## Facts

- Axton-Fisher Tobacco Co. had three stock classes: preferred, Class A common, and Class B common.
- Transamerica Corp. accumulated Axton-Fisher shares and obtained effective control, allegedly dominating management and electing a board largely composed of its officers or agents.
- Axton-Fisher’s principal asset was leaf tobacco bought for about $6.36 million in late 1942/early 1943; by April 1943 its value allegedly rose to about $20 million.
- Under the charter, Class A common was redeemable at a fixed price ($60 plus accrued dividends, totaling $80.80 per share) and, on liquidation, Class A and Class B would share remaining assets, with Class A receiving twice as much per share as Class B.
- Zahn alleged Transamerica planned to capture the tobacco’s increased value by (1) converting its own Class A holdings into Class B, (2) causing the board to redeem outstanding Class A shares at $80.80, and (3) liquidating the company after the redemption so remaining equity (now largely Class B) received the excess value.
- Zahn alleged that if Class A holders had participated in the later liquidation, they would have received about $240 per share rather than $80.80.
- Zahn bought 235 Class A shares in mid-1943; he surrendered 215 in the redemption and retained 20.
- Zahn sued Transamerica (not Axton-Fisher), individually and on behalf of similarly situated Class A holders, asserting breach of fiduciary duty and seeking (i) liquidation value for retained shares and (ii) damages equal to the difference between redemption price and liquidation value for surrendered shares.
- The district court dismissed for failure to state a claim; Zahn appealed.

## Issues

1. Whether a controlling shareholder, acting through a board it dominates, breaches fiduciary duties by using a charter-authorized redemption to eliminate a minority class’s participation in an imminent liquidation and thereby divert value to itself.
2. Whether conduct framed as a shareholder’s self-interested action is actionable when the challenged decision is taken through directors owing fiduciary duties to all shareholders.
3. Whether the complaint’s allegations were sufficient to state a claim for equitable relief and damages against the controlling shareholder.

## Decision

- The Third Circuit reversed the dismissal and remanded.
- The complaint plausibly alleged Transamerica’s control of Axton-Fisher and use of that control to cause a redemption and subsequent liquidation designed to benefit Transamerica and Class B holders at the expense of Class A holders.
- Charter authorization for redemption did not, on the pleadings, immunize the transaction from fiduciary-duty review where the redemption was allegedly used as a device for self-dealing.
- Zahn was permitted to pursue equitable relief and damages, including recovery keyed to the alleged liquidation value that Class A would have received absent the challenged redemption.

## Legal Principles

- A shareholder, including a majority shareholder, generally may vote shares in its own interest; that principle does not excuse conduct when corporate action is taken through directors or a board dominated by the controller.
- Directors (and those who effectively control their decision-making) owe fiduciary duties, including loyalty, to all shareholders and may not use corporate machinery to transfer value to the controller at the expense of a minority class.
- Formal compliance with charter powers (such as a redemption right) does not bar a claim where the power is allegedly employed to achieve an unfair, self-interested redistribution of corporate value.
- On a motion to dismiss, well-pleaded allegations of controller domination and self-interested use of board action to disadvantage a class of shareholders can state a claim for equitable and monetary relief.

## Conclusion

The court held that allegations that a controlling shareholder dominated the board and used a charter-based redemption to deprive Class A holders of liquidation participation stated a claim for breach of fiduciary duty, requiring reversal of the pleading-stage dismissal and remand for further proceedings.


Zahn v. Transamerica Corp., 162 F.2d 36 (3d Cir. 1947)