No. 81-222
IN THE SUPREPlE COURT OF THE STATE OF MONTANA
1982
SKI ROUNDTOP, INC., individually and
derivatively on behalf of SKI
YELLOWSTONE INC.,
Plaintiff and Appellant,
vs.
JOHN P. HALL, FREDERICK L. MORGENTHALER
and CHARLES R. MILLER, JR.,
Defendants and Respondents.
Appeal from: District Court of the Eighteenth Judicial District,
In and for the County of Gallatin
Honorable W. W. Lessley, Judge presiding
Counsel of Record:
For Appellant:
Gregory 0 Morgan argued, Bozenan, Montana
.
Albert Blakey, I11 argued, York, Pa.
For Respondents:
Landoe, Brown Law Firm, Bozeman, Montana
J. Robert Planalp argued, Bozeman, Montana
Morrow, Sedivy, Olson & Eck, Bozeman, Montana
Submitted: September 14, 1982
Decided: January 31, 1983
Mr. Justlce Fred J. Weber delivered the Oplnlon of the
Court.
This case is a companion case to Naylor v. Hail
(1982), Mont . , 651 P.2d 1010, 39 St.Rep. 1953.
Plaintiffs, minority shareholders in Ski YelPowstone,
Inc., appeal from the decision of the Eighteenth Judicial
District Court for Gallatin County, denying them relief in
this stockholders' derivative action arising from the
alleged misconduct of several of the officers and directors
of Ski Yellowstone, a Montana corporation. We affirm the
Distrlct Court with one exception.
The following issues are presented to this Court by
plaintiffs:
(1) Did John Hall breach a duty to minority stock-
holders, with respect to the "C" and "D" stock issues?
(2) After acquiring control of the corporation, did
John Ball engage in a course of conduct which was oppressive
to minority stockholders?
(3) After acquiring control of the corporation, was
John Hall guilty of fraud and self-dealing?
(4) Was the amendment of the corporation's Articles of
Incorporation, which authorized stock for the "C" and "D"
issues, valid under Montana law?
(5) What relief is appropriate under all of the cir-
cumstances?
Ski Yellowstone is a Montana corporation which planned
to develop a four-seasons resort in Gallatin County. It was
organized in 1973 by stockholders in a Pennsylvania corpora-
tion, Ski Roundtop, Inc., which is a minority stockholder in
Ski Yellowstone. The events on which this action is based
occurred primarily in 1975 and 1976, during which time John
Hall obtained control of Ski Yellowstone.
The original stock issue which took place in 1973 was
1,45O,OUO shares, $1.00 par value, which were relatively
evenly distributed among twenty-one shareholders. The
shares were issued at a cost of $1.00 per share, 1,050,000
shares for cash in the amount of $1,050,000, and 400,000
shares for land having a value of $400,000. With the excep-
tion of defendant John Hall and his family corporation,
J.M.S. Corporation, all of the shareholders were friends and
associates oE Irvin S. Naylor, the head of Ski Roundtop and
the primary organizer, with Hans Geier, of Ski Yellowstone.
Naylor originally was in a controlling position in Ski
Yellowstone as well as in Ski Roundtop.
Ski Yellowstone was low on funds by 1974. The issue
of the Forest Service use permit to develop a ski area,
which was essential to the success of Ski Yellowstone, had
been delayed. In order to finance the expense of delay, in
November, 1974, $290,000 worth of Series "A" debentures were
issued. These debentures earned interest and were converti-
ble into the common stock of Ski Yellowstone at $.20 per
share. The dilution of the shares from the original $1.00
per share paid in 1973 was recognized by Naylor, but was
deemed necessary to prevent bankruptcy. John Hall purchased
his $5,000 pro rata preemptive share of the Series "A"
debentures and also purchased by agreement an additional
$42,500 worth of overage (debentures offered to but not
purchased by other shareholders who were first entitled to
purchase). Plaintiffs contend there was a "gentlemen's
agreement" that the Series "A" debentures would not be
converted into stock unless the company was sold.
By 1 9 7 5 S k l Y e l l o w s t o n e a g a i n was s h o r t of c a p i t a l a n d
in July, 1 9 7 5 , $200,000 w o r t h of S e r i e s "8" d e b e n t u r e s w e r e
issued to the shareholders of the company. Series "B"
debentures earned t h e same i n t e r e s t r a t e a n d h a d t h e same
c o n v e r s i o n p r i v i l e g e s a s S e r i e s "A" d e b e n t u r e s .
John Hall became a director (one of ten) of Ski
Yellowstone i n June, 1975. During 1975 and 1976 J o h n H a l l
obtained greater control of Ski Yellowstone by joining
several "allies" in acquiring all unpurchased Series "A"
debentures, converting those "A" debentures into stock,
tnereby i n c r e a s i n g t h e number o f Series "B" d e b e n t u r e s h e
could purchase; subscribing to Series "B" debentures and
converting the same into stock. The result of these
activities was to create a controlling block of shares.
O t h e r s h a r e h o l d e r s a l s o c o n v e r t e d S e r i e s "A" and "B" d e b e n -
tures i n t o common s t o c k , with t h e e x c e p t i o n of plaintiffs
Naylor and G e i e r .
The new v o t i n g m a j o r i t y of s t o c k h o l d e r s reduced the
number of d i r e c t o r s f r o m t e n t o s e v e n , and e l e c t e d F r e d Pack
a s chairman of t h e board in place of I r v i n Naylor. The
corporation authorized the s a l e of $200,000 of S e r i e s "C"
d e b e n t u r e s w i t n t h e same t e r m s as the "A" and "B" deben-
tures. The s u c c e s s o f t h e i s s u e r e q u i r e d a pledge of 80
percent of the issue. The issue failed. John Hall
distributed a letter to Ski Yellowstone shareholders
expressing general confidence i n t h e venture, but pointing
o u t t h a t e x p e n s e s w e r e l i k e l y t o be h i g h e r t h a n a n t i c i p a t e d .
In considering the questioned stock issues, it is
I m p o r t a n t t o k e e p i n mind t h e f o l l o w i n g f i n d i n g s o f f a c t o n
t h e p a r t of t h e D i s t r i c t Court: S k i Y e l l o w s t o n e was f o r m e d
in 1 9 7 3 by Naylor and Hans Geier, both residents of Pennsyl-
vania. Naylor had extensive experience in obtaining venture
type capital for business entities and Geier had twenty
years experience in the ski industry, including sixteen in
upper-level management. The purpose of Ski Yellowstone was
to acquire private lands and the necessary permits to use
government land to develop its resort. Naylor simultane-
ously was chairman of the board of Ski Yellowstone and chief
executive officer of Ski Roundtop, which operates ski resort
areas in Pennsylvania. Initially, Naylor represented to
shareholders of Ski Yellowstone that within a short time a
shareholder could sell his stock for $10 a share. Ski
Yellowstone purchased land and undertook a series of
studies, applied for a Forest Service permit, and filed
extensive environmental data in 1973. At that time, the
Forest Service changed its approach and decided to process
the application in the context of a larger regional study,
which led to a series of delays. By 1974 it was obvious
that Geier was unable to quickly obtain the Forest Service
permit, and Naylor caused John Maples, a plaintiff, to be
hired for the purpose of liquidating Ski Yellowstone or
selling the corporation. In 1974, John Maples represented
to the shareholders that the value of their stock could be
as low as $.12 per share. Following the offering to the
snareholders of Series "C" debentures in 1976, plaintiff
Rosenmiller, also a director of Ski Koundtop and a close
business associate of Naylor, advised Naylor of the
conclusions of his committee that Ski Roundtop should
decline to invest in Series "C" debentures because their
investments should be made in Ski Roundtop's marketing area,
that is the ski business in Pennsylvania, and that Ski
Roundtop should - convert Series "A" and " B " to stock.
not
Because of its insight into the thinking and actions on the
part of the plaintiffs, the District Court set forth the
Rosenmiller letter of May 18, 1976, to Naylor in its
findings as follows:
"I have concluded my discussions with my
Committee relative to the advisability of
Ski Roundtop converting its Ski Yellow-
stone Debentures into Common Stock and
subscribing to the forthcoming Series "C"
Debenture issue. It is the unanimous
opinion of our Committee that we should
do the following:
"1) We auvise that Ski Roundtop, Inc.
honor its commitment under the existing
Series "B" Convertible Notes subscrip-
tion, calling for a payment of $4,843.60.
Although this Note offers no return for
one year it does provide a $.20 a share
conversion feature if it is later deter-
mined that the stock is, in fact, worth
that or a figure in excess of $.20 a
share. Most importantly, this Debenture
has been substantially collateralized by
valuable real estate which has less
demands placed against it due to the
recent conversion of the Hall notes.
"2) It is the unanimous recommendation
that we do not convert our Series "A" and
Series "B" notes into common stock of Ski
Yellowstone, Inc. The only rationale for
doing so would be to return the control
of the Company into its former hands but
the likelihood of this occurring, is
remote at best. It is felt by our Group
that we may be in a stronger position to
allow the new management to go forward
and if successful, we can convert at a
later date and hopefully realize a return
and profit on our investment. If new
management is unsuccessful, we will be
able to write off the common equity
portion of our investment against future
earnings, developing a tax shelter which
will pay for a portion of the loss
incurred. We will further be in a good
position to take legal action against the
new management in the event they have
acted not in the best interest of all
shareholders.
"3) Regarding the proposed $200,000
Series "C" Debenture, we would recommend
against any further investment in Ski
Yellowstone, Inc. at this time. Our
rationale being that our investments
should be made in Ski Roundtop's market-
ing area, advancing that which we do best
and profit from most, namely, the ski
business and recreation generally here in
York and Adams Counties.
"Tnis constitutes the recommendations of
Jacob A. Barnhart, Dr. Anthony Perlman
and W. F. 0 . Rosenmiller."
As noted by the District Court, the letter points out
tne conclusion on the part of those making their recommenda-
tions to Naylor: not to convert stock because of the finan-
cial risk; consider conversion at a later date if the new
management is successful; if new management is unsuccessful,
write off against earnings as a tax shelter; take legal
action in the event the new management has not acted in the
best interest of shareholders; and finally, recommending
against any further investment in Ski Yellowstone.
John Hall also circulated a letter dated May 21, 1976,
to Ski Roundtop's board of directors, suggesting that, while
he as an individual could convert his debentures to stock
for the good of the company, Ski Roundtop would be "ill-
advised" to sacrifice the interest on the debentures and
speculate by so converting. Ski Roundtop might, Hall said,
"open itself to minority shareholder suits," if it chose to
convert.
Tne "C" Series debenture issue failed, although John
Hall subscribed to the number allocated to him, conditional
upon tne success of the issue. The Ski Roundtop shareholders
did not subscribe.
A stockholders' meeting noticed on July 1, 1976, was
held July 16, 1976. It was preceded by a directors' meet-
ing. At that meeting, over Hall's protests that the move
would dilute the stock, Ski Yellowstone directors voted to
issue company stock in the amount of $500,000 at $.05 a
share. The stockholders also approved the issue. ( A $.lo
share issue was voted down.)
In early August, 1976, a falling out took place
between Naylor and Hall, accompanied by a series of acri-
monious exchanges personally and by mail, which led Naylor
to withdraw his support of the "C" Series issue and to
exercise his right to review the issue for sixty days as set
forth in the 1973 founders' agreement, thus moving the
closing date for subscriptions to October 4, 1976. Naylor's
friends, and Hall as well, then also withdrew their
subscribed support and the issue, which had until then been
over 80 percent subscribed, appeared doomed to fail. The
financial situation of the corporation was desperate; land
payments and salaries were due and bank notes overdrawn;
even the company's president, Geier, was convinced Ski
Yellowstone would fail. In October, 1976, Hall subscribed
to a total of $401,000 worth of "C" shares, notwithstanding
his previous indicated intention to subscribe to $100,000 to
$150,000 worth of the shares. Four other shareholders
subscribed for $10,480 worth of stock. John Maples, a
minority shareholder and one of the plaintiffs, wrote Wall a
letter stating, "Congratulations--you have saved the
corporation. "
When Hall paid the 25 percent due on the " C " Series
subscription in October and assumed ownership of 25 percent
oi the stock, he became owner of 50.7 percent of the Ski
Yellowstone stock outstanding (full payment would have given
him o v e r 7 7 p e r c e n t o w n e r s h i p ) . N a y l o r and t h r e e a s s o c i a t e s
resigned from t h e b o a r d o f d i r e c t o r s and w e r e r e p l a c e d by
two p e r s o n a l f r i e n d s o f H a l l who were n o t s h a r e h o l d e r s . The
new b o a r d made a number of changes, including (1) c h a n g i n g
t h e b y l a w s t o p l a c e more power i n t h e chairman, Hall; (2)
a g r e e i n g t o p o s t p o n e f u r t h e r p a y m e n t s d u e on t h e "C" i s s u e ,
first for o n e month and then (on January 7, 1977) u n t i l
needed; ( 3 ) adopting a two-tier b u d g e t , u n d e r w h i c h t h e "C"
S e r i e s p a y m e n t s would b e a p p l i e d t o t h o s e l o n g - t e r m finan-
c i a l obligations e s s e n t i a l t o t h e survival of t h e company,
a n d t h e c o s t s o f o b t a i n i n g t h e F o r e s t S e r v i c e p e r m i t would
b e f u n d e d by a s u b s e q u e n t s t o c k i s s u e .
On December 1 0 , 1 9 7 6 , S k i Y e l l o w s t o n e s o u g h t t o r a i s e
$ 4 5 0 , 0 0 0 i n c a s h by i t s o f f e r o f t h e "Dl1 S e r i e s s t o c k i s s u e
of 9 , 0 0 0 , 0 0 0 s h a r e s a t $.05 p e r s h a r e , w i t h p u r c h a s e r i g h t s
to be allocated i n proportion to s h a r e s owned a s of that
date. The prospectus notified s h a r e h o l d e r s of the first
p o s t p o n e m e n t of "C" S e r i e s p a y m e n t s , a n d t h e a d o p t i o n o f t h e
two-tier b u d g e t s u g g e s t e d by d i r e c t o r M o r g e n t h a l e r . It also
informed them that the sixty-day review period would be
s h o r t e n e d d u e t o t h e p r e s s i n g n e e d f o r c a s h a n d would e x p i r e
on December 23, 1 9 7 6 . The p r o s p e c t u s s t a t e d :
"Should i t be d e t e r m i n e d t h a t a s h a r e -
h o l d e r o f t h e Company r e t a i n s h i s r i g h t
t o e x e r c i s e h i s r i g h t s a f t e r December 2 3 ,
1 9 7 6 , t h e Company may b e r e q u i r e d t o
issue additional shares to such
shareholders."
The s u b s c r i p t i o n t o t h e i n i t i a l "D" S e r i e s a t t r a c t e d v i r t u -
a l l y no subscribers, o n l y one o r two small pledges. One
s h a r e h o l d e r , John Maples, n o t i f i e d John H a l l t h a t he r e f u s e d
t o r e t u r n h i s p r o x y and w a i v e h i s s i x t y - d a y review r i g h t . A s
a result, on J a n u a r y 7 , 1977, t h e S k i Yellowstone d i r e c t o r s
decided that the oifering was unsuccesstul, dropped the
p r i c e of s h a r e s t o $.01 each, a n d i n c r e a s e d t h e number o f
s h a r e s o f f e r e d t o 45,OU0,000. The amended p r o s p e c t u s i n d i -
cated the postponement of payments due on the "C" issue
u n t i l needed, and w a r n e d , a s had t h o s e f o r e a r l i e r issues,
that failure to subscribe would result in substantial
d i l u t i o n of ownership, should t h e i s s u e succeed. The number
of p a y m e n t s was i n c r e a s e d f r o m two t o f o u r , t h e f i r s t due
F e b r u a r y 1 0 , 1 9 7 7 , and t h e l a s t t h r e e d u e on s p e c i f i e d d a t e s
"or thereafter a t t h e c a l l of the Directors." The s t a t e d
p u r p o s e o f t h e amendment was t o " p r o m o t e t h e s u c c e s s o f the
offering." The c l o s i n g d a t e f o r t h e o f f e r i n g was e x t e n d e d
t o F e b r u a r y 1 0 , 1977. Only J o h n H a l l a n d d e f e n d a n t Morgen-
t h a l e r were p r e s e n t a t t h e J a n u a r y 7 , 1977 m e e t i n g .
The "D" i s s u e was s u c c e s s f u l , a g a i n because of John
Hall's subscription to $400,000 of stock, with $2,725 of
s t o c k s u b s c r i b e d by f o u r o t h e r s t o c k h o l d e r s . A s a r e s u l t of
h i s s u b s c r i p t i o n t o t h e S e r i e s "D" i s s u e and h i s p r e v i o u s
subscription t o t h e S e r i e s "C" issue, Hall gained t h e r i g h t
to obtain 94 p e r c e n t stock ownership in the corporation.
The plaintiffs point out that he had invested only 37
p e r c e n t o f t h e money i n v e s t e d i n o r d e r t o g e t t h a t s h a r e o f
ownership. A l e t t e r d a t e d March 1 0 , 1 9 7 7 , f r o m J o h n H a l l t o
t h e s h a r e h o l d e r s i n d i c a t e d t h a t t h e f i r s t payment o n t h e "D"
i s s u e was s u f f i c i e n t t o meet t h e p r e s e n t n e e d s , a n d t h a t t h e
f u r t h e r i n s t a l l m e n t s would b e c a l l e d f o r a s n e e d e d .
From autumn of 1976 on, Hall rejected Naylor1s
r e p e a t e d a t t e m p t s t o s e l l H a l l h i s i n t e r e s t i n S k i Yellow-
stone. Naylor com~nenced t h i s s h a r e h o l d e r s ' suit i n Penn-
sylvania. T h e c a u s e was transferred t o Montana a n d a f t e r
extensive d~scovery, heard before the Eighteenth Judicial
District Court in September, 1981. The District Court
denied plaintiffs relief, concluding that the defendants had
acted in good faith for the benefit of Ski Yellowstone, and
committed no fraudulent, oppressive or illegal acts in the
course of their management of and membership in that
corporation. Plaintiffs appeal.
Because of the complex facts and a number of nondis-
positive accusations by the plaintiffs, we will consider a
number of these accusations first in order to eliminate the
same before proceeding to the substantive issues.
Plaintiffs concede that defendant Hall had the legal
rlght to convert his "A" and "B" debentures to stock, and
that he had the right to purchase unsubscribed debentures
and unsubscribed "C" and "D" stock. All shareholders
possessed those rights. No shareholder was required to give
warning to others of his intent to convert to common stock
or purchase overages.
Plaintiffs' arguments sometimes are misleading in
seeking to establish that John Hall and his "allies" had
gained control of Ski Yellowstone, and thereafter oppressed
the other shareholders. Several of such "allies" were more
closely associated with Naylor than with defendant Hall.
John Hall did not take control of Ski Yellowstone until
October 1976 when he became the majority shareholder. This
was several months after the previous majority of share-
holders had refused to invest further in Ski Yellowstone and
thereby retain their own control. Prior to October, 1976,
Hall was just another minority shareholder and director,
whose vote did not control, and whose responsibility to
other shareholders was significantly less than that of a
majority shareholder.
The record does not establish that Hall's acrimonious
exchanges with other shareholders are significant in consi-
dering the question of oppression. The District Court found
such letters to be "juvenile and unworthy of all letter
writers." The exchanges were frequently mutual. The ylain-
tiffs as well as Hall were a sophisticated lot, knowledge-
able in their fields, and unlikely to abandon an enterprise
to their detriment because of a few caustic exchanges with
other shareholders.
Plaintiffs protest the issuance of shares of Ski Yel-
lowstone to a number of stockholders, including the defen-
dants Miller and Morgenthaler, and also Hall's wife, for
services to the corporation. Section 35-1-606, MCA, pro-
vides that labor or services actually performed may serve as
consideration for shares issued and that "in the absence of
fraud in the transaction, the judgment of the board of
directors or the shareholders, as the case may be, as to the
value of consideration received for shares shall be conclu-
sive." We find no evidence of fraud in these transactions.
Tliere has been shown no impropriety in the transfer of the
stock to these parties. It may be noted that prior to the
gaining of control by Hall, the board of directors headed by
Naylor had issued stock for services to other parties.
Plaintiffs' claim in that regard is without merit.
I
Did John Hall breach a duty to minority stockholders
with respect to the "C" and " D M stock issues? This is the
principal issue urged by the plaintiffs. An extensive
detailed written prospectus was prepared in connection with
both the "C" and "D" stock issues. Each of the prospectuses
was well drafted and contained all of the information rea-
sonably necessary on the part of the shareholders in order
to evaluate each of the stock issues. Each of the stock-
holders received copies of the prospectuses and there is no
dispute in that regard. It is also important to keep in
mind that John Ball was not the controlling stockholder or
director or officer until October 1976. Up to that time he
was at most one of seven directors and of nineteen indivi-
dual stockholders plus two corporate stockholders.
Plaintiffs contend that John Hall breached his duties
to the minority stockholders by actions designed to alienate
them and to facilitate his acquisition of control. We have
previously disposed of the acrimonious correspondence as not
being significant. The District Court did not find any
limitation on the contractual rights of the defendants to
convert their shares. No evidence is referred to which
raises any question as to the sufficiency of such conver-
slons. We therefore have concluded that the stock conver-
sions by the defendants were proper. The plaintiffs argue
that the failure of John Hall to advise other stockholders
oi his plans to support the "C" issue was misleading. There
is no evidence to support that contention. As previously
indicated, the primary plaintiffs already had concluded they
would not support the " C " issue. We find that all informa-
tion reasonably needed by the minority stockholders in order
that they might conclude whether or not to convert their "A"
or "B" debentures, or to purchase "C" or "D" stock issues
was f u r n i s h e d t o them and t h a t t h e r e was n o b r e a c h o f d u t i e s
w i t h r e g a r d t o t h e a l i e n a t i o n of s t o c k h o l d e r i n t e r e s t i n t h e
company.
P l a i n t i f f s contend t h a t John H a l l breached h i s f i d u -
c i a r y d u t i e s t o m i n o r i t y s t o c k h o l d e r s by p u r c h a s i n g s t o c k i n
"C" on t e r m s n o t a v a i l a b l e t o o t h e r s , a n d by a u t h o r i z i n g t h e
"D" i s s u e when t h a t i s s u e was u n n e c e s s a r y . A s mentioned,
t h e p r o s p e c t u s f o r t h e "C" i s s u e a n d f o r t h e "D" i s s u e s e t
forth all of the pertinent d e t a i l s needed by the stock-
holders. The c h a n g e i n t h e amount o f i n t e r e s t t o b e p a i d by
John H a l l w i l l be d i s c u s s e d l a t e r .
In connection with the proposed "D" issue, the
directors, including John H a l l , adopted a two-tier budget.
Under t h i s budget, long-term obligations essential to the
s u r v i v a l of t h e company w e r e t o b e p a i d o u t o f t h e p r o c e e d s
of t h e "C" issue. The s e c o n d t i e r r e l a t e d t o items t o b e
paid i n order t o meet the c o s t s of obtaining the Forest
S e r v i c e p e r m i t , and t h e p l a n was t h a t s u c h s e c o n d t i e r would
be p a i d o u t of t h e p r o c e e d s of t h e "D" i s s u e . Plaintiffs
a r g u e t h a t t h e "D" i s s u e would n o t h a v e b e e n n e e d e d i f H a l l
had p a i d for a l l of t h e "C" issue. T h e r e is s u b s t a n t i a l
evidence contradicting t h i s a s s e r t i o n i n t h e record.
The District Court found that the actions of the
directors and H a l l were to be measured by the "business
judgment rule." We approve the statement of this rule
c o n t a i n e d i n N u r s i n g Home B u i l d i n g C o r p . v. DeHart ( 1 9 7 5 ) ,
i 3 Wash.App. 489, 5 3 5 P.2d 1 3 7 , 143-144, a s follows:
". . . The ' b u s i n e s s judgment r u l e '
immunizes management f r o m l i a b i l i t y i n a
corporate t r a n s a c t i o n undertaken within
b o t h t h e power o f t h e c o r p o r a t i o n and t h e
a u t h o r i t y o f management w h e r e t h e r e i s a
reasonable b a s i s t o indicate t h a t t h e
t r a n s a c t i o n was made i n good f a i t h . An
e x c e l l e n t s t a t e m e n t of t h e ' b u s i n e s s
judgment r u l e ' i s f o u n d i n W . F l e t c h e r
51039 a t p a g e s 621-25:
" ' I t i s t o o w e l l s e t t l e d t o a d m i t o f con-
troversy that ordinarily neither the
d i r e c t o r s nor t h e o t h e r o f f i c e r s of a
c o r p o r a t i o n a r e l i a b l e f o r mere m i s t a k e
o r e r r o r s o f j u d g m e n t , e i t h e r o f law o r
fact. I n o t h e r words, d i r e c t o r s of a
c o m m e r c i a l c o r p o r a t i o n may t a k e c n a n c e s ,
t h e same k i n d o f c h a n c e s t h a t a man would
t a k e i n h i s own b u s i n e s s . Because t h e y
a r e g i v e n t h i s wide l a t i t u d e , t h e law
w i i l not hold d i r e c t o r s l i a b l e f o r honest
e r r o r s , f o r m i s t a k e s of j u d g m e n t , when
t h e y a c t w i t h o u t c o r r u p t m o t i v e and i n
good f a i t h , t h a t i s , f o r m i s t a k e s w h i c h
may p r o p e r l y be c l a s s i f i e d u n d e r t h e h e a d
of h o n e s t m i s t a k e s . And t h a t i s t r u e
z v e n t h o u g h t h e e r r o r s may be s o g r o s s
t h a t t h e y may d e m o n s t r a t e t h e u n f i t n e s s
o f t h e d i r e c t o r s t o manage t h e c o r p o r a t e
affairs. T h i s r u l e i s commonly r e f e r r e d
t o a s t h e " b u s i n e s s judgment r u l e . " '
It ( E ' o o t n o t e s omitted. ) S e e a l s o H. Henn,
Law o f C o r p o r a t i o n s S242 ( 1 9 7 0 ) . "
The a c t i o n s o f t h e b o a r d o f d i r e c t o r s i n t h i s c a s e a r e
t o be rneasureu by t h e b u s i n e s s judgment r u l e . While i t is
clearly arguable that the two-tier budget might not have
been tile p e r f e c t solution to the financial needs of the
corporation, we find ample evidence in the record, as
p o i n t e d o u t by t h e D i s t r i c t C o u r t , demonstrating t h a t t h i s
financial analysis contained in the two-tier b u d g e t was a
r e a s o n a b l e t n e o r y f o r t h e d i r e c t o r s and o f f i c e r s t o a d o p t .
The r e c o r d d o e s n o t show a n y c o r r u p t o r f r a u d u l e n t m o t i v e s .
Of particular significance is t h e absence i n t h e record of
f a c t s showing a n a c t u a l m i s t a k e o f judgment i n t h e a d o p t i o n
or t h e two-tier b u d g e t and t h e i s s u e of the "Dl' s t o c k as
well a s the "C" stock. Following t h e s u b s c r i p t i o n t o t h e
"U" i s s u e , f o r t h e f i r s t t i m e S k i Y e l l o w s t o n e was i n a n a d e -
q u a t e f i n a n c i a l p o s t u r e t o meet c u r r e n t o p e r a t i n g e x p e n s e s
and long-range development expenses. It is lnteresclng to
note that the plaintiffs, who concluded that it was bad
business judgment on their own part to invest additional
funds in this corporation, now contend that the "Dlt issue
was unnecessary and was oniy a device to obtain control ot
the corporation. As mentioned previously, the plaintiffs
haa the option to purchase the stock in tne same manner and
at the same price and terms as the defendants, and in
particular John Hall. As determined by the District Court,
the record contains substantial evidence to support the
business need for tne "D" issue.
We approve the "DM issue following the " C " issue under
the buslness judgment rule, as tne plaintiffs have failed to
prove any basis tor setting the same aside.
Plaintitfs also argue that the reduction in price of
the "0" issue from $.05 to $.01 was an improper sale of the
stock at less than its value. The record demonstrates that
all of the shareholders had the opportunity to purchase the
" D M issue at $.US but failed to do so. The directors then
reduced the prlce from $.05 to $.01 per share, again giving
tile opportunity to ail shareholders to purchase the "D"
issue at S.01 per share. Only John Hall and a few other
stockholaers purchased. The plaintiffs did not choose to
do so. Complete information was furnished under the
prosp2ctus to ail of the stockholciers so that no one was
misled. Plaintiffs argue that the issue should have been
held open at the $ . 0 5 price for sixty days as required under
the founders' agreement. In the prospectus, all of the
stockholders were advised of the tnirteen-day period within
which a decision was required on the $.05 price, and were
also advisea that there was a sixty-day provision which
~rlight give stockholders an opportunity to purchase at the
$.05 p r l c e for a longer period. Having found t h a t no o n e
desired to purchase at $.05, the directors reduced the
oLferlng p r i c e t o $.01 an6 gave t h e t u l l sixty-day period
w i t h i n which t o p u r c h a s e a t s.01. Again, it i s t o be noted
t n a t t h e p l a i n t i f f s d i d not attempt t o purchase o r o f f e r t o
purchase a t t h e $.01 p r i c e . Further, t h e r e was s u b s t a n t i a l
evidence to support the conclusion of the District Court
that the price of $.01 was the fair market value of the
stock. The claim a s t o t h e p u r c h a s e p r i c e o f t h e "D" issue
is w i t h o u t f o u n d a t i o n .
We therefore conclude that there was a legitimate
b u s i n e s s p u r p o s e i n t h e a d o p t i o n by t h e b o a r d o f d i r e c t o r s
of t h e two-tier b u d g e t , a n d i n t h e m a k i n g o f t h e "D" i s s u e ,
as w e l l a s t h e r e d u c t i o n i n t h e s u b s c r i p t i o n p r i c e f o r t h e
"D" s h a r e s f r o m $.O5 to V.01. Such a c t i o n s a r e approved
under t h e b u s i n e s s judgment r u l e .
The District Court prepared extensive and detailed
f i n d i n g s of fact, supported by a memorandum a n a l y z i n g the
f a c t s and r u l e s of law. W w i l l n o t s u b s t i t u t e our judgment
e
for that of the trier of fact. As stated in Jensen v.
Jensen (19bl), Non t . , 629 P.2d 765, 768, 38
" T h i s C o u r t w i l l n o t s u b s t i t u t e i t s judg-
ment f o r t h a t o f t h e t r i e r o f f a c t . W e
w i l l c o n s i d e r o n l y whetner s u b s t a n t i a l
c r e d i b l e evidence supports t h e findings
and c o n c l u s i o n s . Findings w i l l n o t be
overturned unless there is a clear
p r e p o n d e r a n c e of e v i d e n c e a g a i n s t them,
r e c o g n i z i n g t h a t e v i d e n c e may b e weak o r
conflicting, yet still support the
findings. P h e n n i c i e v. P h e n n i c i e ( 1 9 7 9 ) ,
Mont., 6 0 4 P.2d 7 8 7 , 7 9 0 , 36 S t . R e p .
2 3 7 8 , 2381. The j u d g m e n t o f t h e t r i a l
c o u r t is presumed c o r r e c t , and t n l s C o u r t
w i l l draw e v e r y l e g i t i m a t e i n f e r e n c e t o
support t h a t presumption. Marta v. Smith
( 1 9 6 l ) , Mont., 622 P.2d 1 0 1 1 , 1 0 1 5 , 3 8
S t . R e p . 2 8 , 3 2 ; M a d i s o n F o r k Ranch v. L &
B Lodge, E t c . ( 1 9 8 0 ) , Mont., 6 1 5 P.2d
9 0 0 , 905-906, 37 S t . R e p . 1 4 6 8 , 1 4 7 3 . "
On t h e key q u e s t i o n s o f t h e " C " a n d "D" i s s u e s , t h e r e
is substantial credible evidence supporting the findings and
conclusions of the court. We therefore affirm such conclu-
sions on that basis as well.
Plaintiffs also contend that John Hall breached his
fiduciary duties to stockholders when he failed to pay the
balance of the purchase price on the series "C" issue in the
time required under the prospectus. We find that this
failure to pay did deprive the corporation of the purchase
price of the stock, as a result of which the corporation
suffered a loss equivalent to the income which it would have
earned if Hall had paid for the "C" stock on the same basis
as that offered to all shareholders. We therefore hold that
the District Court shall determine the interest to be paid
by John Hall to the corporation, which shall run from the
due date for the payment of the balance of the purchase
price on the " C " issue as contained in the offering to the
date on which it was actually paid.
I1
After acquiring control of the corporation, did John
Hall engage in a course of conduct which was oppressive to
minority stockholders and which justifies liquidation of the
corporation? Plaintiffs contend that there is oppression
sufficient to qualify for liquidation of the corporation
pursuant to section 35-1-921, MCA, which provides in
pertinent part:
"Power of court to liauidate assets and
business of corporation -- venue. (1)
The district courts shall have full power
-
to liquidate the assets and business of a
corporation:
"(a) in an action by a shareholder when
it is established that:
" ( i i )t h e a c t s o f t h e d i r e c t o r s o r t h o s e
i n c o n t r o l of t h e c o r p o r a t i o n a r e i l l e -
gal, oppressive, or fraudulent . . ."
We refer to Skierka v. Skierka Bros., Inc. (1981),
Mont . , 629 P.2d 2 1 4 , 3 8 S t . R e p . 7 5 4 , and Fox v. 7L
Bar Ranch Co. (1982), Mont. , 645 P.2d 929, 39
St.Rep. 862. These c a s e s d i s c u s s a t l e n g t h the rationale
behind t h e l i q u i d a t i o n of a c o r p o r a t i o n because o f i l l e g a l ,
oppressive or fraudulent acts. In the Skierka case, we
quoted from the case of Fix v. Fix Material Co., Inc.
(Mo.App. 1 9 7 6 ) , 538 S.W.2d 351, i n which t h e c o u r t makes t h e
following observations p a r t i c u l a r l y applicable here:
" ' T h e I l l i n o i s c o u r t s made i t c l e a r , when
construing the I l l i n o i s Statute (the
Model for S 351.485 [the Missouri
s t a t u t e ] ) , t h a t " o p p r e s s i o n " is, i n and
of i t s e l f , an independent ground f o r
r e l i e f n o t r e q u i r i n g a showing of f r a u d ,
i l l e g a l i t y , mismanagement, w a s t i n g of
assets, nor deadlock, though t h e s e
f a c t o r s are f r e q u e n t l y p r e s e n t ...
" ' I t h a s o f t e n been s t a t e d t h a t oppres-
sion suggests ... "a visible departure
f r o m t h e s t a n d a r d s of f a i r d e a l i n g , and a
v i o l a t i o n of f a i r p l a y on which e v e r y
s h a r e h o l d e r who e n t r u s t s h i s money t o a
company i s e n t i t l e d t o r e l y . " " ... Such
d e f i n i t i o n s a r e suggested perimeters of
t h e broad term rather than narrow
d e f i n i t i o n s w h i c h would t e n d t o r o b t h e
term o f i t s u s e f u l f l e x i b i l i t y . As we
read t h e s t a t u t e , it is i n t e n d e d t h e
c o u r t s w i l l proceed on a case-by-case
basis. " I " ~ k i e r k a , 629 P.2d a t 2 2 1 , 38
S t . R e p . a t 764.
I t should be noted t h a t b o t h S k i e r k a and - i n v o l v e
Fox
closely-held family corporations. In contrast, a s pointed
o u t by t h e D i s t r i c t C o u r t , t h e p r e s e n t c a s e i n v o l v e s a p p r o x -
imately twenty businessmen with extensive financial and
investment backgrounds.
The p l a i n t i f f s argue that, after gaining control in
1 9 7 6 , J o h n H a l l r a n a one-man show w i t h l i m i t e d m e e t i n g s o f
t h e e x e c u t i v e c o m m i t t e e and b o a r d o f d i r e c t o r s . They a l s o
argue that the firing of Geier indicated such type of
conduct, ignoring the f i n d i n g by the District Court that
G e i e r h a d i m p r o p e r l y t r a n s f e r r e d company f u n d s t o a p r i v a t e
a c c o u n t o f h i s own i n o r d e r t o c o v e r h i s r e t i r e m e n t f u n d i n
a n t i c i p a t i o n of t h e c o l l a p s e of t h e c o r p o r a t i o n . Reference
is a l s o made t o t h e p u r c h a s e of t h e p r o p e r t y t o which N a y l o r
claimed t i t l e . T h a t i s t h e s u b j e c t o f t h e companion c a s e o f
Naylor v. Hall, previously cited, and is n o t appropriate
here.
The D i s t r i c t C o u r t a n a l y z e d t h e s e f a c t s i n d e t a i l , a n d
s e t f o r t h examples i n a number o f p a r a g r a p h s i n i t s f i n d -
i n g s , s h o w i n g how t h e c o n d u c t o f t h e d e f e n d a n t s was p r o p e r
and for the benefit of the corporation. Ultimately, the
D i s t r i c t Court concluded:
"The d e f e n d a n t s a c t e d i n good f a i t h f o r
the b e n e f i t of the corporation, Ski
Yellowstone, Inc.
"The d e f e n d a n t s c o m m i t t e d n o f r a u d u l e n t ,
oppressive, or i l l e g a l a c t s i n t h e course
o f t h e i r management a n d m e m b e r s h i p o f a n d
with S k i Yellowstone, Inc."
A s previously s t a t e d i n Jenson, we w i l l consider only
whether s u b s t a n t i a l c r e d i b l e evidence s u p p o r t s t h e f i n d i n g s
and c o n c l u s i o n s o f t h e c o u r t and t h e f i n d i n g s w i l l n o t b e
overturned u n l e s s t h e r e is a c l e a r preponderance of evidence
a g a i n s t them. W f i n d no b a s i s i n f a c t f o r a n o v e r t u r n i n g
e
of t h e f i n d i n g s and c o n c l u s i o n s .
1x1
A f t e r acquiring c o n t r o l of t h e c o r p o r a t i o n , was J o h n
H a l l g u i l t y of f r a u d a n d s e l f - d e a l i n g ?
T h i s c o n t e n t i o n on t h e p a r t o f t h e p l a i n t i f f s a g a i n i s
b a s e d on s e c t i o n 35-1-921, MCA, which i s a b o v e q u o t e d . The
basic controlling r u l e of law i s a l s o q u o t e d i n Skierka,
above.
Plaintiffs contend that by the postponement of the
making of p a y m e n t s on t h e "C" i s s u e , H a l l e n g a g e d i n i n a p -
propriate self-deallng. T h a t i s s u e h a s b e e n r e s o l v e d by t h e
i n t e r e s t requirement previously s e t f o r t h i n t h i s opinion.
In a similar manner, the contention is made that the
improper purchase of t h e Naylor l o t was significant, but
t h a t h a s a l s o b e e n r e s o l v e d i n t h e c a s e o f N a y l o r v. Hall,
above. P l a i n t i f f s a d d i t i o n a l l y r e f e r t o a number o f r e l a -
t i v e l y i n s i g n i f i c a n t a c t i o n s by H a l l a s a b a s i s f o r s e l f -
dealing. T h e s e c o n t e n t i o n s a r e a n s w e r e d by t h e f i n d i n g s and
c o n c l u s i o n s o f t h e D i s t r i c t C o u r t d e s c r i b e d , w i t h which t h e
p l a i n t i f f s do n o t t a k e i s s u e .
Plaintiffs contend that the issuance of corporate
c r e d i t s f o r s e r v i c e s was i m p r o p e r . The D i s t r i c t C o u r t f o u n d
t h a t t h i s a c t i o n was n o t i m p r o p e r , a n d was s i m i l a r t o t h e
a c r i o n s on t h e p a r t o f some o f t h e p l a i n t i f f s when t h e y w e r e
i n control.
Again, we find that there is substantial credibie
evidence supporting the findings and conclusions of the
D i s t r i c t C o u r t t h a t t h e r e was n e i t h e r f r a u d n o r s e l f - d e a l i n g
on t h e p a r t o f J o h n H a l l .
IV
Was the amendment of the corporation's Articles of
Incorporation, which a u t h o r i z e d s t o c k f o r t h e "C" and " D "
i s s u e s v a l i d u n d e r Montana l a w ? P l a i n t i f f s argue t h a t these
issues must be rolled back because of the failure to give
the statutory notice of the stockholders1 meeting at which
the stockholders approved the amendment of articles to
increase the authorized shares. We hold that the plaintiffs
are equitably estopped from asserting the invalidity of the
amendment.
Section 35-1-207, MCA, as then in effect, provided
that thirty days written notice of a shareholders1 meeting
must be given if the meeting will consider a vote on a
proposed amendment of articles to increase shares. Here,
notice of shareholders1 meeting to be held on July 12, 1976,
was given by a letter dated July 1, 1976, which indicates
substantially less than the statutory thirty days. The date
of the meeting subsequently was changed to July 16, 1976, by
an undated subsequent notice. That notice announced that
the purpose of the meeting was to amend the Articles of
Incorporation in order to draw up the par value and to
increase the number of authorized shares from 6,000,000
shares to a number to be determined at the meeting. The
significance of the meeting was stressed. The effectiveness
of the notice is demonstrated by the vote cast at the
meeting where 2,513,000 shares were represented out of a
total of 2,614,200 shares outstanding, making over 96
percent of the voting stock present in person or by proxy.
The vote at the meeting was unanimous in adopting the
recommendation of the directors to amend the Articles to
increase the number of shares to 60,000,000 shares and to
drop the par value of the shares to $.01. In reliance upon
the validity of the amendment, John Hall alone subscribed to
a substantial number of Series "C" stock, a subscription
which assured the success of the issue. As indicated by the
District Court, this saved the corporation from failure. In
addition, John Hall alone subscribed to a substantial por-
tion of the "D" issue after the failure of other share-
holders to join in that subscription. Again John Hall's
subscription saved the issue from failure. That subscription
was clearly a high-risk adventure which funded the second
tier of the two-tier budget and assured the future financial
viability of the corporation. Wow, years later, when the
issuance of the Forest Service permit seems assured, and the
success of the corporation seems likely, the courts are
asked to invalidate the amendment of the corporation
Artlcles and roll back the stock issues. Obviously this is
directed almost exclusively at John Hall. The plaintiffs
making this request include several of the directors who
approved the amendment and particularly Mr. Naylor, who was
present and abstained from voting, as well as a large number
ok the minority shareholders who actually voted their ap-
proval of the amendment. All of the plaintiff shareholders
have benefited from the purchase by John Hall of the "C" and
"D" stock.
The present action is a stockholders' derivative suit
which is an invention of the courts of equity and is recog-
nlzable only in equity. Noble v. Farmers Union Trading Co.
(1950)r 123 Iqont. 518, 529, 216 P.2d 925, 930. This Court
previously has recognized the flexibility required of courts
of equity in resolving disputes. See, Skierka and Fox,
cited above. We hold that it would be inequitable to allow
the plaintiffs to assert the invalidity of the amendment of
the Articles because of their involvement and acceptance of
benefits.
v
Wnat relief is appropriate under all the circum-
stances? Plaintiffs urge us not to view this suit as merely
the outcome of a corporate power struggle between Naylor and
Hall. The record demonstrates that the root of the conflict
was sucn a power struggle, and that the effect of Wall's
actions was less disastrous than had he failed. The record
discloses that Hall's actions were taken primarily to
preserve and promote Ski Yellowstone, regardless of the very
substantial risk to himself. He converted interest-bearing
debentures into stock, reducing the financial obligation of
the financially-strained corporation, and assumed the risk
that the $.20 per share value of the stock would decrease
(as it did), and, incidentally, gained more voting power.
He twice subscribed to sufficient stock in the company to
insure the success of a subscription which was otherwise
certain to fail. He legitimately gained ownership of the
vast majority of Ski Yellowstone stock.
Naylor, on the other hand, sought to maintain control
of Ski Yellowstone by means which placed himself and Ski
Roundtop in the most secure financial situation, but
threatened the viability of Ski Yellowstone. He originally
indicated his willingness to invest $200,000, assuring
prospective investors that their $1.00 per share would
shortly be worth $10.00, but then only invested $50,000
hiinself. After his arguments with Hall, he withdrew his
support for the " C " Series and persuaded many of his asso-
ciates to do the same despite the company's dire need for
cash. He did not risk converting his own debentures to
stock, and invested no more capital in the corporation after
t h e summer o f 1 9 7 6 . I n d e e d , v e r y few o f t h e m i n o r i t y s t o c k -
h o l d e r s chose t o r i s k f u r t h e r investments i n Ski Yellowstone
a f t e r t h e "0" debentures. They v e n t u r e d a t o t a l o f $ 1 0 , 4 8 0
i n t h e "C" o f f e r i n g and l e s s t h a n t h a t i n t h e 'ID" o f f e r i n g .
Plaintiffs' s t a t e m e n t t h a t f o r 37 p e r c e n t o f t h e i n v e s t m e n t
capital, J o h n H a l l o b t a i n e d o v e r 9 4 p e r c e n t of the stock,
s o u n d s much l e s s s i g n i f i c a n t when w e r e a l i z e t h a t without
t h e a l m o s t $ 9 0 0 , 0 0 0 which H a l l i n v e s t e d , t h e company would
have foundered.
The b u l k o f t h e e v i d e n c e s u p p o r t s t h e c o n c l u s i o n t h a t
t h e s h a r e h o l d e r s withdrew t h e i r s u p p o r t from S k i Yellowstone
primarily because of their unwillingness to extend them-
s e l v e s f u r t h e r i n a r i s k y investment. W e have found t h e r e
was s u f f i c i e n t e v i d e n c e t o s u p p o r t t h e t r i a l c o u r t ' s c o n c l u -
s i o n t h a t t h e "D" i s s u e p r o v i d e d f u n d i n g f o r t h e s e c o n d t i e r
o f t h e b u d g e t and t h a t t h e r e d u c t i o n i n t h e p r i c e o f t h e "D"
s h a r e s from $.05 t o $ . 0 1 was n o t u n r e a s o n a b l e o r i m p r o p e r .
W agree with the D i s t r i c t Court's conclusion t h a t the
e
bottom l i n e is r e a l l y t h a t p l a i n t i f f s c h o s e n o t t o p a r t i c i -
pate and not to invest further in the Ski Yellowstone
venture, and t h e r e m e d i e s s o u g h t a g a i n s t t h e d e f e n d a n t s a r e
not warranted. We conclude that the record adequately
supports the trial court's findings that the defendants'
actions, while not t o t a l l y blameless, were n e i t h e r f r a u d u -
l e n t , oppressive, n o r i l l e g a l , b u t w e r e t a k e n i n good f a i t h
for t h e benefit of the corporation.
Therefore, except f o r our f i n d i n g t h a t John H a l l is
liable to S k i Yellowstone for interest arising from his
d e l a y e d p a y m e n t s on t h e " C " Series subscription, we affirm
t h e District Court i n a l l respects. W e remand t h e c a u s e t o
t h e D i s t r i c t C o u r t f o r a d e t e r m i n a t i o n o f t h e amount of t h e
i n t e r e s t d u e f r o m Mr. H a l l .
/
W concur:
e
~ & w e _ $&$&,,&
S t
Chief ~ u s t i c e
D i s t r i c t Judg tting in
p l a c e o f Mr. ce Gene B.
Daly
Mr. Justice Frank B. Morrison, Jr., dissenting:
I respectfully dissent:
Both the District Court and the majority of this Court
defeated the claim of minority shareholders because the
actions of John Hall salvaged Ski Yellowstone from the
throes of financial ruin. Whether John Hall saved the
"corporate bacon" is not the issue in this case.
In determining whether the "D" stock issue was proper,
the majority rely upon the "business judgment" rule. The
"business judgment" rule is not applicable to this case.
However, this Court's reliance upon the rule indicates that
the majority simply did not understand the essence of plaintiff's
constructive fraud allegation.
The "business judgment" rule is employed to immunize
corporate officers and directors where they act in good
faith, but, as a matter of hindsight, it can be determined
that they did not take the course of action which hindsight
shows to have been the best selection. The rule simply has
no application in this case. Here we must determine whether
the desired corporate objective of obtaining much needed
revenue could have been achieved without "watering" the
stock of minority shareholders. If the revenue could have
been raised without diluting their interests, then the means
Hall employed constituted a "constructive fraud" within the
meaning of Montana law.
John Hall decided to pay for his subscribed stock under
the "C" issue through a deferred payment plan instead of
paying cash as he was supposed to do under the original
offering. This was justified by reliance on a two-tier
budget. Hall claimed it was unnecessary to pay cash for the
stock as there were not sufficient immediate cash needs of
the corporation to require a cash subscription. Then,
without first paying for the "C" issue, Hall caused a "D"
issue. As I hereafter point out, this was a constructive
fraud.
To compound the constructive fraud committed in the
issuance of the "D" stock, Hall and his board of directors
further diluted the interest of the minority shareholders by
replacing the original five cent "D" issue with penny stock.
Of course, this maneuver did not enable the corporation to
raise more money, it simply gave Hall more shares of stock.
The corporate interest was not being further enhanced by
Hall's maneuvering; rather, the minority stockholders'
interests were being further "watered." This again constituted
a constructive fraud.
Corporate directors, in issuing additional shares of
stock, owe a fiduciary duty to minority stockholders. See
Condec Corporation v. Lunkenheimer Company (Del. 1967), 230
Atl.2d 769. Where a fiduciary relationship adheres, the law
of "constructive fraud" controls. Constructive fraud involves
"any breach of duty which, without an actually fraudulent
intent, gains an advantage to the person in fault or anyone
claiming under him by misleading another to his prejudice
. . ." Section 28-2-406(1), MCA. Where a fiduciary duty is
involved, the trustee is bound to act in the highest good
faith. Section 72-20-201, MCA. If a transaction is challenged,
the burden is upon a corporate officer or a corporate director
to prove that the questioned actions were fair and in good
faith. First State Bank of Hilger v. Lang (1918), 55 Mont.
146, 174 Pac. 597.
It is clear from the evidence in this record that the
financing technology employed by Hall benefited Hall at the
expense of minority shareholders. Of course, it is no
defense to argue that Hall benefited the corporation because
the same corporate funds could have been realized without
unnecessarily diluting the interests of minority shareholders.
œ he majority seems to grasp at defendants' argument that
minority shareholders were offered the same price Hall paid
for all stock issues. This rationale makes very bad corporate
law and greatly erodes the protection previously afforded
those benefiting from a fiduciary relationship. Under the
law articulated in the majority opinion, minority shareholders
can now be coerced into purchasing additional shares in a
corporation in which they will have no voice. Further,
unless the minority shareholders are willing to participate
under such adverse circumstances, they will be denied standing
to claim a breach of the fiduciary duty owed. If they have
no money to invest in additional shares, they will be totally
helpless.
There is an old adage that "bad facts make bad law.'' I
can think of no better example than this case. The majority
is rewarding John Hall for rescuing Ski Yellowstone when it
was at the verge of bankruptcy. I certainly understand the
equity in that position. However, in doing so, the majority
has emasculated the law of constructive fraud.
In enacting the laws on constructive fraud, the legislature
sought to prevent the weak from becoming prey of the strong.
The statutory law of this State which sought to advance the
legislature's laudable objective gained added significance
with its application in Skierka v. Skierka Brothers, Inc.
(1981) Mont. , 629 P.2d 214, 38 St.Rep. 754. I can
only conclude from the majority decision in this case, that
the law of constructive fraud as it exists in Montana will
be applied on an ad hoc basis.
I wish to point out to those who attempt to rely upon
this case in the future, that it is nothing but an "aberration"
in the law. Misplaced reliance on the "business judgment"
rule and refusal to apply the law of constructive fraud
resulted from the facts which were here at issue. John Hall
saved this corporation from bankruptcy. All of the investors
in this case were highly-experienced business persons. Hall
carefully made all investment opportunities available to
those with whom he occupied a position of trust. These
factors have permitted him to prevail here, notwithstanding
clear legal principles which should mandate plaintiff's
success.
I would roll back the "D" issue as a matter of law
because under the undisputed evidence in the record, the
issue caused a constructive fraud on minority shareholders.
Mr. Justice John C. Sheehy, dissenting:
I join in the dissent of Mr. Justice Morrison.