Linge v. Ralston Purina Co.

• Citation: 293 N.W.2d 191
• Decision Date: 18 June 1980
• Docket Number: No. 63286,63286
• Parties: David E. LINGE and C. Scott Linge d/b/a Linge Investment Company, Appellants, and Joan B. Allender and Central National Bank and Trust Company, Co-Executors of the Estate of Robert B. Allender, Deceased, William S. Blackburn, Steadman- Blackburn Agency, Inc., Koert S. Voorhees, Fred L. Bjornson, Michael G. O'Donnell, d/b/a O'Donnell Realty Company, Peter K. DeJuhasz, Monte R. Toso, James A. O'Brien, R. E. Doerfer, Donald M. Houpt, Arthur C. Meyer, Alfred Tieze, and Don O. Newland, Intervenors-Appellants, v. RALSTON PURINA COMPANY, Keystone International Inc., and Keyworld, Inc., Appellees.
• Court: United States State Supreme Court of Iowa

Page 191

293 N.W.2d 191

David E. LINGE and C. Scott Linge d/b/a Linge Investment Company, Appellants, and Joan B. Allender and Central National Bank and Trust Company, Co-Executors of the Estate of Robert B. Allender, Deceased, William S. Blackburn, Steadman- Blackburn Agency, Inc., Koert S. Voorhees, Fred L. Bjornson, Michael G. O'Donnell, d/b/a O'Donnell Realty Company, Peter K. DeJuhasz, Monte R. Toso, James A. O'Brien, R. E. Doerfer, Donald M. Houpt, Arthur C. Meyer, Alfred Tieze, and Don O. Newland, Intervenors-Appellants, v. RALSTON PURINA COMPANY, Keystone International Inc., and Keyworld, Inc., Appellees.

No. 63286.

Supreme Court of Iowa.

June 18, 1980.

Rehearing Denied July 11, 1980.

Tom Riley, Lawrence E. Blades and Gregory M. Lederer of Simmons, Perrine, Albright & Ellwood, Cedar Rapids, for appellants.

John J. Greer, Dick H. Montgomery and Richard J. Barry of Greer, Nelson, Bertell, Montgomery & Barry, Spencer, for appellees.

Considered en banc.

McCORMICK, Justice.

A number of former minority shareholders of Keystone International, Inc. (Keystone), seek damages from defendants Ralston Purina Company (Ralston), Keystone, and Keyworld, Inc., a wholly owned subsidiary of Ralston, for alleged wrongs done them in a tender offer and subsequent short-form merger through which Ralston acquired their Keystone stock and merged Keystone into Ralston. The case was tried to the court at law, and the trial court held for defendants, dismissing the petitions. In seeking reversal, plaintiffs and intervenors (hereafter included in references to plaintiffs) contend the court misconceived the nature of their action, erred in sustaining defendants' objection to an exhibit, and was mistaken in holding that the short-form merger was effected in compliance with Iowa law. We affirm the trial court.

The sequence of events which led to this litigation is not in dispute. William Bergman, a Cedar Rapids attorney, organized Keystone in June 1969 to purchase land on Keystone Mountain, about seventy miles west of Denver, Colorado, in order to develop a ski resort. The corporation issued 1,650,000 shares of common stock at $1.00 per share. The stock was sold in a manner intended to qualify the transaction as a private offering. Bergman offered stock to Purina, for whom he had performed legal work, and Purina purchased fifty percent of the issue.

The proceeds of the first issue were used to purchase land, build a base lodge, and install ski lifts. The resort opened for the 1970-71 ski season, but a need for additional capital was soon perceived. A second stock issue, identical in amount to the first, was made in 1970. Existing shareholders purchased much of it through the exercise of preemptive rights, and Purina purchased enough additional stock to increase its holdings to sixty-three percent.

The building of condominiums and other development plans soon established a need for more capital. Ralston loaned Keystone $1,250,000 in September 1970. Soon thereafter, Keystone borrowed an additional $1,800,000 from Mercantile Trust Company of St. Louis after Ralston agreed to subordinate its loan.

Keystone operated at a loss through the 1971-72 ski season and soon needed even more capital. Mercantile Trust Company loaned it $4,700,000 in place of its prior loan. As of the end of that year, Keystone defaulted on a $2,480,000 payment owed to the bank. In May 1973 Keystone borrowed $300,000 more from Ralston to pay current operating expenses. Keystone lost more than $700,000 in the fiscal year ending May 31, 1973.

Keystone decided to build a commercial core to improve the attractiveness of its resort, but it was unable to borrow money for that purpose. Mercantile Trust Company was unwilling to loan the money unless Ralston would increase its equity position in Keystone. In May 1973 Keystone officers, led by Bergman, appeared before Ralston's budget committee and requested $14,700,000 in additional capital, approximately $10,000,000 of this as a loan, approximately $3,000,000 to be used to increase Ralston's equity position, and the remainder for the purchase of stock from minority shareholders in the event of a tender offer. If Ralston increased its equity to eighty percent, it could charge Keystone's losses against its taxable income. The Ralston budget committee approved the request, and Ralston's board authorized a tender offer to be made.

After consultation with Bergman, Ralston arrived at a price of $1.50 per share for minority stock. Because of a possible federal securities law problem, Ralston decided to offer minority shareholders that amount or an amount equal to the price paid for the stock by the shareholder plus six percent annual interest, whichever amount was greater. The tender offer package was mailed to Keystone shareholders on October 4, 1973. As a result of this tender offer, Ralston increased its ownership of Keystone stock to approximately ninety-three percent. After this tender offer had been completed, Ralston decided to acquire the remainder of Keystone's stock through the short-form merger procedure of chapter 496A, The Code. The merger was carried out by forming Keyworld, Inc., merging Keystone into the new corporation and changing the name of the new corporation to Keystone.

Plaintiffs were minority shareholders of Keystone who sold their stock to Ralston in response to the tender offer or gave it up as a result of the short-form merger. In this action they alleged their stock was wrongfully appropriated and sought actual and punitive damages. Their theory of recovery is a matter open to some question. They based the action at least in part on a claim of fraud, and then alleged defendants breached their fiduciary duty. Although the case was originally scheduled for jury trial, the parties waived a jury and tried the case to the court. After a lengthy trial, the court held for defendants. Plaintiffs appealed.

I. The theory of the action. Plaintiffs' main contention is that the trial court erred in holding there is no difference between the essential elements of common-law fraud and breach of fiduciary duty. This assignment of error assumes that a fiduciary duty is owed by a majority shareholder dealing with minority shareholders. It also assumes that the case was pled, tried, and decided on two separate theories of recovery, common-law fraud and breach of fiduciary duty.

In response to a request for admissions, defendants admitted Ralston owed a fiduciary duty to Keystone's minority shareholders. We have not had occasion to decide whether majority shareholders owe a fiduciary duty to minority shareholders, and of course we are not bound by agreement of the parties as to the law. However, our cases have recognized the fiduciary duty of officers and directors in dealing with the corporation and its shareholders. See, e. g. Rowen v. Le Mars Mutual Insurance Co., 282 N.W.2d 639, 649 (Iowa 1979); Holi-Rest Inc. v. Treloar, 217 N.W.2d 517, 525 (Iowa 1974); Holden v. Construction Machinery Co., 202 N.W.2d 348, 356-58 (Iowa 1972); Gord v. Iowana Farms Milk Co., 245 Iowa 1, 16-17, 60 N.W.2d 820, 829 (1953).

The same reasoning supports recognition of a fiduciary duty between a dominant shareholder and minority shareholders. By being in a position to manage corporate affairs through control of the board of directors, a majority shareholder is in the same relationship to minority shareholders as the directors themselves. Other courts have recognized the resulting fiduciary duty. See, e. g., Allied Chemical & Dye Corp. v. Steel & Tube Co., 14 Del.Ch. 1, 12, 120 A. 486, 491 (1923) ("The same considerations of fundamental justice which impose a fiduciary character upon the relationship of the directors to the stockholders will also impose, in a proper case, a like character upon the relationship which the majority of the stockholders bear to the minority.").

We hold that majority shareholders do owe a fiduciary duty to minority shareholders. Therefore we accept the agreement of the parties that Ralston owed such a duty to plaintiffs in the present case.

We also accept the contention of plaintiffs that their petition was sufficient to support a claim of breach of fiduciary duty as an independent ground for recovery. They alleged breach of fiduciary duty separately from their allegations of fraud and nothing in the petition purports to limit the theory of recovery to common-law fraud. Under principles of notice pleading, plaintiffs would not be limited to proof and recovery on the basis of fraud alone. See Christensen v. Shelby County, 287 N.W.2d 560, 563 (Iowa 1980).

Nevertheless the trial court denied recovery on the fraud theory only. The court treated the fiduciary duty as affecting the scope of the duty of disclosure and the burden of proof on the fraud theory rather than changing the elements of the theory or constituting a separate basis for recovery. The court said:

For the purpose of this ruling I will adopt the legal conclusion that a fiduciary relationship exists between a majority stockholder and the minority stockholders. In dealing with the minority, the majority stockholder must exercise the highest standard of good faith, honesty and openness in every significant aspect. A majority's stock purchase from the minority must be preceded by a full and complete disclosure, without misrepresentations or omission, of all material and relevant facts which would enable the minority to make an informed decision.

The acceptance of this concept does not change the nature of the action it remains an action based on common law fraud. However, it does become important in allocating the burden of proof.

As to the burden of proof on the fraud theory, the court thought the fiduciary relationship should cause only the burden of going forward with evidence as opposed to the burden of persuasion to shift to defendants. However, because the court believed this court had held otherwise, it accepted the...