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Keywords

plaintiffdefendantleasecorporation
defendantleasecorporation

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Fliegler v. Lawrence, 361 A.2d 218

Facts

The case arose when John C. Lawrence, president of Agau Mines, Inc., acquired antimony properties under a lease-option and later offered to transfer them to Agau. However, Agau's board determined that the corporation could not acquire the properties at that time. Consequently, the properties were transferred to United States Antimony Corporation (USAC), a closely held corporation formed for this purpose, with Agau receiving a long-term option to acquire USAC. The option was executed in January 1970, and Agau's board later resolved to exercise it, which was approved by a majority of shareholders in October 1970. The plaintiff, a shareholder, then brought a derivative action against the defendants, claiming wrongful usurpation of a corporate opportunity and seeking recovery of shares issued to USAC.

In November, 1969, defendant, John C. Lawrence (then president of Agau, a publicly held corporation engaged in a dual-phased gold and silver exploratory venture) in his individual capacity, acquired certain antimony properties under a lease-option for $60,000. Lawrence offered to transfer the properties, which were then ‘a raw prospect’, to Agau, but after consulting with other members of Agau's board of directors, he and they agreed that the corporation's legal and financial position would not permit acquisition and development of the properties at that time.

Issue

Did the individual defendants, in their capacity as directors and officers of both corporations, wrongfully usurp a corporate opportunity belonging to Agau, and did they wrongfully profit by causing Agau to exercise an option to purchase that opportunity?

Did the individual defendants, in their capacity as directors and officers of both corporations, wrongfully usurp a corporate opportunity belonging to Agau, and did they wrongfully profit by causing Agau to exercise an option to purchase that opportunity?

Rule

The burden is on the defendants to demonstrate the intrinsic fairness of a transaction when they stand on both sides of it, particularly in cases involving interested transactions.

The burden is upon them to demonstrate its intrinsic fairness Johnston v. Greene, Del.Supr., 35 Del.Ch. 479, 121 A.2d 919 (1956); Sterling v. Mayflower Hotel Corp., Del.Supr., 33 Del.Ch. 293, 93 A.2d 107 (1952); Gottlieb v. Heyden Chemical Corp., Del.Supr., 33 Del.Ch. 82, 90 A.2d 660 (1952); David J. Greene & Co., v. Dunhill International, Inc., Del.Ch., 249 A.2d 427 (1968).

Analysis

The court analyzed the fairness of the transaction by considering the circumstances at the time the option was executed and the subsequent changes in market conditions. It noted that while the market value of Agau shares had increased significantly, the defendants had provided substantial evidence that the properties acquired were of considerable value and that the transaction was fair. The court emphasized that the intrinsic fairness of the transaction must be evaluated based on the situation as it existed at the time of the exchange, not based on later developments.

Considering all of the above factors, we conclude that defendants have proven the intrinsic fairness of the transaction. Agau received properties which by themselves were clearly of substantial value. But more importantly, it received a promising, potentially self-financing and profit generating enterprise with proven markets and commercial capability which could well be expected to provide Agau at the very least with the cash it sorely needed to undertake further exploration and development of its own properties if not to stay in existence.

Conclusion

The court concluded that the defendants had proven the intrinsic fairness of the transaction, affirming the Chancery Court's decision in favor of the defendants.

Accordingly, we have no doubt but that this transaction was one which at that time would have commended itself to an independent corporation in Agau's position.

Who won?

Defendants prevailed in the case because they successfully demonstrated the intrinsic fairness of the transaction and showed that Agau was not entitled to the properties without consideration.

Defendants prevailed in the case because they successfully demonstrated the intrinsic fairness of the transaction and showed that Agau was not entitled to the properties without consideration.

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