Farber v. Servan Land Company, Inc.
662 F.2d 371 (5th Cir. 1981)
Serianni and Servin were the
majority shareholders and principle officers of a corporation called
Servan. Servan owned a golf course and country club.
A parcel of land next door to
Servan's golf course came on the market, and at the shareholders' meeting
the directors of Servan considered buying it to make another golf course,
but took no action
Later, Serianni and Servin,
acting as individuals and not representing Servan bought the land on
Serianni and Servin later
told the directors about this, and they had a vote ratifying the action
as being ok.
Three years later, Servan
decided to liquidate, so they entered an agreement with Serianni and
Servin to sell both parcels of land to a third-party.
Farber, a Servan shareholder,
brought a derivative lawsuit
against Serianni and Servin for breach of the duty of loyalty.
Farber argued that buying
the parcel of land constituted the taking of a corporate opportunity.
The Trial Court found for
Serianni and Servin. Farber appealed.
The Trial Court found that
Servan benefited because selling the two parcels of land together was
worth more than selling them separately.
The Court had the land
appraised and found that the division of profits between Servan and
Serianni/Servin when the land was sold was actually skewed in Servan's
favor, and that Serianni and Servin were giving Servan more than their
land was worth.
The Appellate Court reversed.
The Appellate Court found
there were four things to consider when deciding if there was a taking of
a corporate opportunity:
There must be the existence
of a corporate opportunity.
The Court found that since
the directors had discussed buying the land at several board meetings,
and since the land would be useful for corporate purposes (by expanding
the country club) there was a corporate opportunity.
Whether the shareholders
declined the opportunity
Serianni and Servin argued
that the directors did not commit to buying the land at the annual
meeting. However, the Court found that wasn't the same as declining
the opportunity. It was likely that they were just waiting for more
information or for Serianni and Servin to recommend the purchase.
What should have happened
was that Serianni and Servin should have investigated the opportunity
and then put the issue up for a full vote at the next meeting.
Ratification of the
The Court found that the
ratification was meaningless because Serianni and Servin owned 4/7ths
of the stock, and so they just ratified their own inappropriate acts.
The effect of benefit to
The Court noted that
Servan's land was worth more at the end because it was sold with
Serianni and Servin's. However, if Servan had bought the land, they
would have gotten all the
profits. Serianni and Servin made profits that would have otherwise
gone to Servan because they bought the land themselves instead of
letting Servan buy it.
The Court found that based
on the four factors, Serianni and Servin had breached their duty of
loyalty by taking a corporate