A friend and fellow corporate law professor sent along this email:
Little pushback on your conclusion on p. 128 of your concise M&A hornbook
(3d ed.) that swapping a proposed merger for a private control-premium sale would constitute a corporate opportunity problem the minority shareholders could successfully sue over. My take is that a corporate opportunity has to be an opportunity that benefits the corporation’s bottom line, or at least is reasonably projected to do so. I don’t think the corporation’s bottom line is altered by switching from a merger to a private sale, so I don’t see a corporate opportunity. Are we in contestable grey area here, or is there strong precedent in your favor?
(3d ed.) that swapping a proposed merger for a private control-premium sale would constitute a corporate opportunity problem the minority shareholders could successfully sue over. My take is that a corporate opportunity has to be an opportunity that benefits the corporation’s bottom line, or at least is reasonably projected to do so. I don’t think the corporation’s bottom line is altered by switching from a merger to a private sale, so I don’t see a corporate opportunity. Are we in contestable grey area here, or is there strong precedent in your favor? Precedent? Yes. Strong? That's in the eye of the beholder. On to what I found:
In Perlman v. Feldmann itself, a proposal to merge Newport with Follansbee Steel Corporation had cratered shortly before the Wilport negotiations began. At least one commentator has observed that “It may also be that the action of Feldmann in converting the initial merger proposal into an offer to purchase his control block may have played a significant role in the decision.” Kaplan, Fiduciary Responsibility in the Management of the Corporation, 31 Bus. Law. 883, 908 (1976). But the district court had found that:
Nor in my view did plaintiffs succeed in proving harm to Newport resulting from a failure of a merger with Follansbee on possible terms advantageous to Newport. Certainly the geographical separation between the Newport and Follansbee mills was a factor seriously unfavorable to a merger. Anyhow, there is nothing to show that Feldmann's sale prevented a merger: if, indeed, a merger were possible on favorable terms before August 31, 1950— a fact in my judgment not proved— so far as appears it was equally possible after that date.
Perlman v. Feldmann, 129 F. Supp. 162, 186 (D. Conn. 1952), rev'd, 219 F.2d 173 (2d Cir. 1955)
Nevertheless a compendium of articles by distinguished practitioners and scholars argued that:
the case can be categorized as a diversion of a corporate transaction case because Feldmann rejected a proposed merger between Newport and another steel corporation at the same time he accepted Wilport's offer to purchase his controlling shares.
Clifford J. Alexander et al., Problems of Fiduciaries Under the Securities Laws, 20 Real Prop. Prob. & Tr. J. 503, 612 (1985). See also Victor Brudney & Robert Charles Clark, A New Look at Corporate Opportunities, 94 Harv. L. Rev. 997, 1062 (1981) (discussing "the findings of diverted corporate opportunities by officers who sold their shares and deprived their corporations of the opportunity to purchase them, or to make sales of assets or stock that would benefit all shareholders pro rata. Perlman v. Feldmann, 219 F.2d 173 (2d Cir.), cert. denied, 349 U.S. 952 (1955); Jones v. H.F. Ahmanson & Co., 1 Cal. 3d 93, 460 P.2d 464, 81 Cal. Rptr. 592 (1969); International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. 1963).").
A New York case suggests, albeit by negative implication that diverting a merger proposal into a stock sale could be a usurpation of corporate opportunity:
The allegations of the complaint also do not tend to establish a cause of action on the theory that the acts of the defendant amounted to the unlawful deprivation or diversion of a corporate opportunity. (Cf. 104 U. of Pa.L.Rev., supra, at 797; Stanton v. Schenck, 140 Misc. 621, 251 N.Y.S. 221; Perlman v. Feldmann, 2 Cir., 219 F.2d 173, 50 A.L.R.2d 1134, cert. den. 349 U.S. 952, 75 S.Ct. 880, 99 L.Ed. 1277.) The opportunity to bargain for and to effect the merger with Adson upon favorable terms, if a valuable corporate asset, was not lost or in any way curtailed by the acts of the defendant. His acts had the effect of facilitating the merger rather than operating to deprive plaintiff of the opportunity thereof.
Platt Corp. v. Platt, 20 A.D.2d 874, 875, 249 N.Y.S.2d 84, 86 (1964)
On to a California precedent:
In November of 1962 a Mr. Douglas McDonald, president of Lincoln Savings & Loan Association of Los Angeles, and his assistant, David Prince, called on Mr. Halbert at the Association's business office in Tulare. Mr. McDonald asked Mr. Halbert if the Association was for sale. Halbert stated, “No, the Association is not for sale. However my wife and I would entertain selling our stock,” and stated a price of two and one-half times book value. There was no evidence produced that the board of directors or stockholders had been consulted as to whether the company was for sale. ...
Every sale of a block of control stock should not per se be subject to attack, but where the amount received by the majority-director seller is so disproportionate to the price available to the minority stockholders, then such fiduciary-seller must show that no advantage was taken if the sale is questioned. This is especially true in the instant case where Halbert in his triple fiduciary capacity was completely indifferent to his obligations to the minority stockholders. He did not advise the directors or stockholders that he had been approached by persons who desired to acquire the Association. After obtaining an agreement for the price he desired for his own stock and while still an officer-director, he failed to make any effort to obtain for the minority substantially the same price that he received and, in fact, worked actively for the buyers in assisting them to acquire all the stock at a low figure by voicing his recommendation to the minority holders that they sell at below book value. Halbert's other actions in permitting the buyers access to the books, records and reports of the Association, and his agreement to refrain from the payment of dividends only serve to fortify the conclusion that he worked to obtain an advantage for himself and effectively placed the buyers of his stock in a position to dictate terms to the detriment of the minority holders. Further, in advising the minority stockholders to sell their stock for $300 or they might get nothing, he was using his office, experience and reputation gained in the conduct of their affairs to prevent the minority an opportunity to obtain a higher price for their stock.
Brown v. Halbert, 271 Cal. App. 2d 252, 268–69, 76 Cal. Rptr. 781, 791–92 (Ct. App. 1969). There is a lot more going on here than a mere effort to divert the purchaser from acquiring the whole company t acquiring the controlling shareholder's block, of course, which admittedly weakens it as a precedent. Still, the case does treat diversion of a merger proposal as a taking of a corporate opportunity.
