ATTORNEYS FOR APPELLANTS
Gilbert F. Blackmun
Leonard M. Holajter
Highland, Indiana
Nana Quay-Smith
Karl L. Mulvaney
Candace L. Sage
Indianapolis, Indiana
Samuel T. Miller
Munster, Indiana
ATTORNEYS FOR APPELLEE
Paul A. Rake
Gregory A. Crisman
John P. Twohy
Hammond, Indiana
__________________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
G & N AIRCRAFT, INC. and )
PAUL GOLDSMITH, )
)
Appellants (Defendants Below), ) Indiana Supreme Court
) Cause No. 45S05-0003-CV-221
v. )
)
ERICH BOEHM, for himself and ) Indiana Court of Appeals
as minority shareholder of G & N ) Cause No. 45A05-9708-CV-323
Aircraft, Inc., )
)
Appellee (Plaintiff Below). )
__________________________________________________________________
APPEAL FROM THE LAKE SUPERIOR COURT
The Honorable Roger V. Bradford, Special Judge
Cause No. 45D01-9506-CT-722
__________________________________________________________________
ON PETITION FOR TRANSFER
__________________________________________________________________
March 2, 2001
BOEHM, Justice.
This case deals with the obligations of a majority shareholder in a
close corporation and the remedies available to a minority shareholder for
breach of those duties.
Factual and Procedural Background
G & N Aircraft, Inc., is an Indiana corporation engaged in
overhauling and rebuilding piston engines for aircraft. G & N was founded
in 1962 by Paul Goldsmith and Ray Nichols. By the early 1990s, G & N was
owned 34% by Erich Boehm, 26% by Goldsmith, 16 2/3% each by Richard
Gilliland and James McCoy, and 6 2/3% by Greg Goldsmith, Goldsmith’s son.
Goldsmith served as the president, Boehm as the vice-president, and
Gilliland as the secretary of the corporation. Both Goldsmith and Boehm
were employees of G & N. The board of directors consisted of the five
shareholders.
G & N operated its business in a hangar at Griffith Airport owned by
Goldsmith individually. Its principal supplier of engine parts was
Edgecumbe-G & N, Inc., which was owned by Goldsmith, Gilliland, and McCoy.
G & N’s annual sales were on the order of $5 million and its annual net
profit was approximately $220,000.
Goldsmith was the sole owner of several other aviation-related
corporations. None of these was profitable, and one was in default on a
$1.2 million loan that Goldsmith had guaranteed personally. Goldsmith
began to explore means of paying down the loan and was told by his tax
advisor that if he became the sole owner of G & N and converted it from a
Subchapter S corporation to a C corporation, G & N could shelter its
operating income and thereby increase its cash flow by taking advantage of
$1.8 million in operating loss carryforwards of the other companies. In
1994, Goldsmith began negotiating with a bank to finance his acquisition of
all of G & N. He obtained an appraisal of G & N’s shares from its
corporate counsel and accountant that valued the corporation at $961,000.
Goldsmith approached Gilliland and McCoy about selling their shares, but
his loan application was rejected and no transactions were consummated at
that time.
Approximately one year later, Goldsmith renewed his efforts to
consolidate G & N, which was still profitable, with his other companies.
In negotiations and letters detailing his plans to the bank, Goldsmith
expressed his desire to buy out Boehm and the other shareholders, convert G
& N to a C corporation, and then merge the companies to take advantage of
the tax loss carryforwards. He also detailed plans to use his control of G
& N and his position as landlord of the hangar to coerce his fellow
shareholders to sell their G & N stock. He believed he could force all of
the other G & N shareholders to sell their interests by increasing G & N’s
rent at the hangar from $6,500 per month to $30,000, which would raise the
prospect of an expensive relocation. Goldsmith also believed that if he
threatened to eliminate Edgecumbe as G & N’s supplier, he could force
Gilliland and McCoy to sell their G & N shares to preserve the value of
their holdings in Edgecumbe.
On April 26, 1995, Goldsmith offered Boehm $200,000 for his 34%
interest in G & N. Boehm refused to sell. Two days later, Goldsmith sent
Boehm a notice of his resignation as president of G & N. Acting as
landlord of the hangar, Goldsmith accompanied the notice with an eviction
notice giving G & N thirty days to vacate its facilities. On May 1,
Gilliland and McCoy agreed to trade their G & N shares to Goldsmith for
Goldsmith’s holdings in Edgecumbe. Both selling shareholders retained their
positions on the G & N board of directors. As a result of these
transactions, Goldsmith owned 59 1/3% of G & N’s shares, Greg owned 6 2/3%
and Boehm 34%. At a board meeting on May 22, 1995, Boehm proposed
alternate locations for G & N’s operations, which were rejected by the
board. In that same meeting, the board reelected Goldsmith as the
president of G & N by a three to one vote, with Boehm dissenting.
The board met again on June 14, 1995 to discuss the dividend for
1994. For many years, G & N had declared annual dividends in the amount of
its net profits for the preceding calendar year. Because its cash flow in
1993 was inadequate to distribute its entire net profit for that year, the
company had taken out a $300,000 bank loan to pay its dividend. By the
spring of 1995, as a result of this borrowing and obligations to trade
creditors, Matt Hunniford, Goldsmith’s personal accountant, determined that
G & N was not in a financial position to distribute the 1994 earnings as a
dividend. No dividend was declared. At the same meeting, the board also
discussed the possibility of relocating G & N. Goldsmith expressed the
view that this might have “negative effects,” and withdrew his notice of
eviction.
One week later, Goldsmith wrote Boehm a letter demanding that Boehm
sell his stock in G & N to Goldsmith for $250,000. The letter stated that
if Boehm did not sell his stock, as a shareholder he would suffer the
consequences of Goldsmith’s merger plan, which included capital outlays
that would preclude dividends for at least three years. In this letter,
Goldsmith also asked for Boehm’s resignation as vice president and as a
board member and demanded that Boehm vacate his office and remain off the
premises. When Boehm refused Goldsmith’s offer, Goldsmith changed the locks
on Boehm’s office. He then fired G & N’s bookkeeper and transferred G &
N’s accounting function to employees of one of Goldsmith’s businesses.
On June 27, 1995, Boehm filed a complaint against Goldsmith and G & N
asserting both shareholder derivative claims and direct claims for breach
of fiduciary duty. Boehm alleged that G & N was purposefully reducing its
profitability and was not maximizing long-run returns for its owners. On
August 10, 1995, Boehm obtained a preliminary injunction and thirteen days
later amended his complaint to include claims of Goldsmith’s conflicts of
interest, breach of Goldsmith’s fiduciary duties to G & N and to Boehm, and
breach of shareholder agreements by Goldsmith, Gilliland, and McCoy.
Goldsmith and G & N responded by asserting that Boehm had failed to
comply with the requirements of Trial Rule 23.1 for a shareholder
derivative action. G & N also filed a counterclaim for attorney’s fees,
claiming that Boehm’s lawsuit was frivolous. Boehm dismissed his claims
against Gilliland and McCoy and, on July 31, 1996, sought summary judgment
on G & N’s counterclaim against him. Goldsmith and G & N filed cross-
motions for summary judgment.
The trial court denied Goldsmith’s and G & N’s motions for summary
judgment after finding that there were genuine issues of material fact.
The trial court granted Boehm’s motion for summary judgment as to G & N’s
counterclaim and ordered G & N to pay Boehm’s costs and attorney’s fees
after finding the counterclaim baseless. After a four-day bench trial, the
trial court entered judgment directing G & N and Goldsmith to pay $521,319
in exchange for Boehm’s G & N stock. The court also awarded Boehm damages
of $173,939 for back dividends, plus any future dividends until the sale
was closed, $175,000 in punitive damages, and attorney’s fees. The Court
of Appeals affirmed the judgment, but noted that Boehm could recover
attorney’s fees only for his derivative claims, and not his claims as a
minority shareholder. G & N Aircraft, Inc. v. Boehm, 703 N.E.2d 665, 680
(Ind. Ct. App. 1998).
Standard of Review
Where, as here, a trial court has made special findings pursuant to a
party’s request under Indiana Trial Rule 52(A), the reviewing court may
affirm the judgment on any legal theory supported by the findings.
Mitchell v. Mitchell, 695 N.E.2d 920, 923 (Ind. 1998). “[T]he court on
appeal shall not set aside the findings or judgment unless clearly
erroneous, and due regard shall be given to the opportunity of the trial
court to judge the credibility of the witnesses.” T.R. 52(A). When the
specific issue on review relates to the award of damages, a damage award
should not be reversed if it is within the scope of the evidence before the
trial court. Dunn v. Cadiente, 516 N.E.2d 52, 54 (Ind. 1987).
I. Derivative and Direct Actions
As a threshold matter, Boehm asserted both shareholder derivative
claims and also direct claims of breaches of duty to him as a shareholder.
Some claims are against G & N, and some against Goldsmith personally. The
trial court entered judgment against both defendants. One or both were
ordered to purchase Boehm’s G & N shares. Damages for interim cash
shortfalls were also awarded against G & N, and punitive damages of
$175,000 were awarded against Goldsmith. This presents quite an assortment
of claims and remedies that requires some sorting out.
A. Direct v. Derivative Actions
A direct action is “[a] lawsuit to enforce a shareholder’s rights
against a corporation.” Black’s Law Dictionary 472 (7th ed. 1999). This
action may be brought in the name of the shareholder “to redress an injury
sustained by, or enforce a duty owed to, the holder.” 2 Principles of
Corporate Governance § 7.01, at 17 (A.L.I. 1994). Direct actions are
typically appropriate to enforce the right to vote, to compel dividends, to
prevent oppression or fraud against minority shareholders, to inspect
corporate books, and to compel shareholder meetings. Id.
Derivative actions, on the other hand, are suits “asserted by a
shareholder on the corporation’s behalf against a third party . . . because
of the corporation’s failure to take some action against the third party.”
Black’s at 455. They are brought “to redress an injury sustained by, or
enforce a duty owed to, a corporation.” A.L.I. at 17. Derivative actions
are brought in the name of the corporation and are governed by Trial Rule
23.1 and Indiana Code section 23-1-32-1. To bring a derivative action a
shareholder must satisfy four requirements. They are: (1) the complaint
must be verified; (2) the plaintiff must have been a shareholder at the
time of the transaction of which he complains; (3) the complaint must
describe the efforts made by the plaintiff to obtain the requested action
from the board of directors; and (4) the plaintiff must fairly and
adequately represent the interests of the shareholders. Examples of
actions that are typically required to be brought derivatively include
actions to recover for loss of a corporate opportunity, to recover
corporate waste, and to recover damages to a corporation caused by an
officer or director’s self-dealing.
Some courts and commentators, and indeed the defendants in this case,
would distinguish between direct and derivative actions based on whether
the shareholder or the corporation has been injured. John W. Welch,
Shareholder Individual and Derivative Actions: Underlying Rationales and
the Closely Held Corporation, 9 J. Corp. L. 147, 154-57 (1984). Under this
view, if only the interests of the corporation are directly damaged, then
the suit must be derivative. The difficulty in this approach is that, in
many cases, it is entirely unclear whether there has been direct damage to
the shareholders or the corporation or both.[1]
Some courts allow a direct action only if the shareholder’s injury is
distinct from the injuries sustained by other shareholders and the
corporation. Welch at 162. This is also problematic because some injuries
may run to all shareholders—for example, refusal to convene an annual
meeting—and be caused by a breach of the duty owed to every shareholder.
Still other courts take a categorical approach to distinguishing
between direct and derivative lawsuits and look to past judicial decisions
to label a claim as either direct or derivative depending on what previous
courts have done in awarding the requested relief. Id. at 157-59; accord
Tim Oliver Brandi, The Strike Suit: A Common Problem of the Derivative Suit
and the Shareholder Class Action, 98 Dick. L. Rev. 355, 359 (1994). There
are two drawbacks to this approach. First, earlier courts may have
incorrectly classified a particular type of action. Second, shareholders
may have different rights depending on the specific terms of the articles,
bylaws, and agreements of the corporation.
We believe that the correct approach draws the distinction based on
the rights the shareholder asserts. Under this view, a direct action may
be brought when:
it is based upon a primary or personal right belonging to the
plaintiff-stockholder . . . . It is derivative when the action is
based upon a primary right of the corporation but which is asserted on
its behalf by the stockholder because of the corporation’s failure,
deliberate or otherwise, to act upon the primary right.
Schreiber v. Butte Copper & Zinc Co., 98 F. Supp. 106, 112 (S.D.N.Y. 1951).
The rights of a shareholder may be derived from the articles of
incorporation and bylaws, state corporate law, or agreements among the
shareholders or between the corporation and its shareholders. Welch at
160. If none of these establishes a right in the shareholders to the
requested relief, the claim, if it exists at all, must be brought on behalf
of the corporation in a derivative action.
B. Barth v. Barth
The distinction between direct and derivative actions has been
complicated in more recent years by recognition in many jurisdictions,
including Indiana, of direct actions by shareholders in close corporations
for derivative claims. In 1995, this Court held that a shareholder in a
close corporation need not always bring claims of corporate harm as
derivative actions. Rather, in such an arrangement, the shareholders are
more realistically viewed as partners, and the formalities of corporate
litigation may be bypassed. Barth v. Barth, 659 N.E.2d 559, 561 & n.6
(Ind. 1995). The Court, following the American Law Institute’s Principles
of Corporate Governance section 7.01(d), held that a shareholder of a close
corporation may proceed against a fellow shareholder in a direct action if
that form of action would not: (1) unfairly expose the corporation or the
defendants to a multiplicity of actions, (2) materially prejudice the
interests of creditors of the corporation, or (3) interfere with a fair
distribution of the recovery among all interested persons. Id. at 562.
The Court reasoned that “shareholders of closely-held corporations have
very direct obligations to one another and . . . shareholder litigation in
the closely-held corporation context will often not implicate the
principles which gave rise to the rule requiring derivative litigation . .
. .” Id. Specifically, requiring a demand on the board and awarding the
recovery to the corporation may not be appropriate in a close corporation
where there are only two shareholders, and one owns a majority of the stock
and controls the board.[2] Also, under these circumstances, the special
committee proceeding contemplated by Indiana Code section 23-1-32-4 is
often unavailable because there are typically no disinterested directors.
II. Claims against Goldsmith
Boehm alleged that Goldsmith, while acting as president and/or
majority shareholder of G & N: (1) provided advantages to his other
corporations that had no benefit to G & N; (2) refused to find a different
location for the corporation due to his conflicted position as landlord;
(3) chose bad accounting and tax policies; (4) attempted to combine G & N
with his other businesses without any benefit to G & N; (5) paid too much
for parts from Edgecumbe due to his position as an owner of Edgecumbe; (6)
wasted corporate assets; (7) breached his fiduciary duties to the
corporation; (8) transferred corporate assets for personal benefit; (9)
breached his fiduciary duties to Boehm by attempting to coerce a sale of
Boehm’s G & N stock; and (10) accomplished a de facto merger of G & N
without providing dissenter’s rights. Atypically, this case does not
involve any claim that Boehm’s employment was wrongfully terminated.
Boehm’s claims fall into three basic categories: (1) Goldsmith as an
officer and director breached his fiduciary duties to the corporation; (2)
Goldsmith as an officer and director breached his fiduciary duties to Boehm
as a shareholder; and (3) Goldsmith as a majority shareholder in a closely
held corporation breached his fiduciary duties to Boehm. The trial court
determined that Goldsmith “breached his fiduciary duties to the corporation
and his fellow shareholders by pursuing his own personal interests at the
expense of G & N,” but did not differentiate the capacity in which
Goldsmith acted or specify which duties to whom were breached. For the
reasons explained below, we agree with the trial court’s basic holding that
the facts as found support a direct action by Boehm against Goldsmith.
A. Boehm’s Direct Action
To the extent Boehm claims that Goldsmith as an officer and director
breached his fiduciary duties to the corporation in the various
transactions, these allegations assert largely derivative claims. The
facts asserted in the items numbered one through eight above show these
claims to be based on actions Goldsmith took as an officer or director of G
& N. These claims, at least in broad brush, assert breaches of duties owed
to the corporation, not to Boehm. As such, they must satisfy the
requirements of Trial Rule 23.1 for a derivative action unless they fall
under the Barth exception for close corporations.
Goldsmith contends that the trial court erred by allowing Boehm to
proceed with his claims for harm against the corporation without complying
with all the dictates of Trial Rule 23.1. Although Boehm did not file a
verified complaint, eight days after filing his complaint, he filed an
affidavit affirming the allegations of the complaint under penalty of
perjury. We think this satisfies the verification requirement in
substance. As for the demand for director action, Boehm pleaded that a
demand was useless. Goldsmith contends that this was insufficient to
satisfy Trial Rule 23.1 because Boehm did not describe his efforts with
particularity to obtain the action he wanted. Generally, a conclusory
allegation of futility of a demand is insufficient to satisfy this
requirement. Here, however, the majority shareholder and director is the
defendant. Under these circumstances, Boehm’s allegation appears to be
sufficient. See Perlman v. Feldmann, 129 F. Supp. 162, 194 (D. Conn.
1952), reversed on other grounds, 219 F.2d 173 (2d Cir. 1955); Wayne Pike
Co. v. Hammons, 129 Ind. 368, 375-76, 27 N.E. 487, 489-90 (1891).
The propriety of a derivative claim is largely academic because the
relief ordered by the trial court was awarded directly to Boehm, not to G &
N. However, under the facts in this case, it appears that the Barth
exception applies and Boehm was properly allowed to proceed with his claims
for corporate harm as direct actions. See Barth v. Barth, 659 N.E.2d 559,
562 (Ind. 1995). Goldsmith argues that the Barth factors are not satisfied
because there were five shareholders at the time of some of his actions.
Goldsmith argues that a direct action would contravene the Barth stricture
against creating the threat of multiple litigation. Gilliland and McCoy
were shareholders at the time of some of Goldsmith’s actions, but have
since sold their shares to Goldsmith. Although it is not explicit in the
Rule, we think “shareholder” in Trial Rule 23.1 means “current shareholder
as of the time of the suit.” The plaintiff shareholder must “fairly and
adequately represent the interests of the shareholders.” T.R. 23.1.
Because Gilliland and McCoy were not shareholders at the time of all
actions complained of, and sold their shares under pressure, their
interests as of the time of suit were quite different from Boehm’s. At the
least, a derivative recovery would require extensive additional relief to
place those two in the same position as Boehm vis-à-vis any benefit
obtained for G & N. Because these former shareholders do not fairly and
adequately represent current shareholders, they are not potential
derivative plaintiffs and are limited to whatever claim they have as
individuals. As a result, permitting Boehm to proceed individually does
not multiply litigation beyond the lawsuits already inherent in the
situation.
Goldsmith also contends that if the judgment stands, G & N has
creditors who will go unpaid based on the corporation’s current ability to
pay. Goldsmith claims that G & N will be unable to pay Boehm, its bank
debt, and its trade creditors, and notes that G & N has taken out loans in
order to distribute cash equal to its profits and also to cover working
capital. The trial court found that allowing Boehm to proceed with a
direct action would “not materially prejudice the interests of creditors.”
It also observed that “ANB Bank is the only major creditor of G & N and the
debt owed is approximately $200,000.00, substantially less than the value
of G & N.” The amount of debt is apparently in dispute, but we cannot
conclude that the finding of lack of prejudice to creditors was clearly
erroneous. Moreover, as explained in Part III, the recovery for any breach
of fiduciary duty comes from Goldsmith, not G & N. To the extent
Goldsmith, as a shareholder, is forced to draw on G & N’s resources to pay
the judgment, normal corporate protections should be available to prefer G
& N’s creditors over distributions or payments from G & N to Goldsmith to
pay Boehm.
In sum, the reasons for requiring a shareholder to pursue claims as a
derivative action are not present in this case. The plaintiff is one of
three shareholders. Of the three, only Boehm is complaining. The other
two are a father, owning a majority, and his son, with a small percentage.
There is thus no potential for a multiplicity of shareholder suits. There
is also no evidence of any creditor in need of protection, and there is no
concern that Boehm’s recovery will interfere with a fair distribution of
the benefits of the suit. Because none of the underlying reasons for
requiring a derivative action are present here, we hold that Boehm was not
required to bring a derivative action.
B. Claims of Breach of Duties to G & N
Boehm’s claims for breach of Goldsmith’s fiduciary duties to the
corporation can be divided into three categories: self-dealing, corporate
waste, and use of corporate office to achieve personal objectives.
Although directors must act with absolute good faith and honesty in
corporate dealings, Schemmel v. Hill, 91 Ind. App. 373, 385-86, 169 N.E.
678, 682-83 (1930), Indiana Code section 23-1-35-1(e) provides that:
[a] director is not liable for any action taken as a director, or any
failure to take action, unless: (1) the director has breached or
failed to perform the duties of the director’s office in compliance
with this section; and (2) the breach or failure to perform
constitutes willful misconduct or recklessness.
In other words, Indiana has statutorily implemented a strongly pro-
management version of the business judgment rule. A director is not to be
held liable for informed actions taken in good faith and in the exercise of
honest judgment in the lawful and legitimate furtherance of corporate
purposes. The rule includes “a presumption that in making a business
decision, the directors of a corporation acted on an informed basis, in
good faith and in the honest belief that the action taken was in the best
interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del.
1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.
2000). By statute, negligence is insufficient to overcome the presumption;
recklessness or willful misconduct is required.
Boehm first claims that Goldsmith paid too much for Edgecumbe’s parts
and transferred corporate assets for personal gain. In this case, the
shareholders knew of Goldsmith’s connection with Edgecumbe and appear to
have approved the deals, over Boehm’s objections. We think ratification by
formal vote is not required for a corporation with only a few shareholders,
and in which all the shareholders are involved in management and are
clearly aware of the material facts over a period of years. Finally, it is
irrelevant whether Goldsmith’s action as a shareholder is necessary for
ratification. Indiana law specifically permits a shareholder-director to
vote as a shareholder in his own interest despite any conflict. Ind.Code §
23-1-35-2(d) (1998). The transactions were not voidable solely by reason
of Goldsmith’s and others’ interest in the deal.[3] There remains the
question whether a transaction that is not voidable “solely” by reason of a
conflict nevertheless can be the basis of director liability. As the Court
observed in Melrose v. Capitol Motor Lodge, Inc., 705 N.E.2d 985, 991 (Ind.
1998), “The interrelationship between the conflict of interest statute and
the common law of fiduciary duty in close corporations has not been the
subject of judicial attention in Indiana.” The Court went on to imply that
a breach of fiduciary duty claim may nevertheless lie to attack a
transaction that has been ratified. In evaluating a claim of breach of
duty in a close corporation, the Court upheld the challenged transaction
because “(1) the material facts of the transaction and [the director’s]
interest were disclosed or known to [the minority], (2) the requisite
corporate formalities necessary to authorize, approve, or ratify the
transaction were followed, and (3) the transaction was fair to the
corporation.” Id. The third requirement, fairness to the corporation, is
essential under these circumstances. Put simply, it is a breach of the
majority shareholder’s fiduciary duty to cause the corporation to enter
into an unfair transaction to the personal advantage of the majority
shareholder. To the extent G & N overpaid for parts, this would state a
claim. However, the trial court attributed no damages to this claim, and
made no finding that the parts were overpriced. Thus, although this was an
issue debated by both parties, it leads nowhere in this case.
Boehm next claims that Goldsmith wasted corporate assets. More
specifically, he argues that Goldsmith’s salary of $65,000, an amount
equivalent to his tax liability, was a waste of corporate assets. “The
standard of proof in compensation cases requires a plaintiff shareholder to
show the compensation is unjust, oppressive, or fraudulent.” Krukemeier v.
Krukemeier Mach. & Tool Co., 551 N.E.2d 885, 888 (Ind. Ct. App. 1990);
Green v. Felton, 42 Ind. App. 675, 688, 84 N.E. 166, 170 (1908). This
action was also covered by the business judgment rule. Sixty-five thousand
dollars is hardly excessive for the president of a corporation of this size
and Boehm offers nothing to overcome the presumption of validity that
attaches to a director’s actions, or to prove that the compensation is
“unjust, oppressive, or fraudulent.” Thus, we have no evidence that the
value of the corporation reflected in the purchase price ordered by the
trial court was deflated by excessive salaries. It appears Boehm’s real
complaint is not that Goldsmith’s salary was excessive, but rather that his
own was cut off.
Boehm’s final claims involve allegations that Goldsmith refused to
find alternate locations for G & N, chose bad accounting and tax policies,
and attempted to combine G & N with his other businesses. In this case,
the choice of corporate location, accounting procedures, and the attempt to
combine G & N with Goldsmith’s other businesses were all decisions made by
a president and are ultimately the responsibility of the board of
directors. Although all involve potential conflicts, none was concealed
from the board or the shareholders. The location of G & N’s operations was
never questioned by anyone other than Goldsmith himself and appears to have
been ratified by the shareholders until the spring of 1995 when the parties
began open warfare. The tax and accounting policies all apparently relate
to the failed effort to achieve ownership sufficient to consolidate G & N
with Goldsmith’s other operations. First, no damages flowed from these
aborted efforts. Second, in and of itself, attempting to consolidate with
a corporation that can provide tax advantages is not improper if it does
not otherwise operate to the corporation’s disadvantage.
It has been suggested that the director’s judgment should be given the
widest leeway when the subject matter is the operation of the business or
the approval of transactions that affect the ownership or structure of the
business. Bayless Manning, Reflections and Practical Tips on Life in the
Boardroom After Van Gorkom, 41 Bus. Law. 1, 5 (1985). Location of the
facilities, salaries of employees, and chain of suppliers all fall in the
former, sometimes denominated “enterprise” issues. The latter, “ownership-
claim” issues, include mergers, sale of assets, and acquisition of control.
Indiana’s Business Corporation Law imposes the same standard of
liability—recklessness or intentional misconduct—on both. Nevertheless, we
think the judicially-crafted “business judgment rule” operates to give
broadest leeway to judgments that raise enterprise issues, if for no other
reason than the self-interest of the directors/controlling shareholders is
less directly involved. In and of themselves, these issues present no
basis for challenging the judgment of Goldsmith as reckless or intentional
wrongdoing because we have no clear evidence that the decisions were not
judged to be in the best interest of G & N. The trial court found they
were motivated by Goldsmith’s objective to reduce his personal exposure on
the debt of his other corporations. But this motivation does not
necessarily imply that G & N would not also be benefited by increased cash
flow from tax-sheltered money and we have no findings on the operational
advantages or disadvantages the proposed mergers would entail.
C. Fiduciary Duty to Boehm
Boehm also alleges that Goldsmith violated his fiduciary duties to
Boehm as a shareholder. Goldsmith claims that the trial court erred by
allowing Boehm to pursue these claims in a direct action because Boehm’s
sole harm was a decrease in stock value that resulted from losses at the
corporate level. Insofar as Boehm relies on claims that Goldsmith violated
his fiduciary duties to Boehm as a shareholder in a closely held
corporation, these are properly asserted in a direct action because they
are based upon rights and duties owed to Boehm, not the corporation. See
Barth, 659 N.E.2d at 560-61 & n.4.
The standard imposed by a fiduciary duty is the same whether it arises
from the capacity of a director, officer, or shareholder in a close
corporation. Hartung v. Architects Hartung/Odle/Burke, Inc., 157 Ind. App.
546, 552, 301 N.E.2d 240, 243 (1973). “The fiduciary must deal fairly,
honestly, and openly with his corporation and fellow stockholders. He must
not be distracted from the performance of his official duties by personal
interests.” Id., 301 N.E.2d at 243; accord W & W Equip. Co. v. Mink, 568
N.E.2d 564, 571 (Ind. Ct. App. 1991), trans. denied. Other states have
stated it slightly differently: controlling shareholders must “observe
accepted standards of business ethics in transactions affecting rights of
minority shareholders,” and apply a “strict good faith standard.” Burt v.
Burt Boiler Works, Inc., 360 So. 2d 327, 332 (Ala. 1978); Estate of Schroer
v. Stamco Supply, Inc., 482 N.E.2d 975, 980 (Ohio Ct. App. 1984) (quoting 2
F. Hodge O’Neal, O’Neal’s Close Corporations § 8.07, at 45 (2d ed. 1971)).
These states have allowed recovery for excluding the minority shareholder
from meaningful participation in the company, Orchard v. Covelli, 590 F.
Supp. 1548, 1558 (W.D. Pa. 1984), and for “effectively frustrat[ing] the
minority stockholder’s purposes in entering the corporate venture and also
deny[ing] him an equal return on his investment,” Wilkes v. Springside
Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976). However, as one
court cautioned, there must be a balance struck between the majority’s
fiduciary obligations and its rights. Wilkes, 353 N.E.2d at 663. It is
also the policy of the law to leave corporate affairs to the control of
corporate agencies “except in a plain case of fraud, breach of trust, or
such maladministration as works a manifest wrong to [the shareholders].”
Mink, 568 N.E.2d at 575 (citations omitted).
In this case, Boehm contends that Goldsmith violated his fiduciary
duty to Boehm as a fellow shareholder by (1) sending the eviction notice,
(2) threatening the viability of the corporation to force other
shareholders to sell, (3) reducing Boehm from a plurality shareholder to a
minority by wrongly terminating cash distributions, and (4) attempting to
buy Boehm’s shares at an inadequate price. The trial court concluded,
correctly, that shareholders in a close corporation owe each other duties
analogous to partners in a partnership. Barth, 659 N.E.2d at 561 & n.6.
At first blush, one issue here is whether the fiduciary duty as a
majority shareholder extended to use of relationships outside the
corporation. Goldsmith had multiple relationships to G & N. He was its
officer, director, and landlord. He was also a major shareholder of a
critical supplier. He acted in all of those capacities before he became
the majority shareholder. After acquiring Gilliland’s and McCoy’s shares,
he also became the controlling shareholder. Some of Goldsmith’s actions
that were found wrongful were taken in a capacity other than officer,
director, or shareholder of G & N. Specifically, his threat to evict G & N
was made in his capacity as an individual landlord. Presumably, if he held
no position in G & N this would have been a lawful act on his part. Boehm
has not alleged that Goldsmith, as president of G & N, wrongfully exposed G
& N to a lease that permitted its eviction, so the only action complained
of in this issue is the eviction notice itself, which is an act of the
landlord. The obligations of a majority shareholder are sometimes phrased
in terms of then Judge Cardozo’s famous description of the obligation of
partners to act with “[n]ot honesty alone, but the punctilio of an honor of
the most sensitive.” Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928).
Whether this standard imposes duties on majority shareholders in other
capacities is an interesting question. However, for the reasons explained
below, the relief ordered by the trial court was justified by actions taken
as a shareholder, officer, and director, and we need not resolve this
issue.
1. Actions Before Goldsmith Acquired Majority Control of G & N
Goldsmith attempted to purchase Boehm’s shares of G & N for more than
$100,000 less than he had previously had the shares appraised for and
$50,000 less than his original purchase price. In and of itself, this is
not a breach of duty. Absent nondisclosure, fraud, or oppression, a
majority shareholder has no duty to pay a “fair” price for shares. Cf.
Joseph v. Shell Oil Co., 482 A.2d 335, 341 (Del. Ch. 1984). However, when
Boehm refused his offer, Goldsmith attempted to force Boehm to sell his
shares by limiting Boehm’s role in the management of G & N and cutting off
cash distributions from the company. The trial court concluded:
Paul Goldsmith breached his fiduciary duty to the corporation and his
fellow shareholders by pursuing his own personal interests at the
expense of G & N when he plotted to merge his other corporations with
G & N and use G & N’s cash flow to pay off debts of his other
businesses and himself.
Paul Goldsmith breached his fiduciary duty to G & N and his fellow
shareholders when he communicated his intention to terminate the lease
between himself and G & N in order to force other shareholders to sell
their stock in G & N to him.
. . . .
Defendant, Paul Goldsmith has, by operating in a manner unfair to
other shareholders, being dishonest with other shareholders and
through secretly plotting a takeover of G & N and a freeze out of
other shareholders, placed himself in a position to continue to
violate his fiduciary duty to the shareholders and the corporation . .
. .
Goldsmith claims that there can be no breach of a fiduciary duty, or at
least no damages, because he never purchased Boehm’s shares and therefore
Boehm was not harmed. Although Goldsmith’s plan to force Boehm out of the
corporation was not completed, Goldsmith consummated several steps in his
effort to acquire Boehm’s shares. Notably, he acquired the G & N shares
held by Gilliland and McCoy, which gave him majority control of the
corporation. If he accomplished this by wrongful use of his corporate
office, this would plainly create a cause of action in favor of the selling
shareholders.
The first question becomes whether the leverage used to cause the
sale was improper use of a position with G & N, or was simply a hardball,
but lawful, use of economic power derived from a source other than an
office or directorship with G & N. As landlord, Goldsmith was free to
charge the rent he wished. As owner of Edgecumbe, he was free to charge
whatever price he wanted for its parts. But as director and majority
shareholder, he was not free to disregard the interests of G & N. The
trial court found, in effect, that the eviction was a sham and Goldsmith
knew it. In resigning and reassuming the presidency to lend credence to
the threat, Goldsmith abused his office. As events unfolded, the lease
eviction was sufficient to coerce Gilliland and McCoy into what the trial
court found to be “far from . . . an arm’s length transaction.” Moreover,
the trial court noted that “Paul Goldsmith’s plan if neither of the buy out
plans were successful [was] to stop purchasing Edgecumbe parts in order to
force Gilliland and McCoy to sell their shares of G & N to Paul Goldsmith.”
This is a finding that Goldsmith planned to facilitate a scheme to
threaten economic harm to both G & N and Edgecumbe and thereby coerce a
sale of G & N shares owned by minority shareholders of Edgecumbe. The
acquisition of majority control was accomplished by a plan that included an
intentional misuse of corporate office for personal gain.
To the extent Goldsmith coerced a sale at less than fair value, or, if
Edgecumbe had been cut off, to the extent Edgecumbe was damaged, Gilliland
and McCoy would have a direct claim (as shareholders of G & N) or a
derivative claim (as shareholders of Edgecumbe). Neither has been
asserted. Instead, Boehm has sued, claiming that the net result of the
Goldsmith/Gilliland/McCoy transactions was to reduce his 34% holding from a
plurality to a minority. The trial court correctly concluded that this set
of circumstances also provides the basis for a claim by Boehm. These steps
alone would not have achieved Goldsmith’s stated goal of 100% ownership (or
even the 80% we assume he may have coveted). Nevertheless, the
acquisitions leading to majority shareholder status were wrongs to Boehm
because they were steps in a plan ultimately designed to use Goldsmith’s
position with G & N not for any proper business purpose of G & N, but
rather to squeeze Boehm out. The trial court found his damages to be the
reduction in value of Boehm’s shares due to their status as minority
subject to a dominant majority. Because of our resolution of the remedy
issue in Part II.C.3, we do not attempt to quantify these damages
2. Actions as Majority Shareholder
After acquiring control of G & N, Goldsmith terminated Boehm and shut
off cash distributions, leaving Boehm a shareholder in a Subchapter S
corporation receiving taxable income, but no cash to pay the taxes. If
this was done for legitimate business reasons, it is protected by the
business judgment rule. The trial court found, however, that the motive
was to eliminate Boehm as a shareholder to permit Goldsmith to file
consolidated tax returns and bail out his other businesses. Specifically,
the trial court found that, “Paul Goldsmith breached his fiduciary duty to
the corporation and his fellow shareholders by pursuing his own personal
interests at the expense of G & N when he plotted to merge his corporations
with G & N and use G & N’s cash flow to pay off debts of his other
businesses and himself.” That finding is not clearly erroneous and
supports a claim by Boehm against Goldsmith under the Barth doctrine.
3. Remedies Against Goldsmith
a. Judicially Ordered Sale
The trial court concluded that no remedy short of a forced sale was
appropriate. We agree. This corporate marriage cried out for dissolution
by the time it reached the courts. There was no deadlock that would
trigger the receivership provisions of Indiana Code section 23-1-47-1.
Damages are ordinarily the proper remedy for a shareholder aggrieved by
breach of director duty. However, we think the remedy ordered by the
trial court is appropriate here.
The trial court awarded Boehm the buy-out of his stock for $521,319,
damages of $173,939 for the amount of undistributed profits for the period
of Goldsmith’s domination, $175,000 in punitive damages, and attorney’s
fees. Goldsmith contests all of these awards. First, Goldsmith claims
that the judicially ordered sale is improper because the legislature
provided dissenters’ appraisal rights only in the case of a specified
corporate action (merger, etc.), none of which are present here. As a
preliminary matter, we agree with the trial court that Fleming v.
International Pizza Supply Corp., 676 N.E.2d 1051 (Ind. 1997), is not
applicable here because there has been no corporate action that gives rise
to dissenters’ rights. See Ind.Code § 23-1-44-8 (1998). Although
dissenters’ rights are the exclusive remedy in cases of merger, sale of
substantially all of a corporation’s assets, and the other listed
transactions, the Code does not preclude a court from fashioning
appropriate remedies in other situations. As a general proposition, a
trial court “has full discretion to fashion equitable remedies that are
complete and fair to all parties involved.” Hammes v. Frank, 579 N.E.2d
1348, 1355 (Ind. Ct. App. 1991). In this case, the trial court ordered
Goldsmith to purchase Boehm’s shares as a remedy for his actions in
violation of his fiduciary duties to Boehm in the course of a plan
attempting to coerce Boehm into selling his shares. By forcing the other
shareholders to sell their shares and limiting Boehm’s role in the
corporation, Goldsmith essentially rendered Boehm’s shares valueless. It
is difficult to imagine who would buy them and Boehm, himself, can receive
no benefit from them. The trial court’s order for Goldsmith to pay Boehm
the fair market value in exchange for his shares is affirmed.
In a number of states, “oppressive conduct” by the directors or a
majority shareholder is a statutory ground for dissolution of the
corporation. See generally Robert B. Thompson, The Shareholder’s Cause of
Action for Oppression, 48 Bus. Law. 699, 708-10 (1993). The Indiana
Business Corporation Law was enacted at the highwater of concern for
excessive ease of takeover of publicly traded companies. A number of its
provisions are aimed directly at curbing perceived abuses and the
commentary to the BCL includes a number of comments explicitly and
implicitly seeking to further that goal. Judicial dissolution for
oppressive conduct was intentionally deleted from the remedies available
under the Revised Model Act 14.30(2)(ii) because of a concern that it might
be abused in a hostile takeover. Ind.CodeAnn. § 23-1-47-1 cmt. (West
1998). Accordingly, if G & N were a publicly traded corporation, this
remedy would not be available under Indiana law. However, the reasons for
omitting an express remedy of judicial dissolution for oppressive conduct
are not relevant in the context of a close corporation. The commentary
thus leaves us with the unadorned language of the statute as to the
availability of that remedy in a close corporation.
Unlike a number of states, Indiana has no corporate law specifically
applicable to close corporations. The shareholder derivative action is a
creature of equity. Griffin v. Carmel Bank & Trust Co., 510 N.E.2d 178,
183 (Ind. Ct. App. 1987) (“A derivative action is always in equity even
though the only relief available is damages and the corporation could have
maintained an action at law.”), trans. denied. Similarly, a Barth direct
action is for breach of a fiduciary duty, which is also a claim in equity.
Cf. Ross v. Tavel, 418 N.E.2d 297, 304 (Ind. Ct. App. 1981). In either
case, we agree with the trial court that traditional powers of equity
courts are available to fashion a remedy for breach of a fiduciary duty in
a close corporation. We also agree with the courts that have recognized
the need for more flexible remedies in the case of close corporations.
Unlike shareholders in a publicly traded corporation, the oppressed
minority in a close corporation does not have the option of voting with its
feet by selling its shares in a public market for a presumptively fair
price.
For essentially the same reasons we recognized the availability of a
direct action by a minority shareholder in a close corporation in Barth, we
conclude it is appropriate in this context to fashion a remedy that may
amount to a forced dissolution or sale of shares. This remedy should be
exercised only after careful thought. It amounts to a forced withdrawal of
capital from the enterprise if the enterprise itself is the only realistic
source of funding the buyout. This can be true if the corporation is the
buyer or the funding source for the buying shareholder. If the purchase
price is greater than a damage award, the effect may be to force a
withdrawal of capital beyond the level of damages owed. Particularly if
the business is in a startup mode, a forced liquidation of assets may
severely impact it. See generally Edward B. Rock & Michael L. Wachter,
Waiting for the Omelet to Set: Match-Specific Assets and Minority
Oppression in Close Corporations, 24 J. Corp. L. 913 (1999). Nevertheless,
we agree with the Court of Appeals that the remedy fashioned by the trial
court in this case was within its discretion. If Boehm had acceded to
Goldsmith’s tactics and sold for $250,000, he would still have his claim
for damages in the amount of the difference between the fair value of his
shares and the price they brought in an extorted sale. The remedy here
produces essentially the same result. Moreover, the trial court found that
G & N’s worth was substantially more than its bank debt and that G & N was
profitable. On those findings, the remedy is appropriate.
Goldsmith argues that Boehm’s shares should be valued at a discount
because of their minority status. Typically, minority shares in a two-
shareholder corporation will be valued at less than their proportionate
ownership. However, the value of the entire corporation is whatever it is.
If there is a minority discount, there is also a majority premium. In
this case, the majority premium is the result of the extorted acquisition
by Goldsmith of the shares owned by Gilliland and McCoy. This again raises
the issue of whether those transactions were the result of a misuse of
Goldsmith’s role as an officer or director of G & N. Because we affirm the
trial court’s finding that they were the product of wrongful action by
Goldsmith as officer and director of G & N, that majority premium should be
viewed as a corporate asset. It is inappropriate to give Goldsmith the
benefit of a minority discount that was the product of his wrongful acts.
The trial court listened to experts from both sides and pointed out
problems with each before arriving at $521,319 as the value for Boehm’s
shares. Because that amount is supported by the evidence, we cannot
conclude that the trial court erred in its determination.
b. Reimbursement for Omitted Dividends
The trial court further ordered Goldsmith and G & N to pay Boehm the
amount he lost in income from 1994 to 1996 as a result of cessation of G &
N’s distributions to shareholders. That $173,939 remained in the company
instead of being distributed to the shareholders. As such, it increased
the value of the shares and was included in the valuation of the shares as
of 1996. Payment of both the full value of the shares as of 1996 and also
the back dividends produces a double recovery for Boehm. The trial court’s
judgment awarding $173,939 in back dividends is reversed. As of the date
of valuation of the sale ordered by the Court, Boehm should no longer be
viewed as an equity participant in G & N and is not entitled to further
dividends. The trial court also awarded dividends until the fair value of
Boehm’s shares is paid. As of the date of judgment Boehm is properly
viewed as a creditor of Goldsmith entitled to postjudgment interest, but no
longer sharing either the upside or downside of G & N’s profitability.
This award is also reversed.
c. Punitive Damages
Next, Goldsmith contends that punitive damages are inappropriate. He
claims that because there is no basis for compensatory damages, punitive
damages may not be awarded. However, as discussed above, Boehm suffered
harm from Goldsmith’s breaches of his fiduciary duties to Boehm and may be
awarded compensatory damages. We agree with the Court of Appeals that
punitive damages are also appropriate. As the Court of Appeals put it:
Goldsmith deliberately acted, over a period of time, to relegate Boehm
to a minority position and effectively “freeze” Boehm out through a
denial of dividends. . . . In light of this evidence, we cannot say
that the trial court erred in concluding that Goldsmith’s conduct was
oppressive and malicious . . . . Thus, the award of punitive damages
in Boehm's favor was proper.
G & N Aircraft, 703 N.E.2d at 680.
d. Attorney’s Fees
Goldsmith argues that the award of attorney’s fees is contrary to
law. The trial court awarded Boehm “attorney’s fees in this action,” but
did not specify for what or from whom. The Court of Appeals modified this
award to allow for attorney’s fees against G & N for the derivative action,
but no fees against Goldsmith in the direct action. We agree with the
Court of Appeals that Boehm is not entitled to attorney’s fees from
Goldsmith in his direct action. The “United States Rule” is that parties
bear their own fees in the absence of a statute or a basis in quantum merit
for reimbursing a party who has benefited others. The direct action by
Boehm fits neither category.
We also conclude that he is not entitled to attorney’s fees for any
derivative claims. First, as has been seen from the foregoing, we found
the direct claims to be the basis of recovery. A shareholder bringing a
successful derivative action can recover attorney’s fees from the
corporation, but in the absence of a fee shifting statute such as the one
we find in the antitrust laws, there is no basis for recovery from the
defendant. The theory underlying an award of fees in a derivative suit is
that the recovery goes to the corporation as a whole, not the individual
shareholder. The shareholder who has performed a service for the
corporation by bringing the derivative action is entitled to be paid his
fees and expenses incurred in conferring that benefit. But recovery in
this case by Boehm conferred no benefit on the corporation as a whole. As
Barth noted, one effect of allowing direct actions in closely held
corporations is that “the plaintiff, even if successful, cannot ordinarily
look to the corporation for attorney’s fees.” 659 N.E.2d at 563. We
affirm the trial court’s judgment that G & N is liable for Boehm’s
attorney’s fees and expenses connected with its frivolous counterclaim.
The remaining award of attorney’s fees was in error and is reversed.
III. Claims against G & N
Boehm’s complaint and the trial court and Court of Appeals’ rulings
against G & N appear to be based on the same allegations as the complaint
against Goldsmith. G & N claims that it owes no fiduciary duty to its
shareholders and cannot be held liable for any breaches of fiduciary duty
by Goldsmith. Therefore, it argues that it is not liable to Boehm for the
buyout of his shares or any other damages.
A. Claims for Breach of Fiduciary Duty
The trial court and Court of Appeals granted relief against G & N
because there is “vicarious liability a corporation has for actions taken
at its president’s direction.” G & N Aircraft, 703 N.E.2d at 676.
Although a corporation may be held liable for acts committed by the
president within the scope of his employment, that is not the basis of the
relief awarded here.
To the extent Goldsmith as an officer and director breached fiduciary
duties to the corporation, Boehm as a shareholder could pursue a derivative
action in the name of the corporation. If the corporation were itself
liable on such a claim, the recovery becomes circular. The corporation is
the real party in interest as a plaintiff in a derivative suit, and
therefore is the party who receives the recovery, not the party who pays
for the harm. On the other hand, the theory of a Barth recovery is that
the minority is compensated only for damages inflicted on the minority
shareholders of the corporation, not for injury to the corporation as a
whole. If the corporation were liable for that amount, it would
essentially require the continuing shareholders, including the minority
shareholder/plaintiff, to pay for a portion of the damages awarded to them
that were caused by the offending officer/director/shareholder. Once again
a part of the recovery would be circular. Here, because Boehm is being
bought out, that point is irrelevant. But his claim under Barth remains a
claim against Goldsmith, not G & N.
In sum, G & N is not liable for the damages awarded due to Goldsmith’s
breach of his fiduciary duty. Of course, the minority shareholder may seek
to satisfy the judgment by execution on the majority’s share holdings in
the corporation. But awarding a judgment against the majority shareholder
and requiring this route to the corporate pocketbook minimizes the risk of
preferring the shareholders over creditors if the corporate pot is
insufficient to pay the judgment.
B. Claims to Compel Dividends and for Access to Records
Boehm’s claims to direct the distribution of dividends and to compel
access to records are correctly brought as direct actions against G & N.
However, they are moot as a result of our affirmance of the purchase
remedy.
Indiana Code section 23-1-52-2 provides shareholders with the right
to inspect corporate records. If Boehm were prohibited from exercising his
rights, the remedy would be an action to compel the corporation to allow
Boehm access to the records as described in Indiana Code section 23-1-52-
2(a). However, because we have affirmed the judgment directing Goldsmith
to buy Boehm’s shares for fair value, Boehm is no longer a shareholder.
Nonetheless, until the transaction is closed, he should have the same
right. Thus, the trial court’s order to allow Boehm access to the required
records until such time as the stock purchase is consummated is affirmed.
Conclusions
The judgment of the trial court is affirmed in part and reversed in
part and this case is remanded with instructions to enter judgment for
Boehm (1) requiring Goldsmith to purchase Boehm’s G & N shares for
$521,319, (2) awarding Boehm postjudgment interest on the purchase price,
(3) awarding punitive damages of $175,000 against Goldsmith, and (4)
awarding Boehm attorney’s fees from G & N for the defense of the frivolous
counterclaim.
SHEPARD, C.J., and DICKSON, SULLIVAN, and RUCKER, JJ., concur.
-----------------------
[1] This is particularly true of close corporations. This case presents a
good example. One act complained of is a coerced sale of Gilliland’s and
McCoy’s shares through misuse of Goldsmith’s corporate office. Assuming
for the moment that this asserts a claim, in some sense, G & N is the
injured party. To the extent a value (the premium attributable to majority
shareholding) has been acquired by use of a corporate office, it can be
viewed as an appropriation of an asset that rightfully belongs to the
corporation. And to the extent operational disadvantage is a result of the
threatened or consummated termination of Edgecumbe, G & N is injured. But
it is equally valid to view Boehm as the injured party by reason of having
been reduced from a plurality to a minority. See infra Part II.C.1.
[2] Some corporate statutes and courts have attempted to define “close
corporation.” Because G & N had only three shareholders and one of those
is Goldsmith’s son, it falls clearly on the close corporation side of any
line, bright or fuzzy. A minimum requirement is a lack of a public market
for the shares, and most would require a small number of shareholders as
well. Melrose v. Capitol City Motor Lodge, Inc., 705 N.E.2d 985, 990 (Ind.
1998).
[3] Under Indiana Code section 23-1-35-2(a), a transaction is not voidable
“solely because of” a conflict of interest if any one of three
circumstances is found. They are (1) approval by disinterested directors,
which is inapplicable here, (2) “ratification” by the shareholders even if
they are interested, and (3) that the transaction is “fair to the
corporation.”