Story Case

At the annual meeting of the directors of the People's Livery Company, the question of buying foodstuffs for their horses for the following year was considered. Mr. Nance, a stockholder and director of the corporation, was engaged in the wholesale grain business; he offered to sell grain to the corporation for the following year at a certain price. This offer was communicated to the directors by Mr. Olsen, another director. Mr. Nance did not attend the meeting. At this meeting, by a vote of five to three, the directors accepted the grain as offered by Mr. Nance. Mr. Nance delivered the grain to the corporation as agreed upon. The corporation afterwards refused to pay for it. They claimed that a director had no right to deal with his corporation, and, therefore, the sale was void. What should be the decision of the Court under the facts as stated?

Ruling Court Case. Twin-Lick Oil Company Vs. Marbury, Volume 91 United States, Page 587

The Twin-Lick Oil Company was a corporation organized under the laws of the state of West Virginia; it was engaged in the business of raising and selling petroleum. It became very much embarrassed and borrowed from Marbury the sum of $2,000, for which a note was given; to secure this note, the corporation executed a deed of trust of all the corporate property to William Thomas, as trustee; this deed of trust gave Thomas the power to sell the property and pay the debt in case the corporation failed to do so. Thereafter, as the corporation was unable to meet the note, the property was sold, and Marbury bought it. Both at the time that he loaned the money and at the time he bought the property, Marbury was a stockholder and a director in the corporation. Four years later, the corporation, by its directors, brought this action against Marbury, seeking to have him compelled to re-convey the property to the corporation.

It was contended in behalf of the corporation that the conveyance to him of the property was absolutely void, because he was a stockholder and director in the corporation, at the time he accepted the conveyance; and, as a stockholder and director, he was unable to purchase the property from the corporation.

Mr. Justice Miller, in delivering the opinion of the Court, said the following: "That a director of a joint-stock corporation occupies one of those fiduciary relations, where his dealings with the subject matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this Court and in others. The general doctrine, however, in regard to contracts of this class, is, not that they are absolutely void, but that they are voidable at the election of the party whose interest has been so represented by the party claiming under it. We say, this is the general rule; for there may be cases where such contracts would be void ab initio; as where an agent to sell buys of himself, and by his power of attorney, conveys to himself that which he is authorized to sell. * * * The present case is not one of that class. While it is true that Marbury, as director of the corporation, was bound by all those rules of conscientious fairness which courts of equity have imposed as the guides for dealings in such cases, it cannot be maintained that any rule forbids one director among several from loaning money to the corporation when the money is needed, and the transaction is open, and otherwise free from blame. * * * Such a doctrine, while it would afford little protection to the corporation against actual fraud or oppression, would deprive it of the aid of those most interested in giving aid judiciously, and best qualified to judge of the necessity of that aid, and of the extent to which it may safely be given."

The Court decided that the sale to Marbury was not void, but only voidable; but, as the corporation had waited for four years, it had lost its right to avoid the transaction. Thus, it was held that Marbury was entitled to retain the property in question.

Ruling Law. Story Case Answer

The directors owe to their corporation a high degree of duty; they bear to it a fiduciary relation, a relation of trust and confidence. Accordingly, they must be very careful in dealing with the corporation where their interests and the interests of the corporation may come into conflict. Any contract, which a director may make with the corporation, in which his presence or his vote is necessary, is voidable at the option of the corporation. If the director wishes to make a contract with the corporation, he should not attend the meeting of the directors. He should remain entirely without and permit the other directors to exercise their free and independent judgment on the transaction. If he does this, any such contract as he may make with the corporation, is valid and cannot be avoided by the corporation. In the Story Case, Mr. Nance was dealing with the corporation; he wisely remained away from the corporate meeting at which the transaction was consummated. Under the circumstances, the transaction is binding upon the corporation. He is, therefore, entitled to recover the price of the grain as agreed upon.