When will courts interfere with the decisions and management of a corporation?

“In purely a business corporation the authority of the directors in the conduct of the business of the corporation must be regarded as absolute when they act within the law, and the court is without authority to substitute its judgment for that of the directors.” Toebelman v. Missouri-Kansas Pipe Line Co.

 

Courts are not to get involved in the conflicts between responsible managers and a large majority of stockholders on one hand and a dissenting minority view on the other hand.  Courts should not dictate corporate policy and business management.  Directors are chosen to make decision and unless their actions are shown to be tainted with fraud, illegality, or a conflict of interest, their decisions should be accepted as final.

 

Lets put this into context.  Lets say that John buys a minority share of corporation that owns and operates baseball fields.  They have a great business model with all of the fields looking like the historic fields from the early days of baseball, and they have a pretty good turn out by teams and fans.  John thinks that the corporation should invest in lights for the fields so that they can make more money and have more attendance at games when fans and teams are more likely to be able to attend.  However, Jane, the president of the company likes the feel of the fields as they are, and she thinks that teams and fans come to their fields because it reminds them of the old days of baseball.  She thinks that adding lights to the fields would ruin the aura of the fields, and fewer fans would come out to their fields.  A majority of the shareholders agree with her, and they have not put in new lights.

 

If John figures out that his shares aren’t very marketable, and doesn’t want to sell them at a loss, he will likely find it hard to convince a court to intervene in his favor.  Unless John can prove fraud, illegality, or a conflict of interest, it is very likely that that those fields will continue to have no lights.  Courts will not intervene or get involved in a dispute when all John can allege is negligence, and that he is not making the right amount of return on his money.

 

This example illustrates just one more reason to make sure that you know who the directors of a corporation are, and invest wisely, when you purchase shares of a company, especially when you are a minority shareholder.  Contact your local counsel to see if there are any other fact specific circumstances that would change this type of outcome.

 

Photo By: Kevin Palmer