## Facts

- Avery Abrasives, Inc. manufactured abrasive cutting wheels and, under president and majority shareholder Raymond Avery, shifted focus away from smaller wheels toward larger wheels.
- Corporate officer/director Craig Avery and supervisor Michael Passaro sought and obtained Raymond Avery’s permission to form a separate company to make small wheels while keeping their jobs at Avery Abrasives.
- Craig Avery and Passaro formed International Small Wheels (ISW), which produced wheels four inches or less in diameter, a segment Avery Abrasives had de-emphasized.
- For roughly 13 years, ISW’s operations overlapped with Avery Abrasives in multiple ways, including transactions between the companies, shared customers, and some ISW activity occurring on Avery Abrasives’ premises during business hours with involvement of Avery Abrasives employees.
- Minority shareholders were not informed about ISW and later alleged diversion of orders and misuse of corporate equipment, personnel, and time, characterizing the conduct as usurpation of a corporate opportunity and breach of fiduciary duties.
- Plaintiffs also alleged CUTPA violations, unjust enrichment (salary/benefits while running ISW), negligence, that Craig Avery permitted an employee to run a competing business from the premises, and a fraudulent transfer of Craig Avery’s residence to his wife.
- After a bench trial, the trial court found Craig Avery and Passaro were corporate fiduciaries but found no liability, concluding plaintiffs failed to prove material diversion or misappropriation and that any harm, if any, was de minimis.
- Plaintiffs appealed; the Connecticut Supreme Court reviewed the trial court’s findings and the effect of majority-shareholder consent in a derivative posture involving a special litigation committee.

## Issues

1. Whether corporate fiduciaries breached the duty of loyalty and usurped a corporate opportunity by forming and operating a competing small-wheel business while employed by the corporation and allegedly using corporate resources.
2. Whether the president/majority shareholder’s informed authorization or ratification of the competing venture barred derivative liability for corporate-opportunity and fiduciary-duty claims.
3. Whether the evidence supported liability under CUTPA, unjust enrichment, negligence, and the Uniform Fraudulent Transfer Act based on the challenged conduct and alleged harm to the corporation.
4. In a derivative action involving internal corporate decision-making (including a special litigation committee), what level of judicial scrutiny applies to the corporation’s position opposing the claims.

## Decision

- The Connecticut Supreme Court affirmed the judgment for defendants.
- The Court accepted the trial court’s findings that plaintiffs did not prove misappropriation of corporate property or compensable corporate harm beyond de minimis effects.
- The Court held that, on the facts found, the informed consent/authorization by the controlling shareholder to ISW’s formation and operation defeated the corporate-opportunity and fiduciary-duty theories.
- The Court affirmed rejection of the CUTPA, unjust enrichment, negligence, and fraudulent transfer claims due to lack of proven wrongful conduct causing compensable harm and lack of proof of fraudulent intent for the conveyance.

## Legal Principles

- Corporate officers and directors owe a stringent duty of loyalty and generally may not divert for personal benefit a business opportunity that fairly belongs to the corporation.
- Corporate-opportunity analysis is fact dependent and considers the corporation’s business focus, its strategic decisions regarding particular markets, and whether the corporation has effectively declined the opportunity.
- A controlling shareholder’s informed authorization or ratification of a conflict-of-interest arrangement may bar corporate and derivative recovery where the material facts are known and the corporation does not suffer material detriment.
- In derivative litigation, courts may give substantial weight to internal corporate decisions (including positions taken through special litigation committee processes) absent proof of bad faith, self-dealing, or material injury to the corporation.
- Statutory and common-law claims predicated on internal competition or conflicted conduct generally require proof of wrongful conduct and nontrivial harm; restitution requires inequity, and fraudulent transfer requires proof of intent (or other statutory predicates) tied to creditor harm.

## Conclusion

The court upheld judgment for defendants because the trial court reasonably found no material misappropriation or compensable harm and concluded that the controlling shareholder’s informed permission for the competing small-wheel venture, in a market the corporation had chosen to exit, barred the asserted corporate-opportunity, fiduciary-duty, and related statutory and tort claims.


Ostrowski v. Avery, 703 A.2d 117 (Conn. 1997)