## Facts

- CERBCO, Inc. was a holding company with three subsidiaries; its only profitable subsidiary was Insituform East, Inc. (“East”).
- A third party (INA) approached CERBCO’s controlling shareholders/directors (the Eriksons) about CERBCO selling East to INA.
- The Eriksons rejected a corporate sale and instead proposed that INA buy the Eriksons’ controlling stock interest in CERBCO.
- The Eriksons did not disclose to CERBCO’s outside directors that INA had expressed interest in purchasing East, though they did disclose INA’s interest in buying their control block.
- INA and the Eriksons executed a letter of intent for a control-block purchase and INA paid a $75,000 deposit; the deal later expired and was not completed.
- After a minority shareholder demand, CERBCO’s outside directors formed a special committee and retained independent counsel.
- Minority shareholders brought a derivative action alleging the Eriksons usurped a corporate opportunity and breached the duty of loyalty through nondisclosure and self-interested diversion.

## Issues

1. Whether controlling shareholders who are also directors breach the duty of loyalty by failing to disclose a third party’s interest in buying a corporate asset and steering negotiations toward a purchase of their personal control block.
2. Whether directors who could lawfully veto a major asset sale as shareholders under 8 Del. C. § 271 can nonetheless be liable for disgorgement or other damages for disloyal conduct connected to that opportunity.

## Decision

- The Delaware Supreme Court affirmed that the Eriksons breached the duty of loyalty by failing to make full disclosure to CERBCO of INA’s interest in East and by not removing themselves from consideration of the opportunity.
- The Court held that the Eriksons’ statutory power as shareholders under § 271 to vote against a sale of substantially all assets did not immunize them from fiduciary liability for misconduct in their director capacity.
- The Court agreed that “transactional damages” based on the corporation’s failure to complete a hypothetical sale of East to INA were not recoverable because the transaction could not have occurred without shareholder approval the Eriksons could withhold.
- The Court reversed the no-damages ruling to the extent it foreclosed equitable and compensatory remedies tied to the breach, and remanded for a determination of appropriate relief.
- The Court allowed potential disgorgement of benefits connected to the disloyalty (including the $75,000 deposit and related benefits) and recovery of incidental, out-of-pocket corporate losses attributable to the breach (such as investigation and advisory expenses).

## Legal Principles

- Directors and controlling shareholders owe fiduciary duties of loyalty to the corporation, including duties of full disclosure and fair dealing when a corporate opportunity arises.
- A third party’s expressed interest in acquiring a significant corporate asset may constitute a corporate opportunity that must be presented to the corporation rather than diverted for personal advantage.
- Statutory shareholder rights (including the § 271 right to vote against a sale of substantially all assets) do not excuse or cleanse disloyal conduct undertaken in a director capacity.
- When a fiduciary breach occurs, remedies may include disgorgement of benefits causally connected to the breach and compensation for incidental corporate losses, even if expectancy-based damages for an unconsummated transaction are unavailable.

## Conclusion

The court held that although controlling shareholders may vote their shares under § 271 to block a major asset sale and may pursue a control-block sale, they remain accountable as directors for disloyal nondisclosure and diversion of a corporate opportunity; the proper remedy may include disgorgement and incidental damages, but not damages premised on a transaction the corporation could not have completed without the defendants’ consent.


Thorpe v. CERBCO, Inc., 676 A.2d 436 (Del. 1996)