United States Court of Appeals for the Seventh Circuit - 815 F.2d 429
In the case of Jordan v. Duff Phelps, Inc. (1987), the plaintiff, a former employee and shareholder, sued the defendant, a financial services firm, for the breach of contract and fiduciary duty relating to the buyback of his shares. He argued that the defendant failed to reveal their ongoing merger discussions, which, if known, would have increased the value of his shares.
The defendant claimed they were not obliged to disclose the merger talks since they were incomplete and uncertain. Furthermore, they stated they had followed the exact terms of the repurchase agreement. Although the trial court sided with the defendant, the plaintiff appealed.
Ultimately, the court supported the plaintiff, stating the defendant should have informed the plaintiff about the merger discussions before buying back his shares. The court confirmed that closely held corporations owe a fiduciary duty to shareholders under federal securities law and Illinois common law, which includes disclosing crucial information that could affect their decision to sell shares.
The court determined that the merger discussions were essential information, despite not being finalized, as they indicated a substantial change in the firm's value and prospects. Additionally, the court ruled that the plaintiff raised a valid issue concerning whether he would have sold his shares if informed about the merger talks. The case was reversed and sent back for additional proceedings.
This case demonstrates how courts apply federal and state law to interpret contracts and fiduciary duties, weighing justice and fairness with party autonomy and discretion. Additionally, it emphasizes the importance of good faith and fair dealing in corporate transactions.
The case of Flamm v. Eberstadt established that public corporations are not required to disclose ongoing merger negotiations to investors until an agreement in principle on the price and structure of the deal has been reached. However, closely held corporations must disclose material information to investors from whom they purchase stock, including a decision to seek another firm with which to merge, even if an agreement in principle has not been reached. In this case, an employee purchased shares and signed a Stock Restriction and Purchase Agreement with a closely held corporation. The employee was not informed of potential merger negotiations and filed a lawsuit seeking damages based on the value his stock would have had under the acquisition. The court found that the corporation did not breach any duty to disclose as the agreement in principle was the first thing that needed to be disclosed, and the employee sold his stock before the agreement was made. However, the court believes that a jury could find the information withheld to be "material". The fiduciary duty of corporate law applies to close corporations buying their own stock, and insiders of closely held firms buying from outsiders have a fiduciary duty to disclose material facts. The buy-sell agreement of the corporation's stock was intended to ensure employee loyalty to the firm, and a contractual agreement that the firm had no duty to disclose would have separated the investment decision from the employment decision.
The writer is in agreement with Judge Easterbrook sending the case back for trial. They believe that the price-and-structure rule should not be enforced for closely held companies, using Michaels v. Michaels as a precedent. The writer remains wary about applying the rule to public company mergers due to the opposition of the Securities and Exchange Commission. Nonetheless, the majority opinion receives the writer's full support.
The case involves a stockholding employee who agreed to sell their shares back to the corporation at book value upon leaving, with no job rights conferred as a shareholder. The issue is whether the CEO had a duty to disclose negotiations to sell the company, which would have significantly increased the value of the employee's shares. The court held that the corporation had a duty to disclose information about its prospects to the employee, which could have led them to change their mind about quitting. The dissenting judge disagreed, stating that there was no duty of disclosure as per the terms of the stockholder agreement. The lower court did not err in its ruling on this matter. The court also held that the employee was a "shareholder at will" and had no right to benefit from information that was not disclosed to them. The court clarified that while employment at will is subject to an implied duty not to be opportunistic, this duty only applies to contractual rights that have already been earned. The employee's rights under the stockholder agreement did not guarantee them any employment tenure.
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