## Facts

- Minority shareholders of Newport Steel Corporation brought derivative suits seeking an accounting and restitution from C. Russell Feldmann and related selling shareholders after they sold a controlling block of stock.
- Feldmann was Newport’s dominant shareholder and also served as chairman of the board and president, giving him effective control over corporate decisionmaking.
- In August 1950, during a Korean War–era steel shortage, Feldmann and family members sold their control block to Wilport Company, a syndicate of steel end-users seeking assured access to steel supply.
- The sale price materially exceeded the then-prevailing market price, reflecting a substantial control premium.
- As part of the transaction, Feldmann arranged for the sitting board to resign and for Wilport’s nominees to be immediately elected, transferring practical corporate control.
- Plaintiffs alleged that the premium was paid not merely for voting control, but for a corporate asset: Newport’s ability, in a shortage market, to allocate its steel output and thereby capture bargaining advantages that should have benefited Newport.

## Issues

1. Whether a dominant shareholder who is also a top corporate fiduciary breaches duties of loyalty by selling control at a premium that reflects payment for a corporate asset or opportunity (here, allocation power during a shortage).
2. Whether the selling fiduciaries must account to the corporation for the portion of the premium attributable to corporate assets or opportunities.
3. Which party bears the burden to prove fairness and to segregate any portion of the premium properly belonging to the sellers rather than the corporation.

## Decision

- The Second Circuit reversed the judgment dismissing the derivative complaint and remanded.
- The court held the selling defendants accountable to the corporation for the portion of the control premium representing payment for a corporate asset or opportunity.
- The court placed on defendants the burden to demonstrate the transaction’s fairness and to establish what portion of the price, if any, was not attributable to corporate assets or opportunities.
- The case was remanded for an accounting and valuation of the stock absent the improper premium component.

## Legal Principles

- A controlling shareholder who is also a corporate officer/director owes fiduciary duties of loyalty and may not personally profit by diverting corporate assets or opportunities through a control sale.
- A control premium is not per se improper; however, when the premium is paid to obtain a corporate advantage held in trust for the corporation (such as allocation power during a shortage), the premium (to that extent) belongs to the corporation.
- In fiduciary self-benefit transactions involving potential appropriation of corporate value, the fiduciary bears the burden to prove fairness and to separate lawful consideration from consideration paid for corporate property or opportunities.
- The appropriate remedy is equitable accounting and restitution to the corporation of the improper gain attributable to the diverted corporate value.

## Conclusion

The court held that a controller who also managed the corporation could not retain a control premium paid to secure a corporate advantage during a steel shortage, required the sellers to account for any premium attributable to corporate assets or opportunities, and shifted to defendants the burden to prove fairness and segregate any permissible premium on remand.


Perlman v. Feldmann, 219 F.2d 173 (2d Cir. 1955)