Corporations - The Fudiciary Duty of Directors in the Issuance of Stock Subject to Preemptive Rights

Authors

Howard M. Downs, University of Michigan Law SchoolFollow

Abstract

In Gord v. Iowana Farms Milk Co. , a stockholder protested the issue to the defendant of certain shares of stock in a closely held corporation. At the time of the sale, the plaintiff was a director and secretary-treasurer of the corporation with access to the corporate books and knowledge of the corporate assets. At the meeting at which the stock was issued, the plaintiff signed a statement saying "at the present time I do not elect to purchase any stock. . . ." The stock, sold for $15 a share, had a value variously estimated at $50 to $103.22. The plaintiff alleged that defendants as directors breached their fiduciary duty by not disclosing that the issuance price was substantially less than the reasonable value, and that the effect of the issuance would be to dilute the value of his holdings. The trial court dismissed the petition, noting that the plaintiff was an educated, skilled man, that plaintiff in his capacity as an officer and director knew all the facts on which he could make his own mathematical computation of the stock worth, and that there was no fraud or fraudulent concealment. On appeal, held, reversed. There was a breach of the fiduciary duty of the directors in failing to disclose the value of the stock and the diluting effect of such issuance.