Farber v. Servan Land Company, Inc.
662 F.2d 371 (5th Cir. 1981)

  • Serianni and Servin were the majority shareholders and principle officers of a corporation called Servan. Servan owned a golf course and country club.
  • A parcel of land next door to Servan’s golf course came on the market, and at the shareholders’ meeting the directors of Servan considered buying it to make another golf course, but took no action
    • Later, Serianni and Servin, acting as individuals and not representing Servan bought the land on their own.
      • Serianni and Servin later told the directors about this, and they had a vote ratifying the action as being ok.
  • Three years later, Servan decided to liquidate, so they entered an agreement with Serianni and Servin to sell both parcels of land to a third-party.
  • Farber, a Servan shareholder, brought a derivative lawsuit against Serianni and Servin for breach of the duty of loyalty.
    • Farber argued that buying the parcel of land constituted the taking of a corporate opportunity.
  • The Trial Court found for Serianni and Servin. Farber appealed.
    • The Trial Court found that Servan benefited because selling the two parcels of land together was worth more than selling them separately.
      • The Court had the land appraised and found that the division of profits between Servan and Serianni/Servin when the land was sold was actually skewed in Servan’s favor, and that Serianni and Servin were giving Servan more than their land was worth.
  • The Appellate Court reversed.
    • The Appellate Court found there were four things to consider when deciding if there was a taking of a corporate opportunity:
      • There must be the existence of a corporate opportunity.
        • The Court found that since the directors had discussed buying the land at several board meetings, and since the land would be useful for corporate purposes (by expanding the country club) there was a corporate opportunity.
      • Whether the shareholders declined the opportunity
        • Serianni and Servin argued that the directors did not commit to buying the land at the annual meeting. However, the Court found that wasn’t the same as declining the opportunity. It was likely that they were just waiting for more information or for Serianni and Servin to recommend the purchase.
          • What should have happened was that Serianni and Servin should have investigated the opportunity and then put the issue up for a full vote at the next meeting.
      • Ratification of the purchase
        • The Court found that the ratification was meaningless because Serianni and Servin owned 4/7ths of the stock, and so they just ratified their own inappropriate acts.
      • The effect of benefit to the corporation
        • The Court noted that Servan’s land was worth more at the end because it was sold with Serianni and Servin’s. However, if Servan had bought the land, they would have gotten all the profits. Serianni and Servin made profits that would have otherwise gone to Servan because they bought the land themselves instead of letting Servan buy it.
    • The Court found that based on the four factors, Serianni and Servin had breached their duty of loyalty by taking a corporate opportunity.