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					                                         Chapter 39

 Directors, Officers, and
Case 39.1
417 F.Supp.2d 438
SOVEREIGN BANCORP, INC. and, Banco Santander Central Hispano, S.A., Defen-
No. 05 CIV.10394.
March 2, 2006.
, District Judge.
This case centers on a recurring debate in corporate governance, namely the balance of power between a corporation and its
shareholders. Sovereign Bancorp Inc., a banking corporation incorporated under Pennsylvania law (“Sovereign”), finds itself
locked in a battle for control with its largest shareholder, Relational Investors, LLC (“Relational”), incorporated under Dela-
ware law. Dissatisfied with Sovereign's management and with its recent decision to sell a portion of its outstanding com-
mon stock to Santander Central Hispano, S.A. (“Santander”), a bank incorporated under the laws of Spain, Relational as-
serts its rights as a shareholder to persuade a majority of shareholders to oust Sovereign's directors from power. Sovereign
counters that Relational's real interest is to aggrandize*440 its own equity position, and contends that it and other share-
holders may remove directors only upon a showing of cause. If directors could be removed without cause, Sovereign warns,
important principles of corporate stability and continuity would be undermined, particularly where, as here, the Board of
Sovereign is staggered, so that only two of its six directors stand for election at each annual meeting.
I hold, in response to the parties' motions for judgment on the pleadings, , in favor of Relational's position. Under Pennsyl-
vania law and Sovereign's own Articles of Incorporation, I hold that Sovereign's shareholders, upon majority vote, have the

                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                         611

right to remove directors without cause.
I. Procedural and Factual Background
In June of 2004, Relational and its affiliates began acquiring a significant equity stake in Sovereign, accumulating approx-
imately eight percent of Sovereign's issued and outstanding common stock, and becoming Sovereign's largest shareholder.
In late 2004 and early 2005, Relational began to express dissatisfaction about Sovereign's management and, in May 2005,
disclosed that it would seek representation on Sovereign's board at the 2006 annual meeting scheduled to be held in April.
Under the terms of Sovereign's classified board structure, two of the six incumbent directors are to stand for re-election at
the 2006 annual meeting; a second two, at the 2007 annual meeting; and the third two at the 2008 annual meeting. Seek-
ing initially to replace just two directors, Relational filed preliminary proxy materials with the SEC on October 20, 2005, in
connection with its proposed nomination of two directors for election to the Sovereign Board.
In the immediate wake of Relational's announcement, Sovereign announced, on October 24, 2005, that it had reached a de-
finitive agreement with Independence Community Bank of Brooklyn, New York. Under the terms of this agreement, Sove-
reign is to acquire 100% of the outstanding shares of Independence for approximately $3.6 billion. Contemporaneous to the
announcement of its agreement with Independence, Sovereign announced that it had reached a companion agreement with
Santander pursuant to which Santander is scheduled to purchase 19.8% of Sovereign's common stock for approximately $2.4
Expressing concern about the potential implications of Sovereign's agreement with Santander, and contending that the
transaction was not in the best interests of Sovereign or its shareholders, Relational brought suit, and filed its initial com-
plaint on December 12, 2005 (05 Civ. 10394). By its complaint, Relational sought a declaratory judgment that the transac-
tion contemplated by the agreement between Santander and Sovereign would result in Santander owning between 19.8%
and 24.99% of the outstanding shares of Sovereign common stock and thus would constitute a “control transaction” as de-
fined by Subchapter E of the Pennsylvania Business Corporation Law (“PaBCL”). et seq. Under Subchapter E of the
PaBCL, upon the occurrence of a “control transaction” wherein an individual or group acquires voting power over at least
20% of all voting shares of a corporation, any holder of the voting shares of said corporation is entitled to payment of fair
value for their shares upon demand. et seq. Thus, Relational sought a judicial declaration that, upon closing of the transac-
tion with Santander, Sovereign's shareholders would be entitled to receive fair value for their shares.
*441 Shortly thereafter, on December 22, 2005, Relational announced that it intended to seek to remove Sovereign's entire
board at the next shareholder meeting. Following Relational's December 22 announcement, Sovereign filed its complaint
(05 Civ. 10736), seeking a declaration that its board could be removed only for cause and that the transaction would not con-
stitute a control transaction. One week later, Sovereign's board postponed the April 2006 meeting until an unspecified date
after August 31, 2006.
The parties then appeared before me for a conference on January 31, 2006. By Summary Order of January 31, 2006, I di-
rected that the cases be consolidated into 05 Civ. 10394 and set a schedule for filing dispositive motions, and for discovery.
Sovereign filed a motion to dismiss pursuant to ., and ., seeking declarations that Relational's claim concerning the effect of
the Santander transaction should be dismissed because there was no case or controversy, that Relational's claims based on
Sovereign's alleged breach of duties and alleged violations of Section 14(a) of the Securities Exchange Act of 1934 should be
dismissed for lack of standing and capacity to sue, and that Relational's claims asserting a right to remove Sovereign's direc-
tors without cause should be dismissed because both Pennsylvania law and Sovereign's Articles of Incorporation establish
that such removal may only be with cause. Relational filed its opposition to Sovereign's motion to dismiss, and filed its own
motion for judgment declaring that removal of Sovereign's directors could be effected without cause.
Contemporaneous with the instant litigation, Sovereign petitioned the Pennsylvania legislature to amend those provisions of
the Pennsylvania Business and Corporation Law (the “PaBCL”) implicated by the instant litigation. On January 31, 2006,
the Pennsylvania legislature passed revisions to , requiring a specific and unambiguous statement in the articles to permit
removal of directors without cause. The amendment also included changes to Subchapter E, providing that “[s]hares ac-
quired directly from the corporation in a transaction exempt from the registration requirements of the Securities Act of 1933”
are not to be counted when determining whether a person or group has acquired a control position. The amendments were
subsequently signed into law by Pennsylvania Governor Edward Rendell on February 10, 2006.
The parties then appeared before me for oral argument on February 16, 2006, to address the various issues of law presented
by the motions to dismiss. Prior to oral argument, and in light of the recent statutory amendments, Relational voluntarily
withdrew its claim as to the applicability of Subchapter E to the Santander transaction. For the reasons stated on the
record, I denied Sovereign's motion to dismiss Relational's claims of alleged breach of duties and alleged violations of Section
14(a) for lack of standing and capacity to sue. Thus, remaining for decision is the question of whether Sovereign's directors
may be removed without cause, and it is to this question that I now turn.
II. Standard of Review
The standard employed in reviewing a motion for judgment on the pleadings pursuant to ., is the same as that employed for
motions brought pursuant to .

A motion requires the court to determine whether plaintiff has stated a legally sufficient claim. A motion to dismiss under
may be granted only if “it appears beyond doubt *442 that the plaintiff can prove no set of facts in support of his claim which
would entitle him to relief.” ; . The court's function is “not to assay the weight of the evidence which might be offered in
support” of the complaint, but “merely to assess the legal feasibility” of the complaint. . In evaluating whether plaintiff may
ultimately prevail, the court must take the facts alleged in the complaint as true and draw all reasonable inferences in favor
of the plaintiff. See .
III. Discussion
A. The Right of Removal under Pennsylvania Law
At the time of Sovereign's incorporation in 1987, Pennsylvania law expressly provided for the removal of directors without
cause. Pennsylvania Business Corporation Law (“PaBCL”), as enacted in 1933, provided that “the entire board of directors,
or a class of the board, where the board is classified with respect to the power to elect directors, or any individual director
may be removed from office without assigning any cause[.]” 15 Pa. Stat. Ann. § 1405(a) (West Supp.1988) (repealed 1989)
(emphasis added).
Subsequently, as concerns about hostile corporate takeovers grew, several states began enacting legislation to limit the abili-
ty of shareholders to remove directors, with a particular emphasis on promoting classified boards. See Richard H. Koppes,
Lyle G. Ganske & Charles T. Haag, . As staggered boards grew in popularity, removal without cause came to be seen as
antithetical to their plan and purpose, namely stability. See (invalidating corporate bylaw allowing for removal without
cause as incompatible with language of the statute and the certificate allowing for staggered terms). Indeed, the Delaware
legislature ultimately codified the rule that, unless the articles of incorporation provide otherwise, directors of a classified
board may be removed only “for cause.” .
It was within this climate of seeking to protect corporations from the instability engendered by hostile takeovers that the
Pennsylvania legislature repealed § 1405(a) in order to limit the ability of shareholders to remove directors without cause to
situations where the company's charter and by-laws permitted such actions. of the PaBCL, adopted the Delaware approach
to removal of directors:
Unless otherwise provided in a bylaw adopted by the shareholders, the entire board of directors, or a class of the board where
the board is classified with respect to the power to select directors, or any individual director of a business corporation may
be removed from office without assigning any cause by the vote of shareholders, or of the holders of a class or series of shares,
entitled to elect directors, or the class of directors. ... Notwithstanding the first sentence of this paragraph, unless otherwise
provided in the articles, the entire board of directors, or any class of the board, or any individual director of a corporation
having a board classified as permitted by section 1724(b) (relating to classified board of directors), may be removed from of-
fice by vote of the shareholders entitled to vote thereon only for cause, *443 if such classification has been effected by a bylaw
adopted by the shareholders. (emphasis added)
. Thus, under the terms of the statute as amended in 1989, and as in effect at the time that Relational filed its original and
amended complaints, the presumption was that removal of a director where the director was a member of a staggered board
could be effected only for cause, absent indication to the contrary in the articles of incorporation.
In the wake of the instant litigation, Sovereign, seemingly aware that under the terms of the statute as amended in 1989 its
directors might be susceptible to removal without cause, petitioned the Pennsylvania legislature to further amend . The
Pennsylvania legislature responded to Sovereign's request and, on February 10, 2006, Pennsylvania Governor Rendell signed
into law Senate Bill No. 595. The new legislation amends the second sentence of as follows:
Notwithstanding the first sentence of this paragraph, unless otherwise provided in the articles by a specific and unambi-
guous statement that directors may be removed from office without assigning any cause, the entire board of directors, or any
class of the board, or any individual director of a corporation having a board classified as permitted by section 1724(b) (relat-
ing to classified board of directors), may be removed from office by vote of the shareholders entitled to vote thereon only for
cause, if such classification has been effected in the articles or by a bylaw adopted by the shareholders.
Under the newly amended , therefore, statements in the articles allowing for removal without cause are to be ineffective ab-
sent “a specific and unambiguous statement” that removal may be effected “without assigning any cause.”
B. Application of the 2006 Amendments
In light of these recent amendments, the question presented is whether Relational's claim that directors may be removed
without cause must fail where the articles lack the “specific and unambiguous statement” now required by the recent statu-
tory amendment. Relational contends that the newly amended is prospective only, and that application of its heightened
requirements for removal without cause to the instant litigation would amount to improper retroactive application, and
would dramatically alter the legal effect of provisions previously understood to grant Sovereign shareholders the right to
remove directors without cause. Sovereign does not dispute Relational's characterization of the amended as prospective
only, but argues that its application to Relational's current attempt to remove the directors without cause is a proper appli-
cation of a prospective amendment. For the reasons stated below, I hold that the recently amended alters the previously
established understanding between Sovereign and its shareholders as to removal of directors, and therefore amounts to im-
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                          613

proper retroactive application of a prospective statute.
As an initial matter, it should be noted that amendments to the PaBCL are presumptively prospective only. provides:
“[u]nless expressly provided otherwise in any amendment to this subpart, the amendment shall take effect only prospective-
ly.” . No such clear statement is provided in the new amendment to . Instead, Senate Bill No. 595 provides only that the
“act shall take effect immediately,” with no reference to its retroactive application. Having determined, as admitted by both
parties, that *444 the amendment is prospective only, I must now determine whether application of the new requirements of
to Relational's attempt to remove Sovereign's directors without cause would amount to improper retroactive application.
The clear presumption against retroactive application is “deeply rooted in our jurisprudence” and stems from the principle
that “settled expectations should not be lightly disrupted.” . However, a statute is not retroactive simply because it “may
unsettle expectations and impose burdens on past conduct.”          Instead, a statute is deemed retroactive when “it relates back
and gives a previous transaction a legal effect different from that which it had under the law in effect when it transpired.” ;
see also (noting that “every statute, which takes away or impairs vested rights acquired under existing laws, or creates a
new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past,
must be deemed retrospective”). Thus, the essential question is whether “the new provision attaches new legal conse-
quences to events contemplated before its enactment.” Such a determination is an inherently difficult one and there likely
will be disagreement in close cases. However, as the Supreme Court noted, “retroactivity is a matter on which judges tend
to have „sound ... instinct [s],‟ and familiar considerations of fair notice, reasonable reliance, and settled expectations offer
sound guidance.” (citing ).
In determining whether application of the new requirements set out in the amended would be retroactive in effect, there-
fore, I must look to the objective expectations of Relational and Sovereign under the former . Under the prior law, the pre-
sumption was that directors could be removed only for cause “unless otherwise provided in the articles.” . Relational argues
that Sovereign's Articles then in effect provided that directors could be removed without cause upon a majority vote by the
shareholders. (See Zimet Decl., dated Feb. 2, 2006, Ex. E, Art. Eight.) And so they do. As will be discussed in greater de-
tail later in this Opinion, Article Eighth of Sovereign's Articles of Incorporation (the “Articles”) allows for removal of Sove-
reign's directors without cause provided that such removal is accomplished by majority vote of the shareholders. (See id.)
A “corporate charter is a dual contract-one between the state and the corporation and its stockholders, and the other between
the corporation and its stockholders[.]” (holding that the state is unauthorized to alter contractual obligations existing be-
tween the corporation and the shareholders); see also . Under its contract with its shareholders, Sovereign provided in its
Articles that its directors could be removed without cause, and this understanding created a vested right in Sovereign's
shareholders. Although the current dispute centers on whether Relational may now remove Sovereign's directors without
cause, this determination may not be made without consideration of Relational's objective expectations at the time that it
became a shareholder of Sovereign. To impose the *445 new standard set out in the amended would upset Relational's
vested rights as a shareholder and would thus amount to improper retroactive application of a statutory amendment.
It should be noted that the Pennsylvania legislature is undoubtedly permitted to set out the standards by which removal of
directors may be effected. However, in the present case, the new standards imposed by the Pennsylvania legislature would
impermissibly upset the pre-existing contract between Sovereign and its shareholders, without giving fair notice and oppor-
tunity to shareholders to adjust to the new standards. The point at which the settled expectations of the parties will no
longer be disrupted by imposition of a new standard cannot be fixed with precision. What is certain, is that “considerations
of fair notice, reasonable reliance, and settled expectations,” demand that Relational's right to remove directors without
cause under the terms of its contract with Sovereign not be disrupted by legislation enacted on the eve of its attempt to exer-
cise that very same right, with the intent to curtail just such an exercise.
C. Right of Removal under Former and Sovereign's Articles
Having established that the amendments to may not be applied to the present dispute, the remaining determination is
whether, under the former and Sovereign's own Articles, removal of its directors may be without cause.
of the PaBCL sets out the following standard for removal of directors sitting on a classified board:
Unless otherwise provided in a bylaw adopted by the shareholders, the entire board of directors, or a class of the board where
the board is classified with respect to the power to select directors, or any individual director of a business corporation may
be removed from office without assigning any cause by the vote of shareholders, or of the holders of a class or series of shares,
entitled to elect directors, or the class of directors .... Notwithstanding the first sentence of this paragraph, unless otherwise
provided in the articles, the entire board of directors, or any class of the board, or any individual director of a corporation
having a board classified as permitted by section 1724(b) (relating to classified board of directors), may be removed from of-
fice by vote of the shareholders entitled to vote thereon only for cause, if such classification has been effected by a bylaw
adopted by the shareholders. (emphasis added)
. Relational presents a two-pronged argument as to the application of this provision to the current dispute: first, that the
presumption of removal only for cause is inapplicable as Sovereign did not effect the classification of its board in “a bylaw
adopted by the shareholders;” and, second, that, even if the requirements of may be said to apply, Sovereign's Articles clear-

ly and unambiguously allow for removal without cause. Although I reject Relational's argument that the presumption of
removal without cause is inapplicable because the classification of Sovereign's board was not effected by bylaw, I neverthe-
less conclude that Relational may remove Sovereign's directors without cause under the clear language of Sovereign's Ar-
ticles of Incorporation.
1. The Requirement of Classification by Bylaw
Under the express language of , the directors of a classified board may be removed without cause only *446 if a “bylaw
adopted by the shareholders” permits such removal. Sovereign concedes that its classified board structure was established
through its original Articles of Incorporation established by its incorporators, rather than through any bylaw adopted by
those who became its shareholders, but nevertheless argues, by reliance on the official comments to the statute and on other
provisions of the PaBCL, that the classification satisfies the requirements of . (See Def.'s Reply Br. at 8.) Relational counters
that the express requirements of should be strictly construed to protect shareholders against diminution of their rights by
installation of a classified board, and that Sovereign's failure to satisfy these express requirements precludes application of
to the instant litigation. Relational's arguments are without merit. Although the Pennsylvania statute, literally construed,
would restrict application of to voting rights regulated only by shareholder-approved bylaws, the official comments to and
other relevant provisions of the PaBCL, demonstrate dispositively that 's coverage should be interpreted sensibly, not literal-
ly, to extend to rights conferred by the articles of incorporation, as well as by bylaws.
In determining the intended scope of 's application, the Committee Comments provide important guidance. Under Pennsyl-
vania law, committee comments may be considered in the construction and application of a statutory provision and are given
substantial weight in interpreting a statute. See (West 1995); see also . The Committee Comments to are particularly
instructive and demonstrate the intent of the legislature clearly and uniformly to alter the standard for removal of directors.
The Comments provide two relevant propositions, first that staggered boards authorized under earlier statutes of governance
will continue to be effective:
A bylaw classifying the directors into staggered terms adopted by the shareholders under the prior law will satisfy the re-
quirements of the last sentence of paragraph (a)(1) and thus the directors of a corporation having such a bylaw will be re-
movable only with cause after October 1, 1989....
and, second and particularly relevant, that corporate governance provisions established by the Articles of a corporation will
be applicable as equally as bylaws:Under , the provisions that subsection[ ] (a) ... authorize[s] to be set forth in the bylaws
may also be set forth in the articles.
cmt. (West 1997) (amended Committee Comment-1990).
          Pursuant to , “[w]here any provision ... refers to a rule as set forth in the bylaws of a corporation, the reference shall
          be construed to include and be satisfied by any rule on the same subject as set forth in the articles of incorporation.”
Thus, by the enactment of , the Pennsylvania legislature sought to impose a presumption of removal only for cause and ex-
tended the reach of the presumption to boards classified prior to the 1988 amendment and, in conformity with , to boards
classified by the articles rather than by bylaw. The Pennsylvania legislature expressed a clear intent that and should have
retroactive application. Relational's acquisitions thus gave it the right to expect, pursuant to Sovereign's Articles and Penn-
sylvania law, that Sovereign's rules of *447 governance, allowing for removal of directors without cause, would continue to be
the rule of governance unless and until duly changed by appropriate corporate procedure.
2. Removal of Directors under Sovereign's Articles of Incorporation
As discussed earlier, the articles of incorporation of a corporation established under Pennsylvania law are a contract between
the corporation and its shareholders and among the shareholders themselves. See . Article Eighth sets out the applicable
standard for removal of Sovereign's directors. It provides, simply and clearly, that a majority vote of qualified shareholders
may remove directors from office:
No director of the Corporation shall be removed from office as a director, by the vote of shareholders, unless the votes of
shareholders cast in favor of the resolution for the removal of such director constitute at least a majority of the votes which
all shareholders would be entitled to cast at an annual election of directors.
 (Zimet Decl., Ex. E at 2.) Nevertheless, Sovereign contends that Article Eighth should not be interpreted to apply to removal
of directors without cause. (See Def.'s Br. at 27.) Why not? Sovereign's interpretation requires the imposition of language
not included in Article Eighth itself, contrary to standard rules of contract interpretation, presuming that the language was
“chosen carelessly.” . By the plain language of Article Eighth, without the imposition of any additional language, Sovereign
directors may be removed without cause as long as removal is accomplished by majority vote.
Further insight as to the meaning of Article Eighth may be gleaned from an analysis of the law in effect at the time of Sove-
reign's incorporation, for “contractual language must be interpreted in light of existing law, the provisions of which are re-
garded as implied terms of the contract.” Richard Lord, 11 Williston on Contracts § 30.19 (4th ed. 2005). As noted by the
Pennsylvania Supreme Court, “no principle is more firmly established than that the laws which were in force at the time and
place of the making of the contract enter into its obligation with the same effect as if expressly incorporated in its terms.”
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                        615

(internal citations omitted). Here, at the time of Sovereign's incorporation, the applicable law provided that “the entire
board of directors, or a class of the board, where the board is classified with respect to the power to elect directors, or any
individual director may be removed from office without assigning any cause [.]” 15 Pa. Stat. Ann. § 1405(a) (West Supp.
1988) (repealed 1989). Thus, this presumption of removal without cause was incorporated into Article Eighth addressing
the right of removal.
Sovereign counters that the meaning of Article Eighth was altered by the repeal of former § 1405(a) and that the Article
came to assume the presumption of removal only for cause embodied in as enacted under the 1988 PaBCL. Further, Sove-
reign contends that, since the language of Article Eighth was adopted prior to enactment of , it could not have been intended
as an “opt out” to the revised statute which thereafter provided for a presumption of removal only for cause. These argu-
ments are without merit. The plain language of Article Eighth, and an analysis of the law in effect at the time of its enact-
ment in 1987, makes clear that the original Articles of Incorporation provided for removal without cause. The *448 enact-
ment of did not alter this original intent. Indeed, Sovereign itself publicly declared in numerous SEC filings antedating the
enactment of that removal of its directors could be without cause. (See Def.'s Reply Br. at 23.) Although self-serving state-
ments may be inadmissible for purposes of interpreting the meaning of a contract, , they provide important insight into So-
vereign's understanding of the rights of its shareholders to remove directors, and a significant admission contradicting the
interpretation it now finds convenient to proffer. Sovereign's public SEC filings, which must be signed or approved by offic-
ers and directors of a corporation on an annual basis, show that Sovereign's directors understood their positions to be ter-
minable by vote of the shareholders without any demonstration of cause. Having failed to take any action in the years fol-
lowing the enactment of to insulate its directors from the threat of removal without cause, and having authorized public
filings against its directors own interests, Sovereign may not now assert an interpretation that contradicts, not only the
plain language of its Articles, but its own contentions in this litigation as well.
In accordance with the foregoing, I now hold that, under the plain terms of Sovereign's Articles of Incorporation, Sovereign's
directors are subject to removal without cause upon majority vote of its shareholders in accordance with Article Eighth. In
reaching this decision, I am not unaware of the important public policies which seek to balance the interests of protecting
corporate entities from the destabilizing effects of hostile takeovers and abrupt changes in management and the interests of
the right of shareholders to remove directors deemed unfit to continue in the management of the corporation or who persist
in a policy that they, but not the shareholders, prefer. Under Sovereign's Articles of Incorporation, made paramount by
Pennsylvania's statutes of corporate governance, the tension is to be resolved in favor of shareholder autonomy, giving
shareholders the right to remove all or some directors without cause, as long as a majority of qualified shareholders so vote,
and I so hold.
IV. Conclusion
In light of my holding above, Sovereign's motion for judgment on the pleadings as to the right of Relational and other share-
holders to remove its directors without cause is denied and Relational's counter-motion for judgment on the pleadings is
granted. Thus, remaining for consideration are Relational's claims that Sovereign has breached its duties and has acted in
violation of Section 14(a) of the Securities Exchange Act of 1934. An evidentiary hearing on these remaining issues is sche-
duled to commence on March 27, 2006. In accordance with my Order of January 31, the parties are to complete all discovery
by March 16, 2006. Upon completion of discovery, the parties are to submit briefs addressing the remaining factual issues
under the schedule set out in the January 31 Order.
Cognizant of the need for an expedited resolution of all claims currently pending before me in advance of the scheduled clos-
ing of the transaction between Santander and Sovereign in April 2006, the parties may wish to adjust their other contentions
in this case, with the view towards making this order a final judgment. To that end, and to discuss any need to stay changes
in the status quo, the parties through counsel shall attend a conference on March 9, 2006, at 4:30 p.m.

Case 39.2
5 A.2d 503
Del., 1939
Supreme Court of Delaware.
GUTH et al.

LOFT, Inc.
April 11, 1939.
 Caleb S. Layton, of Wilmington, and George Wharton Pepper, of Philadelphia, Pa. (Richards, Layton & Finger, of Wilming-
ton, and John Sailer, James A. Montgomery, Jr., and Pepper, Bodine, Stokes & Schoch, all of Philadelphia, Pa., of counsel),
for appellants.
 Clarence A. Southerland, of Wilmington (David L. Podell, Hays, Podell & Shulman, and Levien, Singer & Neuburger, all of
New York City, of counsel), for appellee.
 Supreme Court, January Term, 1939. Appeal from the Court of Chancery.
 For convenience, Loft Incorporated, will be referred to as Loft; the Grace Company, Inc., of Delaware, as Grace; and Pepsi-
Cola Company, a corporation of Delaware, as Pepsi.
Loft filed a bill in the Court of Chancery against Charles G. Guth, Grace and Pepsi seeking to impress a trust *258 in favor
of the complainant upon all shares of the capital stock of Pepsi registered in the name of Guth and in the name of Grace (ap-
proximately 91% of the capital stock), to secure a transfer of those shares to the complainant, and for an accounting.
The cause was heard at great length by the Chancellor who, on September 17, 1938, rendered a decision in favor of the com-
plainant in accordance with the prayers of the bill. Loft, Inc., v. Guth, Del.Ch., 2 A.2d 225.An interlocutory decree, and an
interlocutory order fixing terms of stay and amounts of supersedeas bonds, were entered on October 4, 1938; and, thereafter,
an appeal was duly prosecuted to this Court.
The essential facts, admitted or found by the Chancellor, briefly stated, are these: Loft was, and is, a corporation engaged in
the manufacturing and selling of candies, syrups, beverages and foodstuffs, having its executive offices and main plant at
Long Island City, New York. In 1931 Loft operated 115 stores largely located in the congested centers of population along the
Middle Atlantic seaboard. While its operations chiefly were of a retail nature, its wholesale activities were not unimportant,
amounting in 1931 to over $800,000. It had the equipment and the personnel to carry on syrup making operations, and was
engaged in manufacturing fountain syrups to supply its own extensive needs. It had assets exceeding $9,000,000 in value,
excluding goodwill; and from 1931 to 1935, it had sufficient working capital for its own cash requirements.
Guth, a man of long experience in the candy, chocolate and soft drink business, became Vice President of Loft in August,
1929, and its president in March 1930.
Grace was owned by Guth and his family. It owned a plant in Baltimore, Maryland, where it was engaged in *259 the manu-
facture of syrups for soft drinks, and it had been supplying Loft with „Lady Grace Chocolate Syrup‟.
In 1931, Coca-Cola was dispensed at all of the Loft Stores, and of the Coca-Cola syrup Loft made large purchases, averaging
over 30,000 gallons annually. The cost of the syrup was $1.48 per gallon. Guth requested the Coca-Cola Company to give Loft
a jobber's discount in view of its large requirements of syrups which exceeded greatly the purchases of some other users of
the syrup to whom such discount had been granted. After many conferences, the Coca-Cola Company refused to give the dis-
count. Guth became incensed, and contemplated the replacement of the Coca-Cola beverage with some other cola drink. On
May 19, 1931, he addressed a memorandum to V. O. Robertson, Loft's vice-president, asking „Why are we paying a full price
for Coca-Cola? Can you handle this, or would you suggest our buying Pebsaco (Pepsi-Cola) at about $1.00 per gallon?‟To this
Robertson replied that Loft was not paying quite full price for Coca-Cola, it paying $1.48 per gallon instead of $1.60, but that
it was too much, and that he was investigating as to Pepsi-Cola.
Pepsi-Cola was a syrup compounded and marketed by National Pepsi-Cola Company, controlled by one Megargel. The Pepsi-
Cola beverage had been on the market for upwards of twenty five years, but chiefly in southern territory. It was possessed of
a secret formula and trademark. This company, as it happened, was adjudicated a bankrupt on May 26, 1931, upon a peti-
tion filed on May 18, the day before the date of Guth's memorandum to Robertson suggesting a trial of Pepsi-Cola syrup by
**506 Megargel was not unknown to Guth. In 1928, when Guth had no connection with Loft, Megargel had tried unsuccess-
fully to interest Guth and one Hoodless, vice-president and general manager of a sugar company, in National Pepsi-Cola
Company. Upon the bankruptcy of this company*260 Hoodless, who apparently had had some communication with Megar-
gel, informed Guth that Megargel would communicate with him, and Megargel did inform Guth of his company's bankruptcy
and that he was in a position to acquire from the trustee in bankruptcy, the secret formula and trademark for the manufac-
ture and sale of Pepsi-Cola.
In July, 1931, Megargel and Guth entered into an agreement whereby Megargel would acquire the Pepsi-Cola formula and
trademark; would form a new corporation, with an authorized capital of 300,000 shares of the par value of $5, to which cor-
poration Megargel would transfer the formula and trademark; would keep 100,000 shares for himself, transfer a like number
to Guth, and turn back 100,000 shares to the company as treasury stock, all or a part thereof to be sold to provide working
capital. By the agreement between the two Megargel was to receive $25,000 annually for the first six years, and, thereafter,
a royalty of 2 1/2 cents on each gallon of syrup.
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                        617

Megargel had no money. The price of the formula and trademark was $10,000. Guth loaned Megargel $12,000 upon his
agreement to repay him out of the first $25,000 coming to him under the agreement between the two, and Megargel made a
formal assignment to Guth to that effect. The $12,000 was paid to Megargel in this way: $5000 directly to Megargel by Guth,
and $7,000 by Loft's certified check, Guth delivering to Loft simultaneously his two checks aggregating $7000. Guth also
advanced $426.40 to defray the cost of incorporating the company. This amount and the sum of $12,000 were afterwards re-
paid to Guth.
Pepsi-Cola Company was organized under the laws of Delaware in August, 1931. The formula and trademark were acquired
from the trustee in bankruptcy of National Pepsi-Cola Company, and its capital stock was distributed as agreed, except that
100,000 shares were placed in the name of Grace.
*261 At this time Megargel could give no financial assistance to the venture directly or indirectly. Grace, upon a comparison
of its assets with its liabilities, was insolvent. Only $13,000 of Pepsi's treasury stock was ever sold. Guth was heavily in-
debted to Loft, and, generally, he was in most serious financial straits, and was entirely unable to finance the enterprise. On
the other hand, Loft was well able to finance it.
Guth, during the years 1931 to 1935 dominated Loft through his control of the Board of Directors. He has completely con-
trolled Pepsi. Without the knowledge or consent of Loft's Board of Directors he drew upon Loft without limit to further the
Pepsi enterprise having at one time almost the entire working capital of Loft engaged therein. He used Loft's plant facilities,
materials, credit, executives and employees as he willed. Pepsi's payroll sheets were a part of Loft's and a single Loft check
was drawn for both.
An attempt was made to keep an account of the time spent by Loft's workmen on Pepsi's enterprises, and in 1935, when Pep-
si had available profits, the account was paid; but no charge was made by Loft as against Pepsi for the services rendered by
Loft's executives, higher ranking office employees or chemist, nor for the use of its plant and facilities.
The course of dealing between Loft, Grace and Pepsi was this: Loft, under the direction of its chemist, made the concentrate
for the syrup and prepared the directions for its mixing. It was sent to Grace in Baltimore, and Grace was charged with the
cost plus ten percent. Grace added the necessary sugar and water. Grace billed the syrup to Pepsi at an undoubted profit, but
shipped the syrup direct to Pepsi's customers, of whom Loft was the chief, at a profit. Whether Loft made or lost money on its
dealings with Grace was disputed. It profited to little or no extent, and probably lost money. As between Loft and Grace, the
latter was *262 extended credit for three and one half years during which time nothing was paid, and it was heavily in-
debted to Loft. As between Grace and Pepsi, the latter paid for the syrup on account, owing always, however, a substantial
balance. But, as between Loft and Pepsi, Loft paid, generally, on delivery, in one instance in advance, and never longer than
thirty days. By June, 1934, Loft's total cash and credit advances to Grace and Pepsi were in excess of $100,000.
**507 All the while Guth was carrying forward his plan to replace Coca-Cola with Pepsi-Cola at all of the Loft stores. Loft
spent at least $20,000 in advertising the beverage, whereas it never had to advertise Coca-Cola. Loft, also, suffered large
losses of profits at its stores resulting from the discarding of Coca-Cola. These losses were estimated at $300,000. They un-
doubtedly were large.
When Pepsi was organized in 1931, 100,000 shares of its stock were transferred to Grace. At that time Guth, in his own
name, had no shares at all. Sometime in or after August, 1933, a settlement was made of Megargel's claim against Pepsi for
arrearages due him under the contract hereinbefore mentioned. That settlement called for the payment of $35,000 in cash by
Pepsi. Guth provided $500, Loft $34,500. In the settlement, 97,500 shares of Pepsi stock owned by Megargel were received by
Pepsi and left with Loft as security for the advance, as the defendants claimed. These shares came into Guth's possession.
Guth claimed that, at the January, 1934, meeting of the Loft Board of Directors, the Megargel settlement, Loft's advance of
$34,500 and Pepsi's receipt of the Megargel stock were reported to the Board, and that the directors authorized the conti-
nuance of Loft's unlimited financing of Pepsi, but no record of the authorization exists.
In December, 1934, Pepsi issued 40,000 of its shares to Grace in settlement of Pepsi's indebtedness to it in the amount as
Grace claimed of $46,286.49, but Loft claimed *263 that the balance due Grace from Pepsi was $38,952.14. At this time
Grace was indebted to Loft in the sum of $26,493.07. Pepsi owed Loft $39,231.86; and Guth owed Loft over $100,000.
Guth claimed that he offered Loft the opportunity to take over the Pepsi-Cola enterprise, frankly stating to the directors that
if Loft did not, he would; but that the Board declined because Pepsi-Cola had proved a failure, and that for Loft to sponsor a
company to compete with Coca-Cola would cause trouble; that the proposition was not in line with Loft's business; that it
was not equipped to carry on such business on an extensive scale; and that it would involve too great a financial risk. Yet, he
claimed that, in August, 1933, the Loft directors consented, without a vote, that Loft should extend to Guth its facilities and
resources without limit upon Guth's guarantee of all advances, and upon Guth's contract to furnish Loft a continuous supply
of syrup at a favorable price. The guaranty was not in writing if one was made, and the contract was not produced.
The appellants claimed that the franchise and trademark were acquired by Pepsi without the aid of Loft; that Grace made an
essential contribution to the enterprise by way of its Baltimore plant, since it would have been necessary for Pepsi to erect
such plant if the Grace plant had not been available; that the valuable services of G. H. Robertson who had a wide experience
in the field of manufacturing and distributing bottled beverages were secured; that no part of the $13,000 paid for Pepsi's

stock by the purchasers thereof was Loft's money; that Pepsi and Grace made large purchases of sugar and containers from
other concerns than Loft; that Loft in 1934 and 1935 bought a very small part of Pepsi's output of syrup; that Guth rendered
invaluable services to Pepsi, and was the genius responsible for its success; that the success of Pepsi was due to Guth's idea
of furnishing Pepsi-Cola in 12 ounce bottles*264 at 5 cents, and to his making license agreements with bottlers; and that all
of the indebtedness of Guth, Grace and Pepsi had been made good to Loft except $30,000 which Guth owed Loft, and which
could be liquidated at any time.
The Chancellor found that Guth had never offered the Pepsi opportunity to Loft; that his negotiations with Megargel in 1931
was not a renewal of a prior negotiation with him in 1928; that Guth's use of Loft's money, credit, facilities and personnel in
the furtherance of the Pepsi venture was without the knowledge or authorization of Loft's directors; that Guth's alleged per-
sonal guaranty to Loft against loss resulting from the venture was not in writing, and otherwise was worthless; that no con-
tract existed between Pepsi and Loft whereby the former was to furnish the latter with a constant supply of syrup for a defi-
nite time and at a definite price; that as against Loft's contribution to the Pepsi-Cola venture, the appellants had contributed
practically nothing; that after the repayment of the sum of $12,000 which had been loaned by Guth to Megargel, Guth had
not a dollar invested in Pepsi stock; that Guth was a full time president of Loft at an attractive salary, and could not claim to
have invested**508 his services in the enterprise; that in 1933, Pepsi was insolvent; that Loft, until July, 1934, bore practi-
cally the entire financial burdens of Pepsi, but for which it must have failed disastrously to the great loss of Loft.
Reference is made to the opinion of the Chancellor (2 A.2d 225) for a more detailed statement of the facts.
By the decree entered the Chancellor found, inter alia, that Guth was estopped to deny that opportunity of acquiring the
Pepsi-Cola trademark and formula was received by him on behalf of Loft, and that the opportunity was wrongfully appro-
priated by Guth to himself; that the value inhering in and represented by the 97,500 shares of Pepsi *265 stock standing in
the name of Guth and the 140,000 shares standing in the name of Grace, were, in equity, the property of Loft; that the divi-
dends declared and paid on the shares of stock were, and had been, the property of Loft; and that for all practical purposes
Guth and Grace were one.
The Chancellor ordered Guth and Grace to transfer the shares of stock to Loft; the sequestrator to pay to Loft certain money
representing dividends declared on the stock for the year 1936; Grace and Guth to pay to Loft certain money, representing
dividends declared and paid for the same year; Guth to account for and pay over to Loft any other dividends, profits, gains,
etc., attributable or allocable to the 97,500 shares of Pepsi stock standing in his name; Grace to do likewise with respect to
the 140,000 shares standing in its name; Guth to pay to Loft all salary or compensation paid him by Pepsi prior to October
21, 1935; and all salary paid by Pepsi to him subsequent to October 21, 1935, in excess of what should be determined to be
reasonable; Guth and Grace to be credited with such sums of money as may be found due them from Loft of from Pepsi in
respect of matters set forth in the bill of complaint; and a master to be appointed to take and state the accounts.
Assignments of error, thirty in number, were filed, covering practically all of the essential findings and conclusions of the
LAYTON, Chief Justice, delivering the opinion of the Court:
 In the Court below the appellants took the position that, on the facts, the complainant was entitled to no equitable relief
whatever. In this Court, they seek only a modification of the Chancellor's decree, not a reversal of it. They now contend that
the question is one of equitable adjustment based upon the extent and value of the respective contributions of the appellants
and the appellee. This change of *266 position is brought about, as it is said, because of certain basic fact findings of the
Chancellor which are admittedly unassailable in this Court. The appellants accept the findings of fact; but they contend that
the Chancellor's inferences from them were unwarrantable in material instances, and far more favorable to the complainant
than they would have been had not he felt justified in penalizing Guth for what seemed to him serious departures from a
strict standard of official conduct. They say that this attitude of mind of the Chancellor was brought about by attacking
Guth's official conduct in such manner as to create an impression of ruthlessness, thereby causing the Chancellor to be less
critical of equitable theory, and more inclined to do what amounted to an infliction of a penalty.
As stated by the appellants, there were certain questions before the Chancellor for determination: (1) was Guth at the time
the Pepsi-Cola opportunity came to him obligated, in view of his official connection with Loft, to take the opportunity for Loft
rather than for himself? On this point the appellants contend no finding was made.
(2) Was Guth, nevertheless, estopped from denying that the opportunity belonged to Loft; and was he rightfully penalized to
the extent of his whole interest therein, merely because resources borrowed from Loft had contributed in some measure to its
development; and did Loft's contributions create the whole value behind the interests of Guth and Grace in Pepsi, thereby
constituting Loft the equitable owner of those interests? These questions were answered in the affirmative; and because of
the answers, the Chancellor, it is said, did not answer the last question before him, that is, Upon what theory and to what
extent should Loft share in the proceeds of the Pepsi-Cola enterprise?
*267 The appellants contend, at length and earnestly, that the Chancellor made no finding of fact with respect to corporate
opportunity. They admit that if the Chancellor had found, or if this Court should find, that the Pepsi-Cola opportunity was
**509 one which Guth, as president and dominant director of Loft, was bound to embrace for it, such finding would create, as
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                           619

it is said, an obstacle to the appellants' right to a reappraisement of the Loft contributions to the Pepsi-Cola enterprise; and
as the oral argument is remembered, it was stated in more direct and explicit terms, that if the Chancellor had so found, or if
this Court should find, in favor of Loft upon the issue, the case would be at an end.
The appellants offer a comparison of the preliminary draft of a decree, submitted by the complainant as Finding A, with the
final draft of that finding. Briefly, the substantial difference is, that in the preliminary draft it was stated that the opportu-
nity to acquire the formula, goodwill and business incident to the manufacture and sale of Pepsi-Cola, belonged to the com-
plainant; whereas, in the decree as signed, it was stated that Guth was estopped to deny that he had received the opportuni-
ty on behalf of the complainant. The appellants say that strenuous objection was made to the draft submitted by the appellee
on the ground that nowhere in the Chancellor's opinion did it appear that he had found, as a fact, that the opportunity be-
longed to Loft, and after full consideration, the Chancellor acquiesced, and the modification was made. The appellee contends
that the chancellor did find that the Pepsi-Cola opportunity belonged to it, and that the modification was made for other rea-
In these circumstances of contention, certain questions suggest themselves for consideration, and some of them for answer:
Did the Chancellor make an explicit finding that the Pepsi-Cola opportunity belonged in equity to Loft, and if so, was such
finding justifiable in fact and in law? If the *268 Chancellor made no such explicit finding, should he have done so, or should
this Court make such finding? Assuming that the Chancellor made no explicit finding and that this Court should not feel
justified in making such finding, was, and is, the doctrine of estoppel properly invocable in favor of the complainant?
The complainant is not, of course, precluded from making the argument that, upon the law and the facts, the Pepsi-Cola op-
portunity belonged to it; nor is this Court prohibited from so finding.
It is necessary briefly to notice what the Chancellor said with respect to the question of corporate opportunity. As a prelimi-
nary to the discussion of the question, the Chancellor stated generally the principles governing officers and directors of a
corporation with respect to their fiduciary relation to the corporation and its stockholders, and their liability to account to
the corporation for profits and advantages resulting from unlawful acts and breaches of trust done and committed in the
promotion of their own interests. He then proceeded to say that Guth, being not only a director of Loft but its president as
well, and dominant in the management of its affairs, the principles and rules governing trustees in their relations with their
correlates applied to him with peculiar and exceptional force. He particularly noticed a proposition of law stated by the de-
fendants, that when a business opportunity comes to an officer or director in his individual capacity rather than in his offi-
cial capacity, and is one which, because of its nature, is not essential to the corporation, and is one in which it has no interest
or expectancy, the officer or director is entitled to treat the opportunity as his own. As stated, he found the proposition ac-
ceptable in the main; but he observed that the cases cited by the defendant recognized as true also the converse of the propo-
sition, and that in all of them the fundamental fact of good faith was found in favor of the officer *269 or director charged
with the dereliction. He then proceeded to say [2 A.2d 240]:
 „Now the evidence in the case subjudice does not warrant the view that any one of these features may be affirmed as existing
here. The brief review of some of its salient features which I have hereinbefore made, shows the opposite of every one of them
to have been the fact. That Loft had the means to finance and establish the business is clearly demonstrated. In every aspect
of essential fact it did so. That Guth did not use his own funds and risk his own resources in acquiring and developing the
Pepsi business is equally demonstrated. He was in fact unable to do so. I dismiss from consideration his claim of a parol con-
tract of guaranty with Loft by which he engaged to save it harmless from any loss it might suffer from its advances. I con-
clude that no such guaranty was given. Even if it was, it was worthless. That the business of producing Pepsi-Cola syrup was
in the line of Loft's business and of practical and not theoretical interest to it, is shown by the fact that Loft was engaged in
manufacturing **510 fountain syrups of numerous kinds to supply its own extensive needs. Indeed the outstanding justifica-
tion which Guth offers for his utilization of Loft's resources on the scale he did, was Loft's need for a constant and reliable
supply of Pepsi-Cola syrup. The former directors now allied with Guth, a minority of the former board, offer a like justifica-
tion for their alleged approval of Guth's acts in plunging Loft deep into the Pepsi venture. It does not become either Guth or
the minority group of directors now associated with him to claim that Pepsi was an enterprise which was foreign to Loft's
purposes and alien to its business interests. The very claim, if accepted, denounces as a shocking breach of their duty as di-
rectors their act of agreeing, as they now say they did, to Guth's free use of Loft's resources of all kinds to an unlimited ex-
tent to promote and develop the enterprise.
„I am of the opinion that under such circumstances as are disclosed in this case, Guth is estopped by what he subsequently
caused Loft to do, to deny that when he embraced the Megargel offer he did so in behalf of Loft. The offer cannot be viewed in
any light other than an expectancy that was Loft's. Guth is estopped to contend to the contrary. The case of Bailey v. Jacobs,
325 Pa. 187, 189 A. 320, cited at an earlier point in this opinion, is a pertinent and persuasive authority in support of that
Manifestly, the Chancellor found to exist facts and circumstances from which the conclusion could be reached that the Pepsi-
Cola opportunity belonged in equity to Loft.
*270[1][2][3][4][5] Corporate officers and directors are not permitted to use their position of trust and confidence to further

their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockhold-
ers. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and mo-
tives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupul-
ous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also
to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his
skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The
rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty
and self-interest. The occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no
hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale.
[6] If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage for himself, the law
charges the interest so acquired with a trust for the benefit of the corporation, at its election, while it denies to the betrayer
all benefit and profit. The rule, inveterate and uncompromising in its rigidity, does not rest upon the narrow ground of injury
or damage to the corporation resulting from a betrayal of confidence, but upon a broader foundation of a wise public policy
that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of the confidence
imposed by the fiduciary relation. Given the relation between the parties, a certain result follows; and a constructive trust is
the remedial device through which precedence of self is compelled to give way to the stern demands of loyalty. *271Lofland
et al. v. Cahall, 13 Del. Ch. 384, 118 A. 1;Bodell v. General Gas & Elec. Corp., 15 Del.Ch. 119, 132 A. 442,affirmed15 Del.Ch.
420, 140 A. 264;Trice et al. v. Comstock, 8 Cir., 121 F. 620, 61 L.R.A. 176;Jasper v. Appalachian Gas Co., 152 Ky. 68, 153
S.W. 50, Ann.Cas. 1915B, 192;Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1;Wendt v. Fischer, 243 N.Y. 439,
154 N.E. 303;Bailey v. Jacobs, 325 Pa. 187, 189 A. 320;Cook v. Deeks, [1916] L.R. 1 A.C. 554.
The rule, referred to briefly as the rule of corporate opportunity, is merely one of the manifestations of the general rule that
demands of an officer or director the utmost good faith in his relation to the corporation which he represents.
[7] It is true that when a business opportunity comes to a corporate officer or director in his individual capacity rather than
in his official capacity, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corpo-
ration, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his
own, and the corporation has no interest in it, if, of course, the officer or director has not wrongfully embarked the **511 cor-
poration's resources therein. Colorado & Utah Coal Co. v. Harris et al., 97 Colo. 309, 49 P.2d 429;Lagarde v. Anniston Lime
& Stone Co., 126 Ala. 496, 28 So. 199;Pioneer Oil & Gas Co. v. Anderson, 168 Miss. 334, 151 So. 161;Sandy River R. Co. v.
Stubbs, 77 Me. 594, 2 A. 9;Lancaster Loose Leaf Tobacco Co. v. Robinson, 199 Ky. 313, 250 S.W. 997.But, in all of these cas-
es, except, perhaps, in one, there was no infidelity on the part of the corporate officer sought to be charged. In the first case,
it was found that the corporation had no practical use for the property acquired by Harris. In the Pioneer Oil & Gas Co. case,
Anderson used no funds or assets of the corporation, did not know that the corporation was negotiating for the oil lands and,
further, the corporation could not, in any *272 event have acquired them, because their proprietors objected to the corpora-
tion's having an interest in them, and because the corporation was in no financial position to pay for them. In the Stubbs
case, the railroad company, desiring to purchase from Porter such part of his land as was necessary for its right of way, sta-
tion, water-tank, and woodshed, declined to accede to his price. Stubbs, a director, made every effort to buy the necessary
land for the company and failed. He then bought the entire tract, and offered to sell to the company what it needed. The
company repudiated expressly all participation in the purchase. Later the company located its tracks and buildings on a part
of the land, but could not agree with Stubbs as to damages or terms of the conveyance. Three and one-half years thereafter,
Stubbs was informed for the first time that the company claimed that he held the land in trust for it. In the Lancaster Loose
Leaf Tobacco Co. case, the company had never engaged in the particular line of business, and its established policy had been
not to engage in it. The only interest which the company had in the burley tobacco bought by Robinson was its commissions
in selling it on its floors, and these commissions it received. In the Lagarde case, it was said that the proprietorship of the
property acquired by the Legardes may have been important to the corporation, but was not shown to have been necessary to
the continuance of its business, or that its purchase by the Legardes had in any way impaired the value of the corporation's
property. This decision is, perhaps, the strongest cited on behalf of the appellants. With deference to the Court that rendered
it, a different view of the correctness of the conclusion reached may be entertained.
[8] On the other hand, it is equally true that, if there is presented to a corporate officer or director a business opportunity
which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of
practical advantage to it, is one in which *273 the corporation has an interest or a reasonable expectancy, and, by embracing
the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law
will not permit him to seize the opportunity for himself. And, if, in such circumstances, the interests of the corporation are
betrayed, the corporation may elect to claim all of the benefits of the transaction for itself, and the law will impress a trust in
favor of the corporation upon the property, interests and profits so acquired. Du Pont v. Du Pont et al., D.C., 242 F. 98, re-
versed on facts, 3 Cir., 256 F. 129;Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378;Irving Trust Co. v.
Deutsch, 2 Cir., 73 F.2d 121,certiorari deniedBiddle v. Irving Trust Co., 294 U.S. 708, 55 S.Ct. 405, 79 L.Ed. 1243;Bailey v.
                    CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                            621

Jacobs, supra;Beaudette et al. v. Graham et al., 267 Mass. 7, 165 N.E. 671;McKey v. Swenson, 232 Mich. 505, 205 N.W. 583.
But, there is little profit in a discussion of the particular cases cited. In none of them are the facts and circumstances compa-
rable to those of the case under consideration. The question is not one to be decided on narrow or technical grounds, but upon
broad considerations of corporate duty and loyalty.
[9] As stated in 3 Fletcher Cyclopedia, Corporations, § 862, an authority seemingly relied on by the appellants, „There is a
vast field for individual activity outside the duty of a director, yet well within the general scope of the corporation's business.
The test seems to be whether there was a specific duty, on the part of the officer sought to be held liable, to act or contract in
regard to the particular matter as the representative of the corporation-all of which is largely a question of fact‟.
Duty and loyalty are inseparably connected. Duty is that which is required by one's station or occupation; is that which one
is bound by legal or moral obligation to do or refrain from doing; and it is with **512 this conception of duty *274 as the un-
derlying basis of the principle applicable to the situation disclosed, that the conduct and acts of Guth with respect to his ac-
quisition of the Pepsi-Cola enterprise will be scrutinized. Guth was not merely a director and the president of Loft. He was
its master. It is admitted that Guth manifested some of the qualities of a dictator. The directors were selected by him. Some
of them held salaried positions in the company. All of them held their positions at his favor. Whether they were supine mere-
ly, or for sufficient reasons entirely subservient to Guth, it is not profitable to inquire. It is sufficient to say that they either
wilfully or negligently allowed Guth absolute freedom of action in the management of Loft's activities, and theirs is an unen-
viable position whether testifying for or against the appellants.
Prior to May, 1931, Guth became convinced that Loft was being unfairly discriminated against by the Coca-Cola Company of
whose syrup it was a large purchaser, in that Loft had been refused a jobber's discount on the syrup, although others, whose
purchases were of far less importance, had been given such discount. He determined to replace Coca-Cola as a beverage at
the Loft stores with some other cola drink, if that could be accomplished. So, on May 19, 1931, he suggested an inquiry with
respect to desirability of discontinuing the use of Coca-Cola, and replacing it with Pepsi-Cola at a greatly reduced price. Pep-
si-Cola was the syrup produced by National Pepsi-Cola Company. As a beverage it had been on the market for over twenty-
five years, and while it was not known to consumers in the area of the Loft stores, its formula and trademark were well es-
tablished. Guth's purpose was to deliver Loft from the thraldom of the Coca-Cola Company, which practically dominated the
field of cola beverages, and, at the same time, to gain for Loft a greater margin of profit on its sales of cola beverages. Cer-
tainly, the choice of an acceptable substitute for Coca-Cola was not a wide one, and, doubtless, *275 his experience in the
field of bottled beverages convinced him that it was necessary for him to obtain a cola syrup whose formula and trademark
were secure against attack. Although the difficulties and dangers were great, he concluded to make the change. Almost si-
multaneously, National Pepsi-Cola Company, in which Megargel was predominant and whom Guth knew, went into bank-
ruptcy; and Guth was informed that the long established Pepsi-Cola formula and trademark could be had at a small price.
Guth, of course, was Loft; and Loft's determination to replace Coca-Cola with some other cola beverage in its many stores
was practically co-incidental with the opportunity to acquire the Pepsi-Cola formula and trademark. This was the condition
of affairs when Megargel approached Guth. Guth contended that his negotiation with Megargel in 1931 was but a continua-
tion of a negotiation begun in 1928, when he had no connection with Loft; but the Chancellor found to the contrary, and his
finding is accepted.
It is urged by the appellants that Megargel offered the Pepsi-Cola opportunity to Guth personally, and not to him as presi-
dent of Loft. The Chancellor said that there was no way of knowing the fact, as Megargel was dead, and the benefit of his
testimony could not be had; but that it was not important, for the matter of consequence was how Guth received the proposi-
[10][11] It was incumbent upon Guth to show that his every act in dealing with the opportunity presented was in the exer-
cise of the utmost good faith to Loft; and the burden was cast upon him satisfactorily to prove that the offer was made to him
individually. Reasonable inferences, drawn from acknowledged facts and circumstances, are powerful factors in arriving at
the truth of a disputed matter, and such inferences are not to be ignored in considering the acts and conduct of Megargel. He
had been for years engaged in the manufacture and sale of a cola syrup in competition*276 with Coca-Cola. He knew of the
difficulties of competition with such a powerful opponent in general, and in particular in the securing of a necessary foothold
in a new territory where Coca-Cola was supreme. He could not hope to establish the popularity and use of his syrup in a
strange field, and in competition with the assured position of Coca-Cola, by the usual advertising means, for he, himself, had
no money or resources, and it is entirely unbelievable that he expected Guth to have command of the vast amount of money
necessary to popularize Pepsi-Cola by the ordinary methods. He knew of the difficulty, not to say impossibility, of inducing
proprietors of soft drink establishments to use a cola drink utterly unknown **513 to their patrons. It would seem clear,
from any reasonable point of view, that Megargel sought to interest someone who controlled an existing opportunity to popu-
larize his product by an actual presentation of it to the consuming public. Such person was Guth, the president of Loft. It is
entirely reasonable to infer that Megargel approached Guth as president of Loft, operating, as it did, many soft drink foun-
tains in a most necessary and desirable territory where Pepsi-Cola was little known, he well knowing that if the drink could
be established in New York and circumjacent territory, its success would be assured. Every reasonable inference points to

this conclusion. What was finally agreed upon between Megargel and Guth, and what outward appearance their agreement
assumed, is of small importance. It was a matter of indifference to Megargel whether his co-adventurer was Guth personally,
or Loft, so long as his terms were met and his object attained.
[12] Leaving aside the manner of the offer of the opportunity, certain other matters are to be considered in determining
whether the opportunity, in the circumstances, belonged to Loft; and in this we agree that Guth's right to appropriate the
Pepsi-Cola opportunity to himself depends upon the circumstances existing at the time it presented itself*277 to him without
regard to subsequent events, and that due weight should be given to character of the opportunity which Megargel envisioned
and brought to Guth's door.
The real issue is whether the opportunity to secure a very substantial stock interest in a corporation to be formed for the
purpose of exploiting a cola beverage on a wholesale scale was so closely associated with the existing business activities of
Loft, and so essential thereto, as to bring the transaction within that class of cases where the acquisition of the property
would throw the corporate officer purchasing it into competition with his company. This is a factual question to be decided by
reasonable inferences from objective facts.
It is asserted that, no matter how diversified the scope of Loft's activities, its primary business was the manufacturing and
selling of candy in its own chain of retail stores, and that it never had the idea of turning a subsidiary product into a highly
advertised, nation-wide specialty. Therefore, it had never initiated any investigation into the possibility of acquiring a stock
interest in a corporation to be formed to exploit Pepsi-Cola on the scale envisioned by Megargel, necessitating sales of at
least 1,000,000 gallons a year. It is said that the most effective argument against the proposition that Guth was obligated to
take the opportunity for Loft is to be found in the complainant's own assertion that Guth was guilty of an improper exercise
of business judgment when he replaced Coca-Cola with Pepsi-Cola at the Loft Stores. Assuming that the complainant's ar-
gument in this respect is incompatible with its contention that the Pepsi-Cola opportunity belonged to Loft, it is no more in-
consistent than is the position of the appellants on the question. In the Court below, the defendants strove strenuously to
show, and to have it believed, that the Pepsi-Cola opportunity was presented to Loft by Guth, with a full disclosure by him
that if the company did not embrace *278 it, he would. This, manifestly, was a recognition of the necessity for his showing
complete good faith on his part as a corporate officer of Loft. In this Court, the Chancellor having found as a fact that Guth
did not offer the opportunity to his corporation, it is asserted that no question of good faith is involved for the reason that the
opportunity was of such character that Guth, although Loft's president, was entirely free to embrace it for himself. The issue
is not to be enmeshed in the cobwebs of sophistry. It rises far above inconsistencies in argument.
The appellants suggest a doubt whether Loft would have been able to finance the project along the lines contemplated by
Megargel, viewing the situation as of 1931. The answer to this suggestion is two-fold. The Chancellor found that Loft's net
asset position at that time was amply sufficient to finance the enterprise, and that its plant, equipment, executives, person-
nel and facilities, supplemented by such expansion for the necessary development of the business as it was well able to pro-
vide, were in all respects adequate. The second answer is that Loft's resources were found to be sufficient, for Guth made use
of no other to any important extent.
Next it is contended that the Pepsi-Cola opportunity was not in the line of Loft's activities which essentially were of a retail
nature. It is pointed out that, in 1931, the retail stores operated by Loft were largely located in the congested areas along the
Middle Atlantic Seaboard, that its manufacturing**514 operations were centered in its New York factory, and that it was a
definitely localized business, and not operated on a national scale; whereas, the Megargel proposition envisaged annual sales
of syrup at least a million gallons, which could be accomplished only by a wholesale distribution. Loft, however, had many
wholesale activities. Its wholesale business in 1931 amounted to over $800,000. It was a large company by any standard. It
had *279 an enormous plant. It paid enormous rentals. Guth, himself, said that Loft's success depended upon the fullest uti-
lization of its large plant facilities. Moreover, it was a manufacturer of syrups and, with the exception of cola syrup, it sup-
plied its own extensive needs. The appellants admit that wholsesale distribution of bottled beverages can best be accom-
plished by license agreements with bottlers. Guth, president of Loft, was an able and experienced man in that field. Loft,
then, through its own personnel, possessed the technical knowledge, the practical business experience, and the resources
necessary for the development of the Pepsi-Cola enterprise.
But, the appellants say that the expression, „in the line‟ of a business, is a phrase so elastic as to furnish no basis for a useful
inference. The phrase is not within the field of precise definition, nor is it one that can be bounded by a set formula. It has a
flexible meaning, which is to be applied reasonably and sensibly to the facts and circumstances of the particular case. Where
a corporation is engaged in a certain business, and an opportunity is presented to it embracing an activity as to which it has
fundamental knowledge, practical experience and ability to pursue, which, logically and naturally, is adaptable to its busi-
ness having regard for its financial position, and is one that is consonant with its reasonable needs and aspirations for ex-
pansion, it may be properly said that the opportunity is in the line of the corporation's business.
The manufacture of syrup was the core of the Pepsi-Cola opportunity. The manufacture of syrups was one of Loft's not unim-
portant activities. It had the necessary resources, facilities, equipment, technical and practical knowledge and experience.
The tie was close between the business of Loft and the Pepsi-Cola enterprise. Beatty v. Guggenheim Exploration Co., 225
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                            623

N.Y. 380, 122 N.E. 378; Transvaal Cold Storage Co., Ltd., v. Palmer, [1904] T. S. *280 Transvaal L. R. 4. Conceding that the
essential of an opportunity is reasonably within the scope of a corporation's activities, latitude should be allowed for devel-
opment and expansion. To deny this would be to deny the history of industrial development.
It is urged that Loft had no interest or expectancy in the Pepsi-Cola opportunity. That it had no existing property right
therein is manifest; but we cannot agree that it had no concern or expectancy in the opportunity within the protection of re-
medial equity. Loft had a practical and essential concern with respect to some cola syrup with an established formula and
trademark. A cola beverage has come to be a business necessity for soft drink establishments; and it was essential to the
success of Loft to serve at its soda fountains an acceptible five cent cola drink in order to attract into its stores the great mul-
titude of people who have formed the habit of drinking cola beverages. When Guth determined to discontinue the sale of Co-
ca-Cola in the Loft stores, it became, by his own act, a matter of urgent necessity for Loft to acquire a constant supply of
some satisfactory cola syrup, secure against probable attack, as a replacement; and when the Pepsi-Cola opportunity pre-
sented itself, Guth having already considered the availability of the syrup, it became impressed with a Loft interest and ex-
pectancy arising out of the circumstances and the urgent and practical need created by him as the directing head of Loft.
[13][14] As a general proposition it may be said that a corporate officer or director is entirely free to engage in an indepen-
dent, competitive business, so long as he violates no legal or moral duty with respect to the fiduciary relation that exists be-
tween the corporation and himself. The appellants contend that no conflict of interest between Guth and Loft resulted from
his acquirement and exploitation of the Pepsi-Cola opportunity. They maintain that the acquisition*281 did not place Guth
in competition with Loft any more than a manufacturer can be said to compete with a retail merchant whom the manufac-
turer supplies with goods to be sold. However true the statement, applied generally, may be, we emphatically dissent from
the application of the analogy to the situation of the parties here. There is no unity between the ordinary manufacturer and
the retailer of his goods. Generally, the retailer, if he **515 becomes dissatisfied with one supplier of merchandise, can turn
to another. He is under no compulsion and no restraint. In the instant case Guth was Loft, and Guth was Pepsi. He absolute-
ly controlled Loft. His authority over Pepsi was supreme. As Pepsi, he created and controlled the supply of Pepsi-Cola syrup,
and he determined the price and the terms. What he offered, as Pepsi, he had the power, as Loft, to accept. Upon any consid-
eration of human characteristics and motives, he created a conflict between self-interest and duty. He made himself the
judge in his own cause. This was the inevitable result of the dual personality which Guth assumed, and his position was one
which, upon the least austere view of corporate duty, he had no right to assume. Moreover, a reasonable probability of injury
to Loft resulted from the situation forced upon it. Guth was in the same position to impose his terms upon Loft as had been
the Coca-Cola Company. If Loft had been in servitude to that company with respect to its need for a cola syrup, its condition
did not change when its supply came to depend upon Pepsi, for, it was found by the Chancellor, against Guth's contention,
that he had not given Loft the protection of a contract which secured to it a constant supply of Pepsi-Cola syrup at any defi-
nite price or for any definite time.
It is useless to pursue the argument. The facts and circumstances demonstrate that Guth's appropriation of the Pepsi-Cola
opportunity to himself placed him in a competitive position with Loft with respect to a commodity essential*282 to it, there-
by rendering his personal interests incompatible with the superior interests of his corporation; and this situation was accom-
plished, not openly and with his own resources, but secretly and with the money and facilities of the corporation which was
committed to his protection.
Although the facts and circumstances disclosed by the voluminous record clearly show gross violations of legal and moral
duties by Guth in his dealings with Loft, the appellants make bold to say that no duty was cast upon Guth, hence he was
guilty of no disloyalty. The fiduciary relation demands something more than the morals of the market place. Meinhard v.
Salmon, supra.Guth's abstractions of Loft's money and materials are complacently referred to as borrowings. Whether his
acts are to be deemed properly cognizable in a civil court at all, we need not inquire, but certain it is that borrowing is not
descriptive of them. A borrower presumes a lender acting freely. Guth took without limit or stint from a helpless corporation,
in violation of a statute enacted for the protection of corporations against such abuses, and without the knowledge or author-
ity of the corporation's Board of Directors. Cunning and craft supplanted sincerity. Frankness gave way to concealment. He
did not offer the Pepsi-Cola opportunity to Loft, but captured it for himself. He invested little or no money of his own in the
venture, but commandeered for his own benefit and advantage the money, resources and facilities of his corporation and the
services of its officials. He thrust upon Loft the hazard, while he reaped the benefit. His time was paid for by Loft. The use of
the Grace plant was not essential to the enterprise. In such manner he acquired for himself and Grace ninety one percent of
the capital stock of Pepsi, now worth many millions. A genius in his line he may be, but the law makes no distinction be-
tween the wrong doing genius and the one less endowed.
*283 Upon a consideration of all the facts and circumstances as disclosed we are convinced that the opportunity to acquire
the Pepsi-Cola trademark and formula, goodwill and business belonged to the complainant, and that Guth, as its President,
had no right to appropriate the opportunity to himself.
The Chancellor's opinion may be said to leave in some doubt whether he found as a fact that the Pepsi-Cola opportunity be-
longed to Loft. Certain it is that he found all of the elements of a business opportunity to exist. Whether he made use of the

word „estopped‟ as meaning that he found in the facts and circumstances all of the elements of an equitable estoppel, or
whether the word was used loosely in the sense that the facts and circumstances were so overwhelming as to render it im-
possible for Guth to rebut the conclusion that the opportunity belonged to Loft, it is needless to argue. It may be said, howev-
er, that we are not at all convinced that the elements of an equitable estoppel may not be found having regard for the dual
personality which Guth assumed.
The decree of the Chancellor is sustained.

Case 39.3
484 F.Supp.2d 131
Kaplan v. First Hartford Corp.
United States District Court,D. Maine.
Richard E. KAPLAN, Plaintiff
FIRST HARTFORD CORPORATION and Neil Ellis, Defendants.
Civil No. 05-144-B-H.
April 2, 2007.
HORNBY, District Judge.
This lawsuit is an effort by a 19% shareholder to realize fair value from his ownership of a publicly held, but thinly traded,
Maine corporation. In his view, fair value is higher than the price the market will pay for his shares. Although the corpora-
tion is public, its shares are not listed on an exchange. A 43% FN1 shareholder controls the corporation. The 19% shareholder
claims that the 43% shareholder has been operating the corporation oppressively for the benefit of himself, his family and
other wholly owned entities. The 43% shareholder claims that he has brought the company back from bankruptcy by his
hard work, and by generously advancing funds and credit from his and his family's assets. The 19% shareholder wants “out
at fair value” and seeks the appointment of a receiver to explore equitable solutions.
          FN1. The Complaint says that Neil Ellis owns 43% (actually 42.9%), citing the 2005 Securities and Exchange Com-
          mission's Form 10K (“10K”), and the defendants admit this number in their answers. The 2006 10K (Pl.Ex. 75) and
          2006 proxy statement (Pl.Ex. 85) show Neil Ellis as the beneficial owner of 40.3% of FHC's common stock. However,
          Plaintiff's Exhibit 106, a demonstrative aid illustrating ownership in FHC, says that Ellis is the beneficial owner of
          46.15% of the company's common stock, citing the 2006 proxy statement. Ellis's post-trial brief also says that he is a
          46.15% owner. Def. Ellis's Post Tr. Br. at 3-4. The difference in these numbers is immaterial to my analysis, so for
          the sake of simplicity I will use the 43% number throughout this opinion.
Oppression relief statutes were designed for closely held corporations. But under the Maine statute, the remedy is available
for publicly held corporations as well.FN2 I conclude that although the 43% shareholder has contributed greatly to the corpo-
ration (it undoubtedly would not have survived without his efforts), he has also engaged in oppressive conduct with respect
to minority shareholders within the meaning of the statute. But the issue of relief is exceedingly difficult for this publicly
held, albeit thinly traded, corporation. At this stage the lawyers have focused almost exclusively on proving or disproving
liability. Indeed, by agreement the parties delayed discovery and expert testimony over stock value, a critical component of
one remedy, court ordered buy-out. Even the plaintiff does not seek dissolution, at least not yet, but the appointment of a
receiver to explore alternative remedies. Although it is clear that the standard for judicial intervention has been met, I am
troubled by the remedy question and have little guidance from the parties. I am also troubled that, unlike most lawsuits in-
volving conflicts over closely held corporations, there are hundreds of company shareholders who are not parties to this law-
suit. Therefore, I ask that the *133 lawyers, after consultation with their clients, present me within sixty days their position
as to what remedy is appropriate.
          FN2. A closely held corporation is a business organization typified by a small number of stockholders, the absence of
          a market for the corporation's stock, and substantial shareholder participation in the management of the corpora-
          tion. In the traditional public corporation, the shareholder is ordinarily a detached investor who neither contributes
          labor to the corporation nor takes part in management responsibilities. Douglas K. Moll, Shareholder Oppression in
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                         625

          Close Corporations: The Unanswered Question of Perspective, 53 Vand. L.Rev. 749, 756-7 (2000). “Risk bearing and
          management are separated in public but not closely held corporations.” F.H. Easterbrook and D.R. Fischel, The
          Economic Structure of Corporate Law 228 (1991). Maine defines a closely held corporation as a corporation with not
          more than 20 shareholders. 13-C M.R.S.A. § 102(2-A). But its statutory remedies for oppression apply to all corpora-
          tions. 13-C M.R.S.A. § 1430.
I conducted a bench trial on November 6 and 7, 2006. After closing arguments on November 9, 2007, I allowed post-trial
briefing. These are my findings of fact and conclusions of law.
                                                       FINDINGS OF FACT
1. First Hartford Corporation (“FHC”) incorporated under Maine statutes in 1909 to engage in the textile industry. FN3 As
textiles declined, the company shifted focus to the acquisition, development and management of real estate. It went public in
the 1960s,FN4 and created a wholly owned subsidiary, First Hartford Realty Corporation to conduct the real estate busi-
          FN3. The plaintiff Richard Kaplan testified that his father, Seymour Kaplan, and his uncle, the defendant Neil El-
          lis, started the business with help from Richard Kaplan's grandfather. Tr. 10:18-11:10. But Neil Ellis was age 78 in
          2006, so he could not have started a corporation in the early twentieth century. Perhaps Kaplan was referring to the
          start of the real estate business or the public offering in the 1960s. That would be more consistent with the parties'
          ages, and the fact that Ellis became President and director in the late 1960s.
          FN4. Judge Gorton so found in Kaplan v. First Hartford, 447 F.Supp.2d 3, 4 (D.Mass.2006) (“Proxy Litig.”).
          FN5. For the time period with which this lawsuit is concerned, FHC operated almost entirely through First Hart-
          ford Realty and, unless the distinction is relevant, I will not differentiate between the two.
2. The Board of Directors currently is comprised of Neil Ellis, an individual defendant in this lawsuit; Stuart Greenwald; and
David Harding. Ellis owns approximately 43% of the company's common stock. He has been a director of FHC since 1966 and
President since 1968.
3. Ellis hired Greenwald as FHC treasurer in 1978 and asked him to become an FHC director in 1980. Greenwald currently
is FHC's secretary and treasurer.
4. Ellis hired Harding in 1992 to manage and supervise property management and to negotiate financing. Harding became a
director in 1998, replacing a previous director/officer, Leonard Seader, who died in 1997. Harding currently is a vice presi-
5. The plaintiff, Richard Kaplan (Ellis's nephew), owns outright and beneficially approximately 19.1% FN6 of the outstanding
shares of FHC (with his brother David, 21% FN7) through family trusts and other business entities. Kaplan's shares came
primarily from inheritance.
          FN6. This number is consistent with Judge Gorton's findings in the Proxy Litigation, and it comes from the 2005
          10K. Pl.Ex. 59. Although the 2006 10K shows Kaplan owning the same number of shares as the 2005 10K, it reports
          a different percentage of ownership, 17.9%. Pl.Ex. 85. The parties both use the 19% number in their briefs, so I will
          use it for the purposes of this opinion. The difference is not material to my analysis.
          FN7. This number also comes from the 2005 10K. Pl.Ex. 59.
6. FHC has about 820 shareholders.FN8 The only other shareholders holding significant amounts of stock are one family with
8%, one with 7%, and another with .99%. The record contains no information on how these families became shareholders,
whether by family relationships, employment, or on the open market. In sum, four families own about 80% of the stock.FN9
          FN8. According to the 2006 10K. Pl.Ex. 75 at 11 of 102.
          FN9. There are 775 shareholders who own 500 or fewer shares and another 27 who own 501 to 1000. Pl.Ex. 76.
7. Neil Ellis is also President and Director of Green Manor Corporation, a *134 holding company he owns with his wife; and
Vice President of Journal Publishing Company, Inc.FN10 (in turn owned by Green Manor Corporation), a corporation that
publishes a newspaper in New England. Pl.Ex. 85 at 8 of 41. I refer to Green Manor, Journal Publishing, and their subsidiar-
ies, along with any other entities owned by Neil Ellis and his family members and not by FHC as “Ellis Entities.”
          FN10. Journal Publishing operates through affiliates such as Journal Inquirer. I will sometimes refer simply to
          Journal, not distinguishing between the affiliates unless the distinction is relevant to the analysis.
8. By the early 1980's FHC was in poor financial condition. It filed for a Chapter 11 reorganization in 1981, FN11 and emerged
from Chapter 11 in 1987 with a negative net worth of about $6 million. Even after it emerged from bankruptcy court protec-
tion, FHC continued to lose money and employees (from 143 employees in fiscal year ending April 30, 1988, to 21 as of April
30, 1997). See Pl.Ex. 64 at FHC0 139 (1988 Form 10K); Pl.Ex. 73 at FHC0569 (1997 Form 10K). During those years, the
company failed to follow corporate formalities. It held no official board meetings, and no annual shareholder meetings from
1986 until 2004, and had no audited financial statements between the fiscal year ending April 30, 1989, and the fiscal year
ending April 30, 1999. The company did continue to make SEC filings; the Form 10Ks throughout the 1990's showed a com-
pany that was struggling to stay in business. In many instances, the President's (Ellis's) letters to shareholders raised the
possibility that FHC might not survive.FN12 The 10Ks from the early 1990s reported no active trading of FHC stock; as the

decade continued, the stock was very thinly traded at nominal prices.FN13During all this time, Ellis managed FHC, hiring
personnel and finding directors (Greenwald and Harding). So far as the evidence discloses, none of the other shareholders
demonstrated any interest in the affairs of the corporation.FN14
         FN11. FHC's subsidiaries were not part of the bankruptcy filing. Pl.Ex. 64 at FHC0039.
         FN12.See, e.g., Pl.Ex. 67 at FHC0284 (Letter dated Jan. 21, 1991); Pl.Ex. 67 at FHC0035 (Letter dated Jan. 8,
         1992); Pl.Ex. 70 at FHC0431 (Letter dated Aug. 16, 1993); Pl.Ex. 32 at FHC0522 (August 17, 1995); Pl.Ex. 72 at
         FHC0565 (Letter dated Sept. 24, 1996).
         FN13.See Pl.Ex. 68-71 (10Ks from 1991-1995 reporting no trading of FHC common stock); see also P. Exs. 72-74
         (10Ks from the latter half of the 1990s reporting small sales of stocks at nominal prices).
         FN14. There was an apparently unrelated family dispute between Kaplan and Ellis concerning the “Allen Clark
         Parkwest matter” disclosed in the 1991 and 1992 proxy statements. Only cryptic references were made to it during
         this trial.
9. Eventually, Ellis nursed FHC back to profitability. In the process of doing so, he often used his own funds and credit, per-
sonally guaranteeing FHC debt. By 2000, there was a market for FHC shares; the stock price since then has trended up-
ward, tracking the company's financial viability.FN15 In October of 2003, as FHC's financial performance was improving and
*135 with the desire to institute a stock option plan for five employees,FN16 FHC planned its first shareholders meeting since
1986. Accordingly, Greenwald called Kaplan to inquire about share ownership and informed Kaplan of the upcoming share-
holder meeting scheduled for early 2004.
         FN15.See Pl.Ex. 21 (2000 10 K reporting market for common stock between .125 and .5); Pl.Ex. 22 (2001 10K report-
         ing a range of .125 to .875); Pl.Ex. 23 (2002 10K reporting a range of .25 to .85); Pl.Ex. 24 (2003 10K reporting a
         range of .41 to .90); Pl.Ex. 61 (2004 10K reporting a range of .70 to 1.90); Pl.Ex. 59 (2005 10K reporting a range of
         1.65 to 3.95); Pl.Ex. 75 (2006 10K reporting a range of 1.70 to 3.75). Large blocks of shares, however, have proven
         difficult to sell. In 2005, Lehman Brothers requested a buy-back of 35,000 shares and agreed to a price of $2.50 a
         share, a number lower than the “market” price at the time “due to the lack of shares traded and the large block
         [Lehman Brothers] held.” Pl.Ex. 35E. On the open market, for this size block of shares, Lehman Brothers would
         have received about $2 per share. Id.
         FN16. Pl.Ex. 25 at 30. Greenwald and Harding were among the five employees. Pl.Ex. 34 18 of 31.
10. Informed of the shareholder meeting, Kaplan planned to introduce a shareholder proposal to amend the FHC by-laws to
require outside directors. Pl.Ex. 34 at 27. On the day before the meeting, Kaplan sent his brother David (also a shareholder
of FHC) to the company's headquarters to obtain a copy of FHC's shareholder list. Greenwald testified that initially he
handed David Kaplan the list, but then Ellis entered the room and took the list from Kaplan's hands. Tr. 102:19-25. Because
FHC thereafter repeatedly denied access to the shareholder list, Richard Kaplan sued FHC in Maine Superior Court in 2004
for access to the records. On January 12, 2005, Justice Marden enforced Kaplan's statutory right as a shareholder to see the
shareholder list. Kaplan v. First Hartford Corp., 2005 WL 2727063, No. Civ. 04-275 (Me.Super.Jan.12, 2005) (Marden, J.)
(“Shareholder List Litig.”). Later, Justice Marden awarded Kaplan attorney fees against FHC, finding that FHC had with-
held the shareholder list from Kaplan in bad faith. Kaplan v. First Hartford Corp., No. 04-cv-275 (Me.Super. June 28, 2005)
(Order awarding Fees and Costs).
11. With delayed access to the shareholder list, Kaplan presented his proposal to amend the bylaws to the February 2005
shareholders meeting. A majority of shareholders rejected Kaplan's proposal to require 80% outside directors on the FHC
12. In preparing for the 2004 and 2005 shareholder meetings (two meetings in 2005), Kaplan examined FHC's proxy state-
ments and SEC filings. He then requested explanations of what he considered to be self-dealing transactions between FHC
and Ellis. When unable to obtain records disclosing the terms of such self-dealing transactions, Kaplan sued FHC three
times in federal court in Massachusetts (2004, 2005 and 2006). He asserted that FHC violated federal securities laws govern-
ing corporate disclosure requirements in the proxy statements it issued prior to the shareholders meetings. The three law-
suits were consolidated. After a bench trial, District Judge Gorton ruled that FHC had made misleading statements and ma-
terial omissions in its proxy statements, as a result of which the shareholders could not determine the extent of Ellis's self-
interest. Judge Gorton held that “FHC should have disclosed 1) the material terms of the transactions in which Ellis or his
family were personally interested, 2) details concerning potential benefits and detriments to Ellis personally and 3) the rela-
tionship between Richmond Realty, Harding, Ellis, and FHC.” Proxy Litig. at 9. Nevertheless, Judge Gorton awarded no
damages, but prospective relief only, because “1) those non-disclosures were rendered less serious by virtue of FHC's dire
financial status, 2) there is no evidence that shareholders would have voted differently had more complete disclosures been
made by FHC and 3) many of plaintiff's claims have been rendered moot by the passage of time and the efforts of FHC to
provide more accurate disclosures with each succeeding proxy statement.” Id. at 16.
*136 13. In 2006, FHC paid a cash dividend of ten cents per share. This was the first dividend that FHC had paid sharehold-
ers in 25 years, Pl.Ex. 75 at 11 of 102, and totaled approximately $300,000. Id. at 16 of 102. Thus, as an owner of 43% of FHC
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                         627

common stock, Ellis received well over $100,000 in dividend payments. In 2006, FHC paid Ellis a bonus of $400,000 on top of
a salary just over $200,000; Greenwald and Harding received bonuses of $150,000 and salaries of approximately $120,000
and $150,000 respectively.
14. Since FHC emerged from bankruptcy, Ellis has treated the company as part of a common enterprise with other compa-
nies that he owns. Over the years, he has obtained financing for FHC's benefit by borrowing through his other companies.
Although Ellis and Greenwald considered that these transactions created inter-company obligations, they did not fully doc-
ument them. Ellis also has directed that FHC advance funds to Ellis Entities. These inter-company obligations were often
interest-free and rarely reduced to writing. The loans were sometimes repaid by what the parties call “off-sets.” Ellis would
instruct Greenwald to forgive debt owed by an Ellis Entity to FHC simultaneously with debt FHC owned to an (often differ-
ent) Ellis Entity (“off-sets” or “set off accounting”). Greenwald testified that for a number of years, FHC engaged in a method
of short-term financing whereby it wrote a check to Journal and asked Journal to hold onto the check until a later day, in
exchange for a check from Journal that could be used immediately. Tr. 143:3-11. The record is replete with other examples of
how Ellis treated FHC as part of a common enterprise. For example, the Lubbock shopping center in Lubbock, Texas is owed
by an Ellis Entity FN17 and managed by FHC, but the management fee arrangement is not reduced to writing. Ellis deter-
mines each year how much money his company will pay FHC.FN18
          FN17. 1.99% is actually owned by a subsidiary of FHC. See, infra, Finding of Fact ¶ 17 (discussing the ownership of
          the Lubbock shopping center).
          FN18. Other examples include the fact that the books and accounting records for some Ellis Entities are maintained
          at FHC's office, by FHC employees, Tr. 79:20-80:2; 46:9-12; and that the Jonathan George Ellis Leukemia Founda-
          tion (of which Neil Ellis and his wife are the sole trustees) is principally funded by a wholly owned subsidiary of
          FHC. Pl.Exs. 100, 101, 102.
15. Aside from recent events, FHC records are incomplete, apparently due to a combination of circumstances: failure to
create records documenting transactions between FHC and Ellis Entities; an FHC computer hard-drive failure in 1999; and
Greenwald's time-and-space-related policy of destroying older documents. (No FHC documents were destroyed after this law-
suit started.) Very few records from related Ellis Entities were presented at this trial. Greenwald testified that he did not
have access to some Ellis Entity records,FN19 the defendants chose to present only a few, and I have no information about the
plaintiff's efforts to obtain them in discovery.
          FN19. Tr. 212-213 (Greenwald testifies that he has access to the internal records of Journal only to the extent that
          Ellis supplies them).
                                         Description of the allegedly self-dealing transactions
16. 1988 MIP 16A and Scitico Gardens Property Swap.In 1988, the Teachers' Retirement System of the State of Illinois
(“Teachers”) became interested in purchasing a number of buildings in the Manchester Industrial Park in Manchester, Con-
necticut. FHC owned most of the buildings through one of its subsidiaries. But one of the buildings was owned by an entity
known as MIP 16A, in turn owned *137 by Green Manor, in turn owned by Ellis and his wife. Tr. 153. The MIP 16A building
was particularly attractive to Teachers. Teachers assigned a specific value to each building that it wanted to purchase, in-
cluding $2,952,600 for MIP 16A's building. Pl.Ex. 90 at FHC 11039. An overall purchase price of $13 million then was nego-
tiated by reducing somewhat the total of Teachers' specific value assignments. The parties agreed upon this composite price
for the entire group of buildings, including Ellis's MIP 16A building. Pl.Ex. 1. Ellis agreed that MIP 16A would sell its build-
ing to Teachers in order to facilitate the overall sale by FHC. (FHC needed the cash.) Greenwald recommended to Ellis that
MIP 16A engage in a nontaxable like-kind exchange with FHC.FN20 As a result, Teachers paid the entire purchase price to
FHC; FHC and MIP 16A both transferred their respective buildings to Teachers; and FHC transferred a separate property,
Scitico Gardens, to MIP 16A, with MIP 16A assuming a debt to FHC of approximately $650,000 (the amount FHC had pre-
viously carried on its books as an obligation from the Scitico Gardens project due to cost overruns during construction). Def.
Ex. 2, 3; Tr. 53. FHC did not obtain a contemporaneous appraisal of Scitico Gardens prior to the swap but the property had a
cost basis (before depreciation) of $2,058,000 FN21 and in Greenwald's opinion, was worth not much more than that. Tr. 154-
55. After the swap, FHC continued to manage Scitico Gardens and received management fees for doing so. There was no offi-
cial board meeting or vote concerning the exchange, but two of the three FHC directors signed the bond for a deed and all
three directors knew about it.
          FN20. This would avoid a taxable gain to Ellis. Tr. 50:10-25. It offered little benefit to FHC since FHC recognized a
          gain on the sale of the industrial building to Teachers before it transferred Scitico Gardens to MIP 16A. Tr. 51:1-4.
          FN21. I do not know exactly how old this number is, but the 1986 10K says that Scitico Gardens “reached substan-
          tial completion and occupancy during the year [1986].” Pl.Ex. 64 at 12.
FHC carried the debt from MIP 16A interest-free and unsecured. Greenwald testified that no security was necessary because
the debt was exceeded by amounts that FHC owed Ellis Entities. FHC never attempted to collect the debt because MIP 16A
did not have the resources to pay it. Tr. 58. The independent auditors found in 1999 that $264,000 of MIP 16A's debt to FHC
had been written off, and Greenwald could not explain the write-off. Tr. 119:21-121:18; Pl.Exs. 2, 26. Even after the write-off,

FHC advanced more money to MIP 16A, and by the end of 2003 the debt had increased to $831,000. Pl.Exs. 2, 5, 7, 9, 11. In
2004, the debt was reduced to zero when Greenwald set off the $831,000 against debts FHC owed Journal pursuant to oral
agreements made in 1993 and 1995. Journal had written off those debts on its own books as uncollectible and had not de-
manded payment, but Greenwald made the off-set anyway; in contrast, he apparently did not resurrect the $264,000 in MIP
16A debt that the auditors had discovered that FHC wrote off as uncollectible.
17. 1994 Hartford Lubbock Exchange. In the early 1990s, an FHC wholly owned subsidiary, Lubbock Parkade, Inc., owned
75% and was the general partner of Hartford Lubbock Limited Partnership (“HLLP”). HLLP owned a shopping center in
Lubbock, Texas. The 25% limited partner was an entity owned by Dollar Dry Dock, a bank that financed the project. HLLP
owed Dollar Dry Dock approximately $12 million in mortgage financing.*138 Greenwald testified that Ellis guaranteed these
loans personally on behalf of HLLP because otherwise the partnership would not have been able to obtain financing to con-
struct the shopping center. Tr. 69; Pl.Ex. 94. At the time Ellis made the guarantees, his only personal stake in HLLP was by
virtue of his ownership interest in FHC.
By 1994, both HLLP and the bank were in serious financial difficulty. HLLP filed for bankruptcy protection to avoid foreclo-
sure. The Federal Deposit Insurance Corporation (“FDIC”) took over the bank and obtained two independent appraisals of
the shopping center at $5.7 and $6.6 million. See Def. Ex. 7 at FHC 16943 and 16698. The FDIC then agreed to accept $5.6
million in cash and a $1 million promissory note in satisfaction of HLLP's $12 million debt (and Ellis's guarantees FN22) and
to surrender its 25% interest in HLLP. Ellis and his wife guaranteed the $1 million promissory note and their daughter put
up collateral. To pay the $5.6 million in cash, HLLP took out a loan guaranteed by the Ellises FN23 from the First National
Bank of West Texas. But the loan was only $5.4 million, and some of the funds were reserved to pay taxes, appraisal fees,
and other expenses.FN24 To make up the difference, Ellis had Journal advance funds on HLLP's behalf through financing
from M & T Bank.FN25The settlement closed July 6, 1994, a deadline set by the FDIC. Almost simultaneously (July 5, 1994)
HLLP's partnership agreement was amended so that a wholly owned FHC subsidiary, Parkade Center, became a 1% general
partner of HLLP, and Lubbock Parkade, a separate company owned by FHC, became a 99% limited partner. Pl.Ex. 91 at
FHC8310. On that same day, FHC sold Lubbock Parkade to Journal in consideration of $3 million of debt forgiveness. FN26
Pl.Ex. 91 at FHC8333.
          FN22. Ellis and his wife guaranteed the settlement agreement, but upon full execution of the agreement, they were
          released from their previous $12 million worth of guarantees.
          FN23. Greenwald testified that Ellis provided a personal guarantee for this loan, but the only guarantee I find in
          the record is one from Ellis's wife, Elizabeth Ellis. Tr. 70:1-4; Def. Ex. 11. Nonetheless, Kaplan does not contest that
          Ellis personally guaranteed the loan, so I will assume that he did.
          FN24.See Def. Ex. 9 (only $5.1 of the $5.4 million was advanced by the First National Bank of West Texas).
          FN25. The loan from M & T Bank was in the amount of $1 million, more than enough to cover the difference. See
          Def. Ex. 9.
          FN26. The defendants point to FHC's 1994 10K as evidence of this $3 million transfer. It says “the stock of Lubbock
          Parkade, Inc. was sold to an affiliated company for $3,000,000.” Pl.Ex. 71 at 30. As further evidence, the defendants
          point to Journal's financial statements showing that the amount due to related parties decreased by more than $3
          million between 2004 and 2005. Pl.Ex. 32 at FHC0494.
Before the FDIC settlement closing and the sale of Lubbock Parkade to Journal, HLLP obtained a commitment from Protec-
tive Life Insurance for $6.5 million in non-recourse financing, with closing to occur in October 1994. Protective Life's financ-
ing arrangement provided that its loan was contingent on Journal Publishing owning a 99% partnership interest in the
project, and also required an $8.7 million appraisal as a condition to its loan. FHC obtained the appraisal (actually $8.75
million) in June 1994, before the FDIC closing in July. Pl.Ex. 92. The Protective Life loan did close in October 1994. As a re-
sult, Ellis no longer had any personal obligations on any debt related to the Lubbock shopping center, and his wholly owned
company owned 99% of it. FHC managed the Lubbock shopping center before and *139 after the transaction, continuing un-
til the present, and has received management fees since the date of the sale in excess of $2 million, Pl.Ex. 85 at 21 of 41, but
its ownership decreased to 1%. FHC was also relieved of whatever obligation it would have had to Ellis had FDIC pursued
Ellis on the guarantees that he made solely on account of FHC.
In 1998, the project was refinanced and Hartford Limited Liability Partnership II (“HLLP II”) was formed because the lender
required a new borrowing entity with no existing debt. FHC was assigned a 1% interest, and HLLP a 99% interest, in HLLP
II. (Because FHC already owned a 1% interest in HLLP, it thus ended up with effectively 1.99%.) Thereafter, at Ellis's direc-
tion, HLLP II made monthly payments to Ellis's daughters totaling $60,000 per year, starting no later than January 2001
and continuing until at least January 2006. Pl.Ex. 55. The partnership recorded the payments as “for services” even though
Ellis, Greenwald, and Harding all knew that Ellis's daughters provided no services to HLLP II. The payments benefited only
Ellis and his family and had no benefit to the partnership or to FHC whose wholly owned subsidiary (Parkade Center) was
general partner.FN27 Now, according to its October 26, 2006 proxy statement (and after Kaplan's litigation against FHC
brought the payments to light), HLLP II has recognized the payments to the daughters as distributions of capital and has
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                        629

also announced that there were other payments (unexplained and undescribed) to Ellis's family members totaling
$1,100,000. As a result, FHC FN28 very recently received $22,000, its retroactive 1.99% share of the distribution. Pl.Ex. 85 at
          FN27. The defendants point out that the partnership agreement mandates distribution of 99% of the net cash flow
          to the limited partner and makes it discretionary for the general partner. I do not see how that bears upon the con-
          flicting-interest analysis.
          FN28. That is what the proxy statement says but presumably it means Parkade Center, Inc., FHC's wholly owned
18. 2000 Putnam Parkade Loan.In 2000, FHC used a subsidiary, Putnam Parkade, to raise money for FHC's general operat-
ing purposes. But because Putnam Parkade was unable to obtain traditional financing, Journal made the loan to FHC out of
proceeds ($1.575 million) that Journal borrowed from Manufacturers and Traders Trust Company (“M & T Bank”). Journal
transferred $1.275 million to Putnam Parkade, treated the remaining $300,000 as satisfaction of a previous debt owed by
FHC to Journal, and thus treated the entire $1.575 million as a new loan from Journal to FHC. Under the agreement be-
tween Journal and FHC, Journal also gained a right to “participation payments” of 95% of the cash flow from Putnam Par-
kade, as well as a right to 95% of any subsequent refinancing proceeds (all on top of interest and principal). The 2000 10K
described this “[a]s an added incentive to make this type of loan.” Pl.Ex. 21 at 24. Greenwald testified that the bank sug-
gested this term to give it a business reason for the deal. The right to these participation payments, however, continued even
after the satisfaction of the loan. Tr. 270:9-10. Journal assigned the FHC note to M & T bank. Pl.Ex. 51. Putnam Parkade
paid off the debt to Journal by Oct. 26, 2004. Pl.Ex. 53. Although after the debt was paid the right to participation payments
still continued, it was not enforced by either Journal or the bank. The agreement with the participation rights was cancelled
altogether during this litigation on January 9, 2006. Pl.Ex. 53.
*140 19. 2002-2006 Balance Sheet Set-offs. Between 2002 and 2006, accounting records show that FHC transferred $2.25
million to Ellis Entities in one form or another, over $2 million of which was transferred after July 1, 2003. These transfers
included direct cash payments to Journal, cash payments to third-party vendors of Journal, and forgiveness of debt that Ellis
Entities owed to FHC. As justification for these recent transfers that benefit a wholly owned Ellis company at the expense of
FHC, Greenwald testified that FHC had an outstanding $2.25 million obligation to Journal because of two loans Journal
made to FHC in 1993 and 1995. Greenwald testified that in 1993, Journal advanced $750,000 to Rhode Island Hospital Trust
National Bank (“RI Bank”) on FHC's behalf, in satisfaction of a $1.9 million debt FHC owed RI bank; and that in 1995, Jour-
nal advanced $1.5 million on FHC's behalf to Shawmut Bank. No promissory notes were executed between FHC and Journal
to reflect the resulting $2.25 million obligation from the two loans. According to Greenwald, Journal financed these pay-
ments by borrowing money from M & T Bank.
Kaplan argues that the record fails to demonstrate that Journal actually made these loans; and, alternatively, that even if it
did, the loans were repaid prior to the recent transfers starting in 2002. Kaplan is understandably unsatisfied with the
dearth of evidence in the record supporting Greenwald's testimony, a fact that I will consider when I turn to oppression; but,
by a narrow margin, I credit Greenwald's account.
As to Kaplan's first complaint, I too question why Journal would advance money on behalf of FHC to settle disputes with RI
Bank and Shawmut Bank that, at least on paper, involve Ellis and his entities far more than FHC. The RI Bank schedule of
indebtedness shows Ellis and Ellis Entities as the borrowers and guarantors of nearly all the debt that was settled; FHC was
listed as a borrower of only $2,002.40 in 1991. FN29 Def. Ex. 14 at FHC 17591. Similarly, the Shawmut lawsuit did not name
FHC or its affiliates as defendants, Def. Ex. 32 at FHC0478, and the settlement agreement was not with FHC. FN30 Green-
wald's explanation is that Ellis, personally and through his entities, had borrowed (and guaranteed) funds from RI Bank and
Shawmut Bank solely on FHC's behalf because FHC could not obtain financing. Therefore, says Greenwald, when Journal
financed the settlement of these debts, it was doing so on account of FHC, not Ellis, thereby creating a debt from FHC to
          FN29. A letter agreement from June 12, 1990, apparently makes FHC a guarantor of all the debt, but so are many
          Ellis Entities. Def. Ex. 14 at FHC17592.
          FN30. The Shawmut settlement letters do refer to “the Hartford lawsuits.” Def. Ex. 21 at FHC 17368. However, the
          settlement agreement was signed by Ellis individually and on behalf of many of his entities (Green Manor Corp.,
          Sommersville Corp., Midway Green Corp. and Plainfield Green Condominium Corp.) but not FHC.
There is documentary evidence showing that Journal made the payments to RI Bank and Shawmut Bank, Def. Exs. 14, 21,
that the payments were made through financing from M & T Bank, Def. Ex. 14 at FHC 17585, and that FHC acknowledged
publicly and contemporaneously that such payments had been made on its behalf. See Pl.Ex. 70 at 29 (FHC's 1993 10K
states that the company has settled a defaulted loan and the “$750,000 has been advanced by an affiliate” of FHC); Pl.Ex. 32
at 9 (FHC's 1995 10K referring to the settlement with Shawmut Bank); cf. Def. Ex. 22 (Journal Publishing's 1995 10K stat-
ing, “In July, the company borrowed *141 $1,500,000, the proceeds of which were advanced to an affiliate by the bank.”).
Internal FHC documentation of this obligation is limited to entries on financial statements that go back only to 1999, which

mention notes payable to M & T Bank (not Journal) for $1.5 Million and $750,000. Pl.Ex. 17. But since the independent au-
ditors first questioned him when FHC resumed audits in 1999, Greenwald has consistently maintained that the entries
represent the amounts that FHC intended to repay Journal in connection with the two advances it received out of M & T
Bank proceeds. See, e.g., Pl.Ex. 2 (handwritten auditor's note indicating that there is “accrued interest on [Notes Payable] to
JI of $1,500,000 and $750,000 [and] JI has written off these balances as uncollected but FHC management intends to pay the
amount owed.”); Pl.Exs. 17, 18. Kaplan has offered no evidence suggesting that these funds were originally borrowed for the
benefit of anyone other than FHC. FHC's 10Ks lend credence to Greenwald's account that Ellis and his entities often took
out loans on behalf of FHC. See, e.g., Pl.Ex. 22 at 30. I therefore conclude that Journal did repay RI Bank and Shawmut on
FHC's account. The question remains whether the loans from Journal to FHC had been paid down before the transfers that
took place between 2002 and 2006. Kaplan points to the fact that Journal's financial statements prior to 1999 show a debt
owed from affiliated parties substantially less than the $2.25 million that FHC would have owed Journal at that time, if
Greenwald's account is credible. However, the auditors in 1999 determined, and Greenwald explained at trial, that some of
the FHC debts had been written off of Journal's books as uncollectible. Once again, Kaplan has offered no evidence to con-
tradict this account.FN31 I find that as of 1999, when the obligation first appears on FHC's books, a debt of $2.25 million was
due and owing to Journal.
         FN31. Although it would be entirely reasonable to think that Journal might have set off some of the $2.25 million in
         prior years (such as the $3 million debt forgiveness related to the Hartford Lubbock exchange), I will not assume so
         much in the face of uncontroverted testimony in the record that the debt had not been set off.
20. Richmond Realty. In 1994, FHC and the United States Department of Housing and Urban Development (“HUD”) entered
a settlement agreement. As part of the settlement agreement, FHC agreed to stop managing HUD-insured properties for a
period of time.FN32
         FN32. This ban continued until three years following “confirmation of the last of the D3 and D4 Debtor Entity
         Plans.” Both Greenwald and Harding testified that the last sale of HUD-insured properties occurred in 2003, sug-
         gesting that the restriction ended in 2006. Tr. 253:12-15; Tr. 83:17-24.
Richmond Realty, LLC, an entity owned by Harding and his wife, was used thereafter to manage HUD properties. Richmond
Realty keeps all its books and records at FHC headquarters; the payroll of Richmond Realty consists entirely of FHC em-
ployees; some FHC employees are paid by FHC for work done on behalf of Richmond Realty; all the profits of Richmond Real-
ity are passed through to FHC by way of either rent payments or otherwise; and no written agreement governs this relation-
ship. Though Harding disclosed to HUD most of the ties between Richmond Realty and FHC, Tr. 256:5-257:8, he did not dis-
close the financial relationship whereby all the profits from the properties passed through Richmond Realty to FHC. Tr.
                                                    CONCLUSIONS OF LAW
The plaintiff Kaplan resides in Massachusetts; the defendant Ellis resides in *142 Connecticut; the defendant FHC is incor-
porated in Maine with its principal place of business in Connecticut; more than $75,000 is at stake. Thus, diversity of citi-
zenship provides federal jurisdiction. 28 U.S.C. § 1332. The parties agree that Maine law applies.
Statutory Grounds for Relief
Kaplan seeks relief under a Maine statute that permits dissolution of a Maine corporation, public or closely held. It states:
A corporation may be dissolved by a judicial dissolution in a proceeding by: . .[a] shareholder if it is established that:
B. The directors or those in control of the corporation have acted, are acting or will act in a manner that is illegal, oppressive
or fraudulent;
E. The corporate assets are being misapplied or wasted[.]
13-C M.R.S.A. § 1430(2)(B) & (E). Although Kaplan asserts that FHC and Ellis are guilty of all these things, he relies pri-
marily on the oppressive conduct criterion. But Kaplan has become diffident in his request for actual dissolution FN33 and
now prefers alternative relief. The statute recognizes the same list of objectionable corporate actions to support either disso-
lution or alternative remedies.
         FN33.Compare Compl. at 3 (seeking dissolution) and Pl. Pretrial Mem. at 1 (seeking dissolution), with Tr. 344:23-
         245:17 (Closing Statement) (“Plaintiff Kaplan doesn't propose at this time, Your Honor, that an order of dissolution
         decree would be necessarily in the best interest of all parties.”).
The parties apparently agree that Kaplan “has the burden of proof on every issue in this case except that, once Plaintiff has
satisfied his burden to show a conflicting-interest transaction,FN34 the burden shifts to Defendant to show that the particular
transaction was ... fair.” FN35 Def. FHC's Post Tr. Br. at 14. James B. Zimpritch, Maine Corporate Law and Practice, § 8.7[d]
at 312-13 (2d ed.2005) (citing 2, Model Business Corporation Act Ann., § 8.61(b), Official Cmt., at 8-402).FN36
         FN34.See13-C M.R.S.A. § 871(2) (“ „Director's conflicting-interest transaction‟ ... means a transaction effected or
         proposed to be effected by the corporation or by a subsidiary of the corporation or any other entity in which the cor-
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                          631

          poration has a controlling interest respecting which a director of the corporation has a conflicting interest.”).
          FN35. I reject the defendants' claim that a safe harbor under section 872(2)(A) applies in this case. Def. Rep. Tr. Br.
          at 2-3. The directors of FHC are not “qualified directors” for the purposes of this provision. See 13-C M.R.S.A. §
          FN36. Although James B. Zimpritch is a partner in the law firm that represents FHC, the plaintiff and defendants
          all cite his treatise, the only treatise on Maine corporate law, and the plaintiff's lawyer agreed at oral argument that
          it is appropriate for the court to rely upon the treatise. Tr. 308:24-309:3.
This agreed-to burden shift, however, does not mean that, if FHC fails to prove that a conflicting-interest transaction was
fair, Kaplan has thereby satisfied the statutory grounds for dissolution. Kaplan still must satisfy me that the unfairness
amounts to fraud, illegality, oppression, corporate misapplication or waste. FN37
          FN37. Kaplan argues that I should also examine (and find wanting) the “procedural fairness” of the transactions.
          Kaplan contends that FHC's disregard of corporate formalities, especially the lack of official board meetings and
          formal votes by the board of directors approving the conflicting-interest transactions, rendered many of FHC's
          transactions procedurally unfair, regardless of whether or not they were fair by market standards. Pl. Tr. Br. at 13-
          14, 19, 26. It is true that Zimpritch says that “fairness goes beyond the single dimension of the market fairness of
          the terms of the deal.” Zimpritch at § 8.7[d] (Citing 2 Model Business Corporation Act Ann. § 8.61(b), Official Com-
          ment, at 8-402). To be fair, says Zimpritch, a transition must “be beneficial to the corporation, and the process of the
          decision making must have been fair.” Id. But the official comment to the Model Business Corporation Act (which
          Zimpritch and Kaplan both cite) explains, “The most obvious [such] illustration ... arises out of the director's failure
          to disclose fully his interest or hidden defects known to him regarding the transaction. Another illustration could be
          the exertion of improper pressure by the director upon other directors.” 2 Model Business Corporation Act Ann. §
          8.61(b), Official Comment, at 8-402. For the most part, those characteristics do not apply here. Procedural unfair-
          ness does not help Kaplan's case.
*143 For corporate misapplication or waste, moreover, Kaplan must demonstrate that “corporate assets are being misapplied
or wasted.” 13-C M.R.S.A. § 1430(2)(E) (emphasis added). Evidence of a conflicting-interest transaction from the 1980s or
1990s whose fairness FHC cannot demonstrate now does not show that corporate assets are being misapplied or wasted.
As for “oppression,” that standard of corporate and director conduct did not become effective until July 1, 2003, see P.L. 2001,
ch. 640, § A-2 (enacting the provision effective July 1, 2003). Therefore, FHC's and Ellis's inability to demonstrate the fair-
ness of a conflicting-interest transaction that occurred before July 1, 2003, is relevant to oppression only if it helps color the
disputed manner in which FHC has been acting since July 1, 2003. FN38 Actions before July 1, 2003, are not independently
actionable under the oppression standard.FN39
          FN38. Maine's Law Court follows “the fundamental rule of statutory construction ... that all statutes will be consi-
          dered to have prospective operation only, unless the legislative intent to the contrary is expressed or necessarily im-
          plied from the language used.” Coates v. Maine Employment Sec. Comm'n, 406 A.2d 94, 96 (Me.1979). The First Cir-
          cuit has observed that conduct occurring before the amendment of a statute, although not actionable, nevertheless
          may be relevant “to show a pattern of illegal conduct, purpose or motivation with regard to independent violations
          that occurred after the effective date.” Lamphere v. Brown Univ., 685 F.2d 743, 747 (1st Cir.1982) (an employment
          discrimination case); see also Lakshman v. Univ. of Maine Sys., 328 F.Supp.2d 92, 103 (D.Me.2004). I believe that
          principle applies here.
          FN39. I therefore need not address statute of limitations issues (Kaplan says they have been waived) or laches is-
          sues (that were preserved in the pleadings).
Fraud or Illegality
Kaplan has not demonstrated fraud or illegality that would justify relief under the dissolution statute. The only allegation of
fraud is that FHC used Richmond Realty to defraud HUD. Although the limited evidence in the record suggests that HUD
was not fully aware of the financial relationship between Richmond Reality and FHC, HUD was told of Harding's relation-
ship to both FHC and Richmond Realty. With no evidence from HUD or testimony from HUD employees, I am unable to
make a finding that there was a fraud on HUD.
As for illegality, Kaplan raises many of these allegations for the first time in his post-trial brief. This case was not tried on
the basis of, and there was no reason for the defendants to defend against or present evidence concerning, allegations that
they violated Federal tax law, the Sarbanes Oxley Act, the Foreign Corrupt Practices Act, the Securities Exchange Act or the
Maine Business Corporations Act (other than the existing judgments in the Maine and Massachusetts lawsuits). I do not
address these claims further.
[1] The previous lawsuits determined that FHC violated section 14(e) of the Securities Exchange Act for misleading state-
ments and material omissions in proxy statements, and section 721 of the Maine Act for denying Kaplan access to FHC's
shareholder lists. Proxy Litig.; Shareholder List Litig. Those violations do not establish the kind of illegality that *144 justi-
fies dissolution under the Maine statute. Those violations have their own penalties and remedies (far less drastic than disso-

lution); the disputes have already been litigated; and the courts' judgments have been implemented (Kaplan's access to FHC
shareholder lists and issuance of new proxy statements that include the text of Judge Gorton's decision). I do not believe that
the Maine dissolution statute contemplates the threat of judicial dissolution (or the alternate remedies) whenever a corpora-
tion is found to have violated a corporate or securities law. There is not yet a pattern here that would support going beyond
the individual statutory penalties and putting the corporate existence in jeopardy based upon illegal behavior.
Misapplication or Waste of Corporate Assets
[2] As evidence that “corporate assets are being misapplied or wasted,” Kaplan points to the legal fees that FHC incurred to
defend against his recent lawsuits in Maine and Massachusetts; the 1988 Scitico Gardens transaction; FHC's recent repay-
ment of loans Journal made to FHC in 1993 and 1995; and recent bonuses FHC paid to Ellis, Greenwald and Harding.
[3] On the legal fees, Kaplan claims that “[i]t is wasteful for FHC to spend over $1,000,000 defending itself against suits by
shareholders requesting adequate information in the face of FHC's stonewalling.” FN40 consider separately whether the con-
duct of FHC's directors that gave rise to the lawsuits or even resisting the lawsuits has been oppressive, but hiring lawyers
to defend a corporation against litigation initiated by others will seldom be misapplication or waste of corporate assets that
invokes the dissolution statute. Directors and officers usually have a duty to engage lawyers to defend the corporation even if
they individually have failed to perform in some way that caused the litigation. I express no view on whether some other
remedy such as a derivative lawsuit would be available to recover the expenditures on behalf of the corporation. Kaplan has
not established that the legal fees spent in defending the corporation amounted to waste.
          FN40. Kaplan mistakenly says “over $ 1,000,000,” citing First Hartford's 2006 Annual Report. Pl.Ex. 75A (emphasis
          added). The report actually says “the company has spent close to $1,000,000 defending these actions.” Id. (emphasis
          added). This number appears to cover the two Maine lawsuits concerning access to shareholder lists, the four Mas-
          sachusetts lawsuits concerning the proxy statements, and this lawsuit seeking dissolution or an alternate remedy.
Kaplan also points to the 1988 Scitico Gardens transaction as a waste of corporate assets. What happened in 1988 does not
show that corporate assets “are” being wasted now. Moreover, given that there is nothing in the record discrediting the relia-
bility of FHC's numbers-Teachers' allocation of $2,952,600 for MIP 16A and Greenwald's testimony that Scitico Gardens was
not worth much more than its cost basis of $2,058,000-I find that the defendants have met their burden of proving that the
Scitico Gardens property swap was fair to FHC at the time it occurred. Even if Ellis gained a tax benefit from the swap, I
cannot see how it was unfair to FHC for Ellis to swap a building worth nearly $3 million in exchange for one worth approx-
imately $2 million.FN41 Kaplan has failed to demonstrate that the Scitico Gardens transaction satisfies the waste standard.
          FN41. Although contemporaneous appraisals of the properties would have been useful, I take into account FHC's fi-
          nancial difficulties at that time and understand why it may have resorted to less precise numbers.
I treat separately Kaplan's attacks on allowing MIP 16A to assume debt to FHC *145 as a result of the Scitico Gardens prop-
erty swap. He says, “Certainly it was wasteful for FHC to take on as part of the property swap the $689,000 in debt that they
knew MIP 16A did not have the ability to repay; just as it was wasteful to continue to advance funds to MIP 16A over the
years.” Pl. Post Tr. Br. at 55. I disagree. It is hard to argue that MIP 16A could not repay the funds, given the way Ellis
treated all the companies as part of a common enterprise, commingling assets as he saw fit. All that Ellis had to do to repay
funds owed to FHC from MIP 16A was direct Greenwald to engage in set off accounting. In fact this is what ultimately took
place in 2004 when FHC set off $831,000 owed by MIP 16A against debts FHC owed Journal Publishing. FN42
          FN42. Kaplan does not argue that it was misapplication or waste to write off as uncollectible the debt of $264,000
          that MIP 16A owed FHC; or that it was misapplication or waste not to resurrect that amount when the debt was
          later set off against the debt owed to Journal that had also been written off as uncollectible. See Pl. Post Tr. Br. at
          55-56 (arguing instead that the entire $2.25 million worth of off-sets to Journal was corporate waste). I examine
          that conduct under the oppression standard.
Kaplan also claims that FHC's directors' recent decision to repay undocumented loans made in 1992 and 1995 is waste or a
misapplication of corporate assets. Kaplan understandably is highly critical of the informality and inadequate documenta-
tion of these loans, a factor I consider when I turn to oppression. But, as for waste, he has offered little evidence to counter
the explanation that Greenwald gave regarding these debts. Given my (albeit hesitant) factual finding that the debts were
due, owing and unpaid in 1999, I reject Kaplan's allegation that the later transfers should not have been made because the
debts were legally unenforceable. Even if the debts were unenforceable (I render no opinion), it is reasonable for a company
to repay a prior obligation to one of its chief financiers. To do otherwise would jeopardize the ability to obtain future financ-
ing from the financier (here Journal or Ellis). At the least it is a business judgment that a court should not disturb; it does
not amount to waste or misapplication of corporate assets. Finally, I render no decision on whether the 2006 bonuses were
corporate waste. Although Kaplan does make this claim, and it is clear that Ellis is unable to justify the bonus he paid him-
self,FN43 I choose to leave open this question and ground liability on the oppression standard. (Ordinarily, a shareholder can
bring a derivative suit to recoup amounts paid in excessive compensation and does not need to resort to the drastic remedy of
          FN43.See, infra, oppression findings ¶ 7.
                    CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                             633

I turn then to oppression as the basis for a remedy, the real focus of Kaplan's case. Under Maine corporate law, a corporation
is subject to judicial dissolution or alternative remedies, if it is established that “[t]he directors or those in control of the cor-
poration have acted, are acting or will act in a manner that is ... oppressive....”13-C M.R.S.A. § 1430(2)(B).
The academic writers recognize that the oppression doctrine and its statutory formulation developed in order to protect mi-
nority shareholders in closely held corporations who otherwise are subject to “freeze out” or “squeeze out” from the benefits
that they expect.FN44 Typically *146 these benefits (employment, for example) are more than simply a financial stake in the
corporation's success. “Just as the market protects the value of the public corporation shareholder's investment, the oppres-
sion doctrine should protect the value of the close corporation shareholder's investment.” Moll at 791. Commentators suggest
that the oppression standard should be limited to closely held corporations. The Model Act Commentary states:
          FN44. “Common freeze-out techniques include the termination of a minority shareholder's employment, the refusal
          to declare dividends, the removal of a minority shareholder from a position of management, and the siphoning off of
          corporate earnings through high compensation to the majority shareholder.” Moll at 758.
As a practical matter, the remedy of judicial dissolution ... is appropriate only for shareholders of closely held firms who have
no ready market for their shares. Shareholders of publicly traded firms are protected by their right to sell out if they are dis-
satisfied with current management....
3 Model Business Corporation Act Annotated § 14.34 (official comment). Accord Moll at 759 (“In the public corporation, the
minority shareholder can escape these abuses of power by simply selling his shares on the market.”). Zimpritch, Maine's cor-
porate law treatise author, declares that “only in the most extreme case would judicial dissolution be appropriate for a public
company.” § 14.11(a). Indeed, proposed changes in the Model Business Corporation Act would limit the remedy of dissolution
for oppression explicitly to nonpublic corporations. 60 Business Lawyer 1622-24 (2005).
[4] But the Commentary I have quoted accompanies a Model Act provision that Maine did not adopt,FN45 and Maine has not
adopted the proposed amendment that would eliminate shareholder dissolution suits for public corporations. Therefore in
Maine, the standard of oppressive conduct governs all corporations, and I must apply it even to this publicly held corpora-
tion. In fact, FHC resembles a closely held corporation in some respects: four families own 80% of its stock; the 43% share-
holder and the 19% shareholder have a family relationship (albeit now estranged) and their relatives were involved in some
unexplained fashion in developing the business; the stock is unlisted and has only very thin trading; one shareholder has
enough stock to control the corporation. But I also recognize that FHC does in fact have about 820 shareholders and that
there is at least a thin market for its stock (in 2006 it traded in the $2 to $3 range except for bulk sales). I therefore also pay
heed to the following statement from the Montana Supreme Court dealing with a similar Montana statute:
          FN45. Section 14.34 of the Model Act, which was not adopted in Maine, permits a private corporation to avoid disso-
          lution by purchasing, or having one of more of its shareholders purchase, all shares owned by a complaining share-
          holder in a dissolution suit for fair value.
This Court has held that oppression may be more easily found in a close corporation than a larger, public corporation be-
cause shares in a closely held corporation are not offered for public sale. We have also held that when addressing these type
of cases, we will proceed on a case-by-case basis.
Daniels v. Thomas, Dean & Hoskins, Inc., 246 Mont. 125, 804 P.2d 359, 368 (1990) (citations omitted). In other words, op-
pression depends on the context.
Neither the Maine Legislature nor the Law Court has given any content to the term “oppressive” as it is used in Maine's sta-
tute.FN46 There is caselaw from other jurisdictions and there is academic commentary. See generally 2 O'Neal and Thomp-
son's, Close Corporations and LLCs: Law and Practice, § 9.18 at 9-102 *147 (3rd ed.2006) (tabular presentation of authority
on oppression statutes by state).
          FN46. There is a recent Maine Superior Court opinion that discusses the oppression standard. See Napp v. Parks
          Camp, No. 04-cv-037 (Me.Super.Nov.3, 2006) (Marden, J.)
According to one commentator, there are three tests for oppression: the so-called “general oppression” test that looks for
“burdensome, harsh and wrongful conduct”; another test that mirrors the fiduciary duty of good faith and fair dealing that
applies to a controlling shareholder; and the “reasonable expectations” test. Robert B. Thompson, The Shareholder's Cause of
Action for Oppression, 48 Bus. Law 699, 711-12 (1992-1993). Another commentator has pointed out that the content of the
term depends greatly upon whose perspective is used: that of the minority shareholder or that of the shareholder/director in
control. (The reasonable expectations test, in particular, focuses on the minority perspective.) Moll at 764.
Kaplan urges me to follow the general oppression standard. The Washington Supreme Court has articulated it as:
burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of
some of its members; or a visible departure from the standards of fair dealing, and a violation of fair play on which every
shareholder who entrusts his money to a company is entitled to rely.
Scott v. Trans-Sys., Inc., 148 Wash.2d 701, 64 P.3d 1, 6 (2003); accord Baker v. Commercial Body Builders, Inc., 264 Or. 614,
507 P.2d 387, 393 (1973) (also noting that the definition is of little value for application in a specific case). See also Jorgensen

v. Water Works, Inc., 218 Wis.2d 761, 582 N.W.2d 98, 107 (App.1998); Giannotti v. Hamway, 239 Va. 14, 387 S.E.2d 725
The defendants urge me to adopt instead the “reasonable expectations test.” FN47See, e.g., Matter of Topper, 107 Misc.2d 25,
433 N.Y.S.2d 359 (1980); Balvik v. Sylvester, 411 N.W.2d 383, 387 (N.D.1987); Stefano v. Coppock, 705 P.2d 443, 446 (Alaska
1985); Fox v. 7L Bar Ranch Co., 198 Mont. 201, 645 P.2d 929 (1982); Brenner v. Berkowitz, 134 N.J. 488, 634 A.2d 1019
(1993). The reasonable expectations test “defines oppression as a violation by the majority of the reasonable expectations of
the minority.” Trans-Sys., 64 P.3d at 6. The Washington Supreme Court defines “reasonable expectations” as “those spoken
and unspoken understandings on which the founders of a venture rely when commencing the venture.” Id.
          FN47. Zimpritch mentions this test. Zimpritch at § 14.11[c].
I do not find it useful to choose among the three tests.FN48 There are no Maine *148 Law Court cases to indicate whether
Maine will adopt any of those approaches. Academic commentary and caselaw recognize that certain courts apply more than
one test, sometimes the circumstances determine which test will be used, and in many cases the tests produce the same re-
sult. See O'Neil § 9:27 at 9-191 (the standards “for determining oppression are not contradictory, as conduct that violates one
of them may well violate the others.”); Colt v. Mt. Princeton Trout Club, Inc., 78 P.3d 1115 (Colo.App.2003) (stating that “the
definition of oppressive conduct is intended to be broad and flexible” and applying both the general oppression definition and
the reasonable expectations definition, as well as looking at the fiduciary duty that majority shareholders owe to minorities);
Trans-Sys., 64 P.3d at 6 (tests “are not mutually exclusive and one or both may be used in the same case depending on the
facts”). In other words, choosing among these “tests” does not add predictability to outcome, an important element of corpo-
rate law. FN49
          FN48. I do find that the reasonable expectations test does not help decide this case. The reasonable expectations test
          typically focuses on closely held corporations where the shareholders initially pooled their resources not only as an
          investment but also as an employment opportunity. The test is often used to support relief when a controlling
          shareholder later freezes out a minority shareholder from employment opportunities (the “reasonable expectations”)
          for one reason or another. It is not particularly applicable here, where Kaplan has inherited his shares and there is
          no evidence concerning his or his forebears' expectations. Trans-Sys., Inc., 64 P.3d at 6 (“Application of the reasona-
          ble expectations test is most appropriate in situations where the complaining shareholder was one of the original
          participants in the venture-one who would have committed capital and resources.”); Thompson at 712 (“There may
          be times when reasonable expectations would be difficult to use, as in situations where shareholders have been giv-
          en or inherited their shares, and in these and other cases courts may prefer to use one of the other standards.”);
          O'Neil at § 9:28 (“The reasonable expectations standard leads a court to examine perils faced by participants in a
          close corporation who have concentrated their financial and human resources in an intimate ongoing business rela-
          FN49. “[C]orporate law, both statutory and judicial, acts as a set of standard terms that lowers the cost of contract-
          ing.” Easterbrook and Fischel at 236. “The more open-ended the standard, the more trouble they have predicting;
          the more trouble they have predicting, the less likely they are to resolve their differences short of litigation....”Id. at
[5] With this background, I turn directly to the record evidence of oppressive conduct, using the word in its ordinary sense
and focusing on conduct that occurred after the effective date of this provision, July 1, 2003: FN50
          FN50. I therefore do not address some disputed transactions in the record, such as the Putnam Parkade Loan (see,
          supra, Findings of Fact ¶ 18), that took place before the effective date of the oppression provision and offer only mi-
          nimal context to the conduct that has occurred since July 1, 2003.
1. In general, Ellis has treated FHC as his own property, moving money back and forth among his various companies includ-
ing FHC, as he thinks beneficial. Kaplan established that proposition in this lawsuit. He also established it in the federal
proxy litigation in Massachusetts where Judge Gorton found: “although transactions which took place many years ago while
FHC was insolvent may be of little consequence today, such transactions are significant in confirming Ellis's peremptory
control over FHC's management and the Board and the comprehensive lack of proper corporate governance.” Proxy Litig. at
2. In early 2004, Ellis directed FHC to deny Kaplan's legitimate request for a stockholder list prior to the first shareholders
meeting in almost 20 years. After discovering Kaplan's interest in appointing disinterested directors, Ellis directed FHC to
continue withholding the shareholder list and to defend against two lawsuits to obtain it, litigation that any lawyer who read
Maine's statute would tell him that FHC was bound to lose eventually. Maine Superior Court Justice Marden held that the
conduct exemplified bad faith:
Defendant's actions in this case in its repeated efforts to deny the plaintiff reasonable access to the shareholders list displays
a clear lack of good faith in its dealing with its shareholder in violation of its duty to that shareholder.
Kaplan v. First Hartford, No. 04-cv-275 (Me.Super. June 28, 2005) (Order awarding Fees and Costs).
3. In connection with three shareholder meetings in 2004 and 2005, FHC issued proxy statements that were negligently mis-
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                         635

leading in their statements and omissions. They prevented shareholders from learning and understanding the full nature of
Ellis's conflicted *149 dealings, namely “the material terms of those transactions in which Ellis and his family were perso-
nally interested, [and] details concerning potential benefits and detriments to Ellis personally.” Proxy Litig. at 15.
4. On a continuing basis until 2006, Ellis directed HLLP II to pay his daughters $60,000 annually (and an additional unex-
plained amount that totaled $1.1 million to Ellis and his family). HLLP II was a partnership in which FHC's wholly owned
subsidiary was the general partner. Ellis ignored this FHC ownership interest, treating the partnership as entirely his
own.FN51 It was undisputed then and now that the daughters rendered no services for their payments, and that no equivalent
pro rata payments were made contemporaneously to FHC or its subsidiary. Only after the practice was brought to light dur-
ing Kaplan's proxy lawsuits were these payments treated as distributions that should have generated a pro rata distribution
to FHC. Furthermore, the defendants have offered no documentation explaining the additional payments to other Ellis fami-
ly members amounting to a total of $1.1 million. The payments were made and condoned by Greenwald and Harding because
Ellis directed them to do so, even though they knew that his daughters had provided no services to HLLP II. Tr. 90:17-20;
262:16-19. These payments are evidence not only of Ellis treating all these corporations as part of a common enterprise, but
also of his exercising peremptory control over FHC's board of directors and the inadequacy of records memorializing his self-
          FN51.See Transcript from the Proxy Litig. at 4 (Docket Item 80, Attachment 1).
          FN52. Kaplan argues that the original Hartford Lubbock transaction resulting from the FDIC settlement (see, su-
          pra, Findings of Fact ¶ 17) was evidence of oppressive conduct. Because it took place many years ago, the transac-
          tion cannot qualify as independent grounds for dissolution, but it could help color the oppressive conduct that has
          occurred since July 1, 2003. Nonetheless I find that the defendants have proven that this transaction was fair to
All the facts surrounding the Hartford Lubbock transaction were thoroughly litigated in this case, and the parties argued
extensively about the fairness of the transaction. Kaplan insists that the way Ellis structured the transaction “ultimately
served [Ellis's] interest above those of FHC,” Pl. Reply to Def. Post Tr. Br. at 9, while the defendants say the transaction was
“a huge benefit to First Hartford.” Def. FHC Opp'n Post Tr. Br. at 10. The parties' disagreement hinges on the issue of what,
if anything, FHC gained from the FDIC forgiving HLLP debt that Ellis had personally guaranteed.
Kaplan points out that FHC did not guarantee any of the debt and was not a general partner of HLLP (FHC's wholly owned
subsidiary was general partner); thus the FDIC could have foreclosed on the property and pursued Ellis on his guarantee,
but could not have pursued FHC. If the debt relief was solely for Ellis's benefit, it is easy to see why Kaplan would complain
that Ellis, a self-interested director, stood to lose the most in the FDIC foreclosure and structured a settlement whereby he
came out farthest ahead.
However, Greenwald testified that Ellis originally gave his personal guarantees for these loans solely on account of FHC
whose subsidiary otherwise could not obtain financing to construct the shopping center. Kaplan offered no evidence to rebut
this assertion. Therefore, the defendants suggest, Ellis could have sought and obtained indemnity from FHC had the FDIC
actually held him liable for the $12 million debt. I find that, at the least, the debt relief accomplished by the FDIC settlement
benefited Ellis and FHC equally.
I also find that the tax consequences of this transaction were of no real benefit to either party. The defendants suggest that
FHC would have had to recognize $12 million taxable gain if it walked away from the project in foreclosure. They did not
explain why that was FHC's taxable gain rather than Lubbock Parkade's (perhaps the latter was a subchapter S corpora-
tion). Nonetheless, since FHC was allowing considerable accrued tax losses to expire at this time, I conclude that the issue of
taxable gain to FHC is of little relevance. Pl.Ex. 71 at 23; Tr. 230. I am not persuaded by Greenwald's speculation about Al-
ternative Minimum Tax and Texas tax. Tr. 230:24-231:4. Without the debt relief issues and the tax consequences, the Hart-
ford Lubbock transaction appears to be a simple, albeit conflicting-interest, transaction. FHC sold 99% of what had become
its 100% interest in Lubbock Parkade to Journal (an Ellis Entity) for $3 million in debt relief, retaining a 1 % general part-
nership interest. Lubbock Parkade's only asset was a shopping center worth $8.7 million with $6.6 million in what would
soon become non-recourse debt. Given these numbers, it is hard to justify Kaplan's complaint-FHC sold an asset worth ap-
proximately $2 million in exchange for $3 million in debt relief. Kaplan does speculate that the property may have been
worth more than $8.7 million, but he offers no evidence in that regard. See Pl. Post Tr. Br. at 19. Rejecting Kaplan's conjec-
ture and using only the record evidence before me, I find that the defendants have met their burden to prove that selling the
shopping center to Journal for $3 million was fair to FHC.
*150 5. To this day, FHC manages the Lubbock shopping center without a written management fee agreement. From 2000 to
2003, before Kaplan showed interest in the affairs of FHC, FHC was receiving management fees in the range of $200,000 to
$300,000. Def. Ex. 30. In 2004, the fee dropped to approximately $60,000; in 2005 it was the same; and in 2006 the fee was
approximately $75,000. Pl.Ex. 75 at 38. The revenues from the shopping center have remained relatively constant as the fees
have dropped dramatically. Def. Ex. 30. Ellis testified that the earlier payments were in excess of the market rate, and were
paid to FHC because “First Hartford needed the money.” Tr. 286. This is a clear example of how Ellis treated all these com-

panies as part of his personal enterprise. Furthermore, the timing of the precipitous drop in management fees since Kaplan
emerged in 2004 suggests that Ellis has been managing FHC with an eye towards his personal advantage, at the expense of
the minority shareholders.
6. Around 2004, Ellis directed the transfer of monies away from FHC to benefit companies that he owned outright. He in-
structed Greenwald to pay legal fees for work done on behalf of Journal out of FHC's funds, and to account for them as re-
payment of two undocumented loans made by Journal to FHC in 1993 and 1995. He continued to make these payments,
along with other cash payments and debt forgiveness to Ellis Entities throughout 2004, including debt forgiveness to MIP
16A of $831,000. Although I concluded that FHC was justified in repaying Journal for these undocumented loans (even
though Journal had previously written off the debt as uncollectible), I observe that FHC did not resurrect the $264,000 that
the auditors discovered had been written off as uncollectible debt from MIP 16A to FHC. These transactions demonstrate
that Ellis disregards corporate formalities, inadequately documents self-interested transactions, treats FHC as part of his
common enterprise, and benefits his own interests over FHC.
7. Even while this litigation was pending, Ellis paid himself a $400,000 bonus in 2006. This bonus was on top of the divi-
dends that Ellis received as a 43% shareholder and on top of his regular salary of over $200,000. I do not apply the business
judgment rule to this decision. See Zimpritch at § 8.7[b] (the business judgment rule does not apply to directors and officers
who set their own compensation). See also,5 Fletcher, Cyclopedia Corporations, § 2129 (Perm. Ed.). This was clearly a self-
interested transaction because Ellis was *151 not a disinterested director in choosing to pay himself this amount, nor were
Greenwald and Harding, his two employees who depend upon him for their livelihoods. Ellis therefore has the burden to
demonstrate the fairness of the compensation. He justifies the $400,000 bonus based upon a compensation consultant's re-
port of what chief executive officers earn. Def. Ex. 28. However, there is no indication that the consultant took into account
that Ellis is also a 43% shareholder, without the need for the conventional incentives that are used to motivate management,
and that he presumably also takes a salary from other overlapping companies that he manages and owns outright with his
wife.FN53 Ellis has failed to demonstrate the fairness of this $400,000 bonus.FN54
          FN53. If he does not take a salary from these other companies, but only from FHC, that would be further evidence of
          oppressive conduct in making FHC shoulder the entire burden of his compensation for running this group of busi-
          FN54. One commentator explains that “the siphoning off of corporate earnings through high compensation to the
          majority shareholder” is a common technique used by majority shareholders to oppress minority shareholders. Moll
          at 758.
No one of these actions alone would meet the oppression standard for a shareholder dissolution suit-each has its own reme-
dy, ranging from the remedies that Kaplan has pursued successfully in Maine state court and in federal court in Massachu-
setts, to other remedies such as a derivative lawsuit, which Kaplan has not pursued. Instead, it is the pattern of abusive con-
duct that establishes oppression. Kaplan has successfully sued FHC four times, yet the pattern of oppressive conduct contin-
ues. The Maine oppression statute should relieve minority shareholders, facing a pattern of abusive conduct, from having to
file a new lawsuit for each individual instance. I recognize that without Ellis, his work, his funds and his credit, FHC would
not have emerged from its financial morass, and the investment of shareholders like Kaplan would long ago have become
worthless. But Ellis chose to continue the real estate business under FHC's auspices, a corporate form where there were oth-
er shareholders to whom the directors had corresponding obligations. He therefore was obliged to operate FHC accordingly,
not treating the company as part of his general family assets, but as an independent entity of which he was a director (and
controlling shareholder) with statutory and fiduciary obligations to others. Whatever good intentions he had originally, his
actions cumulatively demonstrate a pattern of peremptory and oppressive treatment of minority shareholders. The pre-2003
transactions provide a context; the recent $400,000 bonus paid during litigation is the most recent example demonstrating
that Ellis will not end his peremptory and oppressive behavior without intervention. It is true that FHC has reinstated inde-
pendent audits, resumed shareholder meetings, hired an internal auditor and a new securities law firm, and this year for the
first time in memory paid dividends. But at the same time, Ellis has transferred assets away from FHC to his other enter-
prises or his family by slashing management fees of the Lubbock shopping center; covertly paying his family members over
$1.1 million from HLLP II, while ignoring FHC's ownership interest in the partnership; and transferring millions of dollars
to Journal on account of debts previously written off as uncollectible, while at the same time ignoring over $250,000 worth of
previously written off debt that MIP 16A owed FHC. He has also manifested extreme hostility to a shareholder's attempt to
exercise legitimate rights of access to *152 shareholder lists, and has paid himself an excessive bonus as a 43% shareholder.
It is in that respect that I conclude that FHC and Ellis have treated other shareholders oppressively.
[6] When the statutory grounds for dissolution are met, dissolution is not mandatory but lies within the sound discretion of
the court. 13-C M.R.S.A. § 1434; Thompson's Point, Inc. v. Safe Harbor Dev. Corp., 862 F.Supp. 594, 602 (D.Me.1994); Zim-
pritch at § 14.11[a]. At this point, shareholder Kaplan does not seek outright dissolution. FN55
          FN55. Even if he did, I would be reluctant to order dissolution of a solvent, publicly held corporation. Much of the
                   CHAPTER 29: CORPORATTIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS                                           637

          oppressive conduct has been remedied and FHC increasingly follows corporate formalities; there are 820 sharehold-
          ers of this corporation, and only two are before the court in this case; nothing in the record shows what effects disso-
          lution would have on the other shareholders of FHC, i.e., what effect such an order would have on ongoing real es-
          tate projects; how creditors might react to an order of dissolution; what the tax consequences of dissolution might
          be; and what effect an order of dissolution would have on FHC employees. “If it is easy to dissolve a firm, there will
          be more deadlocks, more claims of oppression.” Easterbrook and Fischel at 239. Easterbrook and Fischel disagree
          with Professors Hetherington and Dooley, who call for easier dissolution. See J.A.C. Hetherington and Michael P.
          Dooley, Illiquidity and Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem, 63
          Va. L.Rev. 1 (1977).
Maine law lists several alternative options short of outright dissolution:
[I]n any action filed by a shareholder to dissolve a corporation on any of the grounds enumerated in section 1430... the court
may make an order or grant relief, other than dissolution, that in its discretion it considers appropriate, including, without
limitation, an order:
A. Providing for the purchase at their fair value of shares of any shareholder either by the corporation or by other sharehold-
B. Providing for the sale of all the property and franchises of the corporation to a single purchaser, who succeeds to all the
rights and privileges of the corporation and may reorganize the same under the direction of the court;
C. Directing or prohibiting any act of the corporation or of shareholders, directors, officers or other persons party to the ac-
D. Canceling or altering any provision contained in the articles of incorporation, in any amendment to the articles of incorpo-
ration or in the bylaws of the corporation;
E. Appointing a person who is qualified under the laws of this State to act as a receiver and who has no close personal, busi-
ness or financial relationship to the members of any contending faction within the corporation to act as an additional direc-
tor, either in all matters or in those matters the court directs, and to hold office as a director for any period the court orders,
but not longer than 2 years. The person must be paid by the corporation compensation as ordered by the court and may be
required to post security for the faithful performance of the director's duties in an amount and with any sureties the court
orders; or
F. Canceling, altering or enjoining any resolution or other act of the corporation.
13-C M.R.S.A. § 1434(2).
During the trial, all parties focused on proving or disproving liability, i.e., whether*153 Kaplan could meet the standard for
judicial intervention. Indeed, by agreement they delayed discovery and expert testimony over stock value, a component criti-
cal to one statutory remedy Kaplan seeks, a forced buy-out of his shares. Kaplan's counsel advocates the appointment of an
“independent receiver” who would unwind conflicted transactions, and explore equitable solutions (whatever they might be).
When pressed, all the defendants have said is that no relief is needed or at most an injunction ordering FHC's directors to go
forth and behave properly.
I am unsatisfied with the current record and argumentation on remedy. Accordingly, I request additional briefing on what
remedy is appropriate and, if necessary, further evidentiary submissions on that issue. The briefs should consider the follow-
ing issues that trouble me:
1. I am skeptical of the appointment of an “independent receiver.” Assuming that the parties could even find someone with
the skill and expertise to run this real estate business and simultaneously perform what Kaplan requests, it would be a very
expensive undertaking, with no assurance that the receiver could generate a solution. In the meantime, how would this af-
fect the market for FHC shares, and thus the interests of more than 800 other shareholders?
2. I am skeptical that an injunction alone would satisfy the interests of the minority shareholders. Even if I could tailor an
injunction to the concerns I have (commingling of assets, excessive bonuses, unchecked self-dealing, hostility towards minori-
ty shareholders), I am concerned that it might not constrain Ellis. Kaplan has already prevailed in suits against FHC four
times, yet the oppressive conduct continues. If I were to grant an injunction, I would surely need to retain jurisdiction.
Again, how will that affect other shareholders?
3. Before I even begin to consider Kaplan's request for a forced buy-out or forced sale under section 1434(A) or (B), I would
need evidence of FHC's ability to buy out Kaplan's shares or evidence that a willing single purchaser for FHC exists. Even
with such evidence, Kaplan needs to demonstrate why this remedy is any more appropriate for a public company than a de-
cree of dissolution. Kaplan remains free to sell his shares in the market (something he has not yet tried to do). I recognize
Kaplan's concern that FHC shares are thinly traded, and that it would be difficult to get fair value for his large block of stock
in the market. But there is no evidence that the stock is thinly traded as a result of the oppression I have found. Part of the
risk of owning a minority interest in a small public corporation is that the shares may be difficult to sell, or their market
price may be depressed due to their inherent lack of marketability and the control of large shareholders.
4. Why not provide relief under section 1434(2)(E), i.e., appoint an independent director to help protect the interests of the

minority shareholder and to keep watch on Ellis? FN56 An independent director could create the objective voice needed to
maintain confidence in the market for FHC shares. On the other hand, like an “independent receiver,” an independent direc-
tor would be costly (although less costly than a receiver), and it will be difficult to find a director qualified to sit on the board
of a real estate company, who is willing to enter into the midst of a family dispute, and who is *154 independent and unob-
jectionable to all parties and this court.
          FN56. Although Kaplan has not asked for an independent director in this court, it is similar to the relief he re-
          quested in the proxy fight.
5. Should any proposed remedy address what Kaplan claims are uncorrected losses attributable to Ellis's oppression, such as
the write-off of $264,000 to MIP 16A, the excessive bonus Ellis paid himself in 2006, and the loss (if any) from the Lubbock
shopping center management fee arrangement? If the defendants continue to urge that I grant only modest relief, I need to
understand more fully what other remedies, such as a derivative suit, may be available to FHC's shareholders for the as-
serted losses.
6. Should I direct notice to all other shareholders of their right to intervene in this lawsuit under 13-C M.R.S.A. § 1434(1)
(“Any shareholder of a corporation may intervene in an action brought by another shareholder under section 1430, subsec-
tion 2 to dissolve the corporation in order to seek relief other than dissolution.”)?
Accordingly, I DIRECT the lawyers, after consultation with their clients, to present to me within sixty (60) days their posi-
tions on remedies, also addressing the various concerns I have outlined.

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