Zimble, Kenneth H

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Boston College Law ReviewVolume 2 | Issue 2 Article 264-1-1961Corporations—Stockholders' Vote Not to InstituteSuit as a Bar to a Derivative Action Based onAlleged Violations of AntitrustLegislation.—Rogers v. American Can Co.Kenneth H. ZimbleFollow this and additional works at: http://lawdigitalcommons.bc.edu/bclrPart of the Antitrust and Trade Regulation Commons, and the Business Organizations LawCommonsThis Casenotes is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has been acceptedfor inclusion in Boston College Law Review by an authorized administrator of Digital Commons @ Boston College Law School. For more information,please contact nick.szydlowski@bc.edu.Recommended CitationKenneth H. Zimble, Corporations—Stockholders' Vote Not to Institute Suit as a Bar to a DerivativeAction Based on Alleged Violations of Antitrust Legislation.—Rogers v. American Can Co., 2 B.C.L. Rev.412 (1961), http://lawdigitalcommons.bc.edu/bclr/vol2/iss2/26BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWCorporations—Stockholders' Vote Not to Institute Suit as a Bar to aDerivative Action Based on Alleged Violations of Antitrust Legislation.—Rogers v. American Can Co. 1—Rogers brings derivative suit on behalfof Metal and Thermit Corp. (hereinafter called M. and T.) against AmericanCan Co. (holding a substantial minority stock interest in M. and T.), eightof twelve directors of M. and T., and M. and T. (named as nominal defend-ant) for treble damages and injunctive relief under the antitrust laws. 2M. and T. is engaged in the detinning of tin plate scrap, the sale of suchdetinned steel scrap to steel manufacturers and the sale or use of the tinrecovered in the detinning process. American Can Co. is the principal supplierof tin plate scrap to M. and T. To order to comply with Fed.R.Civ.P. 23(b), 5plaintiff engaged in a proxy battle in which the facts upon which this suitis based were submitted to the shareholders. A majority of the shareholders,exclusive of the shares owned by American Can Co. and the directors namedas parties defendant, re-elected the same directors and voted not to institutethe suit. Defendants moved for dismissal of the complaint and for summaryjudgment. HELD: The shareholders' vote will not bar the derivative suit, asit was an attempted ratification of past violations of the antitrust laws and animplied authorization of future violations.The shareholders' power to determine whether or not to sue has longbeen recognized. 4 This power is in conformity with the generally acceptedview that a corporation is designed to function under "majority rule."6"To permit a minority shareholder to interfere with the corporation's choiceof a course of action, in the exercise of its sound discretion in view of allthe peculiar circumstances, is a serious invasion of the right of majoritycontrol." 6 The derivative action is an extraordinary remedy conceived toprotect the corporation and its shareholders by permitting a shareholder toenforce a corporate cause of action on behalf of the corporation. The rightto maintain a derivative suit, consequently, meets head on with the conceptof "majority rule."In determining whether the stockholders' vote would bar the derivativesuit, the court distinguished past cases on the basis of whether the voterepresented a "business judgment" of a majority of well informed anddisinterested shareholders not to sue, or was an attempted "ratification"of an illegal act. If the vote represented a "business judgment," there wouldbe circumstances under which the vote would bar a derivative suit, but ifI Rogers v. American Can Co., 187 F. Supp. 532 ( D.N.J. 1960).2 Clayton Act § 4, 7, 8, 16, 38 Stat. 730 (1914), 15 U.S.C. §1 15, 18, 19, 26 (1958);Sherman Act II 1, 2, as amended, 69 Stat, 282 (1955), 15 U.S.C. §1 1, 2 (1958).3 Requiring exhaustion of intra-corporate remedies.4 United Copper Securities Co. v. Amalgamated Copper Co., 344 U.S. 261 (1950) ;Hawes v. Oakland, 104 U.S. 450 (1882).Lattin, Corporations 355 (1959): "Furthermore, where the question of whethersuit should or should not be brought is submitted to the shareholders for affirmationby an inquiring board and the majority shareholders decide, in good faith, that suitought not be brought, that should end the matter."8 Notes and Legislation, 53 Harv. L. Rev. 1368, 1374 (1940).412CASE NOTESfound to be an attempted "ratification," the vote would be considered anullity, not effecting a bar to the action. 7This test is a concise and convenient method for obtaining a desiredresult. But its application brings into focus difficulties stemming from thenecessary inquiry into the elusive nature of the shareholders' intent. Thoughthe test admits of precise definition, the criteria for its application are notset forth. The difficulties arise from the failure of the negative vote to reflectwhether the shareholders were motivated by an intent to "ratify" or impliedlyauthorize an illegal act, or to exercise "business judgment." The opinion statesthat ". . . if the vote stated specifically that the stockholders in such vote innowise intended to ratify the past violations of the antitrust laws or to author-ize such a violation in the future, but only expressed the judgment of thestockholders that it would not be the exercise of good business judgment tosue for the past damages, now that they were assured that no future violationswould occur, under such circumstances the vote would not constitute a ratifi-cation of such antitrust violations." 8 Could then, a board of directors avoida derivative suit by merely insuring that the minutes of shareholders' meetingsand literature sent to shareholders include statements to the effect that "theforthcoming vote not to sue is an exercise of business judgment and is innowise intended to ratify the illegal act"? If so, what criteria wouldbe employed to resolve the question presented when both motives are setforth: one shareholder requesting a vote not to sue in order to "ratify theillegal act," while another calls for the exercise of sound "business judgment"?The opinion summarily concludes that the continuing nature of the act,coupled with re-election of the directors charged with illegal conduct demon-strates the shareholders' acquiescence in the carrying on of the allegedly un-lawful conduct. This view omits from consideration a host of possiblemotivating factors which could also logically result in a stockholders' votenot to sue and the re-election of the directors. It has been suggested thatIL. . . unlike ratification—a common act, likely to be done with uniforminattention, often by a blanket vote or even by acquiescence—a decision notto sue would generally be the result of directed attention to the specificproblem of the advisability of the suit." 9 The determination not to enforcea corporate cause of action would undoubtedly involve other considerations. 1°7 As a bar:Solomont & Sons Trust v. New England Theatre Operators, 326 Mass. 99,93 N.E.2d 241 (1950) ; United Copper Securities Co. v. Amalgamated Copper Co., supranote 4.Not a bar:Gottesman v. General Motors Corp., 268 F.2d 194 (2d Cir. 1959); Seigman v.Electric Vehicle Co., 72 N.J. Eq. 403, 65 AtI. 910 (1907).8 Supra note I, at 537.9 Supra note 6, at 1374.10 "On principal, we perceive no reason why the usual rule recognizing thatit is for the corporation to decide questions of business policy should be subjectto an exception limiting the corporate power where a charge is made against anofficer or director but where an independent, disinterested majority of the stock-holders acting reasonably and in good faith have voted that in their judgmentit is not in the best interest of the corporation to sue. We do not believe that413BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEW"A corporation may wish to avoid the unfavorable publicity engenderedby a trial involving the fraud of its officers. It may wish to retain the goodwill and the benefits of a generally profitable administration of the accuseddirectors."11 It is not unlikely that the shareholders considered the possibleeffects of such an action upon the supply of tin plate scrap received fromAmerican Can Co. The profitable history of the corporation while AmericanCan was principal supplier of tin plate scrap must certainly have been asignificant consideration, as the entire operation of M. and T. revolvesaround the processing of tin plate scrap. Can the concept of ratification orimplied authorization be equated with the business judgment confrontinga shareholder in the face of such facts?' 2The absence of criteria to guide the application of the above test setsone in search of justification for empowering a minority shareholder to takeunilateral action to bring suit contrary to the expressed wishes of a majorityof shareholders. Such a right must find its source either in law or in publicpolicy. Examination of the applicable statutes reveals the former not to bethe case." The opinion suggests that public policy is a consideration pre-venting a negative, disinterested shareholders' vote from barring a derivativesuit when the action is based solely on federal antitrust law." This iscontrary to the United Copper case holding which states: "The fact thatthe cause of action is based on the Sherman Act does not limit . . . thepower of the body of stockholders, nor does it give to the individual share-holders the right to interfere with the internal management of the corpo-ration." 0 What is the end served by the "public policy" which deniesvalidity to a reasonable bona fide decision by a disinterested majority thatmore is to be gained by acquiescence than by suit?It has been suggested that the sole end served by such a policy is thepossible deterrent effect it would have on dishonest directors." This view,which would create among shareholders little Attorneys General, overlooksthe fact that Congress has provided for inhibiting dishonest conduct byimpressing upon public officials the duty of enforcing the antitrust laws,"in such a case the power of effective decision shifts from a majority to aminority of the stockholders. We know of no principal requiring that a cor-poration once wronged cannot exercise an honest judgment to refrain from doingthat which may wrong it again." (Emphasis supplied.) Solomont & Sons Trust,supra note, 7, at 114, 93 N.E.2d at 249.11 64 Marv. L. Rev. 334, 335 (1950).12 "The question whether it is good judgment to sue is quite apart from the ques-tion of ratification. This is a distinction of substance and not of form." Solomont &Sons, supra note 7, at 111, 93 N.E.2d at 247.13 Though 15 U.S.C. §§ 16 and 26 provide that a person injured by a violation ofthe antitrust laws may sue and shall be entitled to maintain a suit for injunctive relief,if the violation is continuing in nature, under 15 U.S.C. §§ 4 and 9, the U.S. DistrictAttorneys have a duty to institute actions for an injunction against antitrust violations.14 Supra note 1, at 537.15 United Copper Securities Co. v. Amalgamated Copper Co., supra note 3, at 264.10 Supra note 8, at 335. Accord, Kessler v. Ensley Co., t23 Fed. 546 (ND. Ala.1903).17 Supra note 10.414CASE' NOTESregardless of whether the shareholders vote to sue or not. It is beneficialto distinguish between violations of statutes and violations of the funda-mental "corporate compact" or in fraud of the rights of stockholders.The need to grant minority stockholders the power unilaterally to in-stitute suit contrary to a negative stockholders' vote would not beso great when violation of a statute is the subject of the action, as itwould be when there is a breach or violation of the "corporate compact"or a fraud on the rights of stockholders. Thus, a situation where a boardof directors surcharges the corporation would call for greater protection ofthe minority stockholder than where the directors violate a federal statute,if public policy is to be invoked in the interest of inhibiting dishonest conduct.The court referred to Seigman v. Electrical Vehicle Co. as a leadingcase representing the concept that a negative shareholders' vote will notbar a derivative suit, adopting the view that a vote not to sue is in realityan attempted ratification of an illegal act and is therefore unlawful. How-ever, that case can be reconciled by application of the above distinctionbetween violations of statutes and violations of the "corporate compact"or in fraud on the stockholders' rights. There the stockholders attempted to"ratify the illegal act" by voting not to sue former directors who allegedlydeclared dividends out of capital assets and not surplus assets. Such actionstruck to the core of the corporate organization, denying the shareholderstheir interest guaranteed by the corporate structure. Clearly, an illegalalteration of the basic corporate structure calls for greater protection ofthe minority shareholder than the decision not to exercise the corporation'sright to bring suit under a Federal statute. 18 A derivative suit based onalleged violations of antitrust legislation need not be granted in the interestof "public policy" to inhibit dishonest conduct by directors, as statutoryprovisions for enforcement of those statutes serve that end.KENNETH H. ZIMBLEFair Trade Laws—Requirement of Fair and Open Competition—Ad-mission by Defendant in His Answer is Insufficient to Prove Fair and OpenCompetition in the Gasoline Market.—Gulf Oil Corp. v. Mays.1—Gulf OilCorporation brought a bill in equity against a gasoline retailer seeking toenjoin him from selling Gulf gasoline below the minimum price establishedin contracts between Gulf and other retailers pursuant to the Pennsylvania18 "The fact that the bill calls for an inquiry into the illegality of the transactiondoes not overcome the obstacle that ordinarily stockholders have no standing to inter-fere with the management. Mere belief that the corporate action, taken or contemplated,is illegal gives the stockholder no great right to interfere than is possessed by any othercitizen. Stockholders are not guardians of the public. The function of guarding thepublic from acts deemed illegal rests with public officials." Ashwander v. Tenn. ValleyAuthority, 297 U.S. 288, 343 (1936) (Brandeis, J.).1 164 A.2d 656 (Penn. 1960).415

Corporations—Stockholders\u27 Vote Not to Institute Suit as a Bar to a Derivative Action Based on Alleged Violations of Antitrust Legislation.—Rogers v. American Can Co.

Corporations—Stockholders\u27 Vote Not to Institute Suit as a Bar to a Derivative Action Based on Alleged Violations of Antitrust Legislation.—Rogers v. American Can Co.

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