1924
Ponente: Learned Hand, J.
Topic: Duties of Directors and Controlling Stockholders
FACTS:
·
Liberty Starters Corp. was organized in 1918
under the Corporation Law of NY to manufacture starters for Ford motors and
airplanes.
·
In October 1919, Charles Lee Andrews took
office as a director, and served until he resigned in June 1920. Andrews was a
friend of the preident, Maynard, who had induced him as the largest stockholder
to become a director.
·
During his incumbency, over $500k was raised
by the sales of stock of the company. Officers and employees were hired at
substantial salaries, while the factory was equipped with machinery. Starter
parts were made in quantity, but delays were experienced in the production
thereof, resulting in running charges which steadily depleted the company
funds.
·
Only two meetings of directors were held
between his appointment as director and his resignation. He was able to attend
one and was forced to skip the other because of his mother's death. Andrews'
only attention to the affairs of the company consisted of talks with the
president as they met from time to time.
·
After Andrews resigned, the company continued
doing business until the spring of 1921, when Earle Barnes was appointed as
receiver. Barnes discovered that the company did not have funds, and when the
company's assets were sold, only a small sum was realized.
·
Thereafter, Barnes filed a complaint against
Andrews for misprision of office. The complaint alleged that as a director,
Andrews failed to give adequate attention to the affairs of the company, which
had been conducted incompetently and without regard to the waste in salaries
during the period before production was possible. This was exacerbated by
conflicts among the personnel, in particular between the factory manager and
the engineer.
RULING:
Whether
Andrews was negligent in the discharge of his duties as a director (misprision
of office). – YES.
·
While directors are effectively the managers
of the company, they are not expected to interfere individually in the actual
conduct of its affairs. To do so would disturb the authority of the officers
and destroy their individual responsibility, without which no proper discipline
is possible. To them must be left the initiative and the immediate direction of
the business. The directors can act individually only by counsel and advice to
them.
·
Yet, directors have an individual duty to keep
themselves informed in some detail to the affairs of the company. It is this
duty which Andrews failed to adequately perform.
·
All Andrews did was to talk with the
president, Maynard, as they met while commuting from Flushing, NY, or at their
homes. That might be enough because Andrews did not have reason to subject
Maynard's candor. But it was clear Andrews did not press Maynard for details as
he should have.
·
It is not enough to content oneself with
general answers that the business looks promising and that all seems
prosperous. Andrews was bound, certainly as the months wore on, to inform
himself of what was going on with some particularity. If he had done so, he
would have learned that there were delays in getting into production which were
putting the enterprise in serious peril.
·
Having accepted a post of confidence, Andrews
was charged with an active duty to learn whether the company was moving to
production, and why it was not, and to consider what could have been done to
avoid the conflicts among the personnel, or their incompetence, which was
slowly bleeding the company to death.
Whether
Andrews should be held liable for damages on account of the losses suffered by
the corporation during his incumbency. – NO.
·
While it is true that Andrews was not very
well-suited by experience for the job he had undertaken, he could not be held
liable for damages on that account. After all, it is the same corporation that
chose him which now seeks to charge him.
·
Barnes must go further than show that Andrews
should have been more active in his duties. He must adequately discharge the
burden of proving that Andrews' performance of his duties would have avoided
the losses. In the instant case, this burden was not fulfilled.
No proof
of causation
·
When a business fails from general
mismanagement, business incapacity, or bad judgment, it is difficult to
conjecture that a single director could turn the company around, or how much
dollar he could have saved had he acted properly.
·
In the instant case, there was no showing that
had Andrews done his duty he could have made the company prosper, or at least
could have broken its fall.
Uncertain
and speculative conjectures
·
Andrews is not subject to the burden of
proving that the loss would have happened whether or not he had done his duty.
If he were, it would come to this: If a director were once shown to slack in
the discharge of his duties, he would stand charged prima facie with the
difference between the corporate treasury as it was, and as it would be
adjudged by a hypothetical standard of success.
·
How could such a standard be determined? How
could anyone guess how far a director's skill and judgment would have prevailed
upon his fellows, and what would have been the ultimate fate of the business,
if they had? How is it possible to set any measure of liability, or to tell
what could have contributed to the event?
·
Men's fortunes may not be subjected to such
uncertain and speculative conjectures.
No implied
warranty of special fitness
·
Unlike lawyers or doctors, directors are not specialists.
They must have good sense, but not any technical talent. They are the general
advisers of the business, and if they faithfully give such ability as they have
to their charge, it would not be lawful to hold them liable. Must a director
guarantee that his judgment is good? The answer is no.
·
No persons of sense would take an office if
the law imposed upon them a guaranty of the general success of their companies
as a penalty for any negligence.