Jones v. Ahmanson & Co., 1 Cal.3d 93 (1969) p.handout

SUBJECT

fiduciary duty of majority

FACTS

A savings and loan. Value of share had increased enormously from time the shareholders originally bought them. Plaintiff seeks damages and other relief for losses allegedly suffered by the minority stockholders because of claimed breaches of fiduciary reponsibility by defendants in the creation and operation of United Financial. Majority decided to start a new corporation and paid for that corporation with their shares. After the exchange, United Financial held 85 percent of the outstanding Association value. They did not offer the minority stockholders of the Association to exchange their shares. P contends that the majority used their control of the Association for their own advantage and to the detriment of the minority.

PROCEDURE

Plaintiff appeals from a judgment entered for defendants after an order sustaining defendants' general and special demurrers to her third amended compaint without leave to amend.

ISSUE

Whether the majority breached their fiduciary duty to the minority.

RULE

The majority must act with a duty of good faith and inherent fairness to the minority. The controlling shareholders may not use their power to control the coproration for the purpose of promoting a marketing scheme that benefits themselves alont to the detriminet of the minority.

HOLDING

We have concluded that the allegations of the complaint and certain stipulated facts sufficiently state a cause of action and that the judgment must therefore be reversed.

RATIONAL

The gravamen of plaintiff's action is injury to herself and the other minority stockholders and her action id individual rather than derivative. Majority shareholders have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. Any use of power must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation's business. Rule of inherent fairness from the viewpoint of the corporation and those interested therein. This rule applies alike to officers, directors, and controlling shareholders.

The majority excluded the minority from exchanging their stock for the new corporation. As such no equivalent market could or would be created for Association stock. The majority acted without regard to the resulting detriment to the minority. Such conduct is not consistent with their duty of good faith and inherent fairness.

NOTES

Many jurisdictions would not follow this case. This is extremely broad, liberal, in outlining the parameters of fiduciary obligations of controlling shareholders.

Created on: Wednesday, October 27, 1999 at 12:22:38 (PDT)