Class Exercise: Fiduciary Relationship

1) Meinhard v. Salmon

Meinhard claimed that his former business partner, Salmon, had violated a fiduciary duty by
taking an opportunity to renew a lease in his own name without sharing the benefits. In 1902,
Salmon bought a 20-year lease for the Hotel Bristol, owned by Elbridge Thomas Gerryin
New York. Salmon wished to convert the hotel into shops and offices. To raise money, he
entered a joint venture with Meinhard. They put the terms of their relationship in writing.
Meinhard provided the investment capital while Salmon managed the business. The first five
years, Meinhard would receive 40% of the profits and 50% every year after until the
twentieth year. Meinhard was given the sole power to assign the lease during the term of the
venture. The venture was created to terminate at the end of the lease.

After 20 years, as the lease was expiring and the joint venture coming to an end, the owner of
the reversion of the lease, Gerry, approached Salmon to negotiate a substantial redevelopment
of the property. Gerry was ignorant of the partnership. The terms of the new lease
contemplated destruction of the then-existing buildings after a period of seven years followed
by reconstruction. Salmon resigned the lease in his individual capacity without telling
Meinhard. When Meinhard found out, he sued. Meinhard argued the new opportunity
belonged to the joint venture and sued to have the lease transferred to a constructive trust.
Salmon argued any interest in the new lease could not belong to the joint venture since both
parties expected the venture to terminate when the first lease expired.

2) Smith v. Van Gorkom

The case involved a proposed merger of TransUnion into Marmon Group which was

controlled by Jay Pritzker. Defendant Jerome W. Van Gorkom, who was the TransUnion's
chairman and CEO, chose a proposed price of $55 without consultation with outside financial
experts. He only consulted with the company's CFO, and that consultation was to determine a
per share price that would work for a leveraged buyout.[5] Van Gorkom and the CFO did not
determine an actual total value of the company. [5] The board approved the sale of TransUnion
because it suffered accelerated depreciation and a reduced income.At the Board meeting, a
number of items were not disclosed, including the problematic methodology that Van
Gorkom used to arrive at the proposed price. Also, previous objections by management were
not discussed. The Board approved the proposal.

3) Walt Disney Derivative Litigation

The Walt Disney Company appointed Michael Ovitz as executive president and director. He
had founded Creative Artists Agency, a premier Hollywood talent finder. He had an income
of $20m. Michael Eisner, the chairman, wanted him to join Disney in 1995, and negotiated
with him on compensation, led by Disney compensation committee chair Irwin Russell. The
other members of the committee and the board were not told until the negotiations were well
underway. Ovitz insisted his pay would go up if things went well, and an exit package if
things did not. It totalled about $24 million a year. Irwin Russell cautioned that the pay was
significantly above normal levels and ‘will raise very strong criticism’. Graef Crystal, a
compensation expert warned that Ovitz was getting ‘low risk and high return’ but the report
was not approved by the whole board or the committee.

In August 1995 Eisner released to the press the appointment, before the compensation
committee had formally met to discuss it. Russell, Raymond Watson, Sidney Poitier and
Ignacio E. Lozano, Jr. met on 26 September for an hour. They discussed four other major
items and the consultant, Crystal, was not invited. Within a year Ovitz lost Eisner's
confidence and terminated his contract. Ovitz walked away with $140m for a year's work.
Shareholders brought a derivative suit.

Source: US Case Database