Clagett v. Hutchison

Richard H. Hutchinson (defendant) was the president and controlling shareholder of Laurel Harness Racing Association (Laurel). Hutchinson sold his shares in Laurel to a group of purchasers (the Laurel purchasers) for $43.75 per share. At the time, the market price of each share was between $7.50 and $10. The contract between Hutchinson and the Laurel purchasers provided that the transaction would be finalized between six and 12 months after it was signed. Hutchinson also caused the Laurel purchasers to extend their offer to certain minority shareholders. A group of minority shareholders (the plaintiff minority shareholders) (plaintiffs) filed a lawsuit in federal district court against Hutchinson, alleging that, as the president of Laurel, Hutchinson had breached his fiduciary duties to the minority shareholders by failing to investigate the character, finances, and management skills of the Laurel purchasers. The plaintiff minority shareholders asserted that the actions of the Laurel purchasers indicated that they were likely to commit fraud on Laurel. To support their claims, the plaintiff minority shareholders highlighted the premium price that the Laurel purchasers paid for the stock, the six to 12 months it took to finalize the transaction, and the failure to extend the offer to all minority shareholders. The plaintiff minority shareholders also argued that Hutchinson breached his fiduciary duty by failing to give all minority shareholders an equal opportunity to sell their shares. The district court dismissed the case. The plaintiff minority shareholders appealed.