Ritchie v. McGrath

• Decision Date: 22 July 1977
• Docket Number: No. 48580,48580
• Citation: 1 Kan.App.2d 481,571 P.2d 17
• Parties: J. Proctor RITCHIE, H. D. Ritchie, E. D. Ritchie, Barbara Mary Ritchie, H. D. Ritchie, as natural guardian for Mary Martha Ritchie and Edward Charles Ritchie, and E. D. Ritchie, as natural guardian for Julie Ritchie, Jan Ritchie and Jack Davis Ritchie, Appellants, v. Robert V. McGRATH, Virgil S. Browne, Jr., Henry W. Browne, Deborah Lee Browne, E. B. Shawver, Jerry E. Shawver, Stelbar Oil Corporation, Inc., and Boulevard State Bank, Appellees.
• Court: Kansas Court of Appeals

Page 17

571 P.2d 17

1 Kan.App.2d 481

J. Proctor RITCHIE, H. D. Ritchie, E. D. Ritchie, Barbara Mary Ritchie, H. D. Ritchie, as natural guardian for Mary Martha Ritchie and Edward Charles Ritchie, and E. D Ritchie, as natural guardian for Julie Ritchie, Jan Ritchie and Jack Davis Ritchie, Appellants, v. Robert V. McGRATH, Virgil S. Browne, Jr., Henry W. Browne Deborah Lee Browne, E. B. Shawver, Jerry E Shawver, Stelbar Oil Corporation, Inc. and Boulevard State Bank, Appellees.

No. 48580.

Court of Appeals of Kansas.

July 22, 1977.

Syllabus by the Court

1. Corporate directors and officers are under a very strict fiduciary duty in their relations both to the corporation and to its shareholders. (Following Sampson v. Hunt, 222 Kan. 268, Syl. 1, 564 P.2d 489.)

2. Every stockholder, including a majority stockholder, is at liberty to dispose of his shares at any time and for any price to which he may agree without being liable to other stockholders as long as he does not dominate, interfere with or mislead other stockholders in exercising the same rights. (Following McDaniel v. Painter, 418 F.2d 545 (10th Cir. 1969).)

3. A majority shareholder may be held accountable in the sale of majority stock of a corporation if the circumstances surrounding the proposed transfer would alert suspicion in a prudent person that the purchasers are an irresponsible group who will mismanage and loot the corporate assets.

4. Sales of majority stock of a corporation involving fraud, misuse of confidential information, siphoning off for personal gain of a business advantage belonging to the corporation or its shareholders in common, or wrongfully appropriating corporate assets constitute breaches of the fiduciary duty owed the corporation and its shareholders.

5. Ordinarily, one or more persons may purchase a majority of the shares of a corporation for the purpose of acquiring control thereof and such purchases are not invalidated if accomplished in secrecy.

6. No fiduciary duty is violated by entering into a pooling agreement which is not a voting trust, with other corporate stockholders for the purpose of attaining corporate control or in failing to disclose the existence of such agreement to minority shareholders.

7. The fact that controlling stock sells for more than book value is not evidence of fraud since it is generally recognized that majority stock is more valuable than minority stock. (Following McDaniel v. Painter, supra.)

8. The fact that controlling shareholders may stand in a fiduciary position to minority shareholders, either as officers or directors or even as majority shareholders, does not require them to share a premium received in the sale of their stock if the premium is paid only for the potential for control inherent in the stock and not by reason of any breach of fiduciary duty.

9. Generally, there is no obligation in one group of stockholders to invite participation of other stockholders at a price above market value on a theory of share and share alike.

10. Under the facts and circumstances set forth in the opinion, the sale of a majority of the corporate stock does not constitute the sale of a corporate asset.

11. For reasons more fully set forth in the opinion, it is held that the record does not reflect a breach of fiduciary duty of the defendants as officers, directors, or dominant shareholders in the manner in which they acquired their additional shares, nor in pooling their interests to provide a controlling interest, nor in failing to disclose their objectives in purchasing stock or their pooling agreement, nor by inviting some but not all of the minority shareholders to join with them in a sale at a premium price, and the court did not err in rendering judgment for the defendants.

Robert Martin and Larry B. Spikes of Martin, Pringle, Schell & Fair, Wichita, for appellants.

Donald R. Newkirk and Gerrit H. Wormhoudt of Fleeson, Gooing, Coulson & Kitch, Wichita, for appellee, Robert V. McGrath.

Robert L. Howard and James M. Armstrong of Foulston, Siefkin, Powers & Eberhardt, Wichita, for the appellees, Virgil S. Browne, Jr., Henry W. Browne, E. B. Shawver, Jerry E. Shawver and Stelbar Oil Corp., Inc.

Before SPENCER, P. J., and ABBOTT and SWINEHART, JJ.

SPENCER, Judge:

Initially commenced as a class action and a derivative action pursuant to K.S.A. 60-223 et seq., an order of dismissal was entered as to certain original defendants and this case devolved into a suit wherein plaintiffs, as minority shareholders, seek to recover a proportionate share of a premium received by defendants in the sale of capital stock representing the controlling interest in the Boulevard State Bank, Wichita, Kansas. At the trial level, judgment was entered for the defendants and plaintiffs have appealed.

The Boulevard State Bank was organized in 1953. Members of the Ritchie family, plaintiffs herein, and of the Browne and Shawver families, defendants herein, were among the original shareholders. The defendant McGrath was employed April 11, 1968, as president of the bank and chairman of its board of directors and served as such at all times material herein. The defendant Jerry E. Shawver is a director, and the defendant Virgil S. Browne, Jr., who was one of the original incorporators, had served as a director of the bank until 1961, after which time he served only in an advisory capacity to the board. Plaintiff E. D. Ritchie had served on the board of directors until January, 1974, at which time he retired from the board.

At the time of organization, no single individual owned a majority of the bank stock issued and outstanding, but in 1968 the Browne-Shawver interests, including stock held by Stelbar Oil Corporation, Inc. controlled by the Shawver family and that owned by McGrath, collectively held approximately thirty-eight percent of the outstanding shares. Late in 1969 and in 1970, Virgil S. Browne, Jr. and Jerry E. Shawver, who had other business interests together, discussed the possibility of buying control of the bank as each already "had so much stock . . . and there was such a small market for it" at that time. They decided to include the defendant McGrath in their plan because they believed that McGrath would have more "staying power" as the manager of the bank if he was financially tied to the bank by greater stock ownership. McGrath was contacted and it was determined that the group, including all Browne and Shawver family shareholders and McGrath, needed an additional 6,500 shares to obtain a majority of the issued stock. It was then orally agreed that McGrath would purchase enough shares to bring his total holdings to 3,750 shares and that the Browne-Shawver interests would purchase the remainder, after which they would enter into an agreement to pool their interests. There were then 75,000 shares of capital stock issued and outstanding. McGrath acquired his additional stock during the year 1970, his last acquisition of 2,403 shares being on October 14, 1970.

On October 14, 1970, the shares necessary to constitute a majority had been acquired and on that date the defendants, then collectively possessed of 38,142 shares of the stock, executed an instrument in writing entitled "Pooling Agreement" whereby it was agreed that they would thereafter vote their respective stockholdings in the bank as a unit at any and all meetings of the stockholders for whatever purpose. This agreement was to continue for a period of ten years unless terminated or extended by mutual consent of the parties. It contained an option to purchase the stock of any party to the agreement wishing to sell, and other ordinary provisions. It is to be noted that neither the original oral agreement to purchase additional shares of stock for the purpose of acquiring a controlling interest nor the subsequent written pooling agreement was at any time prior to the sale disclosed to other shareholders or to the other directors. Notwithstanding the pooling agreement, each of the parties to that instrument continued thereafter to vote his stock individually and there is nothing in the record to indicate that any other provision of their written agreement was exercised in any manner.

McGrath testified that perhaps two or three times a year he received inquiries from persons indicating an interest in buying control of the bank, which he would sometimes discuss with Shawver and Browne; but that in 1972, he had been approached by a "local group" interested in buying the controlling interest. This was discussed with Browne and Shawver and, as one result, a price of $80 per share was placed on their stock. That deal did not materialize.

By 1973 the defendants then collectively in control of a majority of the stock of the bank were seriously interested in selling. With McGrath acting for himself and as intermediary for his co-defendants who were parties to the pooling agreement, negotiations were undertaken in response to an earlier inquiry to sell the controlling interest in the bank. This culminated in the execution of a contract under date of June 19, 1974, for the sale of 38,042 shares of stock by the defendants and certain others to James H. Hentzen and Gaylon M. Lawrence at the price of $80 per share. The contract provided for a down payment of $15,000 to be retained by the sellers in full payment of liquidated damages in the event the buyers did not complete the purchase. It also contained the usual representations and warranties by the sellers and provided to the buyers access to the books and records of the bank during normal business hours, with the provision that the buyers pay any expenses incurred by them for services of counsel, accountants or otherwise in connection with the agreement, and that sellers pay any and all such expenses incurred by them in the same connection. As a part of this transaction, the sellers requested and the buyers agreed that the purchase include 2,956 shares owned collectively by James...