Case Study:
Beam v. Stewart
Court of Chancery of Delaware, New Castle
Monica A. Beam, a shareholder of Martha Stewart Living Omnimedia, Inc., (MSO) brought a derivative action against the defendants, all current directors and a former director of MSO, and against MSO as a nominal defendant. MSO is a Delaware corporation that operates in the publishing, television, merchandising, and Internet industries marketing products bearing the “Martha Stewart” brand name. Defendant Martha Stewart (Stewart) is a director of the company and its founder, chairman, chief executive officer, and by far, its majority shareholder, controlling roughly 94.4 percent of the shareholder vote. Stewart, a former stockbroker, has in the past 20 years become a household icon, known for her advice and expertise on virtually all aspects of cooking, decorating, entertaining, and household affairs generally.
The market for MSO products is uniquely tied to the personal image and reputation of its founder, Stewart. MSO retains “an exclusive, worldwide, perpetual royalty-free license to use [Stewart’s] name, likeness, image, voice and signature for its products and services.” In its initial public offering prospectus, MSO recognized that impairment of Stewart’s services to the company, including the tarnishing of her public reputation, would have a material adverse effect on its business. In fact, under the terms of her employment agreement, Stewart may be terminated for gross misconduct or felony conviction that results in harm to MSO’s business or reputation, but is permitted discretion over the management of her personal, financial, and legal affairs to the extent that Stewart’s management of her own life does not compromise her ability to serve the company.
Stewart’s alleged misadventures with ImClone arose in part out of a longstanding personal friendship with Samuel D. Waksal (Waksal). Waksal is the former chief executive officer of ImClone as well as a former suitor of Stewart’s daughter. Waksal and Stewart have provided one another with reciprocal investment advice and assistance, and they share a stockbroker, Peter E. Bacanovic (Bacanovic) of Merrill Lynch. The speculative value of ImClone stock was tied quite directly to the likely success of its application for FDA approval to market the cancer-treatment drug Erbitux. On December 26, Waksal received information that the FDA was rejecting the application to market Erbitux. The following day, December 27, he tried to sell his own shares and tipped off his father and daughter to do the same. Stewart also sold her shares on December 27 (see Case 1-1). After the close of trading on December 28, ImClone publicly announced the rejection of its application to market Erbitux. The following day, the trading price closed slightly more than 20 percent lower than the closing price on the date that Stewart had sold her shares. By mid-2002, these events had attracted the interest of the New York Times and other news agencies, federal prosecutors, and a committee of the U.S. House of Representatives. Stewart’s publicized attempts to quell any suspicion were ineffective at best because they were undermined by additional information as it came to light and by the other parties’ accounts of the events. Ultimately, Stewart’s prompt efforts to turn away unwanted media and investigative attention failed. Stewart eventually had to discontinue her regular guest appearances on CBS’s The Early Show because of questioning during the show about her sale of ImClone shares. After barely two months of such adverse publicity, MSO’s stock price had declined by slightly more than 65 percent. In January 2002, Stewart and the Martha Stewart Family Partnership sold 3 million shares of Class A stock to ValueAct, an investor group.
The complaint alleges that the director defendants breached their fiduciary duties by failing to ensure that Stewart would not conduct her personal, financial, and legal affairs in a manner that would harm the company, its intellectual property, or its business. It also alleges that Stewart breached her fiduciary duty of loyalty, usurping a corporate opportunity by selling large blocks of MSO stock.
Chancellor Chandler
The “duty to monitor” has been litigated in other circumstances, generally where directors were alleged to have been negligent in monitoring the activities of the corporation, activities that led to corporate liability. That the Company is “closely identified”with Stewart is conceded, but it does not necessarily follow that the Board is required to monitor, much less control, the way Stewart handles her personal financial and legal affairs.
Regardless of Stewart’s importance to MSO, she is not the corporation. And it is unreasonable to impose a duty upon the Board to monitor Stewart’s personal affairs because such a requirement is neither legitimate nor feasible. Monitoring Stewart by, for example, hiring a private detective to monitor her behavior is more likely to generate liability to Stewart under some tort theory than to protect the Company from a decline in its stock price as a result of harm to Stewart’s public image
[A] corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position [inimical] to his duties to the corporation.
In this analysis, no single factor is dispositive. Instead the Court must balance all factors as they apply to a particular case. For purposes of the present motion, I assume that the sales of stock to ValueAct could be considered to be a “business opportunity.” I now address each of the four factors articulated in Broz
The amended complaint asserts that MSO was able to exploit this opportunity because the Company’s certificate of incorporation had sufficient authorized, yet unissued, shares of Class A common stock to cover the sale to ValueAct. Defendants do not deny that the Company could have sold previously unissued shares to ValueAct. I therefore conclude that the first factor has been met.
An opportunity is within a corporation’s line of business if it is an activity as to which [the corporation] has fundamental knowledge, practical experience and ability to pursue.
MSO is a consumer products company, not an investment company. Simply stated, selling stock is not the same line of business as selling advice to homemakers. . . . For the foregoing reasons, I therefore conclude that the sale of stock by Stewart was not within MSO’s line of business.
A corporation has an interest or expectancy in an opportunity if there is “some tie between that property and the nature of the corporate business.” . . . Here, plaintiff does not allege any facts that would imply that MSO was in need of additional capital, seeking additional capital, or even remotely interested in finding new investors.
The corporate opportunity doctrine is implicated only in cases where the fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity. Given that I have concluded that MSO had no interest or expectancy in the issuance of new stock to ValueAct, I fail to see, based on the allegations before me, how Stewart’s . . . sales placed [her] in a position inimical to their duties to the Company. Were I to decide otherwise, directors of every Delaware corporation would be faced with the ever-present specter of suit for breach of their duty of loyalty if they sold stock in the company on whose Board they sit.
Additionally, Delaware courts have recognized a policy that allows officers and directors of corporations to buy and sell shares of that corporation at will so long as they act in good faith.
On balancing the four factors, I conclude that plaintiff has failed to plead facts sufficient to state a claim that Stewart . . . usurped a corporate opportunity for [herself] in violation of [her] fiduciary duty of loyalty to MSO. [This count] is dismissed in its entirety for failure to state a claim upon which relief can be granted.
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