Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 16

FACTS In the 1970s, William McCann gave his sons, Bill and Ron, each 36.7 percent of the shares of his close corporation, McCann Ranch and Livestock Company. The remaining shares went to William's wife, Gertrude. When William died, Bill became the corporation's president and chief executive officer. The corporation paid Gertrude's personal expenses in an amount that represented about 75 percent of the net corporate income. Bill received regular salary increases. The corporation did not issue a dividend.
In 2008, Ron filed a lawsuit alleging that the corporation's directors had breached the fiduciary duty they owed him as a minority shareholder. According to the complaint, the directors had subjected Ron to a "squeeze-out" designed to deprive him of the benefits of being a shareholder.
Ron alleged that the directors refused to give him a corporate job or board membership, failed to pay him dividends, and deprived him of other income through a series of business decisions that benefited only Bill and Gertrude. The court granted judgment for the defendants, finding that Ron had essentially filed a derivative suit without making a written demand on the corporation. Ron appealed.
ISSUE Can Ron sue Bill and Gertrude directly for breach of fiduciary duty rather than bringing a derivative action?
DECISION Yes. The Idaho Supreme Court reversed the trial court's decision and held that Ron could proceed with his suit for breach of fiduciary duty.
REASON Ordinarily, a shareholder must bring a derivative suit for claims arising from harm to a corporation. Nevertheless, a minority shareholder of a close corporation may bring an individual suit "if the shareholder alleges harm to himself distinct from that suffered by other shareholders." In this case, McCann Ranch's payments to Gertrude hurt the corporation as a whole. Nevertheless, Ron could sue individually under the theory that he had been subjected to a squeeze-out. Unlike Bill and Gertrude, who were the only other shareholders, Ron did not benefit from any of the decisions at issue. Thus, Ron could bring an individual suit for breach of fiduciary duty because he could show that he had been uniquely harmed.
FOR CRITICAL ANALYSIS-Legal Consideration If this case proceeds to trial, how might the directors try to defend their decisions? What rule concerning director liability might protect them? Explain your answer.