                                                                                         December 30 2011
                                           OP 10-0493

               IN THE SUPREME COURT OF THE STATE OF MONTANA
                                           2011 MT 324



H. ROBERT WARREN; JOAN CROCKER,

              Plaintiffs and Appellants,

         v.

CAMPBELL FARMING CORPORATION;
STEPHANIE GATELY; ROBERT GATELY,

              Defendants and Appellees.


ORIGINAL PROCEEDING:                Certified Question from the Tenth Circuit Court of Appeals
                                    Honorable Wade Brorby, Senior Circuit Judge


COUNSEL OF RECORD:

               For Appellants:

                      Mary E. Duncan (argued), Laurence R. Martin; Felt, Martin, Frazier &
                      Weldon, P.C.; Billings, Montana

               For Appellees:

                      Clinton W. Marrs (argued); Tax Estate & Business Law, LTD;
                      Albuquerque, New Mexico

                      Patrick D. Dougherty, Worden Thane P.C.; Missoula, Montana



                                                                 Argued: September 16, 2011
                                                               Submitted: September 22, 2011
                                                                Decided: December 30, 2011


Filed:

                      __________________________________________
                                        Clerk
Justice Jim Rice delivered the Opinion of the Court.



¶1    On October 7, 2010, the United States Court of Appeals for the Tenth Circuit

certified to this Court questions of Montana law related to this matter.      Warren v.

Campbell Farming Corp., No. 09-2169, 400 Fed. Appx. 312, 2010 U.S. App. LEXIS

24152 (10th Cir. Oct. 7, 2010) (unpublished). The Tenth Circuit Court’s order set forth

three certified questions, which it acknowledged could be reformulated by this Court, the

factual and procedural background, a summary of the District Court’s decision, a

summary of the parties’ arguments, and a statement of reasons for the certification

request. The Tenth Circuit Court also submitted a copy of the District Court’s decision

and copies of the documents filed in that Court.

¶2    Pursuant to M. R. App. P. 15, we accepted the certified questions based upon the

factual and procedural background provided by the Tenth Circuit Court and, following

briefing by the parties, oral arguments were heard on September 16, 2011. We address

the Tenth Circuit Court’s questions as posed:

      (1)      Can the safe harbor provision of § 35-1-462(2)(c), MCA, be
            extended to cover a conflict-of-interest transaction involving a bonus
            that lacks consideration and would be void under Montana common
            law?

      (2)       Does the business judgment rule apply to situations involving a
            director’s conflict-of-interest transaction?

      (3)      Does the holding in Daniels v. Thomas, Dean & Hoskins, Inc., [246
            Mont. 125, 136-39], 804 P.2d 359, 365-67 (Mont. 1990), which appears
            to adopt an alternative test for evaluating whether there has been a

                                         2
          breach of fiduciary duties by a controlling shareholder in a closely-held
          corporation, apply to a transaction that involves a conflict of interest?

¶3     Defendant Campbell Farming Corporation (Campbell or the company) is a

closely-held Montana corporation with a principal place of business in New Mexico.

During the relevant period, Campbell’s shares were controlled by three shareholders:

Defendant Stephanie Gately (Stephanie) controlled 51% of the shares, and Plaintiffs

H. Robert Warren (Warren) and Joan Crocker (Crocker) controlled the remaining 49%.

The company’s president was Defendant Robert Gately (Robert), who is Stephanie’s son.

Stephanie, Robert and Warren were also the three directors of the company.

¶4     The disputed transaction was a proposal by Stephanie, made in her capacity as a

director, to award a bonus to Robert in the form of company stock and cash valued at

$1.2 million “to compensate him for past service to the company and to prevent him from

resigning.” Warren, 400 Fed. Appx. at 312, 2010 U.S. App. LEXIS 24152 at ** 2-3.

Robert was not required to sign an agreement or fulfill any conditions to receive the

bonus. Warren requested that Stephanie’s proposal be voted on by the shareholders.

Warren and Crocker voted their shares against the bonus and Stephanie voted her 51%

interest in favor, resulting in approval of the bonus.

¶5     Warren and Crocker filed a derivative and direct action against the company and

the Gatelys in New Mexico federal district court seeking to void the bonus, asserting

breach of statutory and fiduciary duties and waste of corporate assets, and making

common law claims.         Warren and Crocker sought restitution from the Gatelys,


                                           3
consequential or incidental damages suffered by the company, punitive damages from the

Gatelys, equitable or injunctive relief, and attorney fees. A bench trial was conducted.

¶6     The District Court rejected Defendants’ arguments that the bonus was permissibly

paid under § 35-1-115(11), MCA, which permits directors to fix their own compensation,

and § 35-1-115(12), MCA, which authorizes corporations to establish “share bonus

plans” and other similar plans, concluding these sections were inapplicable. Noting that

“R. Gately was not required to sign an employment contract in order to receive the bonus

and was free to leave the Company at any time,” the District Court ruled that, under

Montana common law, the bonus lacked consideration because it was awarded for past

services, but analyzed it as a director’s conflicting interest transaction under § 35-1-

461(2), MCA. The District Court determined that the bonus was valid under the “safe

harbor” provision of § 35-1-462(2)(c), MCA, because it was “fair” to the company,

reasoning that “[t]here is no reason to believe Montana courts would not extend such a

safe harbor to bonuses awarded for past services.” The District Court analyzed the

actions of Gatelys as directors under the business judgment rule, and concluded the rule

was satisfied. Finally, the District Court considered Plaintiffs’ claim that Stephanie, as

the majority shareholder, violated her fiduciary duties to them as minority shareholders.

The District Court rejected the claim pursuant to Daniels, reasoning that the majority

shareholder1 demonstrated a legitimate business purpose for her actions while the



1
 Stephanie did not individually own a majority of the company’s shares, but controlled the
voting rights of a majority interest.
                                       4
minority shareholders did not demonstrate a less harmful alternative. The District Court

entered judgment in favor of the Defendants.

¶7     On appeal to the Tenth Circuit, the Plaintiffs argued: that the District Court

ignored controlling Montana common law, created a new rule of law that a conflict of

interest bonus transaction lacking consideration may be upheld if a trial court deems it

“fair,” and created a novel exception to the requirement of contractual consideration, but

only for conflicted directors; that the business judgment rule does not apply to director

conflict of interest transactions; and that the District Court erred in applying Daniels to

this case.   Deeming the issues presented as “state-law issues of first impression in

Montana” and “dispositive of the issues in this case,” the Tenth Circuit certified the

questions to this Court. Warren, 400 Fed. Appx. at 315, 2010 U.S. App. LEXIS 24152 at

* 9.

¶8    (1) Can the safe harbor provision of § 35-1-462(2)(c), MCA, be extended to
cover a conflict-of-interest transaction involving a bonus that lacks consideration and
would be void under Montana common law?

¶9     In accordance with the questions framed by the Tenth Circuit Court, we assume

for purposes of this opinion that the bonus in question lacked consideration and involved

a director conflict of interest.

¶10    Campbell is a “closely-held” corporation, but did not elect to become a statutory

close corporation under the Montana Close Corporation Act, §§ 35-9-101 et seq., MCA.

Therefore, the certified questions must be analyzed under the Montana Business

Corporation Act (MBCA). See Daniels, 246 Mont. at 134, 804 P.2d at 364 (claims

                                         5
involving closely-held corporations “are governed by the provisions of the Montana

Business Corporation Act”). The MBCA was enacted in 1991 and patterned after the

American Bar Association’s Revised Model Business Corporation Act (RMBCA). See

John J. Oitzinger, Fair Price and Fair Play under the Montana Business Corporation

Act, 58 Mont. L. Rev. 407, 407-08 (1997) (“the [Montana] legislature enacted an

essentially unchanged version of the American Bar Association’s Revised Model

Business Corporation Law”). Because the MBCA is very similar to the model act,

including the safe harbor provision, the Official Comments to the RMBCA are

instructive. The “key objectives” of the RMBCA “‘are to increase predictability and to

enhance practical administrability. . . . [T]he new subchapter spells out a safe harbor

procedure more meticulously than its predecessors.’” Official Comments to § 35-1-461,

MCA, at 627-28 (2010 Annotations) (quoting 2 Model Business Corporation Act

Annotated [hereinafter MBCA Annotated], Introductory Comments to Subchapter F, at 8-

370 through -371 (3d ed. ABA 2002 & Supp. 2002); see also Committee on Corporate

Laws, Changes in the Model Business Corporation Act—Amendments Pertaining to

Directors’ Conflicting Interest Transactions, 44 Bus. Law. 1307, 1308 (1989) (referenced

in the 2010 Annotations as well as the 1991 legislative record).

¶11    The “safe harbor” procedure is found at §§ 35-1-461 through -464, MCA. Section

35-1-461, MCA, provides the pertinent definitions, and illustrates that a “‘conflicting

interest”’ is one which a director has with regard to the subject transaction:

       As used in 35-1-461 through 35-1-464, the following definitions apply:

                                          6
             (1) “Conflicting interest” with respect to a corporation means the
      interest a director of the corporation has respecting a transaction effected or
      proposed to be effected by the corporation . . . if:
             (a) regardless of whether the transaction is brought before the board
      of directors of the corporation for action, the director knows at the time of
      commitment that he or a related person is a party to the transaction or has a
      beneficial financial interest in or is so closely linked to the transaction and
      the transaction is of such financial significance to the director or a related
      person that the interest would reasonably be expected to exert an influence
      on the director’s judgment if the director were called upon to vote on the
      transaction . . . .

                                         .   .   .

             (2) “Director’s conflicting interest transaction”, with respect to a
      corporation, means a transaction effected or proposed to be effected by the
      corporation . . . in which transaction a director of the corporation has a
      conflicting interest.
             (3) “Related person” means:

                                         .   .   .

            (b) a child, grandchild, sibling, parent or spouse of any child,
      grandchild, sibling, or parent of the director . . . .

Section 35-1-461(1)-(3), MCA (2003). In turn, § 35-1-462(2), MCA, contains the three

mechanisms by which transactions tainted by conflicting interests can nonetheless be

immunized from challenge:

             (2) A director’s conflicting interest transaction may not be enjoined,
      set aside, or give rise to an award of damages or other sanctions in a
      proceeding by a shareholder or by or in the right of the corporation because
      the director or any person with whom the director has a personal, economic,
      or other association has an interest in the transaction if:
             (a) directors’ action respecting the transaction was at any time taken
      in compliance with 35-1-463;
             (b) shareholders’ action respecting the transaction was at any time
      taken in compliance with 35-1-464; or
             (c) the transaction, judged according to the circumstances at the
      time of commitment, is established to have been fair to the corporation.
                                         7
Section 35-1-462(2), MCA. As amplified in the Official Comments, “[i]f the procedure

set forth in section 8.62 [§ 35-1-463, MCA] or in section 8.63 [§ 35-1-464, MCA] is

complied with, or if the transaction is fair to the corporation [§ 35-1-462(2)(c), MCA],

then a director’s conflicting interest transaction is immune from attack on any ground of a

personal interest or conflict of interest of the director.” 2 MBCA Annotated, Official

Comments to § 8.61, at 8-397 (Supp. 1997); see also Committee on Corporate Laws, 44

Bus. Law. at 1322.2

¶12    In their arguments, Plaintiffs equate the term “transaction” used in these

provisions with the term “contract.” Because Robert’s bonus lacked consideration, and

was unenforceable as a contract, Plaintiffs argue, without citation to specific authority,

that “‘fair’ does not include transactions that would not stand alone otherwise. . . . Where

no contract exists, because there was no consideration, there is simply no transaction for

the Court to consider at all.” In other words, Plaintiffs assert that, as a matter of law, the

bonus proposed here is not eligible for review and approval under the safe harbor

procedure. Defendants respond that “[n]ot every bonus awarded to a deserving employee

is awarded pursuant to contract,” and therefore, “there is no obstacle to a director’s

2
  Sections 35-1-461 through -464, MCA, pertain only to a director’s conflict of interest
transaction, making no mention of a shareholder’s conflict of interest. See 2 MBCA Annotated,
Introductory Comments to Subchapter F, at 8-374 (Supp. 1997) (“[S]ubchapter F [§§ 35-1-461
through -464, MCA] deals with directors only.”). The District Court analyzed Stephanie’s
actions in proposing Robert’s bonus in her capacity as a director, stating: “[T]he fact that
S. Gately proposed the bonus in her capacity as a director but the bonus ultimately was referred
to the shareholders for approval prior to any action by the Board does not change the fact that it
was a director’s conflicting interest transaction at its inception and the Court will apply Section
§ 35-1-461 of the MBCA to the transaction.” (Footnotes omitted.) We also analyze this
question in the context of Stephanie’s role as director, not as shareholder.
                                              8
decision to propose or vote on such a bonus, despite a conflict-of-interest, so long as it

otherwise met the safe harbor requirements.” Thus, the issue is whether the bonus

constitutes a “transaction” which is eligible for review under the safe harbor provision.

¶13    We have not previously considered the meaning of “transaction” in this context,

and the term is not expressly defined in the statutory scheme. However, the safe harbor

provision defines “‘[t]ime of commitment’ respecting a transaction” as “the time when

the transaction is consummated or, if made pursuant to contract, the time when the

corporation . . . becomes contractually obligated so that its unilateral withdrawal from the

transaction would entail significant loss, liability, or other damage.”      Section 35-1-

461(5), MCA (emphasis added). The implication of this provision is that a contract is

one way, but not the only way, a transaction can be undertaken, and that “transaction”

was intended to have a more expansive meaning than merely one of contract, which

requires discrete legal elements for its existence. See § 28-2-102, MCA; Knutson v.

Bitterroot Intl. Systems, Inc., 2000 MT 203, ¶ 20, 300 Mont. 511, 5 P.3d 554 (a contract

requires (1) identifiable parties capable of contracting, (2) the parties’ consent, (3) a

lawful object, and (4) sufficient cause or consideration). This view is consistent with the

Legislature’s revision of prior law. Prior to enactment of the MBCA, the predecessor

safe harbor provision stated as follows:

       Director conflicts of interest. (1) No contract or other transaction
       between a corporation and one or more of its directors . . . is either void or
       voidable because of such relationship or interest . . . if:




                                           9
              (a) the fact of such relationship or interest is disclosed or known to
       the board of directors or committee which authorizes, approves, or ratifies
       the contract or transaction by a vote or consent . . . without counting the
       votes or consents of such interested directors;
              (b) the fact of such relationship or interest is disclosed or known to
       the shareholders . . . and they authorize, approve, or ratify such contract or
       transaction by vote or written consent, in which vote or consent such
       interested directors may participate to the extent that they are also
       shareholders; or
              (c) the contract or transaction is fair and reasonable to the
       corporation.

Section 35-1-413(1), MCA (1989) (emphases added). With its enactment of the MBCA,

the Legislature employed only the broader concept of transaction and generally

eliminated the former designation of contract as a subspecies of transaction (“contract or

other transaction”), although vestiges of this distinction remain evident within § 35-1-

461(5), MCA, as discussed above.

¶14    Here, the District Court determined that, under Montana law, the bonus lacked

consideration and could not constitute a valid contract. This conclusion is appropriate, as

the notion of contract does not fit the facts: Campbell undertook no obligation to pay the

bonus to Robert, and Robert made no enforceable promises in order to receive it.

However, the inquiry does not end there. The parties nevertheless respectively sought to

gain something, and we must determine whether their actions, though not qualifying as a

contract, constituted a transaction subject to safe harbor review.




                                         10
¶15    Courts addressing the conflict of interest provisions of the RMBCA have looked to

Black’s Law Dictionary and the Official Comments for assistance in defining

“transaction.” See Mueller v. Zimmer, 124 P.3d 340, 357-58 (Wyo. 2005); Glad Tidings

Assembly of God v. Neb. Dist. Council of the Assemblies of God, Inc., 734 N.W.2d 731,

737-38 (Neb. 2007). Black’s Law Dictionary defines transaction as:

       1. The act or an instance of conducting business or other dealings; esp., the
       formation, performance, or discharge of a contract. 2. Something
       performed or carried out; a business agreement or exchange. 3. Any
       activity involving two or more persons. 4. Civil law. An agreement that is
       intended by the parties to prevent or end a dispute and in which they make
       reciprocal concessions.

Black’s Law Dictionary 1635 (Bryan A. Garner ed., 9th ed., Thomson Reuters 2009) (last

emphasis in original). The Official Comments to Subchapter F state:

       [T]he subchapter is applicable only when there is a “transaction” by or with
       the corporation. For purposes of subchapter F, “transaction” generally
       connotes negotiations or a consensual bilateral arrangement between the
       corporation and another party or parties that concern their respective and
       differing economic rights or interests—not simply a unilateral action by the
       corporation but rather a “deal.”

2 MBCA Annotated, Introductory Comments to Subchapter F, at 8-373 (Supp. 1997).

These sources indicate that, though not limited to contracts, transactions involve the

conducting of business by more than one party—an “activity involving two or more

persons,” “negotiations,” “a deal,” or “a consensual bilateral arrangement” respecting

“differing economic rights or interests.”




                                            11
¶16   In its factual explanation of the case, the Tenth Circuit Court indicates that the

purpose of the bonus was to compensate Robert for past service to the company and to

prevent him from resigning. More specifically, as found in the District Court’s order,

which was provided to this Court and referenced by the Tenth Circuit Court in its order,

Robert was promised implementation of an incentive program which would have

provided him the opportunity to receive additional compensation, and he accepted a

below-market salary based on that promised incentive program.        Although Robert’s

bonus was neither awarded pursuant to an employment contract nor subject to any

conditions for its receipt, the District Court found that “[t]he bonus was intended to

reward R. Gately for past services performed in the ordinary course of his employment as

Company President, to compensate him for the Board’s failure to implement the

promised incentive package by bringing his salary for the past five years up to market

level, and to keep him from resigning as President.” The District Court found that

“R. Gately would have left the Company if he had not received the bonus,” but concluded

“[t]he fact that R. Gately stayed on as President, in the absence of an employment

contract, does not provide consideration for the bonus.” The District Court also found

that the bonus, as constituted, was the result of negotiations between Stephanie and

Robert.

¶17   We conclude that the circumstances here constitute a “transaction” subject to safe

harbor review. Even without regard to past compensation, Campbell sought Robert’s

continued service and Robert stayed on as President because of the bonus he received.

                                       12
While this may not have constituted consideration for a contract to pay the bonus, it was,

at the least, a “consensual bilateral arrangement” involving “differing economic rights or

interests,” or a “business exchange” or “negotiation” that can be reviewed under the safe

harbor provision.

¶18   Our conclusion that the safe harbor provision applies here is supported by the

Official Comments, which describe director compensation as a conflicting interest issue

which can be reviewed for fairness to the corporation:

      Directors’ fees and similar forms of compensation . . . in the normal course
      of business are typically set by the board and are specially authorized
      (though not regulated) by sections 8.11 and 8.57 of the Model Act. These
      practices obviously involve a conflicting interest on the part of most if not
      all of the directors and are capable of being abused, although, in the usual
      case, they fall within normative patterns and fairness can be readily
      established. While, as a matter of practical necessity, these practices are
      universally accepted in principle by the law, board action on directors’
      compensation and benefits would be subject to judicial sanction if not in the
      circumstances fair to the corporation or favorably acted upon by
      shareholders pursuant to section 8.63.

2 MBCA Annotated, Official Comments to § 8.61(b), at 8-403 (Supp. 1997) (emphasis

added).

¶19   Our answer to the first certified question is yes—the subject bonus can be

reviewed under the safe harbor provision.

¶20 (2) Does the business judgment rule apply to situations involving a director’s
conflict-of-interest transaction?

¶21   The MBCA codifies the standards of conduct for directors of a corporation. “A

director shall discharge his duties as a director, including the director’s duties as a

member of a committee: (a) in good faith; (b) with the care an ordinarily prudent person
                                        13
in a similar position would exercise under similar circumstances; and (c) in a manner the

director reasonably believes to be in the best interests of the corporation.” Section 35-1-

418(1), MCA (2003); see also § 35-1-443(1), MCA (applying the duty of care to

officers). Generally, as long as officers and directors satisfy these standards, they will

not be held liable for errors in judgment. See Knutson, ¶ 34 (citation omitted).

¶22    Although codifying the duty of care, the drafters of the RMBCA deliberately

chose not to codify the business judgment rule. Sensitive to the variations in application

of the rule across jurisdictions, they “specifically resisted the temptation to codify the

elusive and related business judgment rule because courts need the flexibility provided by

the business judgment rule in applying the duty of care to directors.” Steven C. Bahls,

Montana’s New Business Corporation Act: Duties, Dissension, Derivative Actions and

Dissolution, 53 Mont. L. Rev. 3, 9 (1992). This Court has explained that the business

judgment rule “‘immunizes management from liability in a corporate transaction

undertaken within both the power of the corporation and the authority of management

where there is a reasonable basis to indicate that the transaction was made in good

faith. . . . It is too well settled to admit of controversy that ordinarily neither the directors

nor the other officers of a corporation are liable for mere mistake or errors of judgment,

either of law or fact.’” Ski Roundtop, Inc. v. Hall, 202 Mont. 260, 273, 658 P.2d 1071,

1078 (1983) (internal quotation marks omitted) (quoting Nursing Home Bldg. Corp. v.

DeHart, 535 P.2d 137, 143-44 (Wash. App. Div. One 1975), and W. Fletcher, Private

Corporations § 1039, at 621-25 (perm. ed. 1974)).

                                           14
¶23    Citing Ski Roundtop, the District Court reasoned that “[t]o the extent S. Gately and

R. Gately acted as directors, their actions are also measured by the ‘business judgment

rule.’” Applying the rule, the District Court determined that “Plaintiffs failed to offer

proof that Defendants’ actions were unreasonable in that they would not have been taken

by ‘an ordinarily prudent man … in the management of his own affairs of like magnitude

and importance,’” quoting Alaska Plastics, Inc. v. Coppock, 621 P.2d 270, 278 (Alaska

1980) (internal quotation marks omitted). It concluded that Defendants “acted prudently

to keep a valuable employee who was being underpaid and in accordance with the

business judgment rule.” However, in a footnote, the District Court noted the issue that

has now been certified to this Court:

               Plaintiffs argue that the business judgment rule does not apply in
       conflicted interest transactions and cite three cases from other jurisdictions
       for this principle. The parties did not cite, and the Court did not locate, any
       Montana cases addressing this issue. The Court need not try to determine
       how Montana would rule on this question, however, because the facts
       satisfy both the more liberal business judgment rule and the more exacting
       fairness standards.

In their arguments to this Court, Plaintiffs maintain their position that the business

judgment rule only applies to defend claims asserting a violation of the duty of care, not

to claims asserting a violation of the duty of loyalty, such as the conflict of interest

situation involved here. Defendants, in their briefing to this Court, argued that the

business judgment rule could apply as a defense to breach of loyalty claims and that it

should merge into the “fairness test” of the safe harbor analysis for conflict of interest

situations. However, at oral argument, Defendants appeared to alter or clarify their

                                         15
position, arguing that the business judgment rule is not considered when resolving a

conflict of interest claim—addressed by the safe harbor provision—but only in resolving

a claimed breach of the duty of care.

¶24    Therefore, we have determined, for purposes of answering the certified question,

to concur with the parties and conclude that the business judgment rule does not apply to

challenges based upon a director’s conflict of interest, a position commonly expressed by

commentators. See Jennifer Berger, Carol Jones, & Britta Larsen, Fletcher Cyclopedia of

the Law of Private Corporations, vol. 3A, § 1040, 50-53 (Perm. ed. West 2002)

(footnotes omitted) (“To gain the protection of the business judgment rule, a director

must have been disinterested, independent, and informed. A director is interested where

the director has a financial or pecuniary interest in a transaction other than that which

devolves to the corporation or to all of the shareholders generally. Accordingly, where

the director appears on both sides of a transaction the rule will not protect the decision or

the director making it. . . . The business judgment rule does not protect corporate

fiduciaries who engage in self-dealing or make decisions affected by inherent conflict of

interest.”); see also Oitzinger, 58 Mont. L. Rev. at 432-33 (footnotes omitted) (“Most

analysts describe these duties in terms of a duty of care to which the business judgment

rule applies, and a duty of loyalty or fair dealing to which the business judgment rule

does not apply. . . . The distinction between breaches of the duty of care on one hand and

breaches of the duty not to self-deal or otherwise deal unfairly on the other has been said

to be ‘fundamental to . . . the preservation of state corporate law.’”).

                                          16
¶25    Our answer to the second certified question is no.3,4

¶26 (3) Does the holding in Daniels, [246 Mont. at 136-39], 804 P.2d at 365-67,
which appears to adopt an alternative test for evaluating whether there has been a
breach of fiduciary duties by a controlling shareholder in a closely-held corporation,
apply to a transaction that involves a conflict of interest?

¶27    ‘“[A] close corporation is one in which management and ownership are

substantially identical to the extent that it is unrealistic to believe that the judgment of the

directors will be independent of that of the stockholders.’” Skierka v. Skierka Bros., Inc.,

192 Mont. 505, 519, 629 P.2d 214, 221 (1981) (internal quotation marks omitted)

(quoting Thisted v. Tower Mgt. Corp., 147 Mont 1, 14, 409 P.2d 813, 820 (1966)). The


3
  We decline to consider whether the District Court erred by relying on Ski Roundtop, a pre-
MBCA case, to reach the opposite conclusion. Although not addressing the conflict of interest
issue in Ski Roundtop, we applied the business judgment rule to the entire board of directors,
including a director who had an apparent conflict of interest. Ski Roundtop, 202 Mont. at 274,
658 P.2d at 1078-79. Application of the MBCA to the situation in Ski Roundtop would require a
different analysis. See Oitzinger, 58 Mont. L. Rev. at 450.
4
  The bonus here was not ratified by a vote of disinterested directors pursuant to § 35-1-462(2)(a)
and 35-1-463, MCA. Therefore, we do not address whether a conflicted transaction, which has
been ratified by a majority of disinterested directors, could still be challenged as a breach of the
duty of care and defended by the business judgment rule. See 2 MBCA Annotated, Official
Comments to § 8.61(b), at 8-400 through -401 (Supp. 1997) (“Clause (1) of subsection (b)
provides that if a director has a conflicting interest respecting a transaction, neither the
transaction nor the director is legally vulnerable if the procedures of section 8.62 [§ 35-1-463,
MCA] have been properly followed. Subsection (b)(1) is, however, subject to a critically
important predicate condition. The condition—an obvious one—is that the board’s action must
comply with the care, best interests and good faith criteria prescribed in section 8.30(a) for all
directors’ actions. If the directors who voted for the conflicting interest transaction were
qualified directors under subchapter F, but approved the transaction merely as an
accommodation to the director with the conflicting interest, going through the motions of board
action without complying with the requirements of section 8.30(a), the action of the board would
not be given effect for purposes of section 8.61(b)(1) [§ 35-1-462(2)(a), MCA]. . . . If a
determination is made that the terms of a director’s conflicting interest transaction, judged
according to the circumstances at the time of commitment, were manifestly unfavorable to the
corporation, that determination would be relevant to an allegation that the directors’ action was
not taken in good faith and therefore did not comply with section 8.30(a).”).
                                             17
fiduciary duty between shareholders of a close corporation is one of the “‘utmost good

faith and loyalty.’” Daniels, 246 Mont. at 137, 804 P.2d at 366. This duty of good faith

runs between all shareholders, applying to both majority and minority shareholders.

Sletteland v. Roberts, 2000 MT 382, ¶ 30, 304 Mont. 21, 16 P.3d 1062; Whitehorn v.

Whitehorn Farms, Inc., 2008 MT 361, ¶ 34, 346 Mont. 394, 195 P.3d 836. Such

shareholders “‘may not act out of avarice, expediency or self-interest in derogation of

their duty of loyalty to the other stockholders and to the corporation.”’ Daniels, 246

Mont. at 137, 804 P.2d at 366 (quoting Donahue v. Rodd Electrotype Co. of New

England, Inc., 328 N.E.2d 505, 515 (Mass. 1975) (emphasis omitted).

¶28   The certified question inquires about application of the Daniels test. Daniels was

a branch manager and shareholder of T D & H, and owned stock in a related corporation,

T & D Properties. Daniels, 246 Mont. at 128-29, 804 P.2d at 361. Thomas was the

president, director, and major shareholder of both corporations. Daniels, 246 Mont. at

129, 804 P.2d at 361. Daniels intended to retire, and an agreement was drafted to

terminate Daniels’ employment and purchase Daniels’ minority stock interest in T & D

Properties. Daniels, 246 Mont. at 129-30, 804 P.2d at 361-62. However, a dispute arose,

and Daniels sued Thomas and both corporations for, inter alia, breach of fiduciary duty.

Daniels, 246 Mont. at 130, 804 P.2d at 362. The District Court held that Thomas had

breached his fiduciary duty to Daniels. Daniels, 246 Mont. at 135, 804 P.2d at 365.

¶29   We reversed that holding, and in so doing modified the duty which shareholders

owe to each other in a closely-held corporation, in reliance upon Wilkes v. Springside

                                        18
Nursing Home, Inc., 353 N.E.2d 657 (Mass. 1976). Daniels, 246 Mont. at 137-38, 804

P.2d at 366.     We noted Wilkes’ statement that “the controlling group in a close

corporation have certain rights to what has been termed ‘selfish ownership’ in the

corporation which need to be balanced against their fiduciary obligation to minority

stockholders,” and quoted Wilkes:

       “It must be asked whether the controlling group can demonstrate a
       legitimate business purpose for its action. . . . In asking this question, we
       acknowledge the fact that the controlling group in a close corporation must
       have some room to maneuver in establishing the business policy of the
       corporation. . . . If called on to settle a dispute, our courts must weigh the
       legitimate business purpose, if any, against the practicability of a less
       harmful alternative.” (Citations omitted.)

Daniels, 246 Mont. at 137, 804 P.2d at 366 (quoting Wilkes, 353 N.E.2d at 663). We

clarified that, while the fiduciary duty among close corporation shareholders is one of

utmost good faith and loyalty, “the controlling group should not be stymied by a minority

stockholder’s grievances if the controlling group can demonstrate a legitimate business

purpose and the minority stockholder cannot demonstrate a less harmful alternative.”

Daniels, 246 Mont. at 137-38, 804 P.2d at 366.

¶30    Although the certified question asks whether Daniels should be applied to “a

controlling shareholder,” the matter is complicated by the fact that Stephanie wore two

hats, acting both as controlling shareholder and as director, and that the claims against her

are based on her actions in both capacities. First, Plaintiffs claimed that Stephanie acted

with a conflict of interest as both director and shareholder, alleging that “[t]he bonus

scheme proposed by S. Gately is a conflict of interest transaction which, under Montana

                                         19
law, cannot be ratified or approved by her either as a director or by voting shares she

owns or controls in favor of shareholders’ ratification.” (Emphasis added.) Nonetheless,

while the claim references Stephanie’s role as shareholder, it necessarily challenges her

role as a director in a conflict of interest transaction. As we explained above, a director

conflict of interest transaction is now clearly governed by §§ 35-1-461 through -464,

MCA; see 2 MBCA Annotated, Official Comments to § 8.60, at 8-383 (Supp. 1997) (“The

limited thrust of the subchapter is to establish procedures which, if followed, immunize a

corporate transaction and the interested director against the common law doctrine of

voidability grounded on the director’s conflicting interest.”); see also 2 MBCA

Annotated, Introductory Comments to Subchapter F, at 8-373 (Supp. 1997) (“The focus

of subchapter F is sharply defined and limited. . . . [T]he subchapter is targeted on legal

challenges based on interest conflicts only.”). Because this claim challenges Stephanie’s

role in a director’s conflict of interest transaction, this claim is reviewed and resolved

only by these statutory provisions. The Daniels test does not apply.

¶31    However, Plaintiffs also asserted a claim of breach of fiduciary duties against

Stephanie, which was not limited to her involvement in a conflict of interest transaction.

They alleged: “As a director and shareholder of the Company, S. Gately owes the

Company and her fellow shareholders fiduciary duties of obedience, diligence and

loyalty. Those duties include obligations of good faith, fair dealing, due care, oversight

and supervision, and to refrain from self-dealing. . . . The Gatelys each violated the

foregoing fiduciary duties by knowingly using their powers and control to cause the

                                        20
Company to award illegal, unfair and grossly excessive compensation to R. Gately. Their

actions were not a good faith exercise of business judgment designed to protect and

promote the best interests of the Company and its shareholders.”5 This claim is separate

from and broader in scope than the alleged conflict of interest violation. As is evident

from a review of the Act, this claim falls outside the provisions of subchapter F of the

RMBCA governing director conflict of interest transactions.

¶32    Regarding the scope of the Act, the Comments explain that “the narrow scope of

subchapter F must again be strongly emphasized; if the transaction is vulnerable to attack

on some other ground, subchapter F does not make it less so for having been passed

through the procedures of subchapter F.” 2 MBCA Annotated, Official Comments to

§ 8.61, at 8-398 (Supp. 1997). Similarly,

       Subchapter F does not undertake to define, regulate, or provide any form of
       procedure regarding other possible claims. For example, subchapter F
       does not address a claim that a controlling shareholder has violated a duty
       owed to the corporation or minority shareholders.

2 MBCA Annotated, Introductory Comments to Subchapter F, at 8-373 (Supp. 1997)

(emphasis added); see also 2 MBCA Annotated, Official Comments to § 8.61, at 8-398

(Supp. 1997) (“If the attack is on other grounds [than a director’s conflicting interest],

subchapter F has no relevance to the issue(s) before the court.”). In an example provided

by the Comments where X Co. is the majority shareholder of Y Co. and votes its qualified

shares under 8.63 [§ 35-1-464, MCA], “the vote under section 8.63 [§ 35-1-464, MCA]

5
  We note that Plaintiffs’ complaint alleged a breach of fiduciary duties against Robert as well, in
his roles as director and officer. The certified question does not address these claims, and we
likewise do not reach them.
                                             21
has no effect whatever of exonerating or protecting X Co. if X Co. fails to meet any legal

obligation that, as the majority shareholder of Y Co., it may owe to the minority

shareholders of Y Co.” See 2 MBCA Annotated, Official Comments to § 8.63(b), at 8-494

(Supp. 1997).

¶33   Although Plaintiffs’ claim of breach of fiduciary duties against Stephanie as

majority shareholder makes reference to “self-dealing,” and certainly encompasses facts

regarding her conflict of interest, the claim broadly alleges that Stephanie, as majority

shareholder, failed to exercise good faith, business judgment, due care, oversight and

supervision, and thus breached her duties to the minority shareholders. This is a claim

which is beyond the scope of the statutory safe harbor provisions. As explained in the

Comments to the RMBCA, even if the transaction is approved as a director’s conflict of

interest transaction, it still could be challenged as a breach of duties to the minority

shareholders. See 2 MBCA Annotated, Introductory Comments to Subchapter F, at 8-373

(Supp. 1997) (“subchapter F does not address a claim that a controlling shareholder has

violated a duty owed to the corporation or minority shareholders”). Thus, this claim is

governed by Montana common law.

¶34   As discussed above, Daniels governs the fiduciary duties owed among

shareholders in a closely-held corporation. Daniels did not directly address a conflict of

interest. Thomas had offered to step aside and let another person handle the negotiations

with Daniels, and we noted that any potential conflict of interest in the matter had

therefore been eliminated. Daniels, 246 Mont. at 139, 804 P.2d at 367. However, our

                                        22
reasoning in Daniels implicitly recognized that the Wilkes balancing test would be

applied in the context of conflicted interest situations involving shareholders in a close

corporation. See Daniels, 246 Mont. at 137, 804 P.2d at 366; see also Solomon v.

Atlantis Development, Inc., 516 A.2d 132, 136 (Vt. 1986) (additional citation omitted) (a

shareholder “is not automatically disqualified from voting on matters affecting his

self-interest . . . . [T]he duty of loyalty and good faith is fulfilled if the controlling group

[or interested stockholder] can ‘demonstrate a legitimate business purpose for its action,’”

citing Wilkes).6

¶35    Thus, the Daniels test is applicable to such claims of breach of fiduciary duty. To

be clear, however, Daniels is not a mechanism by which an otherwise improper

transaction can be validated. The purpose of the Daniels test is to assess the actions of

the majority shareholders in fulfilling fiduciary duties to the minority shareholders.7




6
 We cited the Daniels test in Whitehorn, which involved a claim that majority shareholders had
breached their fiduciary duties to a minority shareholder. Whitehorn, ¶¶ 33, 36. However, a
specific conflict of interest analysis was not undertaken in that case.
7
  Daniels also discussed the law allowing minority shareholder claims for illegal, oppressive, or
fraudulent acts of the corporation. Daniels, 246 Mont. at 139, 804 P.2d at 367 (citing § 35-1-
921, MCA (1989), now codified in § 35-1-938(2)(b), MCA (2011); additional citations omitted).
The Court observed that such claims must be analyzed on a case-by-case basis. Daniels, 246
Mont. at 140, 804 P.2d at 368 (citations omitted). Alleged breach of fiduciary duty is just one
part of that analysis. We have identified “three definitions or approaches for analyzing
oppression: whether there has been ‘harsh, dishonest or wrongful conduct and a visible
departure from the standards of fair dealing which inure to the benefit of [the] majority and to the
detriment of the minority;’ an analysis of ‘the “fiduciary duty” of good faith and fair dealing
owed by majority shareholders to the minority;’ and an assessment of ‘the reasonable
expectations of the minority shareholders in light of the particular circumstances of each case.’”
Whitehorn, ¶ 26 (quoting Fox v. 7L Bar Ranch Co., 198 Mont. 201, 209-10, 645 P.2d 929, 933
(1982)).
                                            23
¶36    In summary, we conclude that the Daniels test does not apply to the claim

challenging Stephanie’s role in the director conflict of interest transaction. That claim is

governed by the safe harbor procedures of §§ 35-1-461 through -464, MCA. However,

the claim of breach of fiduciary duties alleged by the minority shareholders against

Stephanie in her capacity as majority shareholder is governed by Montana common law,

and the Daniels test applies.

                                                        /S/ JIM RICE


We concur:


/S/ MIKE McGRATH
/S/ PATRICIA COTTER
/S/ JAMES C. NELSON
/S/ BETH BAKER
/S/ MICHAEL E WHEAT
/S/ BRIAN MORRIS




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