No. 81-222

IN THE SUPREPlE COURT OF THE STATE OF MONTANA

1982

SKI ROUNDTOP, INC., individually and derivatively on behalf of SKI YELLOWSTONE INC.,

Plaintiff and Appellant,

vs.

JOHN P. HALL, FREDERICK L. MORGENTHALER and CHARLES R. MILLER, JR.,

Defendants and Respondents.

Appeal from: District Court of the Eighteenth Judicial District, In and for the County of Gallatin Honorable W. W. Lessley, Judge presiding

Counsel of Record:

For Appellant:

Gregory 0. Morgan argued, Bozenan, Montana Albert Blakey, I11 argued, York, Pa.

For Respondents:

Landoe, Brown Law Firm, Bozeman, Montana J. Robert Planalp argued, Bozeman, Montana Morrow, Sedivy, Olson & Eck, Bozeman, Montana

Submitted: September 14, 1982

Decided: January 31, 1983

Mr. Justlce Fred J. Weber delivered the Oplnlon of the Court.

This case is a companion case to Naylor v. Hail

(1982), Mont . , 651 P.2d 1010, 39 St.Rep. 1953.

Plaintiffs, minority shareholders in Ski YelPowstone,

Inc., appeal from the decision of the Eighteenth Judicial

District Court for Gallatin County, denying them relief in

this stockholders' derivative action arising from the

alleged misconduct of several of the officers and directors

of Ski Yellowstone, a Montana corporation. We affirm the

Distrlct Court with one exception.

The following issues are presented to this Court by

plaintiffs:

(1) Did John Hall breach a duty to minority stock-

holders, with respect to the "C" and "D" stock issues?

(2) After acquiring control of the corporation, did

John Ball engage in a course of conduct which was oppressive

to minority stockholders?

(3) After acquiring control of the corporation, was

John Hall guilty of fraud and self-dealing?

(4) Was the amendment of the corporation's Articles of

Incorporation, which authorized stock for the "C" and "D"

issues, valid under Montana law?

(5) What relief is appropriate under all of the cir-

cumstances?

Ski Yellowstone is a Montana corporation which planned

to develop a four-seasons resort in Gallatin County. It was

organized in 1973 by stockholders in a Pennsylvania corpora-

tion, Ski Roundtop, Inc., which is a minority stockholder in

Ski Yellowstone. The events on which this action is based

occurred primarily in 1975 and 1976, during which time John

Hall obtained control of Ski Yellowstone.

The original stock issue which took place in 1973 was

1,45O,OUO shares, $1.00 par value, which were relatively

evenly distributed among twenty-one shareholders. The

shares were issued at a cost of $1.00 per share, 1,050,000

shares for cash in the amount of $1,050,000, and 400,000

shares for land having a value of $400,000. With the excep-

tion of defendant John Hall and his family corporation,

J.M.S. Corporation, all of the shareholders were friends and

associates oE Irvin S. Naylor, the head of Ski Roundtop and

the primary organizer, with Hans Geier, of Ski Yellowstone.

Naylor originally was in a controlling position in Ski

Yellowstone as well as in Ski Roundtop.

Ski Yellowstone was low on funds by 1974. The issue

of the Forest Service use permit to develop a ski area,

which was essential to the success of Ski Yellowstone, had

been delayed. In order to finance the expense of delay, in

November, 1974, $290,000 worth of Series "A" debentures were

issued. These debentures earned interest and were converti-

ble into the common stock of Ski Yellowstone at $.20 per

share. The dilution of the shares from the original $1.00

per share paid in 1973 was recognized by Naylor, but was

deemed necessary to prevent bankruptcy. John Hall purchased

his $5,000 pro rata preemptive share of the Series "A"

debentures and also purchased by agreement an additional

$42,500 worth of overage (debentures offered to but not

purchased by other shareholders who were first entitled to

purchase). Plaintiffs contend there was a "gentlemen's

agreement" that the Series "A" debentures would not be

converted into stock unless the company was sold.

By 1 9 7 5 S k l Y e l l o w s t o n e a g a i n was s h o r t of c a p i t a l and

i n J u l y , 1975 , $200,000 w o r t h of S e r i e s "8" d e b e n t u r e s were

i s s u e d t o t h e s h a r e h o l d e r s o f t h e company. S e r i e s "B"

d e b e n t u r e s e a r n e d t h e same i n t e r e s t r a t e and had t h e same

c o n v e r s i o n p r i v i l e g e s a s S e r i e s "A" d e b e n t u r e s .

John H a l l became a d i r e c t o r ( o n e o f t e n ) o f S k i

Y e l l o w s t o n e i n J u n e , 1975. Dur ing 1975 and 1976 J o h n H a l l

o b t a i n e d g r e a t e r c o n t r o l o f S k i Y e l l o w s t o n e by j o i n i n g

s e v e r a l " a l l i e s " i n a c q u i r i n g a l l unpurchased S e r i e s "A"

d e b e n t u r e s , c o n v e r t i n g t h o s e "A" d e b e n t u r e s i n t o s t o c k ,

t n e r e b y i n c r e a s i n g t h e number of S e r i e s "B" d e b e n t u r e s h e

c o u l d p u r c h a s e ; s u b s c r i b i n g t o S e r i e s "B" d e b e n t u r e s and

c o n v e r t i n g t h e same i n t o s t o c k . The r e s u l t o f t h e s e

a c t i v i t i e s was t o c r e a t e a c o n t r o l l i n g b l o c k of s h a r e s .

O t h e r s h a r e h o l d e r s a l s o c o n v e r t e d S e r i e s "A" and "B" deben-

t u r e s i n t o common s t o c k , w i t h t h e e x c e p t i o n of p l a i n t i f f s

Nay lo r and G e i e r .

The new v o t i n g m a j o r i t y o f s t o c k h o l d e r s r e d u c e d t h e

number of d i r e c t o r s f rom t e n t o s e v e n , and e l e c t e d F red Pack

a s c h a i r m a n of t h e boa rd i n p l a c e o f I r v i n N a y l o r . The

corporation a u t h o r i z e d t h e s a l e o f $200,000 of S e r i e s "C"

d e b e n t u r e s w i t n t h e same t e r m s a s t h e "A" and "B" deben-

t u r e s . The s u c c e s s o f t h e i s s u e r e q u i r e d a p l e d g e o f 80

p e r c e n t o f t h e i s s u e . The i s s u e f a i l e d . J o h n H a l l

d i s t r i b u t e d a l e t t e r t o S k i Y e l l o w s t o n e s h a r e h o l d e r s

e x p r e s s i n g g e n e r a l c o n f i d e n c e i n t h e v e n t u r e , b u t p o i n t i n g

o u t t h a t e x p e n s e s were l i k e l y t o be h i g h e r t h a n a n t i c i p a t e d .

I n c o n s i d e r i n g t h e q u e s t i o n e d s t o c k i s s u e s , it i s

I m p o r t a n t t o keep i n mind t h e f o l l o w i n g f i n d i n g s o f f a c t on

t h e p a r t o f t h e D i s t r i c t C o u r t : S k i Y e l l o w s t o n e was formed

in 1 9 7 3 by Naylor and Hans Geier, both residents of Pennsyl-

vania. Naylor had extensive experience in obtaining venture

type capital for business entities and Geier had twenty

years experience in the ski industry, including sixteen in

upper-level management. The purpose of Ski Yellowstone was

to acquire private lands and the necessary permits to use

government land to develop its resort. Naylor simultane-

ously was chairman of the board of Ski Yellowstone and chief

executive officer of Ski Roundtop, which operates ski resort

areas in Pennsylvania. Initially, Naylor represented to

shareholders of Ski Yellowstone that within a short time a

shareholder could sell his stock for $10 a share. Ski

Yellowstone purchased land and undertook a series of

studies, applied for a Forest Service permit, and filed

extensive environmental data in 1973. At that time, the

Forest Service changed its approach and decided to process

the application in the context of a larger regional study,

which led to a series of delays. By 1974 it was obvious

that Geier was unable to quickly obtain the Forest Service

permit, and Naylor caused John Maples, a plaintiff, to be

hired for the purpose of liquidating Ski Yellowstone or

selling the corporation. In 1974, John Maples represented

to the shareholders that the value of their stock could be

as low as $.12 per share. Following the offering to the

snareholders of Series "C" debentures in 1976, plaintiff

Rosenmiller, also a director of Ski Koundtop and a close

business associate of Naylor, advised Naylor of the

conclusions of his committee that Ski Roundtop should

decline to invest in Series "C" debentures because their

investments should be made in Ski Roundtop's marketing area,

that is the ski business in Pennsylvania, and that Ski

Roundtop should - not convert Series "A" and "B" to stock.

Because of its insight into the thinking and actions on the

part of the plaintiffs, the District Court set forth the

Rosenmiller letter of May 18, 1976, to Naylor in its

findings as follows:

"I have concluded my discussions with my Committee relative to the advisability of Ski Roundtop converting its Ski Yellow- stone Debentures into Common Stock and subscribing to the forthcoming Series "C" Debenture issue. It is the unanimous opinion of our Committee that we should do the following:

"1) We auvise that Ski Roundtop, Inc. honor its commitment under the existing Series "B" Convertible Notes subscrip- tion, calling for a payment of $4,843.60. Although this Note offers no return for one year it does provide a $.20 a share conversion feature if it is later deter- mined that the stock is, in fact, worth that or a figure in excess of $.20 a share. Most importantly, this Debenture has been substantially collateralized by valuable real estate which has less demands placed against it due to the recent conversion of the Hall notes.

"2) It is the unanimous recommendation that we do not convert our Series "A" and Series "B" notes into common stock of Ski Yellowstone, Inc. The only rationale for doing so would be to return the control of the Company into its former hands but the likelihood of this occurring, is remote at best. It is felt by our Group that we may be in a stronger position to allow the new management to go forward and if successful, we can convert at a later date and hopefully realize a return and profit on our investment. If new management is unsuccessful, we will be able to write off the common equity portion of our investment against future earnings, developing a tax shelter which will pay for a portion of the loss incurred. We will further be in a good position to take legal action against the new management in the event they have acted not in the best interest of all shareholders.

"3) Regarding the proposed $200,000 Series "C" Debenture, we would recommend against any further investment in Ski Yellowstone, Inc. at this time. Our rationale being that our investments should be made in Ski Roundtop's market- ing area, advancing that which we do best and profit from most, namely, the ski business and recreation generally here in York and Adams Counties.

"Tnis constitutes the recommendations of Jacob A. Barnhart, Dr. Anthony Perlman and W. F. 0 . Rosenmiller."

As noted by the District Court, the letter points out

tne conclusion on the part of those making their recommenda-

tions to Naylor: not to convert stock because of the finan-

cial risk; consider conversion at a later date if the new

management is successful; if new management is unsuccessful,

write off against earnings as a tax shelter; take legal

action in the event the new management has not acted in the

best interest of shareholders; and finally, recommending

against any further investment in Ski Yellowstone.

John Hall also circulated a letter dated May 21, 1976,

to Ski Roundtop's board of directors, suggesting that, while

he as an individual could convert his debentures to stock

for the good of the company, Ski Roundtop would be "ill-

advised" to sacrifice the interest on the debentures and

speculate by so converting. Ski Roundtop might, Hall said,

"open itself to minority shareholder suits," if it chose to

convert.

Tne "C" Series debenture issue failed, although John

Hall subscribed to the number allocated to him, conditional

upon tne success of the issue. The Ski Roundtop shareholders

did not subscribe.

A stockholders' meeting noticed on July 1, 1976, was

held July 16, 1976. It was preceded by a directors' meet-

ing. At that meeting, over Hall's protests that the move

would dilute the stock, Ski Yellowstone directors voted to

issue company stock in the amount of $500,000 at $.05 a

share. The stockholders also approved the issue. (A $.lo

share issue was voted down.)

In early August, 1976, a falling out took place

between Naylor and Hall, accompanied by a series of acri-

monious exchanges personally and by mail, which led Naylor

to withdraw his support of the "C" Series issue and to

exercise his right to review the issue for sixty days as set

forth in the 1973 founders' agreement, thus moving the

closing date for subscriptions to October 4, 1976. Naylor's

friends, and Hall as well, then also withdrew their

subscribed support and the issue, which had until then been

over 80 percent subscribed, appeared doomed to fail. The

financial situation of the corporation was desperate; land

payments and salaries were due and bank notes overdrawn;

even the company's president, Geier, was convinced Ski

Yellowstone would fail. In October, 1976, Hall subscribed

to a total of $401,000 worth of "C" shares, notwithstanding

his previous indicated intention to subscribe to $100,000 to

$150,000 worth of the shares. Four other shareholders

subscribed for $10,480 worth of stock. John Maples, a

minority shareholder and one of the plaintiffs, wrote Wall a

letter stating, "Congratulations--you have saved the

corporation. "

When Hall paid the 25 percent due on the " C " Series

subscription in October and assumed ownership of 25 percent

oi the stock, he became owner of 50.7 percent of the Ski

Yellowstone stock outstanding (full payment would have given

him o v e r 77 p e r c e n t o w n e r s h i p ) . Naylor and t h r e e a s s o c i a t e s

r e s i g n e d from t h e boa rd of d i r e c t o r s and were r e p l a c e d by

two p e r s o n a l f r i e n d s o f H a l l who were n o t s h a r e h o l d e r s . The

new board made a number of c h a n g e s , i n c l u d i n g (1) c h a n g i n g

t h e by laws t o p l a c e more power i n t h e c h a i r m a n , H a l l ; ( 2 )

a g r e e i n g t o p o s t p o n e f u r t h e r payments d u e on t h e "C" i s s u e ,

f i r s t f o r one month and t h e n ( o n J a n u a r y 7 , 1 9 7 7 ) u n t i l

needed; ( 3 ) a d o p t i n g a t w o - t i e r b u d g e t , unde r which t h e "C"

S e r i e s payments would be a p p l i e d t o t h o s e l ong - t e rm f i n a n -

c i a l o b l i g a t i o n s e s s e n t i a l t o t h e s u r v i v a l o f t h e company,

and t h e c o s t s o f o b t a i n i n g t h e F o r e s t S e r v i c e p e r m i t would

be funded by a s u b s e q u e n t s t o c k i s s u e .

On December 1 0 , 1976 , S k i Y e l l o w s t o n e s o u g h t t o r a i s e

$450,000 i n c a s h by i t s o f f e r o f t h e "Dl1 S e r i e s s t o c k i s s u e

of 9 ,000 ,000 s h a r e s a t $ .05 p e r s h a r e , w i t h p u r c h a s e r i g h t s

t o be a l l o c a t e d i n p r o p o r t i o n t o s h a r e s owned a s o f t h a t

d a t e . The p r o s p e c t u s n o t i f i e d s h a r e h o l d e r s o f t h e f i r s t

pos tponemen t of "C" S e r i e s paymen t s , and t h e a d o p t i o n of t h e

t w o - t i e r budge t s u g g e s t e d by d i r e c t o r M o r g e n t h a l e r . I t a l s o

i n fo rmed them t h a t t h e s i x t y - d a y r e v i e w p e r i o d would be

s h o r t e n e d d u e t o t h e p r e s s i n g need f o r c a s h and would e x p i r e

on December 23, 1976. The p r o s p e c t u s s t a t e d :

"Should i t be d e t e r m i n e d t h a t a s h a r e - h o l d e r o f t h e Company r e t a i n s h i s r i g h t t o e x e r c i s e h i s r i g h t s a f t e r December 23, 1976 , t h e Company may be r e q u i r e d t o i s s u e a d d i t i o n a l s h a r e s t o s u c h s h a r e h o l d e r s . "

The s u b s c r i p t i o n t o t h e i n i t i a l "D" S e r i e s a t t r a c t e d v i r t u -

a l l y no s u b s c r i b e r s , o n l y one o r two s m a l l p l e d g e s . One

s h a r e h o l d e r , John Maples , n o t i f i e d J o h n H a l l t h a t he r e f u s e d

t o r e t u r n h i s p roxy and waive h i s s i x t y - d a y r e v i e w r i g h t . A s

a r e s u l t , on J a n u a r y 7 , 1977 , t h e S k i Ye l lows tone d i r e c t o r s

d e c i d e d t h a t t h e o i f e r i n g was u n s u c c e s s t u l , d ropped t h e

p r i c e of s h a r e s t o $ .01 e a c h , and i n c r e a s e d t h e number of

s h a r e s o f f e r e d t o 45,OU0,000. The amended p r o s p e c t u s i n d i -

c a t e d t h e pos tponemen t o f payments due on t h e "C" i s s u e

u n t i l needed , and warned , a s had t h o s e f o r e a r l i e r i s s u e s ,

t h a t f a i l u r e t o s u b s c r i b e w o u l d r e s u l t i n s u b s t a n t i a l

d i l u t i o n of o w n e r s h i p , s h o u l d t h e i s s u e s u c c e e d . The number

of payments was i n c r e a s e d f rom two t o f o u r , t h e f i r s t d u e

F e b r u a r y 1 0 , 1977 , and t h e l a s t t h r e e d u e on s p e c i f i e d d a t e s

" o r t h e r e a f t e r a t t h e c a l l of t h e D i r e c t o r s . " The s t a t e d

p u r p o s e of t h e amendment was t o "promote t h e s u c c e s s o f t h e

o f f e r i n g . " The c l o s i n g d a t e f o r t h e o f f e r i n g was e x t e n d e d

t o F e b r u a r y 1 0 , 1977. Only John H a l l and d e f e n d a n t Morgen-

t h a l e r were p r e s e n t a t t h e J a n u a r y 7 , 1977 m e e t i n g .

The "D" i s s u e was s u c c e s s f u l , a g a i n b e c a u s e o f J o h n

H a l l ' s s u b s c r i p t i o n t o $400,000 o f s t o c k , w i t h $2 ,725 of

s t o c k s u b s c r i b e d by f o u r o t h e r s t o c k h o l d e r s . A s a r e s u l t o f

h i s s u b s c r i p t i o n t o t h e S e r i e s "D" i s s u e and h i s p r e v i o u s

s u b s c r i p t i o n t o t h e S e r i e s " C " i s s u e , H a l l g a i n e d t h e r i g h t

t o o b t a i n 94 p e r c e n t s t o c k o w n e r s h i p i n t h e c o r p o r a t i o n .

T h e p l a i n t i f f s p o i n t o u t t h a t h e had i n v e s t e d o n l y 37

p e r c e n t o f t h e money i n v e s t e d i n o r d e r t o g e t t h a t s h a r e o f

owner sh ip . A l e t t e r d a t e d March 1 0 , 1977 , f rom J o h n H a l l t o

t h e s h a r e h o l d e r s i n d i c a t e d t h a t t h e f i r s t payment o n t h e "D"

i s s u e was s u f f i c i e n t t o meet t h e p r e s e n t n e e d s , and t h a t t h e

f u r t h e r i n s t a l l m e n t s would be c a l l e d f o r a s needed .

From a u t u m n o f 1 9 7 6 o n , H a l l r e j e c t e d N a y l o r 1 s

r e p e a t e d a t t e m p t s t o s e l l H a l l h i s i n t e r e s t i n S k i Yellow-

s t o n e . Naylor com~nenced t h i s s h a r e h o l d e r s ' s u i t i n Penn-

s y l v a n i a . T h e c a u s e was t r a n s f e r r e d t o Montana and a f t e r

extensive d~scovery, heard before the Eighteenth Judicial

District Court in September, 1981. The District Court

denied plaintiffs relief, concluding that the defendants had

acted in good faith for the benefit of Ski Yellowstone, and

committed no fraudulent, oppressive or illegal acts in the

course of their management of and membership in that

corporation. Plaintiffs appeal.

Because of the complex facts and a number of nondis-

positive accusations by the plaintiffs, we will consider a

number of these accusations first in order to eliminate the

same before proceeding to the substantive issues.

Plaintiffs concede that defendant Hall had the legal

rlght to convert his "A" and "B" debentures to stock, and

that he had the right to purchase unsubscribed debentures

and unsubscribed "C" and "D" stock. All shareholders

possessed those rights. No shareholder was required to give

warning to others of his intent to convert to common stock

or purchase overages.

Plaintiffs' arguments sometimes are misleading in

seeking to establish that John Hall and his "allies" had

gained control of Ski Yellowstone, and thereafter oppressed

the other shareholders. Several of such "allies" were more

closely associated with Naylor than with defendant Hall.

John Hall did not take control of Ski Yellowstone until

October 1976 when he became the majority shareholder. This

was several months after the previous majority of share-

holders had refused to invest further in Ski Yellowstone and

thereby retain their own control. Prior to October, 1976,

Hall was just another minority shareholder and director,

whose vote did not control, and whose responsibility to

other shareholders was significantly less than that of a

majority shareholder.

The record does not establish that Hall's acrimonious

exchanges with other shareholders are significant in consi-

dering the question of oppression. The District Court found

such letters to be "juvenile and unworthy of all letter

writers." The exchanges were frequently mutual. The ylain-

tiffs as well as Hall were a sophisticated lot, knowledge-

able in their fields, and unlikely to abandon an enterprise

to their detriment because of a few caustic exchanges with

other shareholders.

Plaintiffs protest the issuance of shares of Ski Yel-

lowstone to a number of stockholders, including the defen-

dants Miller and Morgenthaler, and also Hall's wife, for

services to the corporation. Section 35-1-606, MCA, pro-

vides that labor or services actually performed may serve as

consideration for shares issued and that "in the absence of

fraud in the transaction, the judgment of the board of

directors or the shareholders, as the case may be, as to the

value of consideration received for shares shall be conclu-

sive." We find no evidence of fraud in these transactions.

Tliere has been shown no impropriety in the transfer of the

stock to these parties. It may be noted that prior to the

gaining of control by Hall, the board of directors headed by

Naylor had issued stock for services to other parties.

Plaintiffs' claim in that regard is without merit.

I

Did John Hall breach a duty to minority stockholders

with respect to the "C" and "DM stock issues? This is the

principal issue urged by the plaintiffs. An extensive

detailed written prospectus was prepared in connection with

both the "C" and "D" stock issues. Each of the prospectuses

was well drafted and contained all of the information rea-

sonably necessary on the part of the shareholders in order

to evaluate each of the stock issues. Each of the stock-

holders received copies of the prospectuses and there is no

dispute in that regard. It is also important to keep in

mind that John Ball was not the controlling stockholder or

director or officer until October 1976. Up to that time he

was at most one of seven directors and of nineteen indivi-

dual stockholders plus two corporate stockholders.

Plaintiffs contend that John Hall breached his duties

to the minority stockholders by actions designed to alienate

them and to facilitate his acquisition of control. We have

previously disposed of the acrimonious correspondence as not

being significant. The District Court did not find any

limitation on the contractual rights of the defendants to

convert their shares. No evidence is referred to which

raises any question as to the sufficiency of such conver-

slons. We therefore have concluded that the stock conver-

sions by the defendants were proper. The plaintiffs argue

that the failure of John Hall to advise other stockholders

oi his plans to support the "C" issue was misleading. There

is no evidence to support that contention. As previously

indicated, the primary plaintiffs already had concluded they

would not support the " C " issue. We find that all informa-

tion reasonably needed by the minority stockholders in order

that they might conclude whether or not to convert their "A"

or "B" debentures, or to purchase "C" or "D" stock issues

was f u r n i s h e d t o them and t h a t t h e r e was no b r e a c h o f d u t i e s

w i t h r e g a r d t o t h e a l i e n a t i o n of s t o c k h o l d e r i n t e r e s t i n t h e

company.

P l a i n t i f f s c o n t e n d t h a t J o h n H a l l b r e a c h e d h i s f i d u -

c i a r y d u t i e s t o m i n o r i t y s t o c k h o l d e r s by p u r c h a s i n g s t o c k i n

"C" on t e r m s n o t a v a i l a b l e t o o t h e r s , and by a u t h o r i z i n g t h e

"D" i s s u e when t h a t i s s u e was u n n e c e s s a r y . A s m e n t i o n e d ,

t h e p r o s p e c t u s f o r t h e "C" i s s u e and f o r t h e "D" i s s u e s e t

f o r t h a l l o f t h e p e r t i n e n t d e t a i l s needed by t h e s t o c k -

h o l d e r s . The change i n t h e amount o f i n t e r e s t t o be p a i d by

John H a l l w i l l b e d i s c u s s e d l a t e r .

I n c o n n e c t i o n w i t h t h e p r o p o s e d "D" i s s u e , t h e

d i r e c t o r s , i n c l u d i n g J o h n H a l l , a d o p t e d a t w o - t i e r b u d g e t .

Under t h i s b u d g e t , l ong - t e rm o b l i g a t i o n s e s s e n t i a l t o t h e

s u r v i v a l of t h e company were t o be p a i d o u t o f t h e p r o c e e d s

o f t h e "C" i s s u e . The s econd t i e r r e l a t e d t o items t o be

p a i d i n o r d e r t o meet t h e c o s t s o f o b t a i n i n g t h e F o r e s t

S e r v i c e p e r m i t , and t h e p l a n was t h a t s u c h second t i e r would

be p a i d o u t of t h e p r o c e e d s of t h e "D" i s s u e . P l a i n t i f f s

a r g u e t h a t t h e "D" i s s u e would n o t have been needed i f H a l l

had p a i d f o r a l l o f t h e "C" i s s u e . T h e r e is s u b s t a n t i a l

e v i d e n c e c o n t r a d i c t i n g t h i s a s s e r t i o n i n t h e r e c o r d .

The D i s t r i c t C o u r t found t h a t t h e a c t i o n s o f t h e

d i r e c t o r s and H a l l were t o be measured by t h e " b u s i n e s s

judgment r u l e . " W e a p p r o v e t h e s t a t e m e n t o f t h i s r u l e

c o n t a i n e d i n N u r s i n g Home B u i l d i n g Corp. v . DeHart ( 1 9 7 5 ) ,

i 3 Wash.App. 489, 5 3 5 P.2d 137 , 143-144, a s f o l l o w s :

" . . . The ' b u s i n e s s j u d g m e n t r u l e ' immunizes management f rom l i a b i l i t y i n a c o r p o r a t e t r a n s a c t i o n u n d e r t a k e n w i t h i n b o t h t h e power o f t h e c o r p o r a t i o n and t h e a u t h o r i t y o f management where t h e r e i s a r e a s o n a b l e b a s i s t o i n d i c a t e t h a t t h e

t r a n s a c t i o n was made i n good f a i t h . An e x c e l l e n t s t a t e m e n t o f t h e ' b u s i n e s s judgment r u l e ' i s found i n W . F l e t c h e r 51039 a t p a g e s 621-25:

" ' I t is t o o w e l l s e t t l e d t o a d m i t of con- t r o v e r s y t h a t o r d i n a r i l y n e i t h e r t h e d i r e c t o r s no r t h e o t h e r o f f i c e r s o f a c o r p o r a t i o n a r e l i a b l e f o r mere m i s t a k e o r e r r o r s of judgment , e i t h e r o f law o r f a c t . I n o t h e r words, d i r e c t o r s of a commerc ia l c o r p o r a t i o n may t a k e c n a n c e s , t h e same k i n d of c h a n c e s t h a t a man would t a k e i n h i s own b u s i n e s s . Because t h e y a r e g i v e n t h i s wide l a t i t u d e , t h e law w i i l n o t h o l d d i r e c t o r s l i a b l e f o r h o n e s t e r r o r s , f o r m i s t a k e s of judgment , when t h e y a c t w i t h o u t c o r r u p t m o t i v e and i n good f a i t h , t h a t i s , f o r m i s t a k e s which may p r o p e r l y be c l a s s i f i e d under t h e head of h o n e s t m i s t a k e s . And t h a t is t r u e zven though t h e e r r o r s may be s o g r o s s t h a t t h e y may d e m o n s t r a t e t h e u n f i t n e s s o f t h e d i r e c t o r s t o manage t h e c o r p o r a t e a f f a i r s . T h i s r u l e is commonly r e f e r r e d t o a s t h e " b u s i n e s s judgment r u l e . " '

It (E 'oo tno te s o m i t t e d . ) S e e a l s o H . Henn, Law o f C o r p o r a t i o n s S242 ( 1 9 7 0 ) . "

The a c t i o n s of t h e boa rd o f d i r e c t o r s i n t h i s c a s e a r e

t o be rneasureu by t h e b u s i n e s s judgment r u l e . Whi le i t is

c l e a r l y a r g u a b l e t h a t t h e t w o - t i e r b u d g e t might n o t have

been t i l e p e r f e c t s o l u t i o n t o t h e f i n a n c i a l n e e d s of t h e

c o r p o r a t i o n , w e f i n d ample e v i d e n c e i n t h e r e c o r d , a s

p o i n t e d o u t by t h e D i s t r i c t C o u r t , d e m o n s t r a t i n g t h a t t h i s

f i n a n c i a l a n a l y s i s c o n t a i n e d i n t h e t w o - t i e r b u d g e t was a

r e a s o n a b l e t n e o r y f o r t h e d i r e c t o r s and o f f i c e r s t o a d o p t .

The r e c o r d d o e s n o t show any c o r r u p t o r f r a u d u l e n t m o t i v e s .

O f p a r t i c u l a r s i g n i f i c a n c e i s t h e a b s e n c e i n t h e r e c o r d o f

f a c t s showing a n a c t u a l m i s t a k e of judgment i n t h e a d o p t i o n

o r t h e t w o - t i e r b u d g e t and t h e i s s u e of t h e "Dl' s t o c k a s

w e l l a s t h e "C" s t o c k . Fo l lowing t h e s u b s c r i p t i o n t o t h e

"U" i s s u e , f o r t h e f i r s t t i m e S k i Y e l l o w s t o n e was i n a n ade-

q u a t e f i n a n c i a l p o s t u r e t o meet c u r r e n t o p e r a t i n g e x p e n s e s

and long-range development expenses. It is lnteresclng to

note that the plaintiffs, who concluded that it was bad

business judgment on their own part to invest additional

funds in this corporation, now contend that the "Dlt issue

was unnecessary and was oniy a device to obtain control ot

the corporation. As mentioned previously, the plaintiffs

haa the option to purchase the stock in tne same manner and

at the same price and terms as the defendants, and in

particular John Hall. As determined by the District Court,

the record contains substantial evidence to support the

business need for tne "D" issue.

We approve the "DM issue following the " C " issue under

the buslness judgment rule, as tne plaintiffs have failed to

prove any basis tor setting the same aside.

Plaintitfs also argue that the reduction in price of

the "0" issue from $.05 to $.01 was an improper sale of the

stock at less than its value. The record demonstrates that

all of the shareholders had the opportunity to purchase the

"DM issue at $.US but failed to do so. The directors then

reduced the prlce from $.05 to $.01 per share, again giving

tile opportunity to ail shareholders to purchase the "D"

issue at S.01 per share. Only John Hall and a few other

stockholaers purchased. The plaintiffs did not choose to

do so. Complete information was furnished under the

prosp2ctus to ail of the stockholciers so that no one was

misled. Plaintiffs argue that the issue should have been

held open at the $.05 price for sixty days as required under

the founders' agreement. In the prospectus, all of the

stockholders were advised of the tnirteen-day period within

which a decision was required on the $.05 price, and were

also advisea that there was a sixty-day provision which

~rlight give stockholders an opportunity to purchase at the

$.05 p r l c e f o r a l o n g e r p e r i o d . Having found t h a t no o n e

d e s i r e d t o p u r c h a s e a t $ .05 , t h e d i r e c t o r s r e d u c e d t h e

o L f e r l n g p r i c e t o $ . 0 1 an6 g a v e t h e t u l l s i x t y - d a y p e r i o d

w i t h i n which t o p u r c h a s e a t s . 01 . Aga in , i t i s t o b e n o t e d

t n a t t h e p l a i n t i f f s d i d n o t a t t e m p t t o p u r c h a s e o r o f f e r t o

p u r c h a s e a t t h e $ .01 p r i c e . F u r t h e r , t h e r e was s u b s t a n t i a l

e v i d e n c e t o s u p p o r t t h e c o n c l u s i o n o f t h e D i s t r i c t C o u r t

t h a t t h e p r i c e o f $ . 0 1 was t h e f a i r m a r k e t v a l u e o f t h e

s t o c k . The claim a s t o t h e p u r c h a s e p r i c e o f t h e "D" i s s u e

is w i t h o u t f o u n d a t i o n .

We t h e r e f o r e c o n c l u d e t h a t t h e r e was a l e g i t i m a t e

b u s i n e s s p u r p o s e i n t h e a d o p t i o n by t h e b o a r d o f d i r e c t o r s

o f t h e t w o - t i e r b u d g e t , and i n t h e making o f t h e "D" i s s u e ,

as w e l l a s t h e r e d u c t i o n i n t h e s u b s c r i p t i o n p r i c e f o r t h e

"D" s h a r e s f rom $.O5 t o V.01. Such a c t i o n s a r e a p p r o v e d

unde r t h e b u s i n e s s judgment r u l e .

The D i s t r i c t C o u r t p r e p a r e d e x t e n s i v e and d e t a i l e d

f i n d i n g s of f a c t , s u p p o r t e d by a memorandum a n a l y z i n g t h e

f a c t s and r u l e s o f l aw. We w i l l n o t s u b s t i t u t e o u r judgment

f o r t h a t o f t h e t r i e r o f f a c t . A s s t a t e d i n J e n s e n v .

J e n s e n ( 1 9 b l ) , Non t . , 6 2 9 P.2d 7 6 5 , 768 , 38

" T h i s C o u r t w i l l n o t s u b s t i t u t e i t s judg- ment f o r t h a t o f t h e t r i e r o f f a c t . We w i l l c o n s i d e r o n l y whe tne r s u b s t a n t i a l c r e d i b l e e v i d e n c e s u p p o r t s t h e f i n d i n g s and c o n c l u s i o n s . F i n d i n g s w i l l n o t b e o v e r t u r n e d u n l e s s t h e r e i s a c l e a r p r e p o n d e r a n c e o f e v i d e n c e a g a i n s t them, r e c o g n i z i n g t h a t e v i d e n c e may b e weak o r c o n f l i c t i n g , y e t s t i l l s u p p o r t t h e f i n d i n g s . P h e n n i c i e v . P h e n n i c i e ( 1 9 7 9 ) , Mont. , 6 0 4 P.2d 787 , 790 , 36 S t .Rep . 2 3 7 8 , 2381. The judgment o f t h e t r i a l c o u r t is presumed c o r r e c t , and t n l s C o u r t w i l l d raw e v e r y l e g i t i m a t e i n f e r e n c e t o s u p p o r t t h a t p r e s u m p t i o n . M a r t a v . S m i t h ( 1 9 6 l ) , Mont. , 622 P.2d 1011 , 1 0 1 5 , 38 St .Rep . 28, 32 ; Madison Fork Ranch v. L & B Lodge, E t c . ( 1 9 8 0 ) , Mont. , 615 P.2d 900, 905-906, 37 S t . R e p . 1 4 6 8 , 1473 ."

On t h e key q u e s t i o n s o f t h e " C " and "D" i s s u e s , t h e r e

is substantial credible evidence supporting the findings and

conclusions of the court. We therefore affirm such conclu-

sions on that basis as well.

Plaintiffs also contend that John Hall breached his

fiduciary duties to stockholders when he failed to pay the

balance of the purchase price on the series "C" issue in the

time required under the prospectus. We find that this

failure to pay did deprive the corporation of the purchase

price of the stock, as a result of which the corporation

suffered a loss equivalent to the income which it would have

earned if Hall had paid for the "C" stock on the same basis

as that offered to all shareholders. We therefore hold that

the District Court shall determine the interest to be paid

by John Hall to the corporation, which shall run from the

due date for the payment of the balance of the purchase

price on the " C " issue as contained in the offering to the

date on which it was actually paid.

I1

After acquiring control of the corporation, did John

Hall engage in a course of conduct which was oppressive to

minority stockholders and which justifies liquidation of the

corporation? Plaintiffs contend that there is oppression

sufficient to qualify for liquidation of the corporation

pursuant to section 35-1-921, MCA, which provides in

pertinent part:

"Power of court to liauidate assets and business of corporation -- venue. (1 ) The district courts shall have full power - to liquidate the assets and business of a corporation:

"(a) in an action by a shareholder when it is established that:

"( i i ) t h e ac t s o f t h e d i r e c t o r s o r t h o s e i n c o n t r o l o f t h e c o r p o r a t i o n a r e i l l e - g a l , o p p r e s s i v e , o r f r a u d u l e n t . . ."

W e r e f e r t o S k i e r k a v . S k i e r k a B r o s . , I n c . ( 1 9 8 1 ) ,

Mont . , 629 P.2d 214 , 38 St .Rep . 754, and Fox v. 7L

Bar Ranch Co. ( 1 9 8 2 ) , Mont. , 645 P.2d 929 , 39

S t .Rep . 862. T h e s e c a s e s d i s c u s s a t l e n g t h t h e r a t i o n a l e

b e h i n d t h e l i q u i d a t i o n of a c o r p o r a t i o n b e c a u s e o f i l l e g a l ,

o p p r e s s i v e o r f r a u d u l e n t a c t s . I n t h e S k i e r k a c a s e , w e

q u o t e d f rom t h e case o f F i x v . F i x M a t e r i a l Co., I n c .

(Mo.App. 1 9 7 6 ) , 538 S.W.2d 351 , i n which t h e c o u r t makes t h e

f o l l o w i n g o b s e r v a t i o n s p a r t i c u l a r l y a p p l i c a b l e h e r e :

" 'The I l l i n o i s c o u r t s made i t c l e a r , when c o n s t r u i n g t h e I l l i n o i s S t a t u t e ( t h e Model f o r S 3 5 1 . 4 8 5 [ t h e M i s s o u r i s t a t u t e ] ) , t h a t " o p p r e s s i o n " i s , i n and o f i t s e l f , a n i n d e p e n d e n t g r o u n d f o r r e l i e f n o t r e q u i r i n g a showing o f f r a u d , i l l e g a l i t y , m i s m a n a g e m e n t , w a s t i n g o f a s s e t s , n o r d e a d l o c k , t h o u g h t h e s e f a c t o r s a re f r e q u e n t l y p r e s e n t . . . " ' I t h a s o f t e n been s t a t e d t h a t o p p r e s - s i o n s u g g e s t s . . . " a v i s i b l e d e p a r t u r e f rom t h e s t a n d a r d s of f a i r d e a l i n g , and a v i o l a t i o n o f f a i r p l a y on which e v e r y s h a r e h o l d e r who e n t r u s t s h i s money t o a company is e n t i t l e d t o r e l y . " " . . . Such d e f i n i t i o n s a r e s u g g e s t e d p e r i m e t e r s o f t h e b r o a d t e r m r a t h e r t h a n n a r r o w d e f i n i t i o n s which would t e n d t o r o b t h e term o f i t s u s e f u l f l e x i b i l i t y . A s w e r e a d t h e s t a t u t e , it i s i n t e n d e d t h e c o u r t s w i l l p r o c e e d on a ca se -by -ca se b a s i s . " I " ~ k i e r k a , 629 P.2d a t 221, 38 S t .Rep . a t 764.

I t s h o u l d b e n o t e d t h a t b o t h S k i e r k a and - Fox i n v o l v e

c l o s e l y - h e l d f a m i l y c o r p o r a t i o n s . I n c o n t r a s t , a s p o i n t e d

o u t by t h e D i s t r i c t C o u r t , t h e p r e s e n t c a s e i n v o l v e s app rox -

i m a t e l y t w e n t y bus ine s smen w i t h e x t e n s i v e f i n a n c i a l and

i n v e s t m e n t backg rounds .

The p l a i n t i f f s a r g u e t h a t , a f t e r g a i n i n g c o n t r o l i n

1976 , John H a l l r a n a one-man show w i t h l i m i t e d m e e t i n g s of

t h e e x e c u t i v e commi t t ee and b o a r d of d i r e c t o r s . They a l s o

a r g u e t h a t t h e f i r i n g o f G e i e r i n d i c a t e d s u c h t y p e of

c o n d u c t , i g n o r i n g t h e f i n d i n g by t h e D i s t r i c t C o u r t t h a t

G e i e r had i m p r o p e r l y t r a n s f e r r e d company f u n d s t o a p r i v a t e

a c c o u n t o f h i s own i n o r d e r t o c o v e r h i s r e t i r e m e n t f u n d i n

a n t i c i p a t i o n of t h e c o l l a p s e of t h e c o r p o r a t i o n . R e f e r e n c e

is a l s o made t o t h e p u r c h a s e of t h e p r o p e r t y t o which Nay lo r

c l a i m e d t i t l e . T h a t is t h e s u b j e c t o f t h e companion c a s e of

Naylor v . H a l l , p r e v i o u s l y c i t e d , and is n o t a p p r o p r i a t e

h e r e .

The D i s t r i c t C o u r t a n a l y z e d t h e s e f a c t s i n d e t a i l , and

s e t f o r t h examples i n a number of p a r a g r a p h s i n i t s f i n d -

i n g s , showing how t h e c o n d u c t o f t h e d e f e n d a n t s was p r o p e r

and f o r t h e b e n e f i t of t h e c o r p o r a t i o n . U l t i m a t e l y , t h e

D i s t r i c t C o u r t conc luded :

"The d e f e n d a n t s a c t e d i n good f a i t h f o r t h e b e n e f i t o f t h e c o r p o r a t i o n , S k i Y e l l o w s t o n e , I n c .

"The d e f e n d a n t s commit ted no f r a u d u l e n t , o p p r e s s i v e , o r i l l e g a l a c t s i n t h e c o u r s e o f t h e i r management and membership of and w i t h S k i Y e l l o w s t o n e , I n c . "

A s p r e v i o u s l y s t a t e d i n J e n s o n , w e w i l l c o n s i d e r o n l y

whe the r s u b s t a n t i a l c r e d i b l e e v i d e n c e s u p p o r t s t h e f i n d i n g s

and c o n c l u s i o n s o f t h e c o u r t and t h e f i n d i n g s w i l l n o t be

o v e r t u r n e d u n l e s s t h e r e i s a c l e a r p r e p o n d e r a n c e o f e v i d e n c e

a g a i n s t them. We f i n d no b a s i s i n f a c t f o r a n o v e r t u r n i n g

of t h e f i n d i n g s and c o n c l u s i o n s .

1x1

A f t e r a c q u i r i n g c o n t r o l o f t h e c o r p o r a t i o n , was J o h n

H a l l g u i l t y of f r a u d and s e l f - d e a l i n g ?

T h i s c o n t e n t i o n on t h e p a r t o f t h e p l a i n t i f f s a g a i n is

based on s e c t i o n 35-1-921, MCA, which is above q u o t e d . The

b a s i c c o n t r o l l i n g r u l e o f law is a l s o q u o t e d i n S k i e r k a ,

above.

P l a i n t i f f s c o n t e n d t h a t by t h e pos tponement o f t h e

making of payments on t h e "C" i s s u e , H a l l engaged i n i nap -

p r o p r i a t e s e l f - d e a l l n g . T h a t i s s u e h a s been r e s o l v e d by t h e

i n t e r e s t r e q u i r e m e n t p r e v i o u s l y s e t f o r t h i n t h i s o p i n i o n .

I n a s i m i l a r manner , t h e c o n t e n t i o n is made t h a t t h e

improper p u r c h a s e of t h e Naylor l o t was s i g n i f i c a n t , b u t

t h a t h a s a l s o been r e s o l v e d i n t h e c a s e o f Naylor v. H a l l ,

above. P l a i n t i f f s a d d i t i o n a l l y r e f e r t o a number of r e l a -

t i v e l y i n s i g n i f i c a n t a c t i o n s by H a l l a s a b a s i s f o r s e l f -

d e a l i n g . These c o n t e n t i o n s a r e answered by t h e f i n d i n g s and

c o n c l u s i o n s of t h e D i s t r i c t C o u r t d e s c r i b e d , w i t h which t h e

p l a i n t i f f s do n o t t a k e i s s u e .

P l a i n t i f f s con tend t h a t t h e i s s u a n c e of c o r p o r a t e

c r e d i t s f o r s e r v i c e s was imprope r . The D i s t r i c t C o u r t found

t h a t t h i s a c t i o n was n o t imprope r , and was s i m i l a r t o t h e

a c r i o n s on t h e p a r t o f some o f t h e p l a i n t i f f s when t h e y were

i n c o n t r o l .

Again , w e f i n d t h a t t h e r e is s u b s t a n t i a l c r e d i b i e

e v i d e n c e s u p p o r t i n g t h e f i n d i n g s and c o n c l u s i o n s o f t h e

D i s t r i c t C o u r t t h a t t h e r e was n e i t h e r f r a u d no r s e l f - d e a l i n g

on t h e p a r t of John H a l l .

IV

Was t h e amendment of t h e c o r p o r a t i o n ' s A r t i c l e s o f

I n c o r p o r a t i o n , which a u t h o r i z e d s t o c k f o r t h e "C" and " D "

i s s u e s v a l i d under Montana law? P l a i n t i f f s a r g u e t h a t t h e s e

issues must be rolled back because of the failure to give

the statutory notice of the stockholders1 meeting at which

the stockholders approved the amendment of articles to

increase the authorized shares. We hold that the plaintiffs

are equitably estopped from asserting the invalidity of the

amendment.

Section 35-1-207, MCA, as then in effect, provided

that thirty days written notice of a shareholders1 meeting

must be given if the meeting will consider a vote on a

proposed amendment of articles to increase shares. Here,

notice of shareholders1 meeting to be held on July 12, 1976,

was given by a letter dated July 1, 1976, which indicates

substantially less than the statutory thirty days. The date

of the meeting subsequently was changed to July 16, 1976, by

an undated subsequent notice. That notice announced that

the purpose of the meeting was to amend the Articles of

Incorporation in order to draw up the par value and to

increase the number of authorized shares from 6,000,000

shares to a number to be determined at the meeting. The

significance of the meeting was stressed. The effectiveness

of the notice is demonstrated by the vote cast at the

meeting where 2,513,000 shares were represented out of a

total of 2,614,200 shares outstanding, making over 96

percent of the voting stock present in person or by proxy.

The vote at the meeting was unanimous in adopting the

recommendation of the directors to amend the Articles to

increase the number of shares to 60,000,000 shares and to

drop the par value of the shares to $.01. In reliance upon

the validity of the amendment, John Hall alone subscribed to

a substantial number of Series "C" stock, a subscription

which assured the success of the issue. As indicated by the

District Court, this saved the corporation from failure. In

addition, John Hall alone subscribed to a substantial por-

tion of the "D" issue after the failure of other share-

holders to join in that subscription. Again John Hall's

subscription saved the issue from failure. That subscription

was clearly a high-risk adventure which funded the second

tier of the two-tier budget and assured the future financial

viability of the corporation. Wow, years later, when the

issuance of the Forest Service permit seems assured, and the

success of the corporation seems likely, the courts are

asked to invalidate the amendment of the corporation

Artlcles and roll back the stock issues. Obviously this is

directed almost exclusively at John Hall. The plaintiffs

making this request include several of the directors who

approved the amendment and particularly Mr. Naylor, who was

present and abstained from voting, as well as a large number

ok the minority shareholders who actually voted their ap-

proval of the amendment. All of the plaintiff shareholders

have benefited from the purchase by John Hall of the "C" and

"D" stock.

The present action is a stockholders' derivative suit

which is an invention of the courts of equity and is recog-

nlzable only in equity. Noble v. Farmers Union Trading Co.

(1950)r 123 Iqont. 518, 529, 216 P.2d 925, 930. This Court

previously has recognized the flexibility required of courts

of equity in resolving disputes. See, Skierka and Fox,

cited above. We hold that it would be inequitable to allow

the plaintiffs to assert the invalidity of the amendment of

the Articles because of their involvement and acceptance of

benefits.

v

Wnat relief is appropriate under all the circum-

stances? Plaintiffs urge us not to view this suit as merely

the outcome of a corporate power struggle between Naylor and

Hall. The record demonstrates that the root of the conflict

was sucn a power struggle, and that the effect of Wall's

actions was less disastrous than had he failed. The record

discloses that Hall's actions were taken primarily to

preserve and promote Ski Yellowstone, regardless of the very

substantial risk to himself. He converted interest-bearing

debentures into stock, reducing the financial obligation of

the financially-strained corporation, and assumed the risk

that the $.20 per share value of the stock would decrease

(as it did), and, incidentally, gained more voting power.

He twice subscribed to sufficient stock in the company to

insure the success of a subscription which was otherwise

certain to fail. He legitimately gained ownership of the

vast majority of Ski Yellowstone stock.

Naylor, on the other hand, sought to maintain control

of Ski Yellowstone by means which placed himself and Ski

Roundtop in the most secure financial situation, but

threatened the viability of Ski Yellowstone. He originally

indicated his willingness to invest $200,000, assuring

prospective investors that their $1.00 per share would

shortly be worth $10.00, but then only invested $50,000

hiinself. After his arguments with Hall, he withdrew his

support for the " C " Series and persuaded many of his asso-

ciates to do the same despite the company's dire need for

cash. He did not risk converting his own debentures to

stock, and invested no more capital in the corporation after

t h e summer of 1976 . I n d e e d , v e r y few o f t h e m i n o r i t y s t o c k -

h o l d e r s c h o s e t o r i s k f u r t h e r i n v e s t m e n t s i n S k i Y e l l o w s t o n e

a f t e r t h e "0" d e b e n t u r e s . They v e n t u r e d a t o t a l o f $10,480

i n t h e "C" o f f e r i n g and less t h a n t h a t i n t h e 'ID" o f f e r i n g .

P l a i n t i f f s ' s t a t e m e n t t h a t f o r 37 p e r c e n t o f t h e i n v e s t m e n t

c a p i t a l , John H a l l o b t a i n e d o v e r 9 4 p e r c e n t of t h e s t o c k ,

s o u n d s much l e s s s i g n i f i c a n t when w e r e a l i z e t h a t w i t h o u t

t h e a l m o s t $900,000 which H a l l i n v e s t e d , t h e company would

have f o u n d e r e d .

The b u l k o f t h e e v i d e n c e s u p p o r t s t h e c o n c l u s i o n t h a t

t h e s h a r e h o l d e r s w i thd rew t h e i r s u p p o r t f rom S k i Y e l l o w s t o n e

p r i m a r i l y b e c a u s e o f t h e i r u n w i l l i n g n e s s t o e x t e n d them-

s e l v e s f u r t h e r i n a r i s k y i n v e s t m e n t . W e h a v e found t h e r e

was s u f f i c i e n t e v i d e n c e t o s u p p o r t t h e t r i a l c o u r t ' s c o n c l u -

s i o n t h a t t h e "D" i s s u e p r o v i d e d f u n d i n g f o r t h e s econd t i e r

o f t h e b u d g e t and t h a t t h e r e d u c t i o n i n t h e p r i c e o f t h e "D"

s h a r e s f rom $.05 t o $ .01 was n o t u n r e a s o n a b l e o r imprope r .

We a g r e e w i t h t h e D i s t r i c t C o u r t ' s c o n c l u s i o n t h a t t h e

bot tom l i n e is r e a l l y t h a t p l a i n t i f f s c h o s e n o t t o p a r t i c i -

p a t e and n o t t o i n v e s t f u r t h e r i n t h e S k i Y e l l o w s t o n e

v e n t u r e , and t h e r e m e d i e s s o u g h t a g a i n s t t h e d e f e n d a n t s a r e

n o t w a r r a n t e d . We c o n c l u d e t h a t t h e r e c o r d a d e q u a t e l y

s u p p o r t s t h e t r i a l c o u r t ' s f i n d i n g s t h a t t h e d e f e n d a n t s '

a c t i o n s , w h i l e n o t t o t a l l y b l a m e l e s s , were n e i t h e r f r a u d u -

l e n t , o p p r e s s i v e , nor i l l e g a l , b u t were t a k e n i n good f a i t h

f o r t h e b e n e f i t o f t h e c o r p o r a t i o n .

T h e r e f o r e , e x c e p t f o r o u r f i n d i n g t h a t John H a l l is

l i a b l e t o S k i Y e l l o w s t o n e f o r i n t e r e s t a r i s i n g f rom h i s

d e l a y e d payments on t h e " C " S e r i e s s u b s c r i p t i o n , w e a f f i r m

t h e D i s t r i c t C o u r t i n a l l r e s p e c t s . W e remand t h e c a u s e t o

t h e D i s t r i c t C o u r t f o r a d e t e r m i n a t i o n o f t h e amount of t h e

i n t e r e s t due from Mr. H a l l .

/

We c o n c u r :

~&we_S t $&$&,,& Chie f ~ u s t i c e

D i s t r i c t Judg t t i n g i n p l a c e o f Mr. ce Gene B. Daly

Mr. Justice Frank B. Morrison, Jr., dissenting:

I respectfully dissent:

Both the District Court and the majority of this Court

defeated the claim of minority shareholders because the

actions of John Hall salvaged Ski Yellowstone from the

throes of financial ruin. Whether John Hall saved the

"corporate bacon" is not the issue in this case.

In determining whether the "D" stock issue was proper,

the majority rely upon the "business judgment" rule. The

"business judgment" rule is not applicable to this case.

However, this Court's reliance upon the rule indicates that

the majority simply did not understand the essence of plaintiff's

constructive fraud allegation.

The "business judgment" rule is employed to immunize

corporate officers and directors where they act in good

faith, but, as a matter of hindsight, it can be determined

that they did not take the course of action which hindsight

shows to have been the best selection. The rule simply has

no application in this case. Here we must determine whether

the desired corporate objective of obtaining much needed

revenue could have been achieved without "watering" the

stock of minority shareholders. If the revenue could have

been raised without diluting their interests, then the means

Hall employed constituted a "constructive fraud" within the

meaning of Montana law.

John Hall decided to pay for his subscribed stock under

the "C" issue through a deferred payment plan instead of

paying cash as he was supposed to do under the original

offering. This was justified by reliance on a two-tier

budget. Hall claimed it was unnecessary to pay cash for the

stock as there were not sufficient immediate cash needs of

the corporation to require a cash subscription. Then,

without first paying for the "C" issue, Hall caused a "D"

issue. As I hereafter point out, this was a constructive

fraud.

To compound the constructive fraud committed in the

issuance of the "D" stock, Hall and his board of directors

further diluted the interest of the minority shareholders by

replacing the original five cent "D" issue with penny stock.

Of course, this maneuver did not enable the corporation to

raise more money, it simply gave Hall more shares of stock.

The corporate interest was not being further enhanced by

Hall's maneuvering; rather, the minority stockholders'

interests were being further "watered." This again constituted

a constructive fraud.

Corporate directors, in issuing additional shares of

stock, owe a fiduciary duty to minority stockholders. See

Condec Corporation v. Lunkenheimer Company (Del. 1967), 230

Atl.2d 769. Where a fiduciary relationship adheres, the law

of "constructive fraud" controls. Constructive fraud involves

"any breach of duty which, without an actually fraudulent

intent, gains an advantage to the person in fault or anyone

claiming under him by misleading another to his prejudice

. . ." Section 28-2-406(1), MCA. Where a fiduciary duty is

involved, the trustee is bound to act in the highest good

faith. Section 72-20-201, MCA. If a transaction is challenged,

the burden is upon a corporate officer or a corporate director

to prove that the questioned actions were fair and in good

faith. First State Bank of Hilger v. Lang (1918), 55 Mont.

146, 174 Pac. 597.

It is clear from the evidence in this record that the

financing technology employed by Hall benefited Hall at the

expense of minority shareholders. Of course, it is no

defense to argue that Hall benefited the corporation because

the same corporate funds could have been realized without

unnecessarily diluting the interests of minority shareholders.

œ he majority seems to grasp at defendants' argument that

minority shareholders were offered the same price Hall paid

for all stock issues. This rationale makes very bad corporate

law and greatly erodes the protection previously afforded

those benefiting from a fiduciary relationship. Under the

law articulated in the majority opinion, minority shareholders

can now be coerced into purchasing additional shares in a

corporation in which they will have no voice. Further,

unless the minority shareholders are willing to participate

under such adverse circumstances, they will be denied standing

to claim a breach of the fiduciary duty owed. If they have

no money to invest in additional shares, they will be totally

helpless.

There is an old adage that "bad facts make bad law.'' I

can think of no better example than this case. The majority

is rewarding John Hall for rescuing Ski Yellowstone when it

was at the verge of bankruptcy. I certainly understand the

equity in that position. However, in doing so, the majority

has emasculated the law of constructive fraud.

In enacting the laws on constructive fraud, the legislature

sought to prevent the weak from becoming prey of the strong.

The statutory law of this State which sought to advance the

legislature's laudable objective gained added significance

with its application in Skierka v. Skierka Brothers, Inc.

Mont. (1981) , 629 P.2d 214, 38 St.Rep. 754. I can only conclude from the majority decision in this case, that

the law of constructive fraud as it exists in Montana will

be applied on an ad hoc basis.

I wish to point out to those who attempt to rely upon

this case in the future, that it is nothing but an "aberration"

in the law. Misplaced reliance on the "business judgment"

rule and refusal to apply the law of constructive fraud

resulted from the facts which were here at issue. John Hall

saved this corporation from bankruptcy. All of the investors

in this case were highly-experienced business persons. Hall

carefully made all investment opportunities available to

those with whom he occupied a position of trust. These

factors have permitted him to prevail here, notwithstanding

clear legal principles which should mandate plaintiff's

success.

I would roll back the "D" issue as a matter of law

because under the undisputed evidence in the record, the

issue caused a constructive fraud on minority shareholders.

Mr. Justice John C. Sheehy, dissenting:

I join in the dissent of Mr. Justice Morrison.