the need to protect minority shareholders from abuse by controlling shareholders but emphasized that minority shareholders are not entitled to inhibit the legitimate interests of other stockholders. The court also recognized that a premium reflects the added value of influencing the corporation’s affairs. To mandate that controlling interests be transferred only through offers to all stockholders would represent a radical change to existing law, which should be effected by the legislature, not the courts.