H. Henn. & J. Alexander, Laws on Corporations sec. 140, at 329-36 (1983 & Supp. 1986). The purpose of the doctrine is to protect parties who deal with a business on the assumption that it is regulated by corporate laws. Courts are necessarily hesitant to apply this fiction and will only do so -- in the interest of public policy -- upon a finding that the alleged corporation has met particular criteria which will make it a de facto corporation. Generally the doctrine will be evoked where a statute exists under which the business could have incorporated; there is a colorable attempt to comply with such statute and where there is some use or exercise of corporate privileges. Most courts also add an element of fairness to the parties involved in the analysis. See Henn & Alexander, supra.
Plaintiffs cannot argue that there was any deliberate attempt to incorporate the grain division. The mere fact that the two divisions operated separately is insufficient to find two corporations. The Supreme Court has noted specifically that even when a corporation is divided into completely autonomous divisions it should be scrutinized as a single entity: "the existence of an unincorporated division reflects no more than a firm's decision to adopt an organizational division of labor." Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S. Ct. 2731, 2741, 81 L. Ed. 2d 628 (1984). The Supreme Court further noted that to do otherwise would be an unsound policy, "a rule that punished coordinated conduct simply because a corporation delegated certain responsibilities to autonomous units might well discourage corporations from creating divisions with their presumed benefits." Id. Even if, as plaintiffs contend, Growmark maintains separate patronage rebate accounts and separate membership qualification for its G series shareholders (shareholders who are members of the grain division) and that G series holders do not benefit in any way from the operation of the supply division, this does not justify imposing independent status on the grain division. Furthermore, plaintiffs deliberately ceased being shareholders in only the grain cooperative when they exchanged their shares in ICG, a grain cooperative, for shares in Growmark which operated both a grain and a supply divisions. Gromark is a single corporation and substantially all of its assets were not sold, therefore, plaintiffs' claim that the Board should have consulted them under Del. Code sec. 271 must fail.
Given this conclusion, the common law fraud count, the RICO count and Securities fraud counts must be dismissed. These claims are all based upon an alleged scheme where Growmark sold parts of its grain business without disclosing material information to its shareholders. If plaintiffs had no right to approve the transaction and the Board of Directors had the sole right, then as a matter of law, if a disinterested Board acted on full information, the shareholders are attributed with full information. Maldonado v. Flynn, 597 F.2d 789, 793 (2d Cir. 1979) (applying Delaware law).
2. Reduction in Benefits
Plaintiffs allege that they were injured by the Asset Sale because it diminished the marketing services they previously enjoyed by their association with Growmark, and they suffered a loss in their share value. Courts are traditionally reluctant to review the substance of a board of directors' corporate decisions. This reluctance stems from the fact that it can only examine the business decision and its context in retrospect, and directors, usually businessmen, are presumed more competent to make these decisions. Thus, frequently a court will find that the business judgment rule shields directors from liability even when shareholders contest their decision-making ability.
E.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Directors are immune from liability, however, only if they have fulfilled certain obligations vis-a-vis the shareholders and the corporation. The duty of care requires directors to exercise the degree of skill, diligence and care that a reasonably prudent business person would exercise in similar circumstances.
Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
In Smith v. Van Gorkom, the Delaware Supreme Court stated that directors' duty means taking appropriate steps to inform themselves prior to making a business decision. The Van Gorkom court reviewed the board's decision-making procedure and only when they found that the directors did not pursue a conscientious decision-making process did the court interfere and hold that the directors were liable to the corporation. 488 A.2d 858 (the directors did not adequately investigate the CEO's role in initiating sale of the company or his means at arriving at the per share sale price, the board was not sufficiently informed regarding the intrinsic value of the company before agreeing to the sale, and the company proceeded in haste, deliberating for only two hours, before agreeing to the sale without any apparent justification).
In this case plaintiffs do not quibble with the specific procedure by which the Board reached a decision, but rather they are unhappy with the effects of the decision and the Board's failure to consult the shareholders. Furthermore, the record is sparse as to the details of how and why the Directors made their decision to sell. It seems, however, that the Board was diligent in making the decision. It was not the first time the business structure of the grain division was changed, the Board retained an interest in the grain elevators by acquiring ADM stock, two meetings were held to inform the plaintiffs and all this must be regarded in the context that the Directors presumably were attempting to prevent further losses to the grain division. Plaintiffs' dissatisfaction with the result of this business decision is not appropriate for our review.
3. Constructive Trust
Plaintiffs seek imposition of a constructive trust on the ADM stock held by Growmark in an amount equal to the retained earnings allegedly attributable to their shares. A constructive trust is an involuntary trust which arises by operation of law; whereby a court will remove title from the legal owner, who holds it unfairly, and "convey that interest to one to whom it justly belongs." Commodity Futures Trading Comm'n v. Heritage Capital Advisory Services, Ltd., 823 F.2d 171, 172 (7th Cir. 1987), quoting, Gravitt v. Jennings, 79 Ill. App. 3d 286, 398 N.E.2d 395, 34 Ill. Dec. 720 (Ill. App. 1979). It is an equitable remedy which only may be imposed upon a showing of wrongdoing on the part of the legal owner of the property. Commodity Futures Trading Comm'n, 823 F.2d at 172. We find that Growmark has not been involved in any wrongdoing and do not impose a constructive trust.
Growmark has made no pretense of being any type of business entity other than a corporation and plaintiffs' are its shareholders. There is no reason that traditional corporate law rules should not apply to this litigation. Plaintiffs have failed to demonstrate that they suffered any injury independent of the corporation. Their claims are specific to the entire class of G series stock. Plaintiffs' only option is to bring suit on behalf of the corporation. For this reason, plaintiffs' seven count complaint, brought in their individual capacity, against Growmark and ADM alleging RICO violations, securities fraud violations, common law fraud violation and breach of fiduciary duties must be dismissed.
Even if plaintiffs had standing to sue in their individual capacity their claims have no merit. Under well-recognized theories of corporate law Growmark's Directors had no obligation to consult plaintiffs-shareholders before effecting any of the complained of transactions, and shareholders were not entitled to any of the services they claim they have lost. Plaintiffs have failed to demonstrate that there was any unfairness, fraud, misrepresentation or lack of due care in the transactions approved by the Board, and we will refrain from substantive review of the Directors' business decision.
For the reasons stated above the complaint against all defendants is dismissed.