Guth v. Loft Inc.

"Guth v. Loft, Inc.", 5 A. 2d 503 (Del. Ch. 1939) is a Delaware corporation law case on corporate opportunities and the duty of loyalty. It deviated from the 200 year old rule laid down in "Keech v. Sandford" ["Keech v. Sandford" (1726) Sel Cas. Ch.61] that a fiduciary should leave open no possibility of conflict of interest between his private dealings and the job he is entrusted to do.

Facts

Mr Guth was the President of Loft Inc, which made a cola drink. They got the cola syrup from Coca Cola Ltd, but then Mr Guth decided, it would be cheaper to buy from Pepsi. As he went to enquire, Pepsi went bankrupt. Mr Guth bought the secret syrup recipe, and then purported to sell the syrup on to Loft Inc. He was alleged to have breach his fiduciary duty of loyalty to the company by failing to offer that opportunity to Loft Inc, and instead appropriating it for himself.

Judgment

Daniel J. Layton, the concurrent chief justice, gave the lead judgment for the Delaware Supreme Court. He started off by paying service to the general principle against conflicts of interest.

"Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interest of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers."

But then he stated the main principle as this,

"On the other hand, it is equally true that, if there is presented to a corporate officer or director a business opportunity which the corporation if financially able to undertake, which is, from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself."

So where a corporation cannot take an opportunity because (1) it lacks finances (2) it is not in the same line of business (3) it has not "interest or reasonable expectancy" then a director will be found to have legitimately taken an opportunity for itself. Layton felt that there was no real standard for loyalty and it depends on the facts of the case. The court may enquire and will decide upon the fairness of any transaction. This has been followed in the Delaware General Corporation Law s.144.

"The occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale."

ee also

*"Keech v. Sandford" (1724) 2 Sel Cas Ch 16
*"Boardman v. Phipps" [1967] 2 AC 46

*"Broz v. Cellular Information Systems Inc." Del. Supr. 637 A2d 148 (1996).

*Corporate law
*Business judgment rule

Notes

References

*David Kershaw, ‘Does it matter how the Law Thinks About Corporate Opportunities?’ (2005) 25:4 "Legal Studies" 533
*John Lowry and Rod Edmunds, ‘The No Conflict-No Profit Rules and the Corporate Fiduciary-Challenging the Orthodoxy of Absolutism’ [2000] "Journal of Business Law" 122-142
*V. Brudney and R. C. Clark, “A New Look at Corporate Opportunities” (1981) 94 "Harvard Law Review" 997