No. 73-718
Argued: April 15, 1974Decided: June 19, 1974
- 1. The equitable principles that a stockholder, who has purchased all or substantially all the shares of a corporation from a vendor at a fair price, may not seek to have the corporation recover against that vendor for prior corporate mismanagement, and that the corporate entity may be disregarded if equity so demands, preclude respondent corporations from maintaining the action under either the federal antitrust and securities laws or state law. Pp. 710-713.
- (a) Amoskeag, having purchased 98.3% of the stock of BAR from Bangor Punta and alleging no fraud, would have no standing in equity to maintain this action for alleged corporate mismanagement. Home Fire Insurance Co. v. Barber, 67 Neb. 644, 93 N. W. 1024. Pp. 711-712; 713-714.
- (b) As the principal beneficiary of any recovery and itself estopped from complaining of petitioners’ alleged wrongs, Amoskeag cannot avoid the command of equity through the guise of proceeding in the name of respondent corporations which it owns and controls. Pp. 711-712; 713-714.
- 2. The Court of Appeals’ assumption that any recovery would necessarily benefit the public is unwarranted and also overlooks the fact that Amoskeag, the actual beneficiary of any recovery, would be unjustly enriched since it has sustained no injury. Neither the federal antitrust and securities laws nor the applicable state laws contemplate a windfall recovery by Amoskeag in these circumstances. Pp. 714-716.
- 3. Deterrence of railroad mismanagement is not in itself a sufficient ground for allowing respondents to recover. If such deterrence were the only objective, it would suffice if any plaintiff were willing to file a complaint, and no injury or violation of a legal duty to the particular plaintiff would have to be alleged. P. 717.
482 F.2d 865, reversed.
POWELL, J., delivered the opinion of the Court, in which BURGER, C. J., and STEWART, BLACKMUN, and REHNQUIST, JJ., joined. MARSHALL, J., filed a dissenting opinion, in which DOUGLAS, BRENNAN, and WHITE, JJ., joined, post, p. 719.
James V. Ryan argued the cause for petitioners. With him on the briefs was Roger L. Waldman. [417 U.S. 703, 705]
Alan L. Lefkowitz argued the cause for respondents. With him on the brief was Edward T. Robinson. *
[ Footnote * ] Fritz R. Kahn, Betty Jo Christian, and Charles H. White, Jr., filed a brief for the Interstate Commerce Commission as amicus curiae.
MR. JUSTICE POWELL delivered the opinion of the Court.
This case involves an action by a Maine railroad corporation seeking damages from its former owners for violations of federal antitrust and securities laws, applicable state statutes, and common-law principles. The complaint alleged that the former owners had engaged in various acts of corporate waste and mismanagement during the period of their control. The shareholder presently in control of the railroad acquired more than 99% of the railroad’s shares from the former owners long after the alleged wrongs occurred. We must decide whether equitable principles applicable under federal and state law preclude recovery by the railroad in these circumstances.
I
Respondent Bangor & Aroostook Railroad Co. (BAR), a Maine corporation, operates a railroad in the northern part of the State of Maine. Respondent Bangor Investment Co., also a Maine corporation, is a wholly owned subsidiary of BAR. Petitioner Bangor Punta Corp. (Bangor Punta), a Delaware corporation, is a diversified investment company with business operations in several areas. Petitioner Bangor Punta Operations, Inc. (BPO), a New York corporation, is a wholly owned subsidiary of Bangor Punta.
On October 13, 1964, Bangor Punta, through its subsidiary BPO, acquired 98.3% of the outstanding stock of BAR. This was accomplished by the subsidiary’s purchase [417 U.S. 703, 706] of all the assets of Bangor & Aroostook Corp. (B&A), a Maine corporation established in 1960 as the holding company of BAR. From 1964 to 1969, Bangor Punta controlled and directed BAR through its ownership of about 98.3% of the outstanding stock. On October 2, 1969, Bangor Punta, again through its subsidiary, sold all of its stock for $5,000,000 to Amoskeag Co., a Delaware investment corporation. Amoskeag assumed responsibility for the management of BAR and later acquired additional shares to give it ownership of more than 99% of all the outstanding stock.
In 1971, BAR and its subsidiary filed the present action against Bangor Punta and its subsidiary in the United States District Court for the District of Maine. The complaint specified 13 counts of alleged mismanagement, misappropriation, and waste of BAR’s corporate assets occurring during the period from 1960 through 1967 when B&A and then Bangor Punta controlled BAR. 1 Damages were sought in the amount of $7,000,000 for violations of both federal and state laws. The federal statutes and regulations alleged to have been violated included 10 of the Clayton Act, 15 U.S.C. 20; 10 (b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j (b); and Rule 10b-5, 17 CFR 240.10b-5, as promulgated thereunder by the Securities and Exchange Commission. The state claims were grounded on 104 of the Maine Public Utilities Act, Maine Rev. Stat. [417 U.S. 703, 707] Ann., Tit. 35, 104 (1965), and the common law of Maine.
The complaint focused on four intercompany transactions which allegedly resulted in injury to BAR. 2 Counts I and II averred that B&A, and later Bangor Punta, overcharged BAR for various legal, accounting, printing, and other services. Counts III, IV, V, and VI averred that B&A improperly acquired the stock of the St. Croix Paper Co. which BAR owned through its subsidiary. Counts VII, VIII, IX, and X charged that B&A and Bangor Punta improperly caused BAR to declare special dividends to its stockholders, including B&A and Bangor Punta, and also caused BAR’s subsidiary to borrow in order to pay regular dividends. Counts XI, XII, and XIII charged that B&A improperly caused BAR to excuse payment by B&A and Bangor Punta of the interest due on a loan made by BAR to B&A. In sum, the complaint alleged that during the period of their control of BAR, Bangor Punta, and its predecessor in interest B&A, “exploited it solely for their own purposes” and “calculatedly drained the resources of BAR in violation of law for their own benefit.”
The District Court granted petitioners’ motion for summary judgment and dismissed the action. 353 F. Supp. 724 (1972). The court first observed that although the suit purported to be a primary action brought in the name of the corporation, the real party in interest and hence the actual beneficiary of any recovery, was Amoskeag, the present owner of more than 99% of the outstanding stock of BAR. The court then noted that Amoskeag had acquired all of its BAR stock long after the alleged wrongs occurred and that Amoskeag [417 U.S. 703, 708] did not contend that it had not received full value for its purchase price, or that the purchase transaction was tainted by fraud or deceit. Thus, any recovery on Amoskeag’s part would constitute a windfall because it had sustained no injury. With this in mind, the court then addressed the claims based on federal law and determined that Amoskeag would have been barred from maintaining a shareholder derivative action because of its failure to satisfy the “contemporaneous ownership” requirement of Fed. Rule Civ. Proc. 23.1 (1). 3 Finding that equitable principles prevented the use of the corporate fiction to evade the proscription of Rule 23.1, the court concluded that Amoskeag’s efforts to recover under the Securities Exchange Act and the Clayton Act must fail. Turning to the claims based on state law, the court recognized that the applicability of Rule 23.1 (1) has been questioned where federal jurisdiction is based on diversity of citizenship. 4 The court found it unnecessary [417 U.S. 703, 709] to resolve this issue, however, since its examination of state law indicated that Maine probably followed the “prevailing rule” requiring contemporaneous ownership in order to maintain a shareholder derivative action. Thus, whether the federal rule or state substantive law applied, the present action could not be maintained.
The United States Court of Appeals for the First Circuit reversed. 482 F.2d 865 (1973). The court stated that its disagreement with the District Court centered primarily on that court’s assumption that Amoskeag would be the “sole beneficiary” of any recovery by BAR. The Court of Appeals thought that in view of the railroad’s status as a “public” or “quasi-public” corporation and the important nature of the services it provides, any recovery by BAR would also inure to the benefit of the public. The court stated that this factor sufficed to support a corporate cause of action and rendered any windfall to Amoskeag irrelevant. In addition, the court noted that to permit BAR to recover for the alleged wrongs would provide a needed deterrent to “patently undesirable conduct” in the management of railroads. Id., at 871. Finally, the court confronted the possibility that any corporate recovery might be diverted to enrich the present BAR shareholders, mainly Amoskeag, rather than re-invested to improve the railroad’s services for the benefit of the public. Although troubled by this prospect, the court concluded that the public interest would nonetheless be better served by insuring that petitioners would not be immune to civil liability for their allegedly wrongful conduct. Without deciding the issue, the court also suggested the possibility of devising “court-imposed limitations” on the use BAR might make of any recovery to insure that the public would actually be benefited.
We granted petitioners’ application for certiorari. 414 U.S. 1127 (1974). We now reverse. [417 U.S. 703, 710]
II
A
We first turn to the question whether respondent corporations may maintain the present action under 10 of the Clayton Act, 15 U.S.C. 20, and 10 (b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j (b), and Rule 10b-5, 17 CFR 240.10b-5. The resolution of this issue depends upon the applicability of the settled principle of equity that a shareholder may not complain of acts of corporate mismanagement if he acquired his shares from those who participated or acquiesced in the allegedly wrongful transactions. See, e. g., Bloodworth v. Bloodworth, 225 Ga. 379, 387, 169 S. E. 2d 150, 156-157 (1969); Bookman v. R. J. Reynolds Tobacco Co., 138 N. J. Eq. 312, 372, 48 A. 2d 646, 680 (Ch. 1946); Babcock v. Farwell, 245 Ill. 14, 40-41, 91 N. E. 683, 692-693 (1910). 5 This principle has been invoked with special force where a shareholder purchases all or substantially all the shares of a corporation from a vendor at a fair price, and then seeks to have the corporation recover against that vendor for prior corporate mismanagement. See, e. g., Matthews v. Headley Chocolate Co., 130 Md. 523, 532-535, 100 A. 645, 650-651 (1917); Home Fire Insurance Co. v. Barber, 67 Neb. 644, 661-662, 93 N. W. 1024, 1030-1031 (1903). See also Amen v. Black, 234 F.2d 12, 23 (CA10 1956). The equitable considerations precluding recovery in such cases were explicated long ago by Dean (then Commissioner) Roscoe Pound in Home [417 U.S. 703, 711] Fire Insurance Co. v. Barber, supra. Dean Pound, writing for the Supreme Court of Nebraska, observed that the shareholders of the plaintiff corporation in that case had sustained no injury since they had acquired their shares from the alleged wrongdoers after the disputed transactions occurred and had received full value for their purchase price. Thus, any recovery on their part would constitute a windfall, for it would enable them to obtain funds to which they had no just title or claim. Moreover, it would in effect allow the shareholders to recoup a large part of the price they agreed to pay for their shares, notwithstanding the fact that they received all they had bargained for. Finally, it would permit the shareholders to reap a profit from wrongs done to others, thus encouraging further such speculation. Dean Pound stated that these consequences rendered any recovery highly inequitable and mandated dismissal of the suit.
The considerations supporting the Home Fire principle are especially pertinent in the present case. As the District Court pointed out, Amoskeag, the present owner of more than 99% of the BAR shares, would be the principal beneficiary of any recovery obtained by BAR. Amoskeag, however, acquired 98.3% of the outstanding shares of BAR from petitioner Bangor Punta in 1969, well after the alleged wrongs were said to have occurred. Amoskeag does not contend that the purchase transaction was tainted by fraud or deceit, or that it received less than full value for its money. Indeed, it does not assert that it has sustained any injury at all. Nor does it appear that the alleged acts of prior mismanagement have had any continuing effect on the corporations involved or the value of their shares. 6 Nevertheless, by causing the present [417 U.S. 703, 712] action to be brought in the name of respondent corporations, Amoskeag seeks to recover indirectly an amount equal to the $5,000,000 it paid for its stock, plus an additional $2,000,000. All this would be in the form of damages for wrongs petitioner Bangor Punta is said to have inflicted, not upon Amoskeag, but upon respondent corporations during the period in which Bangor Punta owned 98.3% of the BAR shares. In other words, Amoskeag seeks to recover for wrongs Bangor Punta did to itself as owner of the railroad. 7 At the same time it reaps this windfall, Amoskeag desires to retain all its BAR stock. Under Home Fire, it is evident that Amoskeag would have no standing in equity to maintain the present action. 8 [417 U.S. 703, 713]
We are met with the argument, however, that since the present action is brought in the name of respondent corporations, we may not look behind the corporate entity to the true substance of the claims and the actual beneficiaries. The established law is to the contrary. Although a corporation and its shareholders are deemed separate entities for most purposes, the corporate form may be disregarded in the interests of justice where it is used to defeat an overriding public policy. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 442 (1934); Chicago, M. & St. P. R. Co. v. Minneapolis Civic Assn., 247 U.S. 490, 501 (1918). In such cases, courts of equity, piercing all fictions and disguises, will deal with the substance of the action and not blindly adhere to the corporate form. Thus, where equity would preclude the shareholders from maintaining an action in their own right, the corporation would also be precluded. Amen v. Black, supra; Capitol Wine & Spirit Corp. v. Pokrass, 277 App. Div. 184, 98 N. Y. S. 2d 291 (1950), aff’d, 302 N. Y. 734, 98 N. E. 2d 704 (1951); Matthews v. Headley Chocolate Co., supra; Home Fire Insurance Co. v. Barber, supra. It follows that Amoskeag, the principal beneficiary of any recovery and itself estopped from complaining of petitioners’ alleged wrongs, cannot avoid the command of equity through the guise of proceeding in the name of respondent corporations which it owns and controls.
B
Respondents fare no better in their efforts to maintain the present actions under state law, specifically 104 [417 U.S. 703, 714] of the Maine Public Utilities Act, Maine Rev. Stat. Ann., Tit. 35, 104 (1965), and the common law of Maine. In Forbes v. Wells Beach Casino, Inc., 307 A. 2d 210, 223 n. 10 (1973), the Maine Supreme Judicial Court recently declared that it had long accepted the equitable principle that a “stockholder has no standing if either he or his vendor participated or acquiesced in the wrong . . . .” See Hyams v. Old Dominion Co., 113 Me. 294, 302, 93 A. 747, 750 (1915). 9 Thus, Amoskeag would be barred from maintaining the present action under Maine law since it acquired its shares from petitioners, the alleged wrongdoers. Moreover, the principle that the corporate entity may be disregarded if equity so demands is accepted by Maine precedents. See, e. g., Bonnar-Vawter, Inc. v. Johnson, 157 Me. 380, 387-388, 173 A. 2d 141, 145 (1961).
III
In reaching the contrary conclusion, the Court of Appeals stated that it could not accept the proposition that Amoskeag would be the “sole beneficiary” of any recovery by BAR. 482 F.2d, at 868. The court noted that in view of the railroad’s status as a “quasi-public” corporation and the essential nature of the services it provides, the public had an identifiable interest in BAR’s [417 U.S. 703, 715] financial health. Thus, any recovery by BAR would accrue to the benefit of the public through the improvement in BAR’s economic position and the quality of its services. The court thought that this factor rendered any windfall to Amoskeag irrelevant.
At the outset, we note that the Court of Appeals’ assumption that any recovery would necessarily benefit the public is unwarranted. As that court explicitly recognized, any recovery by BAR could be diverted to its shareholders, namely Amoskeag, rather than re-invested in the railroad for the benefit of the public. Id., at 871. Nor do we believe this possibility can be avoided by respondents’ suggestion that the District Court impose limitations on the use BAR might make of the recovery. 10 There is no support for such a result under either federal or state law. BAR would be entitled to distribute the recovery in any lawful manner it may choose, even if such distribution resulted only in private enrichment. In sum, there is no assurance that the public would receive any benefit at all from these funds.
The Court of Appeals’ position also appears to overlook the fact that Amoskeag, the actual beneficiary of any recovery through its ownership of more than 99% of the BAR shares, would be unjustly enriched since it has sustained no injury. 11 It acquired substantially all the BAR [417 U.S. 703, 716] shares from Bangor Punta subsequent to the alleged wrongs and does not deny that it received full value for its purchase price. No fraud or deceit of any kind is alleged to have been involved in the transaction. 12 The equitable principles of Home Fire preclude Amoskeag from reaping a windfall by enhancing the value of its bargain to the extent of the entire purchase price plus an additional $2,000,000. Amoskeag would in effect have acquired a railroad worth $12,000,000 for only $5,000,000. Neither the federal antitrust or securities laws nor the applicable state laws contemplate recovery by Amoskeag in these circumstances. 13 [417 U.S. 703, 717]
The Court of Appeals further stated that it was important to insure that petitioners would not be immune from liability for their wrongful conduct and noted that BAR’s recovery would provide a needed deterrent to mismanagement of railroads. Our difficulty with this argument is that it proves too much. If deterrence were the only objective, then in logic any plaintiff willing to file a complaint would suffice. No injury or violation of a legal duty to the particular plaintiff would have to be alleged. The only prerequisite would be that the plaintiff agree to accept the recovery, lest the supposed wrongdoer be allowed to escape a reckoning. Suffice it to say that we have been referred to no authority which would support so novel a result, and we decline to adopt it. 14 [417 U.S. 703, 718]
We therefore conclude that respondent corporations may not maintain the present action. 15 The judgment of the Court of Appeals is reversed.
