Bailey v. Vaughan

• Decision Date: 22 July 1987
• Docket Number: No. 16970,16970
• Citation: 178 W.Va. 371,359 S.E.2d 599
• Parties: David Brent BAILEY, et al. v. Dennis R. VAUGHAN, Jr., etc., et al.
• Court: West Virginia Supreme Court

Page 599

359 S.E.2d 599

178 W.Va. 371

David Brent BAILEY, et al. v. Dennis R. VAUGHAN, Jr., etc., et al.

No. 16970.

Supreme Court of Appeals of

West Virginia.

July 22, 1987.

Syllabus by the Court

1. "The relationship of a director to stockholder in a corporation is not of that strict fiduciary character as to preclude him as a matter of law from purchasing the shares of stock of such stockholder without incurring the penalty of having the sale set aside at the election of the stockholder, regardless of the facts and circumstances of the transaction." Syllabus Point 3, Poole v. Camden, 79 W.Va. 310, 92 S.E. 454 (1916).

2. "But a director or managing officer of a corporation does sustain such fiduciary relationship to a stockholder of a corporation, as to require of him when proposing to purchase his stock, and he is called upon for information as to the property and financial condition of the corporation, and its plans and purposes for the future, and for all other facts affecting the value of such stock, and if he offers his opinion thereon, and undertakes to give some information peculiarly within his knowledge as such director or officer, he is bound at his peril, and upon penalty of having the sale rescinded, to give full and correct information and to withhold nothing from such stockholder affecting the value of his shares." Syllabus Point 4, Poole v. Camden, 79 W.Va. 310, 92 S.E. 454 (1916).

3. "While the officers and directors of a business corporation are accorded a rather broad latitude in the conduct of the affairs of the corporation, they occupy a fiduciary relationship toward it and its shareholders. The same fiduciary relationship exists on the part of the majority shareholders of a business corporation toward its minority shareholders." Syllabus Point 2, Masinter v. Webco Co., 164 W.Va. 241, 262 S.E.2d 433 (1980).

4. A director, who solicits a shareholder to purchase his stock and fails to disclose information not known to the shareholder that bears upon the potential increase in value of the shares, shall be liable to the shareholder either to have the sale rescinded or to respond in damages.

5. "Even if the trial judge is of the opinion to direct a verdict, he should nevertheless ordinarily hear evidence and, upon a trial, direct a verdict rather than try the case in advance on a motion for summary judgment." Syllabus Point 1, Masinter v. Webco Co., 164 W.Va. 241, 262 S.E.2d 433 (1980).

Steven L. Miller, Cross Lanes, for appellants.

Lee O. Hill, James R. Snyder, Jackson, Kelly, Holt & O'Farrell, Charleston, for Vaughan.

John A. Rollins, Charleston, for Merrill Lynch.

Mario J. Palumbo, Love, Wise, & Woodroe, Charleston, for Centurion Corp.

MILLER, Justice:

This appeal requires us to consider whether the director of a corporation has a fiduciary duty to disclose material information affecting the value of the stock when purchasing stock from a minority stockholder. The circuit court granted summary judgment in favor of the corporate director on the ground that no legal duty exists requiring the disclosure of information to a shareholder. ¹ Because we believe that in special circumstances the common law of this State should recognize a fiduciary duty to disclose material information, we reverse the judgment of the circuit court and remand the case for further proceedings.

The plaintiffs, former minority shareholders in the Citizens National Bank of St. Albans (CNB), brought this action in the Circuit Court of Kanawha County against Dennis R. Vaughan, Jr., an officer and director of CNB, to whom they had sold 1,200 shares of CNB stock. The stock was purchased for $20 per share on November 29, 1982, with Merrill Lynch Pierce Fenner & Smith, Inc. (Merrill Lynch), acting as the agent and broker for the undisclosed principal, the defendant Vaughan.

The plaintiffs alleged in their initial complaint that the Kanawha Valley Bank, or a parent or subsidiary corporation thereof had offered to purchase CNB stock for $25 per share and that Centurion BanCorp, Inc. (Centurion) had made an offer of $30 per share prior to the time they sold their stock to the defendant Vaughan. The plaintiffs alleged in their amended complaint that Vaughan had breached a fiduciary duty he owed them by not disclosing that negotiations were in progress for the sale of CNB to Centurion. They also alleged that Vaughan had knowledge of negotiations and offers to purchase because of his position as a director of CNB and that this information was not known to the general public nor by them. ² Merrill Lynch and Centurion were also named as defendants. ³

During the proceedings below, the plaintiffs took the deposition of Elmer Burton Gunter, senior vice president of CNB, who stated that One Valley Bancorp had expressed interest in acquiring CNB after the enactment of new banking legislation. CNB had supplied that bank with the financial information it had requested by some time in October or in the first two weeks of November, 1982. He also stated that Centurion by some time between November 15, 1982, and December 20, 1982, had also expressed some interest in acquiring CNB and had sent its representatives for exploratory discussions.

An affidavit by Charles F. Dodrill, the executive vice president of CNB, reveals that in April of 1982, One Valley Bancorp had expressed interest orally and in writing of an affiliation with CNB. This was followed with a request by One Valley Bancorp for certain information from CNB between October 18, 1982, and November 15, 1982. Mr. Gunter, in his deposition, admitted knowledge of the April, 1982 communications with One Valley Bancorp. He also indicated that this information would have been shared with the other directors at their next monthly board meeting.

The defendants filed several affidavits from banking officials indicating that no offers to purchase CNB had been made until after the time the plaintiffs sold their stock to the defendant Vaughan. This was also confirmed by Mr. Gunter in his deposition.

In February, 1983, CNB announced to its stockholders that Centurion had offered to purchase CNB stock for $30 per share. This offer was approved and accepted in July, 1983. The plaintiffs instituted this action in early November, 1983, which resulted in the adverse judgment now on appeal.

The defendant Vaughan argues that under West Virginia law, a corporate director or officer owes no fiduciary duty to disclose insider information to a minority shareholder about negotiations or an offer to sell the corporation, unless the purchaser inquires about such information. He contends the only duty owed in this situation is to refrain from making material misrepresentations of facts amounting to fraud or deceit, citing Staker v. Reese, 82 W.Va. 764, 97 S.E. 641 (1918), and Poole v. Camden, 79 W.Va. 310, 92 S.E. 454 (1916).

We acknowledged in Poole that "all authorities agree that where a director misrepresents material facts peculiarly within his knowledge as a corporate officer," he may be held liable. 79 W.Va. at 317, 92 S.E. at 457. This point is summarized in 18B Am.Jur.2d Corporations § 1809 at 661 (1985):

"If there is any actual fraud on the part of the director or officer, the stockholder induced thereby to sell his stock to such director or officer is entitled to relief as in other cases of fraud. In a number of cases, the fact that the purchaser of stock is a director or officer of the corporation, together with the fact that misrepresentations or a partial disclosure only concerning the stock is made, has been deemed to constitute a fraud justifying relief." (Footnotes omitted).

See generally 3A W. Fletcher, Cyclopedia of the Law of Private Corporations § 1172 (1986). It appears that both Poole and Staker were decided on this ground, as in each case the director was asked about the financial affairs of the corporation and gave misleading information.

In Poole, the defendant was a director, treasurer, and officer of a railroad company who had employed a stockbroker as his "secret agent" to offer $175 per share in the railway company. A representative of the stockholder then went to the director and sought full information in regard to the value of the stock. According to the plaintiff's representative, the defendant made a number of inaccurate and misleading representations designed to minimize the growth and profitability of the company. He also indicated a desire to acquire a controlling interest in the company, when in fact he and his associates already were in control of the corporation's operations. We concluded the trial court was correct in rescinding the sale and stated in Syllabus Points 3 and 4:

"3. The relationship of a director to stockholder in a corporation is not of that strict fiduciary character as to preclude him as a matter of law from purchasing the shares of stock of such stockholder without incurring the penalty of having the sale set aside at the election of the stockholder, regardless of the facts and circumstances of the transaction.

"4. But a director or managing officer of a corporation does sustain such fiduciary relationship to a stockholder of a corporation, as to require of him when proposing to purchase his stock, and he is called upon for information as to the property and financial condition of the corporation, and its plans and purposes for the future, and for all other facts affecting the value of such stock, and if he offers his opinion thereon, and undertakes to give some information peculiarly within his knowledge as such director or officer, he is bound at his peril, and upon penalty of having the sale rescinded, to give full and correct information and to withhold nothing from such stockholder affecting the value of his shares." ⁴

In Staker, we applied the rule against affirmative misrepresentations where a managing officer of a corporation had concealed the fact that a sale was pending and held in Syllabus Point 1:

"Where...