## Facts

- A court-approved reorganization created the Baltimore Transit Company with debentures, preferred stock, and common stock issued to different stakeholder groups.
- The reorganization established a 10-year voting trust covering all preferred and common stock; trustees held record title and beneficiaries held voting trust certificates.
- Under the capital structure, preferred stock carried significant director-election control, including enhanced control while dividends were in arrears; no preferred dividends were paid.
- Several voting trustees also held substantial debentures, creating potential conflicts between their trustee duties and personal financial interests.
- In 1944, shortly before the voting trust was to terminate, the trustees/directors caused a charter amendment without notice to certificate holders.
- The amendment (1) removed the preferred stock’s enhanced voting feature tied to dividend arrearages, (2) granted voting rights to debenture holders based on principal amount, and (3) altered prior voting arrangements affecting common stockholders.
- A preferred voting trust certificate holder sued on behalf of similarly situated holders, seeking equitable relief to set aside the amendment as unauthorized and a breach of fiduciary duty.
- The trial court dismissed for failure to state a claim.

## Issues

1. Whether voting trustees had authority to vote trust-held shares to amend the corporate charter in a manner that materially reduced or reallocated the voting rights associated with the trust beneficiaries’ interests.
2. Whether trustees breached fiduciary duties by using entrusted voting power to advantage debenture holders at the expense of preferred beneficiaries, particularly where trustees held debentures.
3. Whether a voting trust certificate holder stated an equitable claim to restrain or set aside a charter amendment that allegedly impaired the voting rights expected to be returned upon trust termination.

## Decision

- The appellate court reversed the dismissal and remanded for further proceedings.
- The complaint plausibly alleged that the trustees’ charter amendment constituted an abuse of trust and breach of fiduciary duty.
- Even if trustees had formal corporate power to vote for charter amendments, fiduciary limits could make such an amendment improper when it diluted one class’s voting rights to benefit another class in which trustees had a personal stake.
- The allegations required factual development and could not be rejected at the pleading stage.

## Legal Principles

- Voting trustees are fiduciaries and must exercise voting power in good faith for the benefit of the beneficiaries as a whole.
- Fiduciaries may not use entrusted voting power to favor one class of security holders over another when the result materially harms a beneficiary class and benefits a favored class.
- A fiduciary’s conflict of interest (including self-benefit from the challenged action) supports equitable scrutiny and potential relief.
- The existence of statutory or charter authority to amend corporate governance documents does not insulate fiduciaries from liability where the vote is an alleged breach of trust.
- Beneficial holders of voting trust certificates may seek equitable relief, including setting aside a challenged charter amendment, when trustees allegedly impair the voting rights tied to the beneficial interest.

## Conclusion

The court held that a voting trust certificate holder stated a viable equitable claim that voting trustees breached fiduciary duties by amending the charter to dilute preferred beneficiaries’ voting power and confer voting rights on debenture holders in a way that could benefit the trustees’ own debenture interests, warranting litigation on the merits rather than dismissal.


Brown v. McLanahan, 148 F.2d 703 (4th Cir. 1945)