Corporations – “Personal Interst” of Directors in Corporate Transactions

Serious dissension had developed between two factions of the seven member board of directors of defendant corporation. Group A, consisting of four members, represented a working majority of the outstanding stock recently acquired by a group of investors. Group B, consisting of three members, had constituted the active management of the corporation for a number of years. The resignation of group B was probable if group A continued to dominate the board. It was proposed that stock of the defendant be exchanged for stock in another corporation. Under the overall plan, group A was to resign and two members of this group were to sell their stock in the defendant corporation at a price one-third above the market price. Group B was to remain with the corporation as officers and directors. This plan was approved unanimously by the board, and was submitted in detail to a special meeting of the stockholders who approved the plan by a vote of 14 to 1 (84% of the issued and outstanding stock voting). Minority stockholders brought a derivative suit against the corporation and its officers to enjoin consummation of the plan. The district court granted the injunction. On appeal, held, affirmed. The personal interest of the directors in the plan was such as to deprive the stockholders of the unprejudiced judgment to which they were entitled. Seagrave Corp. v. Mount, Spain v. Mount, (6th Cir. 1954) 212 F. (2d) 389.