"Guth v. Loft, Inc. 5 A.2d 503 (Del. 1939)"

"Loft, Inc. manufactured and sold candies, syrups, and beverages and operated 115 retail candy and soda fountain stores. Loft sold Coca-Cola at all of its stores, but it did not manufacture Coca-Cola syrup. Instead, it purchased its 30,000-gallon annual requirement of syrup and mixed it with carbonated water at its various soda fountains.In May 1931, Charles Guth, the president and general manager of Loft, became dissatisfied with the price of Coca-Cola syrup and suggested to Loft's vice president that Loft buy Pepsi-Cola syrup from National Pepsi-Cola Company, the owner of the secret formula and trademark for Pepsi-Cola. The vice president said he was investigating the purchase of Pepsi syrup.Before being employed by Loft, Guth had been asked by the controlling shareholder of National Pepsi, Megargel, to acquire the assets of National Pepsi. Guth refused at that time. However, a few months after Guth had suggested that Loft purchase Pepsi syrup, Megargel again contacted Guth about buying National Pepsi's secret formula and trademark for only $10,000. This time, Guth agreed to the purchase, and Guth and Megargel organized a new corporation, Pepsi-Cola Company, to acquire the Pepsi-Cola secret formula and trademark from National Pepsi. Eventually, Guth and his family's corporation owned a majority of the shares of Pepsi-Cola Company.Very little of Megargel's or Guth's funds were used to develop the business of Pepsi-Cola. Instead, without the knowledge or consent of Loft's board of directors, Guth used Loft's working capital, credit, plant and equipment, and executives and employees to produce Pepsi-Cola syrup. In addition, Guth's domination of Loft's board of directors ensured that Loft would become Pepsi-Cola's chief customer.By 1935, the value of Pepsi-Cola's business was several million dollars. Loft sued Guth, asking the court to order Guth to transfer to Loft his shares of Pepsi-Cola Company and to pay Loft the dividends he had received from Pepsi-Cola Company. The trial court found that Guth had usurped a corporate opportunity and ordered Guth to transfer the shares and to pay Loft the dividends. Guth appealed"

Layton, Chief Justice

Public policy demands of a corporate officer or director the most scrupulous observance of his duty to refrain from doing anything that would deprive the corporation of profit or advantage. The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.

The real issue is whether the opportunity to secure a very substantial stock interest in a corporation to be formed for the purpose of exploiting a cola beverage on a wholesale scale was so closely associated with the existing business activities of Loft, and so essential thereto, as to bring the transaction within that class of cases where the acquisition of the property would throw the corporate officer purchasing it into competition with his company.

Guth suggests a doubt whether Loft would have been able to finance the project. The answer to this suggestion is two-fold.

Loft's net asset position was amply sufficient to finance the enter-prise, and its plant, equipment, executives, personnel, and facilities were adequate. The second answer is that Loft's resources were found to be sufficient, for Guth made use of no other resources to any important extent.

Guth asserts that Loft's primary business was the manufacturing and selling of candy in its own chain of retail stores, and that it never had the idea of turning a subsidiary product into a highly advertised, nationwide specialty. It is contended that the Pepsi-Cola opportunity was not in the line of Loft's activities, which essentially were of a retail nature.

Loft, however, had many wholesale activities. Its wholesale business in 1931 amounted to over $800,000. It was a large company by any standard, with assets exceeding $9 million. excluding goodwill. It had an enormous plant. It paid enormous rentals. Guth, himself, said that Loft's success depended upon the fullest utilization of its large plant facilities. Moreover, it was a manufacturer of syrups and, with the exception of cola syrup. it supplied its own extensive needs. Guth, president of Loft, was an able and experienced man in that field. Loft, then, through its own personnel, possessed the technical knowledge, the practical business experience, and the resources necessary for the development of the Pepsi-Cola enterprise. Conceding that the essential of an opportunity is reasonably within the scope of a corporation's activities, latitude should be allowed for development and expansion. To deny this would be to deny the history of industrial development.

We cannot agree that Loft had no concern or expectancy in the opportunity. Loft had a practical and essential concern with respect to some cola syrup with an established formula and trade. mark. A cola beverage has come to be a business necessity for son drink establishments: and it was essential to the success of Loft to serve at its soda fountains an acceptable five-cent cola drink in order to attract into its stores the great multitude of people who have formed the habit of drinking cola beverages.

When Guth determined to discontinue the sale of Coca-Cola in the Loft stores, it became, by his own act, a matter of urgent necessity for Loft to acquire a constant supply of some satisfactory cola syrup, secure against probable attack, as a replacement: and when the Pepsi-Cola opportunity presented itself. Guth having already considered the availability of the syrup, it became impressed with a Loft interest and expectancy arising out of the circumstances and the urgent and practical need created by him as the directing head of Loft.

The fiduciary relation demands something more than the morals of the marketplace. Guth did not offer the Pepsi-Cola opportunity to Loft, but captured it for himself. He invested little or no money of his own in the venture, but commandeered for his own benefit and advantage the money, resources, and facilities of his corporation and the services of its officials. He thrust upon Loft the hazard, while he reaped the benefit. In such a manner he acquired for himself 91 percent of the capital stock of Pepsi-Cola, now worth many millions. A genius in his line he may be, but the law makes no distinction between the wrongdoing genius and the one less endowed

Judgment for Loft affirmed.

questions

1 what is the summary

2 what is the issue

3 whats is the rule

4 what is the application