, decided by the New York Court of Appeals
, is a well-known case in American corporate law
, dealing with the duties of a corporation's board of directors
when faced with a conflict of interest
. It is a famous early version of what is now known as the business judgment rule
Facts of the case
Robert F. Mullins built a system of water pipes around Rockaway Beach in Queens, New York, at a cost of $69,000 ($1.4 million in today's money). He signed a contract to sell the system to the Queens County Water Company for $110,000 ($2.2 million today), $50,000 of which was in stock and $60,000 of which was in bonds.
Mullins also happened to be a shareholder in the water company, and had a seat on the board of directors. The transaction had to be approved at a shareholder meeting of the water company. Mullins was at this meeting and voted to approve the transaction. He didn't technically need to, because 470 of the 500 outstanding shares voted "yes."
The lone dissenter, James Gamble, couldn't outvote everyone else with his thirty shares. So he sued Mullins and the water company to have the transaction invalidated. Gamble won at trial and in the first appeal. Then the case went to New York's highest court, where it was kicked back downstairs with a famous opinion.
Justice Rufus Peckham wrote the opinion, in which he ordered the case sent back for a new trial, giving the following hints:
A shareholder has a legal right, at a meeting of the shareholders, to vote upon a measure, even though he has a personal interest therein separate from other shareholders. In such a meeting each shareholder represents himself and his own interests solely, and he in no sense acts as a trustee or representative of others. The law of self interest has at such time very great and proper sway.
There can be little doubt, too, that at such meetings those who do vote upon their own stock vote upon it in the light solely of their own interest, or, at least, in what they conceive to be their own interest. Their action resulting from such votes must not be so detrimental to the interests of the corporation itself, as to lead to the necessary inference that the interests of the majority of the shareholders lie wholly outside of and in opposition to the interests of the corporation and of the minority of the shareholders, and that their action is a wanton or fraudulent destruction of the rights of such minority. In such cases it may be stated that the action of the majority of the shareholders may be subjected to the scrutiny of a court of equity at the suit of the minority shareholders.
I think that where the action of the majority is plainly a fraud upon, or, in other words, is really oppressive to the minority shareholders, and the directors or trustees have acted with and formed part of the majority, an action may be sustained by one of the minority shareholders suing in his own behalf and in that of all others coming in, etc., to enjoin the action contemplated, and in which action the corporation should be made a party defendant. It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief.
Peckham did not find fraud in Mullins' actions; he said that the trial court would have to do that. "A discrepancy as large as that between $80,000 or $85,000 and $110,000 is not necessarily a fraud. The court would have to find the further facts already stated in this opinion as necessary to exist, before such action should be enjoined."
- Gamble v. Queens County Water Co., 25 N.E. 201 (1890)