## Facts

- Insuranshares Corporation of Delaware was an investment trust whose only assets were investment securities.
- A “management group,” including Northern Fiscal Corporation and related banks and individuals, owned 75,933 of 284,032 shares and, despite being a numerical minority, held effective control by installing a board composed of its designees.
- The management group sold its controlling block to a “Boston group” for approximately $310,000, reflecting a premium for corporate control.
- The Boston group financed the entire purchase price through an unsecured loan from Paine, Webber & Co.
- After the transfer of control, Insuranshares’ securities were pledged to secure the loan, and the lender was permitted to sell portfolio securities to satisfy the debt, allowing the purchase to be funded in substance by corporate assets.
- Insuranshares had previously been looted through similar tactics years earlier, and some members of the management group had acquired their shares in connection with that earlier episode.
- Before the sale closed, the Boston group sought and obtained board action permitting valuable investment securities to be converted to cash; after closing, the portfolio was rapidly depleted.
- Insuranshares sued the former controlling shareholders in a diversity action to recover losses, and the court addressed liability while reserving damages for later determination.

## Issues

1. Whether holders of a minority but controlling block who dominate corporate affairs through a compliant board owe fiduciary duties to the corporation in connection with selling control.
2. Whether controlling shareholders breach duty by selling control at a premium under circumstances indicating the buyer will use corporate assets to finance the purchase and loot the corporation, without reasonable inquiry.
3. Whether a formally private stock sale may be treated in substance as a sale of corporate control integrated with a contemplated diversion of corporate assets.

## Decision

- The court held the defendants liable for breach of fiduciary duty arising from the sale of their controlling block.
- The court treated the transaction as a sale of corporate control, not merely an arm’s-length stock sale, because control and corporate policy were transferred and corporate assets were used to finance the acquisition.
- The court found the defendants had enough information to be suspicious of the buyers’ intentions and were obligated to make reasonable investigation rather than proceed blindly.
- The court reserved determination of damages for later proceedings.

## Legal Principles

- Although shareholders ordinarily may buy and sell stock at arm’s length, a shareholder who actually controls a corporation through directors subject to its direction may be treated as a fiduciary comparable to a director.
- A controlling shareholder selling control may not take a control premium while transferring power to purchasers the seller knows, or has reason to suspect, will injure the corporation, including by looting corporate assets.
- Courts may look to substance over form and characterize a nominal stock sale as a sale of control when the transfer of control is functionally linked to planned use or disposition of corporate property.
- When circumstances indicate the purchase will be financed by the corporation’s own assets, controlling sellers have a duty of reasonable inquiry and may be liable for facilitating foreseeable diversion of corporate assets.

## Conclusion

The court imposed fiduciary-based liability on a controlling minority that sold control for a premium under suspicious circumstances, where the buyers’ acquisition depended on using the corporation’s own securities and the sellers failed to investigate and facilitated actions enabling the depletion of corporate assets.


Insuranshares Corp. of Del. v. N. Fiscal Corp., 35 F. Supp. 22 (E.D. Pa. 1940)