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Harris v. Carter
Delaware Court of Chancery
582 A.2d 222 (1990)
Michael Harris (plaintiff) was a minority shareholder in Atlas Energy Corporation, an oil-and-gas company. The Carter group (defendants), a group of Atlas's shareholders who owned 52 percent of Atlas's stock, entered into a stock-exchange agreement with Frederic Mascolo (defendant). Pursuant to the agreement, the Carter group would exchange their Atlas shares for Mascolo's shares in Insuranshares of America (ISA). Additionally, the agreement provided that the Carter group would resign their positions at Atlas directors and ensure that Mascolo and a group of his designees would be appointed in their place. The agreement described ISA as a company engaged in the insurance field and contained Mascolo's representations and warranties that ISA owned all the stock of two life-insurance companies, which was allegedly untrue. During negotiations, Mascolo provided the Carter group with a draft financial statement indicating that ISA had an investment in a third life-insurance company, which was also allegedly untrue. Atlas's chief financial officer examined the financial statement and raised concerns about its accuracy, but the Carter group never followed up on those concerns. After Mascolo purchased the Carter group's stock, Atlas's newly appointed board of directors (i.e., Mascolo and his designees) took actions including changing Atlas's name to Insuranshares of America, Inc., reducing Atlas's authorized capitalization, purchasing all outstanding shares in ISA using Atlas stock, and entering negotiations to sell all of Atlas's oil properties. Harris brought an action against the Carter group, Mascolo, and Mascolo's designees. Among other allegations, the complaint asserted that the Carter group owed a duty of care to Atlas to take reasonable steps to investigate Mascolo's legitimacy before they sold control of the company to him and that they breached this duty by failing to conduct even a basic investigation into the suspicious aspects of the transaction before entering into the agreement. The defendants moved to dismiss.
Rule of Law
Holding and Reasoning (Allen, J.)
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