## Facts

- Ross Transport, Inc. was formed in 1942 to operate buses transporting workers to an explosives plant in Elkton, Maryland.
- The corporation authorized 5,000 shares of no-par stock; directors set a $20 per-share price and initially resolved to offer stock valued at $30,000 (about 1,500 shares).
- By spring 1942, 1,035 shares had been subscribed and issued among directors, officers, and other investors, including Charles T. Crothers and Edmund W. Crothers.
- After a shareholder’s death, Charles T. Crothers bought the decedent’s shares at $20 plus interest; this did not increase outstanding shares.
- On August 26, 1942, the corporation issued 365 additional shares at $20 per share to the president’s family members and to a director/general manager:
  - 40 shares to Elizabeth B. Williams, 100 to Corrine Williams, 100 to Lois Williams Young, and 125 to William B. Ross.
- Payment for the Williams-family shares came from the president’s personal check; Ross paid for his shares.
- The additional issuance increased outstanding stock to 1,400 shares and enabled Williams and Ross to obtain control.
- No meeting was held after the original organizational resolutions to authorize or evaluate the August issuance, and other shareholders were not offered a chance to buy proportionately.
- Although defendants claimed the issuance funded additional buses, evidence showed the company was financially successful and paying substantial dividends.
- After demand on the corporation to sue was refused, minority shareholders filed a derivative action seeking cancellation of the shares and repayment of dividends; the trial court granted relief.

## Issues

1. Whether directors and officers breached fiduciary duties by causing the corporation to issue stock to themselves or their relatives on terms that diluted other shareholders and shifted control, without showing corporate necessity and fairness.
2. Whether such an issuance constituted constructive fraud and was voidable in a stockholders’ derivative action, warranting cancellation of the shares and restitution of dividends.

## Decision

- The Maryland Court of Appeals affirmed the decree for the plaintiffs in full.
- The court held the challenged issuance to insiders and relatives was a constructive fraud on the corporation and the other shareholders.
- The court ordered cancellation of the 365 shares and required the recipients to repay dividends received on those shares to the corporation.

## Legal Principles

- Directors and officers occupy a fiduciary relationship to the corporation and its shareholders and are treated as trustees regarding corporate affairs.
- When fiduciaries use their control over stock issuance to purchase shares for themselves or their relatives, the transaction is presumptively improper; fiduciaries bear the burden to prove utmost fairness to the corporation and shareholders.
- An insider stock issuance that dilutes existing holders and creates or strengthens control can constitute constructive fraud even without proof of actual intent to defraud, particularly where corporate necessity and fair dealing are not shown.
- Preemptive-rights doctrine may inform analysis of dilutive issuances, but equitable relief may rest on fiduciary-duty and constructive-fraud grounds without resolving the full scope of preemptive rights for unissued authorized shares.

## Conclusion

The court upheld equitable relief against a board-controlled insider stock issuance that diluted minority interests and shifted control, holding the fiduciaries failed to prove fairness or corporate necessity and requiring cancellation of the shares and restitution of dividends to the corporation.


Ross Transport, Inc. v. Crothers, 185 Md. 573, 45 A.2d 267 (Md. 1946)