Demoulas Super Markets, Inc. (DSM), was owned by brothers George and Telemachus Demoulas, each owning an equal number of shares of stock. From 1964 through May 1971, the company grew from 5 stores to a chain of 14 supermarkets, including 2 stores in New Hampshire. George died suddenly on June 27, 1971, and at his death, Telemachus assumed control of DSM under the terms of a voting trust. Valley Properties, Inc. (Valley), was set up in 1974 to provide real estate for DSM. In 1990, Georges son Arthur, age 22 and a shareholder of DSM and Valley, brought shareholder derivative actions on behalf
»Demoulas Super Markets, Inc. (DSM), was owned by brothers George and Telemachus Demoulas, each owning an equal number of shares of stock. From 1964 through May 1971, the company grew from 5 stores to a chain of 14 supermarkets, including 2 stores in New Hampshire. George died suddenly on June 27, 1971, and at his death, Telemachus assumed control of DSM under the terms of a voting trust. Valley Properties, Inc. (Valley), was set up in 1974 to provide real estate for DSM. In 1990, Georges son Arthur, age 22 and a shareholder of DSM and Valley, brought shareholder derivative actions on behalf of DSM and Valley, contending that since Georges death Telemachus had diverted business opportunities away from DSM into other businesses that were solely owned by Telemachuss branch of the family. The evidence showed that in the 1970s two new corporations were formed and operated supermarkets in New Hampshire; DSM supplied the financing and management, but ownership was held in Telemachuss sisters and daughters names. By 1986, these stores grew into a single supermarket chain operating under the Market Basket name and entirely owned by members of Telemachuss branch of the family. The trial court judge determined that Telemachus had diverted these corporate opportunities from DSM, and the court ordered the transfer back to DSM of the assets and liabilities of the new corporations. In her decision, the judge cited lines from Ulysses, by Alfred Lord Tennyson, in which Ulysses speaks lovingly of his son Telemachus, expressing the belief that he would rule wisely and decently after his death. Telemachus denied that any acts were improper or gave rise to liability and charged that the judge was not impartial, as evidenced by her quotation from Tennysons poem. Telemachus appealed. Judicial Opinion GREANEY, J. We reject the various arguments that a new trial is required because the judge was notimpartial . The judges use of a literary reference from Tennysons Ulysses to begin her findings of fact and rulings of law and the few sharp remarks alluded to by the defendants make no case for bias. The literary reference was the judges stylistic way of stating the theme of her decision, based on the facts she had found. The trial was long, arduous, and, at times, very bitter. There might have been, from time to time, a momentary lapsebut, especially in a case as acrimonious as this one proved to be, appellate courts must grant the presider some margin of humanity. The [trial] judge found that DSM and Valley had been injured when corporate opportunities, namely, potential business ventures that should rightfully have been offered to those corporations, were instead pursued either by the individual defendants or by other companies in which those defendants held ownership interests. The judge found as well that self-dealing transactions had occurred in which defendants who had fiduciary duties to DSM and Valley transferred assets from these corporations to other defendant-owned companies, for less than fair value. The requirements that determine the propriety of pursuing corporate opportunities and engaging in self-dealing transactions are similar, and will be referred to here as the corporate opportunity doctrine. In applying the doctrine to the facts of this case, we agree with the judges conclusions that the defendants participated in, or benefited from, improper diversions of corporate opportunities and self-dealing transactions, to the detriment of DSM and Valley . In the case of a close corporation, which resembles a partnership, duties of loyalty extend to shareholders, who owe one another substantially the same duty of utmost good faith and loyalty in the operation of the enterprise that partners owe to one another, a duty that is even stricter than that required of directors and shareholders in corporations generally. In the often repeated words of then Chief Judge Cardozo of the New York Court of Appeals, [n]ot honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior that describes this more rigorous duty. A director or officer is not entirely barred from pursuing a corporate opportunity, but a person holding either position cannot do so unless the opportunity is first offered to the corporation and rejected by it. In this aspect, the corporate opportunity doctrine may be considered to be a rule of disclosure. To satisfy the principle of fairness to the corporation and to meet his duty of loyalty, the fiduciary must fully disclose to the corporation, all material facts concerning the opportunity . In short, to meet a fiduciarys duty of loyalty, a director or officer who wishes to take advantage of a corporate opportunity or engage in self-dealing must first disclose material details of the venture to the corporation, and then either receive the assent of disinterested directors or shareholders, or otherwise prove that the decision is fair to the corporation. Otherwise, the officer or director acts in violation of his fiduciary duties, and whatever gain or advantage that he acquires may be held for the benefit of the corporation so as to deny him any benefit or profit. With these principles in mind, we next examine the ventures and transactions that the judge found to have been conducted in violation of the fiduciary duties of DSMs and Valleys directors and officers . The judge concluded that Market Basket represents a corporate opportunity that rightfully belonged to DSM and was diverted from it in a breach of fiduciary duty, and that its assets are derived from that diversion or from additional wrongful self-dealing transactions. She therefore ordered the return of Market Baskets assets and liabilities to DSM. We conclude that the result reached by the judge is supported by her extensive factual findings (which in turn have support in the evidence) . The creation of Seabrook Sales and P & P Foods was a breach of Telemachuss fiduciary duty of loyalty, notwithstanding the fact that the companies were initially owned by persons who were not themselves directors or officers of DSM. (As has been mentioned, Telemachuss sister Ann Burliss owned Seabrook, and his daughter Frances owned P & P Foods. In 1981, Frances exercised an option that had been arranged by Telemachus and purchased Seabrook from Burliss.) A fiduciary is liable either where he benefits directly or where profits flow instead to a third party or to another company under the fiduciarys control. It is clear from the judges findings that these companies were set up at Telemachuss direction and were independent in name only. DSM, which Telemachus fully controlled, managed and financed the operations of these companies. The use of DSMs corporate resources to support these companies indicates that they were wrongfully diverted corporate opportunities. Seabrook Sales opened its second store in 1975 under the Market Basket name (which had previously been registered by DSM in both Massachusetts and New Hampshire), and changed its corporate name to Market Basket, Inc., in 1979 (with DSMs permission). In 1981, P & P Foods exercised Francess option and acquired Market Basket, Inc. The latter was a subsidiary of P & P Foods until the two were merged in December 1983; the next month, P & P changed its name to Market Basket. By this time, the company owned seven stores: six in New Hampshire, and one in Chelsea, Massachusetts (a store whose ownership by Market Basket instead of DSM belies the defendants argument that Seabrook Sales and P & P Foods were created simply to overcome New Hampshire liquor law restrictions). Because the entity that is now Market Basket arose from the merger of two diverted corporate opportunities that rightfully belonged to DSM, the relief ordered with respect to the current assets and liabilities of Market Basket could rest on that fact alone . [Authors Note: With certain technical adjustments, the Supreme Judicial Court of Massachusetts upheld the trial courts order to the Telemachus Branch to transfer back to the original corporations the assets and liabilities of the entities that benefited from the improper diversion of corporate opportunities and resources.] Question 1: Is a director or officer of a corporation totally barred from pursuing corporate opportunities? Question 2: What, if anything, is wrong with Telemachus setting up his sister Ann as owner of the Seabrook Corporation and his daughter Frances as owner of the P & P Foods Corporation in order to avoid the appearance of violating his fiduciary duty to DSM? Do family members have a right to start their own businesses?
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