Martin v. Marlin

• Citation: 529 So.2d 1174,13 Fla. L. Weekly 1639
• Decision Date: 12 July 1988
• Docket Number: No. 86-3163,86-3163
• Parties: 13 Fla. L. Weekly 1639 Marjorie R. MARTIN, individually, and Henry Spiegel, Anne Spiegel and the Diane Birdman Irrevocable Trust, as General Partners of Nottingham Associates, a Florida General Partnership, individually, and as representatives of all similarly situated shareholders of City National Bank Corporation, Appellants, v. Robert M. MARLIN and Jack D. Burstein, Appellees.
• Court: Court of Appeal of Florida (US)

Page 1174

529 So.2d 1174

13 Fla. L. Weekly 1639

Marjorie R. MARTIN, individually, and Henry Spiegel, Anne Spiegel and the Diane Birdman Irrevocable Trust, as General Partners of Nottingham Associates, a Florida General Partnership, individually, and as representatives of all similarly situated shareholders of City National Bank Corporation, Appellants, v. Robert M. MARLIN and Jack D. Burstein, Appellees.

No. 86-3163.

District Court of Appeal of Florida Third District.

July 12, 1988.

Rehearing Denied Sept. 7, 1988.

Kenny, Nachwalter & Seymour, and Thomas H. Seymour and Kevin J. Murray, Miami, for appellants.

Podhurst, Orseck, Parks, Josefsberg, Eaton, Meadow & Olin, and Aaron S. Podhurst, Anderson, Moss, Russo & Cohen, Daniels and Hicks, and Mark Hicks, and Ralph O. Anderson and Elizabeth Koebel Clarke, Miami, for appellees.

Before HUBBART, BASKIN and DANIEL S. PEARSON, JJ.

DANIEL S. PEARSON, Judge.

The issue in this case is whether the defendants, Marlin and Burstein, breached any fiduciary duty to the plaintiffs, minority shareholders in the City National Bank Corporation, or unlawfully sold their positions as corporate officers when they accepted a substantial premium for the sale of their shares of stock and rights to vote certain other stock, and thereby relinquished their voting control in the corporation. We hold that the actions of the defendants were lawful and that, therefore, no cognizable cause of action was asserted by the plaintiffs. We accordingly affirm the summary judgment for Marlin and Burstein.

I.

A.

In 1981, City National Bank Corporation was a thinly-traded corporation with about 215 shareholders owning the 2,072,720 shares issued by the bank. ¹ Slightly more than 42 percent of the corporation's stock--857,087 shares--was held in the City Voting Trust. In February of that year, Marlin and Burstein gained control of the bank through ownership and control of shares in the City Voting Trust, and the voting rights to 200,000 shares of stock outside the trust under a proxy/option agreement with the owner of the shares, Polly Lux de Hirsch Meyer. ² Marlin assumed the chairmanship of the bank, and Burstein became a member of its board of directors and its president.

B.

Alberto Duque--eventually to purchase Marlin and Burstein's controlling interest in the bank, the event which precipitated this lawsuit--made his first substantial investment in the bank when, in early 1981, he bought 327,908 shares--38 percent--of the City Voting Trust. ³ Although Duque became a trustee along with Marlin and Burstein, management decisions of the Trust were required to be made by two of the three trustees. Thus, the voting unit of Marlin and Burstein, through their own shares and control of others, effectively controlled all of the shares held in the City Voting Trust.

Several weeks later, Duque received from Marlin and Burstein a 37.5 percent interest in their proxy/option agreement with de Hirsch Meyer. In June 1981, in an attempt to enhance his emerging effort to take control of the bank, Duque purchased 767,500 shares not held in the Voting Trust--37 percent of the outstanding shares of the bank. Thus, after June 1981, Duque owned a total of 1,095,408 shares--327,908 in the Voting Trust and 767,500 outside the Voting Trust--or more than fifty percent of the total number of shares issued by the bank. But despite his ownership of a majority of the bank's outstanding shares, Duque did not control the bank because he did not control the Voting Trust.

In August 1981, Duque, unsuccessful in enlisting the cooperation of other shareholders in his attempt to gain control of the Voting Trust and unsuccessful in his efforts to persuade Marlin and Burstein to buy him out, agreed to purchase the shares held in the Voting Trust by Marlin and Burstein and others, at $45.00 per share, a premium of $33.00 per share above the then-existing market value. Duque also agreed to pay Marlin and Burstein $4,590,000 for their interest in the de Hirsch Meyer proxy/option agreement ⁴ and to indemnify Marlin and Burstein for any claims that might be asserted by the remaining shareholders, those holding shares outside the Voting Trust.

The actual sale was delayed six months for tax reasons. During this period, Marlin and Burstein did nothing to inform the minority shareholders of the agreement and ignored objections raised by the few who learned of it. When the sale took place, Burstein, as president of the bank, caused the bank to issue a general release to himself, Marlin, and the other members of the Voting Trust. Upon the sale, Duque finally gained control of the bank; he owned 1,624,587 shares (all 857,087 shares in the Voting Trust and 767,500 shares outside the Trust) and controlled the vote of the 200,000 shares in the proxy/option agreement. Marlin and Burstein resigned their positions as directors and Burstein his as president; Duque assumed control.

C.

The plaintiffs are shareholders whose shares were not held in the Voting Trust and were not bought by Duque. Although they make no claim that the value of their shares diminished as a result of the sale of others' stock to Duque--indeed the plaintiffs' subsequent sales of their stock at a substantial profit show otherwise--they want to share in the good fortune of Marlin and Burstein (and other Voting Trust shareholders) which they allege came about because Marlin and Burstein (1) improperly used their fiduciary positions to further their own interests; (2) sold their corporate offices; (3) unfairly favored the minority shareholders in the Voting Trust when they required that Duque pay a premium for their shares, but not those of minority shareholders who were not members of the Trust; (4) breached their fiduciary duty when they required Duque to purchase the shares in the proxy/option agreement, even though Duque did not need the shares to gain control of the Bank; and (5) engaged in a civil conspiracy against the plaintiffs. The essence of all but the last of these allegations is that Marlin and Burstein unfairly retained the premium they received for their controlling interest in the corporation; thus, we treat them as one.

II.

The law of the marketplace dictates that a shareholder who has a controlling interest in a corporation will likely be able to receive a higher price per share than a minority shareholder. As a general rule, nothing in the law of the courthouse prevents a majority shareholder from retaining this "control premium." See Delano v. Kitch, 663 F.2d 990, 998 (10th Cir.1981); Zetlin v. Hanson Holdings, Inc., 48 N.Y.2d 684, 421 N.Y.S.2d 877, 397 N.E.2d 387 (1979); H. Henn & J. Alexander, Laws of Corporations and Other Business Enterprises § 241, at 657 (3d ed.1983). This is so even if, as is so frequently the case, the controlling shareholder is an officer or director of the corporation. E. Brodsky & M.P. Adamski, Law of Corporate Officers and Directors § 5:01, at 5-2 (1984). While some decades ago this general rule was under persistent attack in academia, it is clear that the rule survived unscathed in the courts and, indeed, now finds itself in fashion in a significant segment of academia. ⁵ This debate aside, courts have generally held firm to the rule:

"The thoughtful and scholarly writings of the academic commentators on sale of control have had surprisingly little influence on the way courts decide cases. With only infrequent and relatively minor exceptions, the courts still adhere to the traditional view that a shareholder, irrespective of whether he is also a director, officer, or both, may sell his shares, just as he may sell other kinds of personal property, for whatever price he can obtain, even if his shares constitute a controlling block and the price per share is enhanced by that fact. Further, the courts generally hold that neither the selling shareholder nor his purchaser is under an obligation to see that other shareholders are provided opportunities to sell their shares on the same favorable terms as the controlling shareholder or even to inform minority shareholders of the price and other terms of the sale of the controlling interest."

O'Neal, Symposium: Sale of Control--Introduction, 4 J. Corp. L. 239, 239 (1979).

Undaunted by the weight of this authority, the plaintiffs rely on the oft-quoted words of Judge Friendly:

"We start from one of the 'well-established principles of equity ... that a ... corporate officer or director ... may not sell or transfer such office for personal gain.' ... The reason for the rule is plain. A fiduciary endeavoring to influence the selection of a successor must do so with an eye single to the best interests of the beneficiaries. Experience has taught that, no matter how high-minded a particular fiduciary duty may be, the only certain way to insure full compliance with that duty is to eliminate any possibility of personal gain."

Rosenfeld v. Black, 445 F.2d 1337, 1342 (2d Cir.1971). ⁶ What the plaintiffs overlook is that this well-established principle of equity that a corporate officer or director may not sell such office for personal gain is limited to situations where the sale of the corporate office is "by itself (i.e., unaccompanied by sufficient stock to carry voting control)," M. Feuer, Personal Liabilities of Corporate Officers and Directors, 103 (J. Johnston rev. 2d ed. 1974) (emphasis supplied). See In re Caplan, 20 A.D.2d 301, 303, 246 N.Y.S.2d 913, 915 (App.Div.) ("Where there has been a transfer of the majority of the stock, or even such a percentage as gives working control, a change of directors by resignation and filling of vacancies is proper."), aff'd, 14 N.Y.2d 679, 249 N.Y.S.2d 877, 198 N.E.2d 908 (1964); San Remo Copper Mining Co. v. Moneuse, 149 A.D. 26, 133 N.Y.S. 509 (App.Div.1912); H. Henn & J. Alexander, Laws of Corporations and Other Business Enterprises § 241, at 656 n. 1 (3d ed. 1983) ("Generally, it is illegal to sell corporate office or management control by...