Lawton v. Nyman

United States Court of Appeals
For the First Circuit

Nos. 02-1371, 02-1407

JUDITH A. LAWTON; THOMAS LAWTON; MARSHA E. DARAS; STEPHEN H.
LAWTON; NANCY LAWTON CRONIN; DAVID T. LAWTON; T. MICHAEL LAWTON;
JOANNA J. LAWTON; SUZANNE M. LAWTON,

Plaintiffs, Appellees/Cross-Appellants,

v.

ROBERT NYMAN; KEITH JOHNSON; KENNETH NYMAN,

Defendants, Appellants/Cross-Appellees,

NYMAN MANUFACTURING CO.,

Defendant, Cross-Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

[Hon. Ernest C. Torres, U.S. District Judge]

Before

Selya, Circuit Judge,
Stahl, Senior Circuit Judge,
and Lynch, Circuit Judge.

Robert Corrente with whom Brian C. Newberry and Hinckley,
Allen & Snyder LLP were on brief for appellants.

Karen Pelczarski with whom Staci L. Kolb and Blish & Cavanagh,
LLP were on brief for appellees.
April 29, 2003
 LYNCH, Circuit Judge. Following trial, the district

court found officers and directors with voting control of a closely

held family corporation, Nyman Manufacturing Co., to be in breach

of their state law fiduciary duties to minority shareholders whose

shares the three had caused the corporation to redeem without

making adequate disclosures. Robert Nyman, Kenneth Nyman, and

Keith Johnson were held jointly and severally liable to nine Nyman

family members for the total sum of $2,096,798.50, which was,

roughly, the value of those shares at the time of the sale of the

Nyman corporation to a strategic buyer some sixteen months later,

following the redemption of their shares. The court also awarded

prejudgment interest under state law at the rate of 12 percent from

May 30, 1996, the date the plaintiffs sold their shares.

The three defendants appeal, on the basis that the

liability finding of breach of fiduciary duty was error in that

the non-disclosed information was not material. They also argue

the court erred in its award of damages and as to the date on which

prejudgment interest started to run. The plaintiffs cross-appeal,

find fault with the damages, and argue they were entitled to more.

We affirm the liability finding and remand for further

proceedings on the appropriate measure of damages.

I.

Nyman Manufacturing Company was a closely held, fourth-

generation family-owned company in Rhode Island that manufactured

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paper and plastic dinnerware. Robert Nyman, the President and CEO

of the company, and his brother Kenneth, the Vice-President of

Manufacturing, had worked in the business their entire adult lives.

There were two classes of company stock: Class A shares,

which were non-voting, and Class B shares, which were voting stock.

The company's articles of incorporation authorized 13,500 shares of

Class A stock and 1,500 shares of Class B stock. Traditionally,

one or two family members owned all of the Class B stock, while the

Class A shares were dispersed throughout the family. No dividends

were ever paid on either class of stock. Robert and Kenneth Nyman

had each inherited 375 shares of the Class B voting stock from

their uncle; this was the entirety of the issued Class B stock.

Because they were the controlling shareholders, we refer to them as

the majority shareholders of the company. In the beginning of

1995, there were 8,385 shares of Class A stock outstanding. Judith

Lawton, the sister of Robert and Kenneth, owned Class A stock, as

did her husband and eight children. The Lawtons together owned 952

Class A shares. The children of Robert and Kenneth together owned

another 140 Class A shares. Beverly Kiepler, another Nyman

sibling, and her daughter together owned 700 Class A shares. The

Magda Burt Estate controlled 2,256 Class A shares, and the Walfred

Nyman Trust controlled 1,677 Class A shares.

The company teetered on the verge of bankruptcy in the

late 1980s. In 1991, the company's performance again began to

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suffer. In 1994, after three consecutive years of losses, the

company hired Keith Johnson, a specialist in turning around and

then selling companies, as a consultant. Johnson was made the

Chief Financial Officer and Treasurer in August 1994, and his

liability stems from his position as an officer.1 He was promised

an equity share of the company if he could revive the company's

flagging profits.

By the spring of 1995, it appeared that the fortunes of

the ailing company were being reversed. Earlier, in the fiscal

year ending March 25, 1995, the company reported a profit of nearly

$1.6 million, in vivid contrast with its past losses. On April 3,

1995, the company granted Johnson 1,000 options to buy Class A

stock at $145.36 a share. This price was equal to eighty percent

of book value; no effort was made to ascertain the actual market

value of the stock, as required by the bylaws.2 In the words of

the district court, at this time "the prospect of a future sale of

the company to a strategic buyer was, at most, nothing more than a

remote possibility."

In July 1995, after a series of discussions, the company

offered to redeem 2,256 shares from the Magda Burt Estate. On

1
For convenience sake, we refer to the three defendants using
the term majority shareholders although Johnson did not hold Class
B voting shares and purchased Class A shares later.
2
The district court found that the award of options to
Johnson, who had accepted a lesser salary in exchange for an equity
share, was not improper.

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November 6, 1995 the Burt shares were redeemed for $145.36 per

share. That price represented eighty percent of the $180 book

value of the stock in April 1995. The price was not pegged to the

higher November 1995 book value of $312.02 a share.3 After probate

court approval, the estate accepted and the deal closed on November

6, 1995. That same day, the Board, which now consisted of Johnson,

Robert and Kenneth, issued options to these three to buy the same

number of shares as those redeemed, at the same price, $145.36 a

share. Robert received 1,128 options, while Kenneth and Johnson

received 564 options each.

In January 1996, the company also offered to redeem the

shares held by the Walfred Nyman Trust. The offer was again for

$145.36 a share. By that time, the book value had risen to $318.59

a share. One of the beneficiaries of the trust, Beverly Kiepler,

withheld agreement, and the offer was abandoned.

The company's fiscal year ended on March 29, 1996. The

unaudited financials showed a profit of $3.5 million and a

quadrupling of shareholder equity. Although it is true that much

of the profit came from non-recurring items, it is also true that

the three defendants, sitting as the Board, adopted deferred

3
Under Rhode Island law, book value is not necessarily the
fair value of a share. Egan v. Wirth, 58 A. 987, 992 (R.I. 1904).
Since defendants pegged the option price to book value, we continue
to use it to keep comparisons in like format.

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compensation plans for themselves which had a total value of $2

million.

They also decided to hire a consultant and, at the March

20, 1996 annual meeting, authorized Johnson to begin to interview

candidates. Although the defendants dispute that their intent was

for the consultant to help them sell the company, the district

court permissibly inferred, from the evidence at trial, that such

was their purpose. This inference was based, inter alia, on the

contents of the retention letter with the consultant eventually

hired, Shields & Co., dated in August 1996, which was, in turn,

based on an earlier meeting. That letter made clear that Shields

would offer services including:

1. strategic issues as they relate to the long-term
value of Nyman;
2. operational issues to maximize Nyman's position
in the future in the eyes of a potential
acquirer;
3. the specific dynamics of the merger and
acquisition market;
4. assist you in responding to the numerous
acquisition inquiries when appropriate . . . .

None of this information was disclosed to the minority

shareholders. There is evidence, not specifically referred to by

the district court, that by May 1996 the three defendants were also

engaged in discussions, also undisclosed, to acquire other

companies. Those discussions did not lead to a merger or

acquisition.

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 In April 1996, Johnson, on behalf of the company, offered

to purchase 700 shares of Class A stock directly from Kiepler and

her daughter for $145.36 a share. By that point, shareholder

equity had risen to $576.40 per share. Johnson put Kiepler under

a false deadline, saying that the bank waivers which would permit

the purchase would expire on May 1, 1996. This was untrue: no

waivers had yet been secured. Kiepler declined the offer, based on

the low price.

On May 8, 1996, the company, over Johnson's signature,

sent letters to all Class A shareholders except Robert and Kenneth,

their spouses, and the Walfred Nyman Trust, offering to redeem

their shares for $200 per share. The letter said the following:

I would like to report to you some information
about Nyman Mfg. and a limited term opportunity that you
now have as a Nyman shareholder with [] shares of Class
A Non-Voting Stock.

As you know, the Company has had major "ups and
downs" over the past 10 years including 5 years in which
significant losses were experienced. In the two most
recent years, the Company's financial condition has
improved and its lending banks have agreed that limited
amounts of its common stock may be re-purchased. This is
an opportunity for shareholders who are interested in
achieving liquidity now.

Last November, the Company was able to re-purchase
certain shares of stock held by Rhode Island Hospital
Trust Bank as co-executor of Marge Burt's estate at a
price of $145.36 per share. Since that time, the Company
has received several inquiries from other minority
shareholders concerning their desire to sell their shares
of Nyman Mfg. Co. stock. In response to these inquiries,
the Company has negotiated with its lending banks to
allow it to offer to purchase additional shares of Nyman
stock at this time.

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 Given favorable economic factors and current
estimates of operating results, the Company is offering
to purchase all of your shares at a price of $200 per
share.

Since the Company cannot provide you with any
advice as to whether the sale of the stock by you is in
your best financial interest, we suggest that you discuss
this matter with your financial advisor. You should know
that these receipts will be subject to the appropriate
federal and state taxes and that you should consult with
a tax advisor, particularly with regard to your share of
any tax-loss carry-over from the Magda Burt estate which
may help to reduce any tax liability you may have.

Please indicate on the enclosed form your interest
in selling your [] shares back to the Company at the
offer price of $200.00 per share for a total value of [].
This offer will expire on May 22, 1996. The Company is
planning to complete this transaction with you within two
weeks after the receipt of your written acceptance of
this offer along with the receipt of your stock
certificates.

Several statements in the letter were not accurate. The

record shows that the impetus to redeem the shares came from the

company, not that the company made the offer in response to several

inquiries from other minority shareholders concerning their desire

to sell their stock. The record also shows that there was no bank-

imposed deadline of May 22, as the letter implied. One lender had

imposed no deadlines and the other had imposed a deadline of July

29. This phoney deadline of May 22 meant that the minority

shareholders had to decide whether to sell before the company made

its next audited financial statements available.

The next day, on May 9, 1996, Johnson reported to

Heller Financial, Inc. that Nyman's fiscal year-end profit was

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estimated to be $3.533 million, and he included a copy of Nyman's

unaudited FY 1996 financial statement. The unaudited financials

were not disclosed to plaintiffs, nor was the decision to retain a

consultant, nor was the fact that the defendants were in May

engaged in discussions to acquire other companies. The letter also

implied that the $200 a share price was based on "favorable

economic factors and current estimates of operating results," but

did not disclose what was meant by this. The stock price of $200

a share was based on neither current market value nor book value.

Defendants did not seek to have an appraisal done.

On May 10, Robert called Judith Lawton to ensure that she

had received the letter. He described the offer as a "once in a

lifetime" opportunity. He gave no further financial information

about the company's recent upturn or its plans.

Most of the Lawtons met on the evening of May 10 and,

after ruminating over the weekend, all of the Lawtons who held

stock in Nyman Manufacturing Co. agreed to sell their shares.

Judith, her husband Thomas, and seven of their children sold all of

their combined 952 shares back to the company on May 30, 1996 for

$200 a share; the children of Robert and Kenneth Nyman also sold

their 140 shares back to the company at $200 a share. Because this

stock was redeemed by the company, the redemption increased

defendants' share of the Class A stock.

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 On June 25, 1996, the company awarded Robert, Kenneth,

and Johnson options to purchase a total of 1,092 Class A shares.

This is the same as the number of shares redeemed by the company on

May 30. Robert received the right to purchase 432 shares, and

Kenneth received the right to purchase 330 shares, for $220 a

share.4 Johnson received the right to purchase 330 shares for $200

a share.

The officers also purchased all Class A and B shares in

the company treasury on June 25. For these they signed promissory

notes totaling $973,000 that called for interest payments to be

made commencing on June 30, 1997. Robert purchased 1,675 Class A

and 375 Class B shares; Kenneth purchased 1,250 Class A and 375

Class B shares; and Johnson purchased 1,190 Class A shares. Again,

there was no appraisal of shares.

By June 1996, the book value of the shares was $527.50.

The district court accepted the valuation of defendants' expert,

William Piccerelli, that in May and June 1996, the fair market

value of the company's stock was approximately $303 a share.

Johnson at some point discovered that the Van Leer

Corporation, a Dutch company whose subsidiary, Chinet, was a

competitor of Nyman Manufacturing, had funds available to acquire

other companies. In October 1996, Johnson discussed with Thomas

4
The stock option plan required majority shareholders to pay
110 percent of "fair market" value.

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Shields, a principal of Shields & Co., the possibility of a

strategic acquisition by Van Leer. These discussions between

Johnson and Shields & Co. continued in January 1997. In March

1997, Johnson met with representatives of Van Leer to discuss a

sale. Van Leer offered to purchase the company, and it signed a

letter of intent on June 25, 1997. The sale closed on September

29, 1997.

Van Leer purchased all of Nyman Manufacturing's stock for

$28,164,735.00. After deducting closing costs of $980.383.00, and

an escrow amount of $1,423,331.00, set aside to satisfy a potential

liability of the company, the net amount paid to shareholders was

$25,761,021.00. Some $1,667.38 was paid for each of the 13,500

Class A shares and options, and $2,167.59 was paid for each of the

1,500 Class B shares, 1.3 times the price of the Class A shares.

Van Leer asked that the stockholders' options not be exercised, and

in return, the options were bought as if they had been exercised.

A chronology is set forth at the end of the opinion.

II.

Judith and Thomas Lawton and seven of their eight

children filed suit against Robert and Kenneth Nyman, Keith

Johnson, and Nyman Manufacturing in the United States District

Court for the District of Rhode Island on May 22, 1998. They

alleged that the defendants were in breach of their fiduciary

duties and had committed securities and common-law fraud. The

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plaintiffs asserted that the redemption price they were paid for

their stock was less than the true value, that the defendants knew

that the company might be sold, and that they misrepresented and

failed to disclose material facts regarding, inter alia, the sale

of the company and the value of the stock.

A parallel suit was filed by Beverly Kiepler, the

beneficiary to the Walfred Nyman Trust who originally rejected the

sale of the trust's Class A shares, and her daughter, against

Robert, Kenneth and Johnson. She alleged that the defendants'

award of options to themselves, and their purchase of treasury

stock, diluted the stockholders' ownership interests.

After separate bench trials, the district court issued

two opinions on the same day. In the Kiepler case, the court found

that the purchase of treasury shares had constituted a breach of

fiduciary duty, but that the granting of options to purchase shares

was not in violation of that duty. Kiepler v. Nyman, No. 98-272-T,

2002 U.S. Dist. LEXIS 19630 (D.R.I. Jan. 17, 2002).5

In the Lawton case, the court found that the company's

purchase of the Lawtons' shares was a breach of common-law

fiduciary duty. However, the court dismissed the federal

securities law claims, finding that disclosure was not required

under the applicable statutes. It also found that the claim

against the granting of the options failed because it should have

5
The Kiepler case ultimately settled.

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been brought as a derivative shareholder action on behalf of the

corporation, and that the April 1995 grant to Johnson was, in any

event, not in breach of any duty. Lawton v. Nyman, No. 98-288-T,

2002 U.S. Dist. LEXIS 17398 (D.R.I. Jan. 17, 2002). The court held

that it was a breach of fiduciary duty for the defendants to have

purchased the treasury shares in June 1996, and accordingly

subtracted those shares in determining the value per share in

September 1997, but did not deduct the price defendants paid for

those shares from the valuation of the company. The Lawton

plaintiffs appealed the damages calculation and the dismissal of

their federal securities claim and their claim regarding the grant

of options; the defendants appealed the breach of fiduciary duty

finding and the damages award.

III.

We review the district court's legal conclusions de novo,

and its factual conclusions after a bench trial for clear error.

Walsh v. Walsh, 221 F.3d 204, 214 (1st Cir. 2000). We review

damages awards for abuse of discretion. Trull v. Volkswagen of

Am., Inc., 320 F.3d 1, 9 (1st Cir. 2002). An error of law is an

abuse of discretion. Seavey v. Barnhart, 276 F.3d 1, 9 n.8 (1st

Cir. 2001).

A. Breach of Fiduciary Duty Under Rhode Island Law

The defendants frame their challenge to the breach of

fiduciary duty finding by arguing that the district court failed to

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use the correct standard of materiality. They argue the district

court was required to use the same standard of materiality for both

the federal securities law claim, under Section 10b of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000), and the

state common-law fiduciary duty claim; the fact that the court

found on materiality grounds that there was no federal securities

law violation means, they argue, that it was error for the district

court to have found that there was a violation of state law

fiduciary duties.

Whatever doubts we have about the district court's

federal securities law analysis need not be resolved. There is no

need to explore whether there are significant differences between

the disclosure standards under Section 10b and the Rhode Island law

on fiduciary obligations owed among shareholders in closely held

family corporations. The parties agreed at oral argument that the

federal securities law claims have essentially dropped out of the

action. We do refer to federal securities law cases by analogy and

because Rhode Island law may look to them for guidance.

Defendants here stand in three intertwined capacities:

as directors, as officers, and, for Robert and Kenneth Nyman, as

majority shareholders of a closely held corporation. We consider

these capacities as a group for purposes of the analysis. For more

than a century, Rhode Island law has viewed directors of companies

as owing a fiduciary duty to the shareholders of the company.

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Olney v. Conanicut Land Co., 18 A. 181, 182 (R.I. 1889). It has

analogized the duties corporate officers owe to stockholders to

those of trustees. Point Trap Co. v. Manchester, 199 A.2d 592,

595-96 (R.I. 1964); Hodges v. Screw Co., 1 R.I. 312, 340-41 (1850).

Such a relationship is one of trust and confidence and
imposes the duty on the fiduciary to act with the utmost
good faith. That good faith requirement forbids action
on the part of a fiduciary without the knowledge and
consent of his cestui que trust when he has an individual
interest in the subject matter or when his interest is in
conflict with that of the person for whom he acts.

Point Trap, 199 A.2d at 596. Rhode Island law also provides that

directors of an insolvent corporation owe this fiduciary duty to

creditors. Olney, 18 A. at 182; see Ed Peters Jewelry Co. v. C &

J Jewelry Co., 51 F. Supp. 2d 81, 99 (D.R.I. 1999).

In A. Teixeira & Co. v. Teixeira, 699 A.2d 1383 (R.I.

1997), the court reiterated that corporate officers stand in a

fiduciary capacity and are liable if they take corporate

opportunities; if a small number of shareholders in a corporation

act as though they were partners, then they have a fiduciary duty

to each other as partners.6 Id. at 1386-88. The claim at issue

here involves, by contrast, breach of a duty to minority

shareholders.

6
In Tomaino v. Concord Oil of Newport, Inc., 709 A.2d 1016
(R.I. 1998), the court applied similar Massachusetts law as
developed under the Donahue doctrine. Id. at 1021 (citing Donahue
v. Rodd Electrotype Co. of New Eng., Inc., 238 N.E.2d 505, 515
(Mass. 1975)).

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 The Rhode Island Supreme Court has had no occasion to

expressly define the obligations owed by shareholders to each other

in a closely held family corporation. But in Teixeira the court

reiterated that "shareholders in a close held family corporation

may have a fiduciary duty toward one another." Id. at 1387 (citing

Estate of Meller v. Adolph Meller Co., 554 A.2d 648, 651-52 (R.I.

1989), and Fournier v. Fournier, 479 A.2d 708, 712 (R.I. 1984))

(emphasis added). The court noted that "the existence of such a

fiduciary duty is a fact-intensive inquiry" and that shareholders

could show by evidence, such as a stockholder's agreement, that no

such duty had been undertaken. Id.

The fiduciary duties of corporate directors, officers and

majority owners encompass a variety of different situations. See

generally P.M. Rosenblum, Corporate Fiduciary Duties in

Massachusetts and Delaware, in How to Incorporate & Counsel a

Business 293 (MCLE 2000); L.E. Mitchell, The Death of Fiduciary

Duty in Close Corporations, 138 U. Pa. L. Rev. 1675 (1990). Still,

defendants have essentially conceded that Rhode Island law would

recognize a fiduciary duty among shareholders in a closely held

family corporation and that it would be a heightened duty. We too

think that the Rhode Island Supreme Court would recognize such a

duty, at least in the absence of an express shareholder agreement

to the contrary.

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 This case involves the narrow question of the duties owed

by officers and directors, including those who are majority

controlling shareholders in a closely held corporation, to minority

shareholders when the defendants offer to buy, or have the

corporation redeem, the shares of minority shareholders. What

precise duties are owed in this situation is also a question on

which there is no direct precedent in Rhode Island law. Given

Rhode Island's rule that officers have a fiduciary duty, we think

Rhode Island is likely to adopt at least those duties required by

the common law "special facts" rule, as described by our sister

circuit:

Close corporations buying their own stock, like
knowledgeable insiders of closely held firms buying from
outsiders, have a fiduciary duty to disclose material
facts. . . . The "special facts" doctrine developed by
several courts at the turn of the century is based on the
principle that insiders in closely held firms may not buy
stock from outsiders in person-to-person transactions
without informing them of new events that substantially
affect the value of the stock. See, e.g., Strong v.
Repide, 213 U.S. 419, 29 S. Ct. 521, 53 L. Ed. 853
(1909), and the cases discussed in Comment, Insider
Trading at Common Law, 51 U. Chi. L. Rev. 838 (1984); cf.
Janigan v. Taylor, 344 F.2d 781 (1st Cir. 1965) . . . .

Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 435 (7th Cir. 1987).7

The Colorado Supreme Court applied the "special facts" rule in a

case factually similar to this:

7
Jordan draws a strong dissent from Judge Posner on the
liability finding based on the facts of the case. See 815 F.2d at
444 (Posner, J., dissenting). For a more general critique, see
D.A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation,
1988 Duke L.J. 879.

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 We hold, therefore, that it is a violation of a fiduciary
duty for an officer or director of a closed corporation
to purchase the stock of minority shareholders without
disclosing material facts affecting the value of the
stock, known to the purchasing officer or director by
virtue of his position but not known to the selling
shareholder.

Van Schaack Holdings, Ltd. v. Van Schaack, 867 P.2d 892, 899 (Colo.

1994). Again, defendants agree that under Rhode Island law there

is a duty to disclose material information to minority shareholders

faced with an offer by the close corporation, controlled by

majority shareholders, to purchase their shares.

The district court defined the standard for determining

materiality as follows: "When directors of a closely held

corporation are purchasing a minority stockholder's shares,

fiduciary duty imposes an obligation of 'complete candor' to

disclose 'all information in their possession 'germane' to the

transaction.'" (quoting F.H. O'Neal' & R.B. Thompson, O'Neal's

Close Corporations § 8.12, at 129 (3d ed. & Supp. 1995)). That is

a generally accepted standard and its use was appropriate. The

court found that under state law, negotiations for a sale need not

be underway for there to be a duty to disclose; the duty "also

encompasses transactions that the directors anticipate are

reasonably likely to occur or that are something more than remote

possibilities." The district court, in its finding that the

defendants were in breach of their fiduciary duties, focused on the

company's repurchase of the plaintiffs' stock for $200 a share in

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May 1996, when the defendants, as it found, had a realistic

expectation that Nyman Manufacturing might be sold.

The defendants argue that when a company is considering

the possibility of sale, the standard for materiality, even under

state law, requires something much more definite. Defendants cite

to Section 10b securities cases in support.8 See, e.g., List v.

Fashion Park, Inc., 340 F.2d 457 (2d Cir. 1965); James Blackstone

Mem'l Library Ass'n v. Gulf, Mobile & Ohio R.R., 264 F.2d 445 (7th

Cir. 1959). The cases they cite, however, do not apply federal

securities law to closely held corporations.

It seems to be commonly accepted that officers of close

corporations have a greater duty of disclosure about the possible

sale or merger of a company to minority shareholders than do

officers of a publicly traded corporation.9 See, e.g., Michaels v.

Michaels, 767 F.2d 1185, 1196-97 (7th Cir. 1985). One reason given

is that premature disclosure could itself do more harm than good in

a publicly traded market, because it could lead to inflation of the

8
The question of when directors and officers, under a
fiduciary duty, must disclose possible actions is one not
restricted to closely held corporation or even to the securities
laws. It also comes up under ERISA. See Vartanian v. Monsanto
Co., 131 F.3d 264, 272 (1st Cir. 1995) (finding a fiduciary duty of
disclosure when an employer fails to disclose its "serious
consideration" of whether to adopt a change in employee plan
benefits that would affect the plaintiff). Of course, there may be
different thresholds depending on context.
9
In its ruling on the federal securities law claim the
district court referred to a case involving public companies. See
Jackvony v. RIHT Fin. Corp., 873 F.2d 411 (1st Cir. 1989).

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stock price which might prevent the sale or merger. See Flamm v.

Eberstadt, 814 F.2d 1169, 1176 (7th Cir. 1987). In public

companies, there is also more of a need for a certain, clear rule

as to when disclosure is required. Id. at 1178; Greenfield v.

Heublein, Inc., 742 F.2d 751, 757 (3d Cir. 1984). As the Seventh

Circuit has recognized, those reasons disappear when, as here,

"there is no public market for a shareholder's stock." Michaels,

767 F.2d at 1196. In a close corporation the company need disclose

a decision to sell only to the person whose stock is to be acquired

and the company may extract promises of confidentiality. See

Jordan, 815 F.2d at 431.

Rhode Island law would, we think, similarly recognize a

heightened duty of disclosure in a close corporation setting by

officers who are majority shareholders with undisclosed

information, who are purchasing minority shares or causing the

corporation to do so. It would also, we think, impose an objective

rather than a subjective standard of materiality. See, e.g., TSC

Indus., Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976); see also

Jackvony v. RIHT Fin. Corp., 873 F.2d 411, 415 (1st Cir. 1989).

Materiality depends on all the circumstances. The

general rule under the securities laws is that when contingent or

speculative events are at issue the materiality of the events

"depends on the probability that the [event] will be consummated,

and its significance to the issuer of the securities." Basic Inc.

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v. Levinson, 485 U.S. 224, 250 (1988) (emphasis added). No single

factor is necessarily determinative of the materiality inquiry.

See id. at 239. Here there were only two possible types of buyers

for plaintiffs' shares -- the defendants (either directly or by

causing redemption of the shares) or an outside buyer looking to

acquire the company. Here the defendants did not disclose their

decision to work toward selling the company, their decision to hire

a consultant, or their acquisition talks in May with other

companies. Each is pertinent to the question of whether there was

an outside buyer for the shares.

The mere causing of a closely held corporation to offer

an inadequate price by majority shareholders to minority

shareholders is not itself sufficient to establish a breach. It

may be evidence, though, as to breach of other duties. And if a

majority shareholder violates his duties of disclosure and the

minority shareholder sells at an inadequate price, the minority

shareholder can seek damages based on the difference between the

offered price and the fair value of the stock. See Sugarman v.

Sugarman, 797 F.2d 3, 8 (1st Cir. 1986) (applying Massachusetts law

in freeze-out scenario).

If the finding of breach of fiduciary duty turned purely

on the definiteness of the plan to sell, this would be a difficult

liability issue. However, the case does not turn on that isolated

proposition, but instead on an interrelated series of non-

-22-
disclosures and misrepresentations. There is ample evidence to

support the district court's finding of breach of fiduciary duty.

As the district court held, the redemption of the

plaintiffs' stock represented a marked departure from the company's

previous lack of interest in purchasing stock. As the district

court also held, "Additional indications of the defendants'

suddenly strong and, otherwise, inexplicable interest in acquiring

more shares may be found in the urgency with which they sought to

redeem the Lawton and Kiepler shares as shown by the artificial

deadlines established for responses to the redemption offers."

The evidence supports the plaintiffs' theory that these

defendants engaged in a concerted, accelerating effort to buy up

the minority shareholders' stock, thus increasing the defendants'

ownership of the company, in anticipation of a sale of the company.

We understand the district court to have concluded that the non-

disclosure of the possibility of a sale was material, even at this

early stage, because it motivated the defendants' actions and was

information which would aid and be important to the plaintiffs in

evaluating the offer made.

There is more than adequate supporting evidence. There

was evidence defendants were willing to violate the bylaws in the

price set for options they acquired. Indeed, the district court

found the corporation had from 1995 embarked on a program to "re-

purchase shares of the Company in order to eliminate any

-23-
shareholders who are not active in day-to-day operations of the

Company." (internal quotations omitted). The district court found

that the defendants made the decision to redeem the minority shares

even though the company had a pressing need for cash and was laying

off workers to conserve funds. The district court reasonably

concluded that the explanation was that "on May 8, 1996, when the

defendants offered to buy back all of the plaintiffs' shares, they

anticipated that the company soon could be sold for much more than

the amounts that they paid for those shares."

Of course, with the May 1996 redemption offer the

plaintiffs knew that defendants (and their families) were

attempting to get sole ownership of the company. This might have

led a reasonable investor to ask why and to seek further

information. Still, this is not enough to render immaterial as a

matter of law the undisclosed and misrepresented information. In

all events, the district court's factfinding that there was a

violation is supportable.

Thus, the evidence reasonably can be interpreted to show

a scheme by defendants to obtain total ownership of the company for

less than fair value through a variety of devices, anticipating a

future sale. The devices fall into two general categories: first,

the failure to disclose that management had decided to try to sell

the company and, second, the withholding of other material

information as to the redemption and misrepresentation of other

-24-
information. For example, while defendants on May 9 thought it was

material to Nyman's lenders that they have the company's unaudited

financials, the defendants failed to disclose that information to

the plaintiffs. To effectuate this scheme, defendants pressured

plaintiffs to sell by imposing false deadlines, telling Judith

Lawton this was a "once in a lifetime opportunity," failing to

disclose financial information which would call into question the

adequacy of the price offered, and timing the offer so that

plaintiffs would not have the audited financial results while

defendants simultaneously disclosed financial results to lenders.

See Jordan, 815 F.2d at 434 (board's decision to seek a buyer

coupled with fact that one putative buyer considered company to be

worth $50 million sufficient to support a finding of materiality in

close corporation).

We find no clear error in the conclusion that this

totality of information would be germane and material to a selling

minority shareholder and we uphold the liability finding.

B. Damages

1. Theory of Damages Calculation

The district court's method of calculating damages in

this case is essentially a conclusion of law, to which we give full

review. See Wilson v. Great Am. Indus., Inc., 855 F.2d 987, 996

(2d Cir. 1988). In general, as the district court recognized,

where immediate rescission of the purchase is unavailable, there

-25-
are two different approaches to damages for non-disclosure by

majority shareholders in a closely held corporation, with

variations on both themes. The usual rule is to measure the

plaintiffs' loss by the difference in price between what they

received for their stock and its fair value at the time of sale.

See, e.g., Sugarman, 797 F.2d at 8 (applying Mass. law); Holmes v.

Bateson, 583 F.2d 542, 562 (1st Cir. 1978).

In appropriate cases, another approach, used in defrauded

seller cases under federal securities laws, is to require

defendants to pay over their wrongful profits in order to avoid

unjust enrichment of a wrongdoer. Janigan v. Taylor, 344 F.2d 781

(1st Cir.). In a case involving a violation to a defrauded seller

in a public company under § 28(a) of the Securities Act,

the correct measure of damages . . . is the difference
between the fair value of all the . . . seller received
and the fair value of what he would have received had
there been no fraudulent conduct, except for the
situation where the defendant received more than the
seller's actual loss. In the latter case damages are the
amount of the defendant's profit.

Affiliated Ute Citizens v. United States, 406 U.S. 128, 155 (1972)

(citing Janigan, 344 F.2d at 786); see Holmes, 583 F.2d at 562.

Under Rhode Island damages law, "The basic precondition

for the recovery of lost profits is that such a loss be established

with reasonable certainty. Although mathematical precision is not

required, the [trier of fact] should be provided with some rational

model of how the lost profits occurred and on what basis they have

-26-
been computed." Long v. Atl. PBS, Inc., 681 A.2d 249, 252 (R.I.

1996) (citations and internal quotation omitted). "We do not

require mathematical certainty in this calculation. All that is

required is that the court be guided by some rational standard."

Abby Med./Abbey Rents, Inc. v. Mignacca, 471 A.2d 189, 195 (R.I.

1984) (citation omitted). At the same time, damages awards may not

be based on speculation. MacGregor v. R.I. Co., 60 A. 761, 762

(R.I. 1905); see Thermo Electron Corp. v. Schiavone Constr. Co.,

958 F.2d 1158, 1166 (1st Cir. 1992). Finally, where breach of

fiduciary duty is involved, the Rhode Island courts have looked to

equity for appropriate remedial principles. See, e.g., Matarese v.

Calise, 305 A.2d 112, 119 (R.I. 1973). We caution that we are not

deciding federal securities law questions, but rather look to cases

involving the securities laws for guidance on how the Rhode Island

courts would address the question. The choice between these

remedies is within the discretion of the district court, but must

accord with proper legal principles. See Siebel v. Scott, 725 F.2d

995, 1002 (5th Cir. 1984).

a. Difference between price received and fair value
absent the breach of fiduciary duty

The district court used September 1997, when the company

was sold to Van Leer, as the relevant time to compute the

difference between the price received and the fair value. The

usual rule is that the fair value is to be determined as of the

time of the plaintiffs' sale. The district court departed from the

-27-
usual rule based on two rationales. First, the court thought "it

is reasonable to conclude that, if the possibility of a sale had

been disclosed, the plaintiffs would not have sold their shares for

$200 each; but, rather, would have held on to [their shares] in the

hope that the sale would take place." Second, it found that,

"Since, in May of 1996, it was not certain that Nyman Manufacturing

would be sold, it is impossible to calculate precisely the

strategic value of the plaintiffs' stock at that time. The best

indication of that value is [the sale price in September 1997]."

Neither rationale can be sustained on this record.

There are a number of problems with the rationale that

plaintiffs would have retained the stock over the next sixteen

months if the requisite disclosures had been made. None of the

plaintiffs testified to this effect, and there is no other evidence

from which this conclusion can be drawn. Moreover, it is

inconsistent with other findings the court made. The conclusion

itself does not establish whether the plaintiffs would have sold

had all the material information been provided. Further, it does

not establish whether plaintiffs, in possession of all material

information, would have sold if they had been offered $303 a share,

a price the district court determined to be the fair market value

in May 1996, or whether plaintiffs would have sought a premium, and

if so, what premium. And it does not establish whether defendants

would have proceeded with redemption at any of these higher prices.

-28-
Key subsidiary factual findings are simply absent; largely, we

suspect, because the parties neither produced the evidence nor

requested the findings.

There is no evidence in the record to support the

"conclusion" that "if the possibility of the sale had been

disclosed" in May 1996, the plaintiffs would have held their stock

until September 1997, some sixteen months later. The plaintiffs

never testified to this at all, despite the ease with which this

line of questioning could have been explored. Further, the factual

findings made do not support this theory. The district court noted

that plaintiffs had not bothered to seek additional financial

information or outside advice before they sold their stock in May,

that at least some of the plaintiffs had been exploring the

possibility of redemption for some time, that plaintiffs accepted

the offer two weeks before the deadline and within days after the

offer was made, and that the decision was reached over a weekend

after a family conference. These findings are more consistent with

the conclusion that the family members would have leapt at the

opportunity to sell in May 1996, especially at $303 a share, even

if told that management was considering a sale of the company and

in possession of the unaudited financials.

On appeal, the plaintiffs attempt to excuse their lack of

proof by referring to our decision in Ansin v. River Oaks

Furniture, Inc., 105 F.3d 745 (1st Cir. 1997), which upheld an

-29-
inference that the plaintiffs would not have sold their stock when

they did had they known about plans for an initial public offering

(IPO). Id. at 758. Plaintiffs overread Ansin. In that case, the

evidence showed at least one of the plaintiffs was initially

planning to hold his stock until the IPO but was pressured into an

early sale. Id. at 750-51. Further, there were actual sale

negotiations which had not been disclosed, and the defendants knew,

at the time they purchased the shares, that the preconditions for

an IPO had been met. The court inferred that plaintiffs would not

have deviated from their initial plan had they known about the

impending IPO. By contrast, here there was no evidence of the

plaintiffs' investment goals or how they would have responded to

news of the potential sale of the business.

Plaintiffs' rejoinder in their briefs is that of course

they would have held on to their stock in May 1996 had they known

what their shares would have been worth when the company was sold

to Van Leer. The argument very much misses the point. No one knew

in May 1996 that the company would be sold in September 1997 for a

per share value of about nine times what the plaintiffs were paid.

The damages must be tied somehow to the information withheld or

misrepresented. The information withheld was not that the company

would in fact be sold to a strategic buyer some sixteen months

later, much less at that price.

-30-
 This theory that plaintiffs would have held on to their

stock is also inconsistent with the district court's conclusion

that, "Although it is fairly clear that by May 8, 1996, the

defendants anticipated the possibility that Nyman Manufacturing

would be sold, there is no indication that, at the time, a sale was

anything more than a mere possibility."10 Nothing in the record

establishes that a mere possibility of sale of the company would

have led plaintiffs to retain their stock. That is particularly so

if they had been offered $303 a share in May 1996, the fair market

value the district court accepted as true through Piccerelli's

expert testimony.

We also reject the district court's second rationale --

that the sale price of the corporation some sixteen months later in

1997 represented a reasonable proxy for the market value of the

shares in May 1996. No evidence supports this conclusion, and it

is clearly erroneous. Indeed, several of the district court's

other findings undercut its conclusion. The court found, as noted,

that the fair market value of minority-held Class A stock in May

1996 was $303 a share. It found that while there could be a

premium over market value for a strategic sale of the company,11

10
The district court also later used the phrase "distinct
possibility."
11
It is not clear whether the fair market value of the stock
in May 1996, $303 a share, assumed disclosure of the possibility of
a sale. The district court at times seems to refer to an
additional strategic sale bonus to the value of the stock if the

-31-
there was, as of May 1996, no likelihood of a sale, only a "mere

possibility." Finally, the district court rejected the testimony

offered by the plaintiffs' expert, Steven Carlson, for a number of

appropriate reasons, including his lack of training and education,

the inconsistency of his methods with generally accepted methods of

business valuation, and miscalculations.

Piccerelli, whose testimony the district court accepted,

testified to a fair market value of $303 for a single share of non-

voting company stock in May 1996. He defined fair market value as

the amount at which property would change hands between a willing

seller and a willing buyer when neither is acting under compulsion

and when both have knowledge of the relevant facts. He

acknowledged that there were different methodologies available and

was cross-examined on his choice. He was also cross-examined on

his experience with valuing companies and on the total value he

assigned the company for May 1996 of $6,800,000. Piccerelli was

asked about whether the Van Leer sale undermined his confidence in

the numbers, and he said it did not.

Using different figures, both sides' experts said two

discounts had to be taken into account in valuing a single share of

the company in May 1996: a marketability discount and a minority

"mere possibility" of a sale had been disclosed, on the assumption
that any sale would be a strategic sale. This topic was not
directly addressed by the evidence and there is no finding on the
point.

-32-
discount. By definition, a sale of an entire company will not

involve any minority share or marketability discount, further

undercutting the district court's assumption of equivalence between

the May 1996 and September 1997 values.12 There is a notable

absence of expert or other evidence in support of any assumption

that the "mere possibility" of sale would have increased the fair

market value in May 1996 by adding a premium. We discuss the

premium issue further below.

b. Avoidance of Windfall to Wrongdoer and Award of
Defendants' Profits

There is another possible theory of recovery, first

articulated in this court in Janigan: awarding plaintiffs whatever

profits the fraudulent buyers made on resale of the stock in order

to avoid unjust enrichment. 344 F.2d at 786-87; see 3 A.R.

Bloomberg & L.D. Lowenfels, Securities Fraud & Commodities Fraud §

9.1 (2d ed. 2002). The rule is based on equity and the principle

that it is "more appropriate to give the defrauded party the

benefit even of windfalls than to let the fraudulent party keep

them." Janigan, 344 F.2d at 786. Under the Securities Act the

Supreme Court has held, citing Janigan, that "where the defendant

received more than the seller's actual loss . . . damages are the

amount of the defendant's profit." Affiliated Ute, 406 U.S. at

12
Further undercutting the equivalence theory is the district
court's finding in the companion Kiepler case that the company's
"long-term success was far from assured because it faced increased
competition from much larger companies."

-33-
155. "This alternative standard aims at preventing the unjust

enrichment of a fraudulent buyer and it clearly does more than

simply make the plaintiff whole for the economic loss proximately

caused by the buyer's fraud." Randall v. Loftsgaarden, 478 U.S.

647, 663 (1986).

We believe that Rhode Island would adopt a similar

equitable remedial rule of avoiding unjust enrichment for

redemption of minority shareholders' stock involving a breach of

fiduciary duty by corporate officers who are majority shareholders

in close corporations. Indeed, equitable principles are routinely

applied to remedies for breach of fiduciary duty.

Under Rhode Island law, a court's equitable power to

award unjust enrichment damages is sometimes wielded under the

rubric of the constructive trust. "A constructive trust will be

imposed upon property that is obtained in violation of a fiduciary

duty." Simpson v. Dailey, 496 A.2d 126, 128 (R.I. 1985). "The

underlying principle of a constructive trust is the equitable

prevention of unjust enrichment of one party at the expense of

another in situations in which legal title to property was obtained

. . . in violation of a fiduciary or confidential relationship . .

. ." Id. While often used to grant the plaintiff legal title to

real property, see, e.g., Matarese, 305 A.2d at 119, the

-34-
constructive trust can also be used to convey proceeds or other

liquid assets, see Simpson, 496 A.2d at 127.13

But there is need for a great deal of caution. The

fiduciary label means different things in different contexts.

Officers and directors of a close corporation are not wholly

comparable to trustees entrusted with the assets of minor wards,

and unjust enrichment may not be an appropriate remedy here. The

law of remedies as to the latter situation may not be entirely

appropriate for the former. And the answer to the question of what

are to be counted as "windfall profits" is far from clear from the

record in this case. Rhode Island law discourages the award of

speculative profits. See MacGregor, 60 A. at 762. Further, it is

a general principle of equity "that the courts impose the least

drastic remedy available to achieve the desired goals." See J.R.

13
Rhode Island law elevates the standard of proof of liability
to clear and convincing evidence before a constructive trust may be
imposed. Under Rhode Island law, "parties requesting the
imposition of a constructive trust must establish by clear and
convincing evidence the existence of fraud or breach of a fiduciary
duty; absent such proof there can be no constructive trust."
Curato v. Brain, 715 A.2d 631, 634 (R.I. 1998); see Clark v.
Bowler, 623 A.2d 27, 29 (R.I. 1993); Desnoyers v. Met. Life Ins.
Co., 272 A.2d 683, 690 (R.I. 1971).
In our view, a damages theory based on avoidance of unjust
enrichment is not identical to the law on creation of a
constructive trust. Nevertheless, a constructive trust damages
theory is an option the district court may consider. If damages
under Rhode Island law are to be based on a constructive trust
theory, then evidence of the nature of the fiduciary duty and the
fact of the breach of that duty must be clear and convincing.

-35-
Farrand, Ancillary Remedies in SEC Civil Enforcement Suits, 89

Harv. L. Rev. 1779, 1813 (1976).

The district court did not independently analyze the

Janigan avoidance of unjust enrichment theory of damages. Rather,

based on its earlier error as to the value of plaintiffs' shares as

of May 1996, it said, "That loss is identical to the profit

realized by the defendants," and "the amount recoverable as damages

is the same as the amount that the defendants would be required to

disgorge."

There is little circuit law on the issue of how to

approach a Janigan award based on the avoidance of unjust

enrichment. Commentators have noted the confusion about damages in

securities actions; a recent article by the authors of a leading

treatise on securities law is entitled Compensatory Damages in Rule

10b-5 Actions: Pragmatic Justice or Chaos. L.D. Lowenfels & A.R.

Bloomberg, 30 Seton Hall L. Rev. 1083 (2000).14 This has been

called a confused area of law where the courts, forced to rely on

their wits, have crafted a myriad of approaches. See DCD Programs,

Ltd. v. Leighton, 90 F.3d 1442, 1446 (9th Cir. 1996).

In equity, the correct legal standards interact with the

underlying facts in determining an appropriate remedy. We think

14
Another, by Michael Kaufman, is entitled No Foul, No Harm:
The Real Measure of Damages Under Rule 10b-5, 39 Cath. U. L. Rev.
29 (1989)(arguing that damages should measure the relative
materiality of the non-disclosed information).

-36-
the wiser course is to remand the matter of this theory of damages

for such further proceedings as are warranted. In doing so we set

some general parameters, cautioning that this is not an area where

hard and fast rules are either easy to articulate or warranted.

To be clear, Janigan does not embody a rule that

plaintiffs are automatically entitled to all of defendants' profits

from defendants' subsequent resale of stock regardless of

circumstance. Janigan itself does not state a per se rule that all

subsequent profits accrue to plaintiffs; it is subject to

significant restrictions which were not considered here. Janigan

built upon an earlier case which stressed that "the particular

circumstances surrounding the case" must be taken into account.

Myzel v. Fields, 386 F.2d 718, 749 (8th Cir. 1967).

Janigan itself recognized at least two limits. First, it

referred only to the profit which was "the proximate consequence of

the fraud," itself a limiting factor. This court, sitting en banc,

limited the application of the Janigan rule in the context of

publicly traded companies. SEC v. MacDonald, 699 F.2d 47 (1st Cir.

1983). MacDonald held that the SEC could not recover, on a

disgorgement of profits theory, the defendants' profits from use of

insider information for a period beyond a reasonable time after

public dissemination of the information. This was so, we held,

because "when a seller of publicly traded securities has learned of

previously undisclosed material facts, and decides nevertheless not

-37-
to replace the sold securities, he cannot later claim that his

failure to obtain subsequent stock appreciation was a proximate

consequence of his prior ignorance." Id. at 53 (emphasis added).

Here, we have a close corporation; the plaintiffs lacked the

opportunity, available to public shareholders, to reenter the

market. Rather, MacDonald is significant, for our purposes, for

its emphasis on the need for the wrongful profits to be "causally

related" to the breach of duty. Id. at 54.15 MacDonald also holds

that the purpose of Janigan-type recovery is remedial, not

punitive. Id.16

Second, Janigan said that extraordinary gains in a

company's affairs attributable to extra efforts by defendants are

not part of the windfall profits. See 344 F.2d at 787. "[A]

subsequent increase in the value of the stock attributable to

special or unique efforts of the fraudulent party other than those

for which he is duly compensated" is not a windfall subject to

disgorgement. Nelson v. Serwold, 576 F.2d 1332, 1338 n.3 (9th Cir.

1978); see Siebel, 725 F.2d at 1002.

15
As one treatise has noted, the Janigan rule has particular
strength when it is used for a close corporation: "[U]nlike the
publicly traded situation, the plaintiff does not have the
alternative of covering by going into the market and purchasing the
security after becoming aware of the fraud." 3C H.S. Bloomenthal
& S. Wolff, Securities and Federal Corporate Law § 13:44 (2d ed.
1999).
16
We have no reason to think Rhode Island would permit the
measure of damages to be punitive rather than remedial.

-38-
 As the Janigan doctrine has been refined, recovery of the

defendants' later profits is usually applied when the subsequent

resale follows fairly closely the original purchase from the

plaintiffs. See, e.g., Pidcock v. Sunnyland Am., Inc., 854 F.2d

443 (11th Cir. 1988) (company put up for sale in the same month in

which the agreement for a fraudulent purchase was signed); Siebel,

725 F.2d at 1001 ("[A] defendant's profits may be disgorged where

he fraudulently induces the plaintiff to sell securities to him and

resells them shortly thereafter at a higher price . . . .")

(emphasis added).17 "The mere passage of time, if long enough, may

limit the amount of profits recoverable by a previously defrauded

seller." Pidcock, 854 F.2d at 447; see also Gerstle v. Gamble-

Skogmo, Inc., 478 F.2d 1281, 1306 (2d Cir. 1973) ("The passage of

time introduces so many elements . . . that extreme prolongation of

the period [9 years] for calculating damages may be grossly

unfair."). In situations where the period of time was short and

the defendants thus had more reason to be aware of a possible sale,

the dangers of a speculative award are small. The length of time

between the repurchase of stock and the eventual sale of the

company here falls at neither extreme of this temporal continuum,

17
It is true that Janigan awarded profits from a sale two
years later. But there are differences between Janigan and the
present case. For example, in Janigan, the difference between the
true market value of the stock at the time of the sale and its sale
price was negligible; here it was not, and plaintiffs will receive
real damages in any event.

-39-
and the district court is best positioned to make specific findings

as to the effect, if any, of the passage of time.

Here there are a great many unanswered and perhaps

unanswerable questions. For example, would defendants have

tendered more than $200 a share upon disclosing the material

information to plaintiffs? Would plaintiffs have accepted a higher

tender, say, at $303 a share? Would defendants have offered that

much? Would plaintiffs have held onto their shares in any of these

scenarios? Is it fair to reward plaintiffs with the fruits of all

profits given the risks defendants undertook in their subsequent

management? Can any of these factors be quantified in some sense?18

The district court should also consider whether the case

is appropriate for application of a Janigan approach which deems a

defendant's later profits from sale of a company to be unjust

enrichment. Other models of equitable relief may be better suited

for the facts of this case, if equitable relief is warranted at

all. If the evidence shows that the plaintiffs would have sold

their shares even had they received the withheld information, then

"any profit [defendants] earned above the premium [they] would have

paid the [plaintiffs] absent the fraud is not unjust enrichment."

18
The Seventh Circuit has used the model of assessing the
probabilities of a series of events (e.g., of a possible sale, of
a possible strategic sale, of plaintiffs holding on to their stock
until time of sale) and discounting the sale price for these and
other variables. See Jordan, 815 F.2d at 442. Even there, the
court required a showing that the plaintiff would have retained
stock ownership if full disclosure had been made. Id.

-40-
Rowe v. Maremont Corp., 850 F.2d 1226, 1241 (7th Cir. 1988).

Moreover, it may be that the stock's sale price in September 1997

is so untethered to the stock's fair value in May 1996 that

equitable relief is inappropriate. See Holmes, 583 F.2d at 563-64.

Another approach may be to rely not on what the fair

market price was at the time of sale, but on the premium plaintiffs

would have exacted from defendants were the relevant information

disclosed. See Rowe, 850 F.2d at 1243. This solution would award

plaintiffs more than their loss, strictly speaking, while not

requiring the disgorgement of all of defendants' eventual profit,

some of which may have been justly earned. (We recognize that this

solution may be more akin to the first damages rationale discussed

above.) In the effort to avoid giving wrongdoers a windfall, there

must be attention to what the windfall really is. Because of the

ambiguity about the meaning of the finding of the district court

that the fair market value of the shares was $303, and whether that

figure included a premium for a possible sale, this approach may or

may not be an appropriate model.

Part of what complicates this case is that there was a

series of material omissions or misstatements, and the different

categories of breach may produce different remedial results. See

Sharp v. Coopers & Lybrand, 649 F.2d 175, 191 (3d Cir. 1981). The

district court should make such findings as are necessary and

-41-
fashion a remedy accordingly which does not give windfalls to

defendants and which remedies the real harm to plaintiffs.

In any event, the floor of the damages plaintiffs will

receive is the difference between the $200 and $303 a share on

their percentage of ownership of the company in May 1996. We take

no view as to which of the damages options are best suited to this

case.

2. Application of Damages Theory

If the district court does choose to apply a damages

award grounded in unjust enrichment theory, some close questions

arise concerning how to calculate the defendants' profit, and the

plaintiffs' share of that profit. First, the district court made

a series of calculations concerning the percentage of ownership by

both sides at various times, most of which either defendants or

plaintiffs contest.19

Second, defendants rightly complain that the district

court's calculation of the sale price of the company was incorrect.

The price paid by Van Leer was $25,761,021, but defendants were

required to pay $1,042,400 for the promissory notes they signed

when they purchased the treasury shares on June 25, 1996. When

calculating the September 1997 purchase price of the company, the

19
Perhaps these controversies could effectively be bypassed
if the district court were to simply use the various ownership
percentages as of the time just before redemption of the
plaintiffs' stock in May 1996.

-42-
total purchase price of the stock should be reduced by that sum to

reflect the fact that Van Leer, in effect, received an immediate

refund of over a million dollars upon purchase of the company.

Third, defendants argue that the district court abused

its discretion in awarding prejudgment interest calculated from May

30, 1996, the date the plaintiffs agreed to sell their stock, and

not from the purchase of the company sixteen months later.

Prejudgment interest is meant to compensate plaintiffs for their

"inability to utilize funds rightly due" them. R.I. Tpk. & Bridge

Auth. v. Bethlehem Steel Corp., 446 A.2d 752, 757 (R.I. 1982). It

must be calculated on the date the damages begin to accrue, even if

a cause of action accrues earlier for other purposes. Blue Ribbon

Beef Co. v. Napolitano, 696 A.2d 1225, 1230-31 (R.I. 1997).

Otherwise, the plaintiffs would be compensated for more than

"waiting for recompense to which they were legally entitled."

Martin v. Lumbermen's Mut. Cas. Co., 559 A.2d 1028, 1031 (R.I.

1989).

We need not address whether the district court abused its

discretion in awarding interest from May 1996 when its damages

award was predicated, at least in part, on the theory that

plaintiffs would not have sold their stock until September 1997.

We caution only that the date prejudgment interest is awarded must

comport with the theory of damages.

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C. Options

The plaintiffs also appeal the district court's denial of

their challenge to the individual defendants' granting of options

to themselves. This was a separate claim from that involving the

repurchase of plaintiffs' shares by the company.

The district court held that any claim as to options was

a derivative claim not available to plaintiffs to assert in a

direct action. We find no error. The usual rule is that an action

grounded in an injury to a corporation must be brought as a

derivative suit. Vincel v. White Motor Corp., 521 F.2d 1113, 1118

(2d Cir. 1975); Halliwell Assocs. v. C.E. Maguire Servs., Inc., 586

A.2d 530, 533 (R.I. 1991). If, however, the injury is the result

of a violation of a duty owed directly to shareholders, they may

sue on their own behalf. "Where the act complained of creates not

only a cause of action in favor of the corporation but also creates

a cause of action in favor of the stockholder, as an individual,

for violation of a duty owing directly to him, the stockholder may

bring suit as an individual." Empire Life Ins. Co. v. Valdak

Corp., 468 F.2d 330, 335 (5th Cir. 1972) (emphasis in original).

In order to pursue a derivative suit, plaintiffs must allege that

all other avenues of redress are foreclosed, including redress by

the board of directors. See R.I. Super. Ct. R. Civ. P. 23.1

(defining the requirements for shareholder derivative suits);

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Hendrick v. Hendrick, 755 A.2d 784, 794 (R.I. 2000) (closely held

corporation).

A challenge to the granting of options to executives

usually requires a derivative suit. See In re Triarc Cos., 791 A.2d

872, 878 (Del. Ch. 2001) (rejecting a direct claim of fiduciary

breach based on the granting of options to corporate executives in

a public corporation). This is because if the option price is too

low, the corporation as a whole suffers, because it will not

receive a fair price when the options are exercised. The fact that

the option price was too low because the defendants may have known

something improperly withheld from the plaintiffs does not

transform this suit into one which may be brought directly. The

context of a closely held corporation does not change this

analysis. See Hendrick, 755 A.2d at 793-94 (requiring a derivative

action to challenge executive compensation in a closely held

corporation); accord Symmons v. O'Keeffe, 644 N.E.2d 631, 638

(Mass. 1995) (same); Bessette v. Bessette, 434 N.E.2d 206, 208

(Mass. 1982).

Plaintiffs argue that a direct cause of action should be

available because the individual defendants are also stockholders,

so that they would benefit from a derivative action on behalf of

all stockholders. This argument proves too much. Many, if not

most, corporate executives are stockholders in the companies they

represent. To establish an exception that would allow direct suits

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any time they named executives who were also stockholders would

eviscerate the derivative suit requirement.

We affirm the district court's dismissal of the

plaintiffs' claim against the granting of options.

D. Conclusion

Disputes among next generations in family-owned small

companies are not infrequent. Sometimes, as here, the disputes

lead to litigation. The parties now have what may be their last

opportunity to reach an agreement. We hope they will seize it.

We affirm the holding that defendants were in breach of

their duties under Rhode Island law to the plaintiff minority

shareholders in their redemption of plaintiffs' shares in May 1996.

We also hold that the measure of the fair market value as of May

1996 is determined: the plaintiffs would be entitled to the

difference per share between $303 and $200 (subject to the proviso

stated before). The measure of the damages tied to preventing

unjust enrichment to defendants is not determined, nor is the issue

of whether that measure is the appropriate yardstick under

equitable principles to use given the facts of this case. The case

is remanded for further proceedings. The district court, in its

discretion, may take such additional evidence as it deems necessary

to enable it to make the necessary findings. Each side shall bear

its own costs.

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 Lawton v. Nyman

Chronology

1936 Nyman Manufacturing founded by John Nyman.

late 1980s Robert and Kenneth Nyman inherited all Class B
voting shares and became president and vice-
president and members of the board of directors.

early 1990s Nyman Manufacturing lost money.

by 1994 Nyman Manufacturing on verge of bankruptcy.
Robert and Kenneth personally guaranteed $1
million loan and reduced their salaries and
benefits.

August 1994 Nyman Manufacturing hired Keith Johnson as CFO
and Treasurer.

early 1995 Nyman Manufacturing doing better; Board adopted
stock option and buy-back plans.

April 3, 1995 Board granted Johnson option to buy 1,000 Class A
shares at 80 percent of book value,
$145.36/share.

late 1995 Fleet Bank terminated relationship with Nyman
Manufacturing; Johnson obtained new financing
from other institutions.

November 6, 1995 Board redeemed the 2,256 Class A shares owned by
the estate of Magda Burt for $145.36/share.
Robert, Kenneth and Johnson ("the Defendants")
received options to buy 2,256 shares.

January 1996 Board offered to redeem 1,677 Class A shares
owned by the Walfred Nyman Trust for $145.36.
Offer rejected because of Beverly Kiepler's
resistance.

March 29, 1996 1996 fiscal year ended; Nyman Manufacturing
earned a $3.5 million profit but largely on non-
recurring items.

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April 1996 Board voted the Defendants deferred compensation
plans worth $2 million and decided to hire a
consultant.

April-May 1996 Johnson talks to Kiepler about possible
redemption of her shares and tells her the bank
waiver permitting possible redemption of her
shares expires on May 1. This is untrue.

May 8, 1996 Johnson mailed letter to stockholders offering
$200/share buy-back. Letter doesn't mention
possibility that company could be sold.

May 10, 1996 Robert called Judith Lawton; described
opportunity to sell as "once in a lifetime"; did
not mention possibility company might be sold.

May 30, 1996 The Lawtons sold their 952 Class A shares for
$200/share. The children of Robert and Kenneth
also sold 140 Class A shares.

June 25, 1996 The Defendants voted themselves options to buy
1,092 shares at $200/share to $220/share. The
Defendants also bought all available treasury
shares (4,115 Class A shares and 750 Class B
shares) for $200/share. The book value of the
company's shares is $527.50/share.

August 1996 The Defendants met with Shields & Co. to discuss
the possible sale of the company and other
issues.

October 1996 Johnson identified the Van Leer Corp. to Thomas
Shields as a possible acquirer.

November 1996 Shields sent Johnson a letter identifying the
"universe of potential buyers in the next three
years."

March 1997 Johnson met with Van Leer executives in the
Netherlands to discuss sale of Nyman
Manufacturing or joint venture.

June 25, 1997 Letter of intent signed providing that Van Leer
will buy all outstanding Nyman Manufacturing
stock.

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September 29, 1997 Closing for Van Leer purchase of Nyman
Manufacturing. Van Leer paid $1,667.38 per
Class A share and $2,167.59 per Class B share.

May 22, 1998 Complaint filed in Lawton v. Nyman.

January 17, 2002 District court decided Lawton v. Nyman and
Kiepler v. Nyman.

July 2, 2002 Kiepler appeal dismissed at parties' behest.

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