Guth v. Loft Inc.

Guth v. Loft Inc, 5 A.2d 503, 23 Del. Ch. 255 (Del. 1939) is a Delaware corporation law case, important for United States corporate law, on corporate opportunities and the duty of loyalty. It deviated from the year 1726 rule laid down in Keech v Sandford[1] that a fiduciary should leave open no possibility of conflict of interest between his private dealings and the job he is entrusted to do.

Guth v. Loft Inc
CourtDelaware Court of Chancery
DecidedApril 11, 1939 (1939-04-11)
Citation(s)5 A.2d 503, 23 Del. Ch. 255 (Del. 1939)
Case opinions
Layton
Court membership
Judge(s) sittingDaniel J. Layton, Richards, Rodney, Speakman, Terry
Keywords
Directors' duties, conflicts of interest

Facts

Charles Guth was the president of Loft, Inc., a candy and syrup manufacturer, which served a cola drink at its fountain stores. Loft's soda fountains purchased cola syrup from Coca-Cola Ltd., but Guth decided it would be cheaper to buy from Pepsi after Coke declined to give him a larger jobber discount. Pepsi went bankrupt before Guth (and Loft) could inquire about obtaining syrup from Pepsi.

Guth then personally bought the Pepsi company and its syrup recipe. With the aid of Loft chemists, he reformulated the recipe, and soon purported to sell the syrup to Loft.

He was sued by Loft's shareholders, who alleged that he breached his fiduciary duty of loyalty to the company by failing to offer that opportunity to Loft, 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 is 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)no money (2) different business, and/or (3) it has not "interest or reasonable expectancy" in taking the opportunity, 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.

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.

Significance

This has been followed in the Delaware General Corporation Law §144, although authorities differ as to whether §144 covers the Guth v. Loft situation.

See also

Notes
  1. Keech v Sandford (1726) Sel Cas Ch61

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
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