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Harris v. Carter | 582 A.2d 222 (1990)
Capitalism has its share of contradictions. On the one hand, people have freedom to buy and sell as they please. On the other hand, people sometimes are responsible to others for their conduct in the marketplace. In Harris versus Carter, a corporate shareholder alleged that an ownership group should be held accountable for selling the company to a bunch of looters. Let’s see how the court balanced free enterprise with responsibility when the deal went bad.
The court described the facts of the case as alleged in the complaint.
Michael Harris was a minority shareholder in Atlas Energy corporation, which dealt in oil and gas. A shareholder group called the Carter group owned fifty-two percent of the corporation. In nineteen eighty-six, the Carter group entered a stock-exchange agreement with a group of investors led by Frederic Mascolo.
The Carter group agreed to exchange its shares of Atlas for Mascolo’s shares of a company called Insuranshares of America, or I S A. The agreement stated that I S A owned two subsidiary life-insurance companies. The agreement also provided that the members of the Carter group would resign from Atlas’s board of directors and make sure that Mascolo and his associates were appointed in their places.
During negotiations, the Mascolo group produced a financial statement that said I S A owned a third life-insurance company that wasn’t mentioned in the share-exchange agreement. Atlas’s chief financial officer reviewed the financial statement and raised concerns about whether it was accurate. The Carter group didn’t follow up on those concerns.
Harris alleged that I S A actually owned none of the companies it claimed to own. He also alleged that after I S A acquired the Carter group’s shares and took control of Atlas, it essentially looted the corporation. The new owners changed Atlas’s name to Insuranshares of America, reduced the company’s authorized capitalization, purchased I S A shares using Atlas corporate stock, and made plans to sell Atlas’s oil-producing properties. According to Harris, these and other actions by the Mascolo group devalued the corporation.
Harris brought a derivative action in the Delaware Court of Chancery against members of the Carter and Mascolo groups. Among other claims, Harris alleged that the Carter defendants breached a duty of care to Atlas by failing to take reasonable steps to investigate the legitimacy of the Mascolo group before selling that group a controlling interest in Atlas. The Carter defendants moved to dismiss the case for failure to state a claim on which relief could be granted.
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