Lewis v. S.L. & E., Inc.

FACT:  Lewis (Plaintiff), a SH of SL&E, Inc. (Defendant), brought a derivative suit against directors of Defendant, claiming that they had wasted the assets of SL&E by causing SL&E to lease business premises to LGT another corporation operating a tire dealership.  Plaintiff claimed that the directors grossly undercharged LGT for its occupancy and use of property owned by Defendant.  At trial, Defendant directors contended that the rental paid by LGT was reasonable by offering evidence concerning the financial straits of LGT, the cost to LGT of operating the property, and the rentals paid by 2 other properties in that neighborhood.  The trial court held that Plaintiff had failed to establish the rental value of the property during the period it was leased to LGT, and that Defendant was therefore entitled to judgment on the derivative claims.  Implicit in the court’s finding, granting judgment for Defendant upon Plaintiff’s failure to prove waste, was a determination that Plaintiff bore the burden of proof on that issue.  Plaintiff appealed, arguing that the trial court improperly allocated to him the burden of proving his claims of waste, and that since Defendant failed to prove that the transactions in question were fair and reasonable, Plaintiff was entitled to judgment.

ISSUE:  When a SH attacks a transaction in which the directors have an interest other than as directors of the corporation, may the directors escape review of the merits of the transaction?

HOLDING:  No.  When a SH attacks a transaction in which the directors have an interest other than as directors of the corp., the directors may not escape review of the merits of the transaction.  Under normal circumstances the directors of a corp. may determine, in the exercise of their business judgment, what Ks the corp. will enter into and what consideration is adequate, w/out review of the merits of their decisions by the courts.  The business judgment rule presupposes that the director have no conflict of interest.  Here, the directors of Defendant were also directors of LGT.  Thus, the directors of Defendant had the burden of proving that the rent paid by LGT for the property rented was fair and reasonable.  The record shows that the directors failed to carry their burden.  At trial, there was no direct testimony as to what would have been a fair rental during the relevant period, and the evidence that was introduced fell far short of establishing that rent paid was a fair annual rental value for the period.  Thus, judgment should be entered against the directors in such an amount as the trial court shall determine to be equal to the amounts by which the annual fair rental value of the property exceeded the price paid by LGT while it rented the property from Defendant.  Reversed and remanded.

RULE:  When a SH attacks a transaction in which the directors have an interest other than as directors of the corp., the directors may not escape review of the merits of the transaction.

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