## Facts

- Coast Oyster Company (Coast), a Washington corporation, faced serious liquidity problems in 1960 and considered selling major oyster properties at Allyn and Poulsbo to raise cash.
- Verne Hayes, Coast’s president, manager, director, and significant shareholder, proposed the sale and approached Coast employee Joseph W. Engman as a potential buyer.
- Coast’s board approved a sale of the Allyn and Poulsbo properties to a new corporation to be formed by Engman, Keypoint Oyster Company (Keypoint), for $250,000.
- Engman lacked sufficient capital and, after board approval, sought financing help from Verne.
- Verne and Engman agreed that Hayes Oyster Company (Hayes Oyster), an Oregon corporation owned by Verne’s brother Sam Hayes and partly by Verne, would obtain a 50% interest in Keypoint in exchange for Hayes Oyster’s cosigning the purchase note.
- Verne did not disclose to Coast’s board or shareholders that he and Hayes Oyster had arranged to acquire a 50% interest in Keypoint in connection with the sale.
- Coast’s shareholders later approved the sale, with Verne voting his shares in favor, without knowledge of his conflicting interest.
- After closing, Keypoint stock was issued; shares were delivered to Verne with an assignment later completed to transfer the claimed 50% interest to Hayes Oyster.
- Coast later learned of the undisclosed arrangement and contested Hayes Oyster’s claim to the Keypoint stock.

## Issues

1. Whether Coast’s president/director breached fiduciary duties by failing to disclose his and an affiliated company’s interest in the purchaser of Coast’s assets.
2. Whether, as a remedy for the breach, Coast was entitled to the benefits obtained through the undisclosed self-interested arrangement, including the disputed 50% Keypoint stock interest.
3. Whether board or shareholder approval of the asset sale barred relief where approval was obtained without disclosure of the fiduciary’s interest.

## Decision

- The Washington Supreme Court affirmed in part and reversed in part the trial court.
- The court held that Verne Hayes breached the fiduciary duty of loyalty owed to Coast by concealing the agreement that Hayes Oyster would obtain a 50% ownership interest in Keypoint tied to the asset sale.
- The court rejected the contention that corporate approval of the sale ratified the transaction because the approvals were not informed by disclosure of Verne’s conflicting interest.
- The court ordered that the disputed 50% Keypoint stock interest claimed by Hayes Oyster be awarded to Coast as the proper recipient of the benefit derived from the breach.

## Legal Principles

- Corporate officers and directors owe a fiduciary duty of loyalty comparable to trustee obligations, requiring full disclosure of personal interests in transactions involving corporate assets.
- A fiduciary’s nondisclosure of a material conflict in a transaction affecting the corporation is inherently unfair; relief does not depend on proving intent to defraud or measurable corporate loss.
- Corporate board or shareholder approval does not constitute ratification of a conflicted transaction unless the approving body is fully informed of the fiduciary’s interest and other material facts.
- Profits or benefits obtained by a fiduciary through breach of the duty of loyalty belong in equity to the corporation; courts may order disgorgement and transfer of the benefit to the corporation (constructive-trust-type relief).

## Conclusion

The court held that a corporate president/director who secretly acquires a personal stake in the buyer of corporate assets violates the duty of loyalty, and it granted equitable relief by transferring the undisclosed stock benefit to the corporation rather than allowing the fiduciary or his affiliate to retain it.


State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co., 64 Wash. 2d 375, 391 P.2d 979 (Wash. 1964)