Indiana Law Review


VI. Corporations

Paul J. Galanti*

Five cases decided by the courts and several significant pieces

of legislation adopted by the Indiana General Assembly during the

survey period warrant discussion.'

A. Insider Security Transactions

Perhaps the most significant case decided during the survey

period, and arguably the most unfortunate, was not decided by an
Indiana court but rather by the United States Court of Appeals for

the Seventh Circuit purporting to apply Indiana law. In Freeman v.
Decio,^ the court affirmed an order granting summary judgment for
the defendants in a derivative action brought against certain offi-

cers and directors of a publicly held corporation for allegedly using

material inside information as the basis for trading shares of the

corporation.^ The plaintiff also alleged that one defendant had en-
gaged in "short swing" trading in violation of section 16(b) of the

1934 Act.*

*Professor of Law, Indiana University School of Law — Indianapolis. A.B,, Bow-
doin College, 1960; J.D., University of Chicago, 1963.

'One decision with Indiana connections decided during the survey period is wor-

thy of a passing reference. Indiana Nat'l Bank v. Mobil Oil Corp., 578 F.2d 180 (7th
Cir. 1978), affirmed a judgment for Mobil in an action brought by banks representing

offerees in a tender offer for the securities of Marcor, Inc. Id. at 187. The plaintiff

banks contended that Mobil was obligated under §§ 14(d)(6) and 14(e) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78(d)(6), (e) (1976) [hereinafter referred to as the

1934 Act] to accept the tendered shares. The court of appeals rejected this contention

and held that because the banks had not deposited the securities within eight days of

Mobil's "public announcement" of the number of shares it would purchase under the
tender offer, as specified in the tender offer, Mobil was not obligated to accept late-

tendered shares. 578 F.2d at 184. The main issue before the court was whether Mobil's

issuance of a press release to the financial press constituted a "public announcement"

which triggered the banks' obligation to deposit the shares. The court held: (1) The

phrase "public announcement" has a generally accepted meaning in the securities field

that would clearly encompass press releases, which sophisticated parties, such as the

banks, should have known; (2) the banks were not entitled to individual notice of the

obligation to deposit the shares; and (3) the publicity surrounding the press release

was more than enough notice to alert the banks of their obligations. Id. at 185-87.
^584 F.2d 186 (7th Cir. 1978).

Ud. at 200.

^5 U.S.C. § 78p(b) (1976). Section 16(b) provides that
[f]or the purpose of preventing the unfair use of [inside] information which

may have been obtained by such beneficial owner, director, or officer by
reason of his relationship to the issuer, any profit realized by him from any

purchase and sale, or any sale and purchase, of any equity security of such

133



134 INDIANA LA W REVIEW [Vol. 13:133

The most important issue in Freeman was whether Indiana law
permits a shareholder to maintain a derivative action against in-

siders who trade shares of the corporation on the basis of material
inside, meaning nondisclosed, information. In effect, the principal
question was whether Indiana would follow the New York Court of
Appeals' landmark decision in Diamond v. Oreamuno,^ which estab-
lished a common law right of a corporation to recover profits made
by insiders using inside information, or the Florida Supreme Court's
decision in Schein v. Chasen,^ which refused to adopt the innovative

issuer . . . within any period of less than six months . . . shall inure to and be

recoverable by the issuer ....
Id. The justification for the harsh remedy of § 16(b), which applies to innocent statu-
tory insiders as well as those who trade with manipulative intent, is the supposed in
terrorem effect upon the latter. It is doubtful that § 16(b) has this effect, and it has

been roundly criticized by commentators. See generally Bateman, The Pragmatic

Interpretation of Section 16(h) and the Need for Clarification, 45 St. John's L. Rev.
772 (1971); Munter, Section 16(b) of the Securities Exchange Act of 1934: An Alter-
native to "Burning Down the Bam in Order to Kill the Rats, " 52 Cornell L.Q. 69
(1966); Wu, An Economist Looks at Section 16 of the Securities Exchange Act of 1934,
68 COLUM. L. Rev. 260 (1968).

Unfortunately, Freeman is somewhat muddy about which defendants were
charged with violating § 16(b). At one point, the court refers to two of the defendants
who were outside directors of the corporation, 584 F.2d at 187, but at another point,
the opinion refers to one of the outside directors and an inside director who was an
officer as well as a director of the corporation. Id. at 188. It appears that the first

reference is in error. The officer-director who was charged with the § 16(b) violation
apparently was not charged with trading on inside information, and hence he would

not have been a party to the suit if there had not been an alleged § 16(b) violation.

This supposition is supported by the fact that the only discussion in the opinion of the

potential § 16(b) violation pertained to the summary judgment entered in favor of the
inside director. See discussion at note 42 infra. It seems that the district court did not

consider or rule on the § 16(b) claim against the outside director. 584 F.2d at 188 n.2.

This conclusion, however, is not absolutely clear because in still another portion of the

opinion, the court stated that the fourth defendant, the inside director, was alleged to

have made sales and gifts of stock at various times knowing that the financial data for
the corporation were misstated. Id. at 197. It is not certain whether the complaint was

ambiguous or the opinion poorly written.

'24 N.Y.2d 494, 248 N.E.2d 910, 301 N.Y.S.2d 46 (1969). Diamond generated con-

siderable interest and, contrary to the inference that can be drawn from the footnotes

in Freeman, generally favorable comment in legal journals. See, e.g.. Note, A Com-
parison of Insider Liability Under Diamond v. Oreamuno and Federal Securities

Laws, 11 B.C. Indus. & Com. L. Rev. 499 (1970); Note, Insider Trading on Undisclosed

Corporate Information: Diamond v. Oreamuno, 22 Me. L. Rev. 283 (1970); Note, Dia-

mond V. Oreamuno: A Fresh Approach to Insider Trading and the Duties of the Cor-
porate Fiduciary, 31 U. PiTT. L. Rev. 296 (1969); 37 Fordham L. Rev. 477 (1969); 83

Harv. L. Rev. 1421 (1970); 18 J. Pub. L. 493 (1969); 45 Notre Dame Law. 314 (1970); 23

Sw. L.J. 921 (1969); 55 Va. L. Rev. 1521 (1969); 22 Vand. L. Rev. 1412 (1969); 1970 Wis.

L. Rev. 576. See also Note, Common Law Corporate Recovery for Trading on Non-
Public Information, 74 CoLUM. L. Rev. 269 (1974).

«313 So. 2d 739 (Fla. 1975), discussed in 28 U. Fla. L. Rev. 223 (1975), and noted

in 41 Mo. L. Rev. 589 (1976). Schein was initially decided by the Second Circuit Court



1980] SURVEY- CORPORATIONS 135

ruling of Diamond in a fact situation that would have required an
expansive reading of Diamond to impose liability.

The Freeman decision is unfortunate in two major respects.
First, at a time when the protection afforded security owners under
the federal securities laws is being drastically curtailed by the

United States Supreme Court/ the court decided that Indiana would
follow the status quo approach of Florida, a basically noncommercial

state, rather than the innovative approach of New York, the most
important commercial state in the country, in developing the com-

mon law to meet a changing social need. The second unfortunate
aspect of Freeman is that the court really did not have to decide
whether Indiana would adopt the Diamond view because an alterna-
tive holding of the trial court, affirmed by the court of appeals, was
that the defendants had not traded on material inside information.^

Thus, the court could have and should have relied on the alternative

ground to keep the issue open until it could be ruled on by an Indi-
ana court.

In fact, the Seventh Circuit specifically declined to employ the
certified question rule of the Indiana Rules of Appellate Procedure^

because it "agree[d] with the district court's conclusion that there

[was] no factual basis for the plaintiff's allegations that the defend-

ants sold Skyline stock on the basis of inside information . . . ."'''

Certainly, the Seventh Circuit had precedent for using this pro-

of Appeals as a diversity case. Schein v. Chasen, 478 F.2d 817 (2d Cir. 1973), vacated

and remanded sub nom. Lehman Bros. v. Schein, 416 U.S. 386 (1974). The Second Cir-
cuit's decision in Schein also generated considerable, although not necessarily favor-

able, comment in legal journals. See Note, Tippee Liability Under Common Law, 11
Hous. L. Rev. 200 (1973), Note, From Brophy to Diamond to Schein: Muddled Think-
ing, Excellent Result, 1 J. Corp. L. 83 (1975); Note, "Tippee" Liability Extended to

Remote Third Parties, 53 Neb. L. Rev. 279 (1974); Note, Restitution as a Common Law
Basis for Holding an Outside Nontrading Tipper Liable for Tippee Profits, 24

Syracuse L. Rev. 1369 (1973); Note, Securities Fraud Under State Common Law:
Schein v. Chasen—Expanding Liability for the Tipper and Tippee, 45 U. Colo. L. Rev.
519 (1974); 40 Brooklyn L. Rev. 1334 (1974); 53 B.U.L. Rev. 1150 (1973); 42 Fordham L.
Rev. 211 (1973); 87 Harv. L. Rev. 675 (1974); 45 Miss. L.J. 260 (1974); 48 St. John's L.

Rev. 415 (1973); 5 St. Mary's L.J. 834 (1974); 48 Tulane L. Rev. 166 (1973); 26 Vand.
L. Rev. 1337 (1973); 19 Vill. L. Rev. 533 (1974); 13 Washburn L.J. 534 (1974).

'See, e.g., Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977); Piper v. Chris-Craft

Indus., Inc., 430 U.S. 1 (1977); TSC Indus., Inc. v. Northway Inc., 426 U.S. 438 (1976);
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976); Foremost-McKesson, Inc. v. Provi-
dent Sec. Co., 423 U.S. 232 (1976); Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975);

United Hous. Foundation, Inc. v. Forman, 421 U.S. 837 (1975); Blue Chip Stamps v.

Manor Drug Stores, 421 U.S. 723 (1975); Kern County Land Co. v. Occidental Petro-
leum Corp., 411 U.S. 582 (1973); Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418
(1972).

«584 F.2d at 200.

'IND. R. App. p. 15(0).
^°584 F.2d at 189 n.8.



136 INDIANA LA WREVIEW [Vol. 13:133

cedure because Gabhart v. Gabhart,^^ in which the Indiana Supreme
Court held that Indiana law protects minority shareholders through

judicial review of corporate squeeze-out mergers/^ was a certified
question. Thus, in Gabhart the Seventh Circuit was willing to utilize
the procedure to determine an important issue of Indiana law, but in

Freeman the court declined to do so because, if the opinion can be
taken at face value, it really did not have to decide the question. If

the issue was so important that the Seventh Circuit felt compelled
to decide it when an alternative holding was available, the issue cer-
tainly was important enough to certify to the Indiana Supreme
Court.

It is difficult to fathom why the Seventh Circuit was unwilling
to utilize the certified question procedure.*^ A reading of Freeman,
however, discloses an extraordinary antipathy toward the develop-

ment and evolution of common law protection of shareholder inter-
ests that approaches an attitude of trying to stop the development

of any "newfangled" law in this area. Perhaps the court, in its hostil-

ity toward Diamond, felt that if the issue had been presented to the

Indiana Supreme Court, which had taken a major step in protecting
the interests of minority shareholders in Gabhart, the Indiana court

might have adopted the Diamond approach. If so, this is the view of
Professor Manne with a vengeance.^'*

The Freeman complaint alleged that the defendant directors had
breached their fiduciary duties to Skyline Corporation by trading in

its stock on the basis of material nonpublic information acquired by

virtue of their official positions, and further alleged that the direc-

tors should be compelled to account to Skyline in a derivative action

for the profits from those transactions.^^ The Seventh Circuit indi-

cated that the only case brought to its attention which raised the

question whether Diamond would be followed in another jurisdiction
was Schein. Apparently, the court was unaware that the Second Cir-

cuit, which initially decided in Schein that Florida would adopt Dia-

mond, declined to extend the doctrine to a principal shareholder of a

corporation who was neither an officer nor a director. ^^

"370 N.E.2d 345 (Ind. 1977).

''Id. at 353.

'^Schein was certified to the Florida Supreme Court by the Second Circuit after

it was vacated and remanded by the Supreme Court. 313 So. 2d 739 (Fla. 1975). The

Second Circuit's decision in Schein has been called result oriented, with the court tak-

ing the position that a remedy should exist for a wrong. See 40 Brooklyn L. Rev.

1334, 1344 (1974).

"See discussion at note 19 infra and accompanying text.
'^584 F.2d at 186. The profits would be the difference between the price realized

by the defendants and the price of the stock after the adverse developments were dis-

closed.

'Trigitemp Corp. v. Financial Dynamics Fund, Inc., 524 F.2d 275 {2d Cir. 1975).



1980] SURVEY-CORPORATIONS 137

An understanding of Freeman requires an understanding of Dia-
mond. Diamond was a derivative action by a shareholder of Manage-
ment Assistance, Inc. (MAI) charging that two of the defendants, the
chairman of the board and the president, sold MAI shares before a
substantial decline in the net earnings of the corporation was an-
nounced. A precipitous decline in the price of the stock followed the
disclosure of the drop in earnings. The New York Court of Appeals
reasoned that "a person who acquires special knowledge or informa-
tion by virtue of a confidential or fiduciary relationship . . . [cannot]

exploit that knowledge or information for his own personal benefit
but must account to his principal for any profits . . . ."^^ To the
court, this was "merely a corollary to the broader principle, inherent
in the nature of the fiduciary relationship, that prohibits a trustee

or agent from extracting secret profits from his position of trust."'^

Diamond presented the court with a situation in which the acts
of the defendants were admittedly wrongful but the corporation had
not suffered injury or damage. The defendants argued that because
the corporation was not "damaged" and was unaffected by their ac-
tions, it should not be permitted to recover the proceeds and, conse-

quently, a derivative action was inappropriate.'® The court rejected
this contention, reasoning that an allegation of damage to the cor-
poration was not an essential requirement for a cause of action
founded on a breach of fiduciary duty.^*' When fiduciary duties are
involved, the law does not merely compensate the plaintiff, here the

corporation represented by the shareholder, for the defendant's

wrongs but also attempts to prevent wrongs "by removing from
agents and trustees all inducement to attempt dealing for their own
benefit in matters which they have undertaken for others, or to

which their agency or trust relates."^' In effect, the information on

MAI's declining fortunes was treated as an "asset," which could not
be used by a fiduciary despite a lack of injury to the corporation.

The court was mainly interested in the relationship between the
corporation and the defendants rather than of the relationship be-

tween the defendants and the unknown persons who might have
purchased their shares over the stock exchange. The court reasoned:

Thus, the Second Circuit recognized the limits of Diamond even before Schein was
decided.

•^24 N.Y.2d at 497, 248 N.E.2d at 912, 301 N.Y.S.2d at 80.

''Id. at 497-98, 248 N.E.2d at 912, 301 N.Y.S.2d at 80.

'Tor a discussion of the nature of shareholder derivative actions, see generally

H. Henn^ Handbook of the Law of Corporations §§ 358-360 (2d ed. 1970); 2 G. Horn-
stein, Corporation Law & Practice §§ 711, 716, 734 (1959); Hornstein, The Share-
holder's Derivative Suit in the United States, 1967 J. Bus. L. 282.

'"24 N.Y.2d at 498, 248 N.E.2d at 912, 301 N.Y.S.2d at 81.

''Id., 248 N.E.2d at 912, 301 N.Y.S.2d at 81 (quoting Button v. Willner, 52 N.Y.

312, 319 (1873)).



138 INDIANA LA WREVIEW [Vol. 13:133

The primary concern, in a case such as this, is not to deter-
mine whether the corporation has been damaged but to
decide, as between the corporation and the defendants, who
has a higher claim to the proceeds derived from the exploita-
tion of the information. In our opinion, there can be no justi-
fication for permitting officers and directors, such as the
defendants, to retain for themselves profits, which it is
alleged, they derived solely from exploiting information
gained by virtue of their inside position as corporate offi-
cials.^^

The Freeman court did not believe Indiana would take a similar
position. The court reluctantly acknowledged the conventional
wisdom that insider trading should be deterred although it may
lessen the "efficiency" of the capital allocation function of the securi-

ties markets.^^ Clearly, the court would prefer to follow the views of

the foremost advocate of the benefits of "insider trading," Professor

Henry Manne, who suggests that insiders should be allowed to trade
freely on inside information and that such a right "may be funda-
mental to the survival of our corporate system."^* Professor Manne
asserts that such trading helps the market because the appropriate
price for stock is determined on the basis of the best information

available and that the best information is possessed by insiders.

Essentially, Professor Manne is arguing that insider trading is a
useful device for compensating the true entrepreneurs in a corpora-

tion in which traditional forms of compensation might not be ade-

quate. Admittedly, allowing an inside innovator who has partici-
pated in a new development that will increase the value of his com-
pany's shares to take advantage of the uninformed public has some
appeal. Although allowing an innovator to be compensated by a
shareholder who sells without knowledge of the potential develop-
ment might be justified — even though the corporation itself should
perhaps pay the innovator his worth, it is difficult, if not impossible,

to justify a rule permitting defendants such as those in Diamond
and Freeman to "bail out" before news of adverse developments
becomes public. In effect, the Freeman court has permitted such ac-
tion by deciding that Indiana courts would not penalize insiders who
benefited from nonpublic information of adverse developments to

the corporation.

In begrudgingly accepting the proposition that insider trading

should be discouraged, the Freeman court emphasized that section

''2i N.Y.2d at 498, 248 N.E.2d at 912, 301 N.Y.S.2d at 81.
^'584 F.2d at 190.

^"H. Manne, Insider Trading in the Stock Market 110 (1966). As the Freeman
court notes, Professor Manne's views are quite controversial. 584 F.2d at 190 n.l2.



1980] SURVEY-CORPORATIONS 139

16(b) of the 1934 Act was a response to abuse of inside information

and noted that the Securities and Exchange Commission (SEC) has

also utilized the powers granted under section 15(c)(1) of the 1934

Act^^ and SEC Rule lOb-5^^ to police insider trading.^^ The court fur-
ther noted that "victims" of insider trading may recover damages
under the common law in some cases^^ under rule lOb-5, or even
under provisions of state Blue Sky laws.^^ Unlike the Diamond court,
however, the Freeman court did not feel that the existing remedies
for controlling insider trading were inadequate. The court discussed
the "victims" of insider trading in a lengthy footnote^^ and observed

that there was considerable ambiguity about who should be con-
sidered a direct victim of insider trading. The court posited that
although those persons who bought from or sold to insiders in im-
personal market transactions might feel cheated, they probably

would have traded even if the insiders had stayed out of the market.

The court further reasoned, though, that persons who traded securi-
ties who would not have done so had the insiders made public their
inside information might reasonably be considered victims.^^ The
problem with this approach is that it broadens the class of victims

to include all persons who traded from the time that the insiders
entered the market until the information became public, or at least
includes all persons who traded at the same time as the insiders.^^
This class could be enormous, yet the insiders would be liable to

everyone. This is not a point in favor of the status quo approach;

however, this is an argument in favor of Diamond. Under the ap-
proach taken by the Diamond court, rejected by Freeman, the issue
is whether the insiders should keep their profits or disgorge them to
the corporation. If the corporation recoups the profits, those persons

who bought from insiders who were bailing out at least find their in-
vestment has appreciated in value to the extent of the profits, and

'^5 U.S.C. § 780(c)(1) (1976).

'm C.F.R. § 240.10b-5 (1979). See, e.g., SEC v. Texas Gulf Sulphur Co., 401 F.2d
833 (2d Cir. 1968). The Freeman court also mentioned § 17(a) of the Securities Act of
1933, 15 U.S.C. § 77q(a). 584 F.2d at 191. Although contrary to the court's implication,
the likelihood of the present Supreme Court upholding a private right of action under
that section is somewhat remote.

'^584 F.2d at 190.

^^See, e.g.. Strong v. Repide, 213 U.S. 419 (1909); Low v. Wheeler, 207 Cal. App.
2d 477, 24 Cal. Rptr. 538 (1962); Hotchkiss v. Fischer, 139 Kan. 333, 31 P.2d 37 (1934).

''See, e.g., Ind. Code § 23-2-1-12 (1976).
'»5&.4 F.2d at 191 n.20.

''Id.

'^See generally Fleischer, Securities Trading and Corporate Information Prac-
tices: The Implications of the Texas Gulf Sulphur Proceedings, 51 Va. L. Rev. 1271
(1965); Note, Damages to Uninformed Traders for Insider Trading on Impersonal Ex-
changes, 74 COLUM. L. Rev. 299 (1974).



140 INDIANA LA WREVIEW [Vol. 13:133

those persons who bought at the same time but not from the in-
siders also find that their investment has become more valuable.
Nothing in Diamond suggests that insiders should be compelled to
disclose adverse information as soon as it is available because there

can be legitimate reasons for keeping it temporarily confidential,

but when the insiders profit from that confidential knowledge, they
should not be permitted to keep their wrongfully obtained gains.

The Diamond court relied heavily on the Delaware decision in
Brophy v. Cities Service Co.,^^ which held that a corporation could
recover the profits derived by a confidential secretary to a director

of the corporation who, knowing that the corporation was about to
enter the market to purchase its own shares, purchased shares and
resold them at a profit to the corporation. The Diamond court also
relied on section 388 of the Restatement (Second) of Agency,^^ which

establishes the broad rule prohibiting an agent from taking advan-

tage of a corporate opportunity.^^ The Freeman court rejected the
premise that all inside information should be considered a corporate

asset and posited that it would be better to inquire whether there

was any potential loss to the corporation from the use of the infor-
mation in insider trading. According to the court, the problem with

Diamond was that the defendants' information was not potentially
valuable to the corporation in its own right because the corporation
itself could not exploit it in dealing in its own securities. Hence, the
information was not an "asset," and it therefore could be exploited

by an insider .^^ In an age of distrust of large corporations and lack of

public interest in the securities market, such formalistic reasoning is

appalling.

Even assuming that damage to the corporation^^ is a crucial ele-
ment of a shareholder derivative action against insiders who have
abused their position,^^ the Diamond court recognized that regard-

^^31 Del. Ch. 241, 70 A.2d 5 (1949), noted in 63 Harv. L. Rev. 1446 (1950).

^^Restatement (Second) of Agency § 388 (1957). See also id., Comment c.
^^To be sure, trading on inside information is not the typical practice covered by

§ 388. See generally 37 Fordham L. Rev. 477 (1969).
^'584 F.2d at 194.

^^The Freeman court distinguished Brophy on this ground. In Brophy, the cor-
poration was directly injured because the defendant's purchase of corporate stock for
his own account could force the price to rise, and hence the corporation would have to
pay more for its shares than it otherwise would have to.

^*It should be noted that Florida, where Schein was decided, clearly requires

damage to the corporation as a prerequisite for a shareholder derivative action. See
Palma v. Zerbey, 189 So. 2d 510 (Fla. Dist. Ct. App. 1966), cert denied, 200 So. 2d 814

(1967); Citizen's Nat'l Bank v. Peters, 175 So. 2d 54 (Fla. Dist. Ct. App. 1965); Maronek
V. Atlantis Hotel, Inc., 148 So. 2d 721 (Fla. Dist. Ct. App. 1963); James Talcott, Inc. v.
McDowell, 148 So. 2d 36 (Fla. Dist. Ct. App. 1962). See generally 28 U. Fla. L. Rev.

223, 230 (1975).



1980] SURVEY-CORPORATIONS 141

less of a lack of specific allegations of damage, harm to the corpora-
tion from the defendants' actions could be inferred. The court rea-
soned that the corporation "has a great interest in maintaining a

reputation of integrity, an image of probity, for its management and
in insuring the continued public acceptance and marketability of its

stock."^^ The Freeman court considered any harm to the corporation
from insider trading as "little different" from the harm that could
be inferred whenever a corporate official committed an illegal or un-
ethical act using a corporate asset, which lacks the "element of loss

of opportunity or potential susceptibility to outside influence"""

necessary to require an accounting to the corporation. Unfortunate-

ly, the court failed to recognize that there is a considerable dif-

ference between a situation in which an insider misuses an asset,
even to the point of embezzling funds from the corporation, and one

in which he trades on inside information. In the former, the distrust

is likely to be directed at the individual qua individual rather than

at the individual qua management of the corporation. In the latter
situation, the public is likely to perceive that the ethical standards

of the management as a whole are so low that they cannot be
trusted not to take advantage of the investing public. This percep-

tion can hurt all shareholders: those who bought from the insiders
without knowledge of the adverse information, those who bought
from others without knowledge, and those who did not sell but main-
tained their stock position.

The Freeman court further questioned the Diamond analysis of
potential double liability of defendants who may be personally liable
to purchasers of their stock after disgorging their profits to the cor-

poration. The court did not consider the resort to an interpleader ac-
tion, suggested in Diamond as a means of binding injured investors
to the judgment in an action to recover the fund,'*' as an adequate
solution to this problem. The court also rejected the Diamond con-
tention that double liability should be imposed to more effectively
deter insider trading and that double liability is justified analyti-

cally because the two causes of action, one on behalf of the investor
and one on behalf of the corporation, are based on separate legal

wrongs.'*^

^'24 N.Y.2d at 499, 248 N.E.2d at 912, 301 N.Y.S.2d at 81 (1969), quoted in 584

F.2d at 194. See also Southwest Pump & Mach. Co. v. Forslund, 225 Mo. App. 262, 29
S.W.2d 165 (1930).

^"584 F.2d at 194.

*^Id. at 195. See generally Conant, Duties of Disclosure of Corporate Insiders

Who Purchase Shares, 46 Cornell L.Q. 53 (1960); Note, Common Law Corporate
Recovery for Trading on Non-Public Information, 74 COLUM. L. Rev. 269 (1974).



142 INDIANA LAW REVIEW [Vol. 13:133

The Freeman court concluded, in effect, that the Diamond court
and the Second Circuit in Schein were not really concerned with
double liability because the courts doubted that the investors — the
true victims of insider trading — would be able to bring suit. There-
fore, the possibility of double liability was purely theoretical to
those courts/^ The Seventh Circuit rejected this position, reasoning
that effective remedies against insider trading have been developed

subsequent to the Diamond decision. In this respect the court
stated:

In spite of other recent developments indicating that such

class actions would not become as easy to maintain as some
plaintiffs had perhaps hoped, it is clear that the remedies for

insider trading under the federal securities laws now consti-
tute a more effective deterrent than they did when Diamond
was decided.'"'

Unfortunately, the Freeman court appears to be operating in a

vacuum. The Supreme Court has not only made it more difficult for

rule lOb-5 class actions to be brought but its decisions in the last

few years display a decided hostility toward any shareholder actions

under the rule.'"'

Freeman is both tragic and ironic in this respect. The irony is

that many of the expansive readings of rule lOb-5 by the lower
federal courts were from a perceived inadequacy of the common law
to protect the interests of investors in cases of insider trading.

Because the Supreme Court has recently taken a position blocking

further expansion of rule lOb-5, the only recourse shareholders have

is through the development of the common law. The tragedy of
Freeman is that the court clearly fails to recognize that the position

of investors is worse, not better, than it was at the time of Dia-

"584 F.2d at 195.

"M at 195-96. The court cited Eisen v. Carlisle & Jacquelin, 386 U.S. 1035 (1967),
and Hochfelder v. Ernst & Ernst, 425 U.S. 909 (1975). Presumably, the court was ac-
tually referring to the Eisen decision reported at 417 U.S. 156 (1974), because 386 U.S.

1035 reports a denial of certiorari in an earlier stage of the litigation, and was also

referring to the Hochfelder decision reported at 425 U.S. 186 (1975). Hochfelder does

not appear at 425 U.S. 909, but does appear at 425 U.S. 986, which only reports a

denial of rehearing.

*^See generally cases cited note 6 supra. As one observed in discussing Schein,

the Florida Supreme Court has acknowledged that

[w]hen new relations between men arise . . . law is called in to adjust them.
Legal doctrines are predicated on reason and custom, mark their growth

from rude beginnings, and, like the order of the universe, are constantly

changing to adjust the new relations of society. We have no better proof of
this than the development of our common law and system of equity.

41 Mo. L. Rev. 589, 595 (1976). See also 83 Harv. L. Rev. 1421, 1432 (1970).



1980] SURVEY-CORPORATIONS 143

mond. The common law should be evolving to protect investors
because of the decline of rule lOb-5, but the Freeman court states
that the common law will not and does not have to expand because
of the availability of the rule lOb-5 cause of action.

In fact, Freeman did not consider the possibility that the best
remedy for trading on inside information on impersonal stock ex-
changes may be recovery solely by the corporation and not by in-
vestors who bought from or sold to the insiders. Arguably, investors
who, by luck, can trace their transactions back to the insiders should

not be favored over other investors who traded with noninsiders at
the same time with the same degree of ignorance. By allowing the
corporation to recoup the profits, all investors will be benefited.

The only Indiana decision discussed in Freeman was the early
case of Board of Commissioners v. Reynolds,^^ in which it was held
that a director does not have a duty to disclose inside information to

a shareholder from whom he is buying stock. ^^ The court noted that
Board of Commissioners and Diamond could be distinguished
because the former involved fiduciary duties owed to a selling
shareholder whereas the latter involved a duty owed to the corpora-
tion. The Freeman court felt, however, that a jurisdiction that does
not protect a selling shareholder from insider trading would be

unlikely to create a cause of action in the corporation's favor. The

court noted that Indiana had enacted securities laws containing an

antifraud provision*^ since Board of Commissioners was decided, but
it is not at all clear what relief would be available in the context of

Freeman other than to the actual purchasers of the shares, if they
could be determined. Freeman did recognize that Board of Commis-
sioners was a thin reed indeed to support the court's position,

because the court noted that there have been suggestions that

Board of Commissioners be overruled.''^
The Seventh Circuit also agreed with the district court that the

defendants had not, in fact, traded on the basis of inside informa-

tion. This position should have been the sole ground for affirming

the decision. There cannot be any valid argument on the point
because there did not appear to be sufficient evidence constituting

'HA Ind. 509 (1873).

''Id. at 513.

''iND. Code § 23-2-1-12 (1976), cited in 584 F.2d at 191.
"^The court referred to Ryan, Should Tippecanoe County Commissioners v.

Reynolds be Overruled?, 16 Ind. L. J. 563 (1941), and noted that the court in Krull v.
Pierce, it? Ind. App. 638, 71 N.E.2d 617 (1947), believed it would be overruled. 584 F.2d at

196 n.41. Krull, however, does not seem to support this observation, desirable though it
might be. The court apparently was unaware that the continuous authority of Board of
Comm'rs appears to have been recognized in Yorke v. Batman, 376 N.E.2d 1211 (Ind.

Ct. App. 1978).



144 INDIANA LA W REVIEW [Vol. 13:133

"significant probative evidence tending to support the complaint"^"

to withstand a motion for summary judgment. The court upheld the
propriety of considering evidence of the defendants' past patterns of

sales of the corporation's shares and of their motivations for making
the challenged sales.^' Although liability for trading on inside infor-

mation would not be precluded merely because the defendants con-

tinued in a pattern of selling shares, the pattern would be relevant

in determining whether the insiders were in fact trading on inside
information.'^'

Certain transactions objected to in the complaint could not have

been based on inside information because the financial statements

allegedly misstating the results for the fiscal period in question

were not prepared until the period was over. Furthermore, certain
allegations by the plaintiff concerning the accuracy of the financial

statements could not stand up to the defendants' evidence explain-

ing the financial results. With respect to the second period during
which insider trading was alleged, the court recognized that the
decline in the company's earnings was not known to the defendant
directors as an "accounting fact" before the end of the quarter in

question, unlike the situation in Diamond, and found that certain
supposed "inside information" was in fact public knowledge." In
other words, the allegations that the defendants were trading on in-

side information were pure conjecture.'^

The Seventh Circuit also held that the failure to disclose predic-

tions of the company's future prospects was not a nondisclosure of

material inside information under the circumstances of the case and

that this conclusion was appropriate in either the Diamond type

cause of action or under rule lOb-5." Although the author clearly dis-

agrees with the Freeman conclusion that Diamond would be re-

jected in Indiana, suits should not be allowed when an earnings

prediction, which is unsupported by hard information on earnings,

sales, or costs, was not disclosed.'*^

'"584 F.2d at 196-97 (citing First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 290

(1967)).

5'584 F.2d at 197.

^^M n.44. The court recognized that an adverse inference of bailing out on the

basis of inside information can be drawn against an insider who suddenly sells a
significant portion of his holdings if material adverse information about the corporation

subsequently becomes public, but the court further recognized that the inference could

be nullified if the sales in question were consistent in timing and amount with past pat-

terns or if other circumstances might reasonably account for the sale.

'Ud. at 199-200.

^^Admittedly, Diamond involved a motion to dismiss whereas Freeman involved a
motion for summary judgment.

""See generally 3 A. Bromberg. Securities Law: Fraud § 8.2, at 197-98 (1977).

^®The Freeman court also affirmed the summary judgment for the director who
was charged with insider trading in violation of § 16(b) of the 1934 Act. The plaintiff



1980] SURVEY-CORPORATIONS 145

B. Representation of Corporations

State ex rel. Western Parks, Inc. v. Bartholomew County Court^'^

is an interesting decision involving the propriety of nonattorneys

representing corporations in legal proceedings. The Indiana
Supreme Court held that Indiana Code section 34-1-60-1, which pro-
vides that corporations organized under the Indiana General Cor-

poration Act''^ and the four professional corporation acts^^ "need not

appear by attorney in civil cases filed on a small claims docket of a

circuit, superior or county court,"*^" was without force or effect, and
that "a corporation must be represented by legal counsel in a small
claims court proceeding."^' Consequently, the court made permanent
an alternative writ of mandate and prohibition ordering the respond-
ent, Bartholomew County Court, to refrain from exercising further

jurisdiction over the law suit involved in the controversy until

either legal counsel appeared on behalf of the plaintiff corporation

or the case was dismissed.*^^
The controversy had its origins in an action filed by Remove All,

Inc. against the relator. Western Parks, Inc. The claim was filed by
Remove All's office manager who was not an attorney admitted to
practice in Indiana. The relator moved to dismiss the action alleging
improper venue, but this motion was overruled and the matter was
set for trial.*^'^ A default judgment was entered when Western Parks
failed to appear at trial. Western Parks also did not appear at a
hearing on a motion for proceedings supplemental filed by Remove
All's office manager. At or subsequent to that hearing, another non-
attorney employee of Remove All signed an application for contempt
citation, and the respondent ordered the relator to appear and show
cause why it should not be attached and cited for contempt. The con-
tempt hearing was continued, but prior to the new date the relator,

contended that the insider was liable because the restrictions against resale of the

stock had expired within six months of the time it was sold. The court rejected this
view, and held that the stock was acquired when he became committed to take and
pay for it, not when the restrictions lapsed. 587 F.2d at 200. See Silverman v. Landa,
306 F.2d 422, 424 (2d Cir. 1962); Blau v. Ogsbury, 210 F.2d 426, 427 (2d Cir. 1954). This

position is true, although the certificates would not be delivered to the director until

the restrictions have lapsed.

^^383 N.E.2d 290 (Ind. 1978).

•^^iNi). Code §§ 23-1-1-1 to -12-4 (1976 & Supp. 1979).
''Id. §§ 23-1-13-1 to -11 (1976) (General Professional); id. §§ 23-1-13.5-1 to -6 (1976)

(Professional Accounting); id. §§ 23-1-14-1 to -21 (1976 & Supp. 1979) (Professional
Medical); id. §§ 23-1-15-1 to -21 (1976) (Professional Dental).

^"/(t § 34-1-60-1 (1976).

^^'383 N.E.2d at 293.

''Id. at 291.

^^Although it is not indicated in the opinion, presumably the relator appeared by

counsel in moving to dismiss.



146 INDIANA LA W REVIEW [Vol. 13:133

by counsel, filed a motion to set aside the default judgment and an
alternative motion for an order requiring Remove All to appear
through legal counsel or have the action dismissed. Both motions

were overruled. The relator then petitioned the supreme court to
issue the alternative writ of mandate and prohibition. The reported
decision made permanent the temporary writ granted by the court.^"

The issue before the court was the validity of the 1976 amend-
ment to the Indiana Code of Civil Procedure excepting cases in
which a corporation was involved in an action brought in small
claims court from the general rule that a corporation must appear in
court through counsel.^^ Justly protective of the constitutional man-
date giving the court original jurisdiction to determine the qualifica-

tions for admissions and practice of law,^^ the court held that the

statutory provision purportedly allowing corporations to appear by
nonattorneys was in conflict with the rules governing the qualifica-
tions precedent to the practice of law in Indiana and thus was with-
out force or effect. "^^ The basis of this position was, of course, the
doctrine of separation of powers.^^

After rejecting the authority of the legislature to authorize lay

persons to represent corporations in small claims proceedings, the

court proceeded to determine whether under its rules a nonattorney

could represent a corporation. The court noted that although some

rules of small claims courts provide that a party "may appear either
in person or by attorney,""^ the rules are silent about whether a cor-

poration may appear by an agent who is not a licensed attorney.
The court cited a number of decisions from other jurisdictions, par-
ticularly Illinois, as establishing the rule that the agent representing

the corporation must be an attorney .^° The court also noted that

«^383 N.E.2d at 293.

'"See Act of Feb. 26, 1976, Pub. L. No. 132, § 44, 1976 Ind. Acts 655 (codified at

IND. Code § 34-1-60-1 (1976)).
''Ind. Const, art. 7, § 4. See also Ind. R. App. P. 4(A)(l)-(3); Ind. R. Admiss. & Discp.

3, 24.

"383 N.E.2d at 293. See Ind. Code § 34-5-2-1 (1976); In re Public Laws Nos. 305 &
309, 263 Ind. 506, 334 N.E.2d 659 (1975); State ex rel Blood v. Gibson Circuit Court,

239 Ind. 394, 157 N.E.2d 475 (1959).
''^383 N.E.2d at 292 (citing State ex rel Indiana State Bar Ass'n v. Moritz, 244

Ind. 156, 191 N.E.2d 21 (1963)).
'^383 N.E.2d at 292. See, e.g., Ind. R. Sm. Cl. 2(B)(5).
'"383 N.E.2d at 292 (citing SEC v. Research Automation Corp., 521 F.2d 585 (2d

Cir. 1975); James v. Daley & Lewis, 406 F. Supp. 645 (D. Del. 1976); Nicholson Supply
Co. V. First Fed. Sav. & Loan Ass'n, 184 So. 2d 438 (Fla. Dist. Ct. App. 1976); National
Bank of Austin v. First Wis. Nat'l Bank, 53 111. App. 3d 482, 368 N.E.2d 119 (1977);

Tom Edwards Chevrolet, Inc. v. Air-Cel, Inc., 13 111. App. 3d 378, 300 N.E.2d 312
(1973); Remole Soil Serv., Inc. v. Benson, 68 111. App. 2d 234, 215 N.E.2d 678 (1966)). Cf.
Johnson v. Pistakee Highlands Community Ass'n, 390 N.E.2d 640 (111. App. Ct. 1979)

(corporate officer's preparation of claim did not constitute practice of law). In National



1980] SUR VEY- CORPORA TIONS 147

some jurisdictions have expressly extended the rule to small claims
court. ^' Interestingly, the court did not cite its own decision in State
Bank v. Bell,^^ which contained dictum that a corporation must ap-
pear by an attorney .^^ Nor did it cite Jefferson Park Realty Corp. v.
Kelley, Glover & Vale,''^ in which it was held that in the context of
service and appearance the term "attorney" meant any person
authorized to appear and represent a party to an action.^'^ The court
also held that when an officer of a corporation on whom service
might be made waived issuance and service of summons to a com-
plaint and filed an answer and general denial, the trial court had

jurisdiction over the corporation and the resulting judgment was
binding on the corporation.^^

The Western Parks court reasoned that a corporation should not

be permitted to appear by "itself" even though an individual may do
so if he or she pleases. The court further reasoned that the in-
dividual appearing pro se has a personal stake in the outcome of the

litigation as both a party litigant and as an individual. A corpora-
tion, however, cannot be identified entirely with any one individual

because the corporation is an independent legal entity separate and

apart from its shareholders, officers, and agents. Thus, any agent

representing the corporation would have only an indirect stake in

the law suit."

The court was clearly concerned that confusion may arise when
a corporation appears and is represented by several agents at dif-

ferent stages of the proceedings, as was the case with the plaintiff
in Western Parks. The court asserted that a lack of legal expertise

Bank of Austin, the issue was whether a partner could represent a partnership in
court. The court held that the partner could not because a lay agent cannot appear for
a principal. 53 111. App. 3d at 489, 368 N.E.2d at 125.

'•383 N.E.2d at 292 (citing Tom Edwards Chevrolet, Inc. v. Air-Cel, Inc., 13 111.
App. 3d 378, 300 N.E.2d 312 (1973)). See also Tuttle v. Hi-Land Dairyman's Ass'n, 10

Utah 2d 195, 350 P.2d 616 (1960).
'^5 Blackf. 127 (Ind. 1839).

'"105 Ind. App. 313, 12 N.E.2d 977 (1938).

''Id. at 321, 12 N.E.2d at 981.

''Id. at 322, 12 N.E.2d at 981.

"See Madding v. Indiana Dept. of State Revenue, 149 Ind. App. 74, 270 N.E.2d
771 (1971). See generally H. Henn, supra note 19, § 78. This is always theoretically the

case, but the proposition may be questioned because the small corporation with one
director who is "in fact" the corporation is such a commonplace occurence. Of course,
the court has to think in terms of all corporations and not just the one-person corpora-

tion. It might be difficult to formulate a rule permitting the small, solely-owned cor-

poration to appear by the person who owns and controls it while requiring the large
corporation to appear by counsel. The problem is not as pronounced with the one-
person corporation or the giant corporation, but with corporations having two or three
principals, the identity of interest is not as clear.



148 INDIANA LAW REVIEW [Vol. 13:133

by these persons "combined with a failure to maintain a proper

chain of communication"^*^ might frustrate the judicial process. To be
sure, problems can arise even when different attorneys who are
members of the same law firm appear for a corporation at various
stages in a judicial proceeding, but the likelihood of problems occur-

ring is, or should be, much less in this situation if the attorneys are
true professionals. There is little doubt that lay persons represent-

ing corporations can disrupt the judicial process.^^

In two recent cases courts in other jurisdictions have reversed

condemnation awards in favor of corporations represented by nonat-

torneys because the lack of legal expertise of the nonattorneys

resulted in the improper admission of evidence.^" These cases were

not cited in Western Parks, but they support the court's proposition

that the nonattorney representative of a corporation can "frustrate

the continuity, clarity and adversity which the judicial process

demands."^^ Because sizable condemnation rewards were reversed,

these two decisions are somewhat embarrassing to attorneys. In ef-
fect, the appellate courts were telling the defendant landowners that

they should have been represented by attorneys whose legal train-
ing, skills, and expertise would have resulted in smaller judgments

for the taking of their property.

The decisions holding that a corporation must appear by an at-
torney in small claims courts are not unanimous. In Dixon v.
Reliable Loans, Inc.,^^ the Georgia Court of Appeals, recognizing the

intent behind the Georgia statute concerning the practice of law,

held that a corporation could sue without an attorney .^^ In Brooks v.

Small Claims Court,^^ the California Supreme Court held that cor-
porations can appear without an attorney in the California small

claims courts.®^ The court noted that the poor and unexperienced
litigant would still be at a disadvantage against a skilled corporate

representative if the provision designed to aid the poor litigant and

provide equality for all small claims litigants keeps him from obtain-

ing counsel.^^

'«383 N.E.2d at 293.

"Of course, this is also true when individuals represent themselves, but then that
is an individual's right.

'^"City of DeKalb v. Nehring Elec. Works, Inc., 40 111. App. 3d 726, 353 N.E.2d 150

(1976); City of Akron v. Hardgrove Enterprises, Inc., 47 Ohio App. 2d 196, 353 N.E.2d

628 (1973).

«'383 N.E.2d at 293.
^'112 Ga. App. 618, 145 S.E.2d 771 (1965).

'Ud. at 620, 145 S.E.2d at 772.

''S Cal. 3d 661, 504 P.2d 1249, 105 Cal. Rptr. 785 (1973).

'"Id. at 669, 504 P.2d at 1254, 105 Cal. Rptr. at 790.

'Hd., 504 P.2d at 1254-55, 105 Cal. Rptr. at 790-91.



1980] SURVEY- CORPORATIONS 149

The result reached in Western Parks, that corporations must be
represented by licensed attorneys in small claims courts, is certainly

defensible as an abstract matter, although there are arguments in

favor of eliminating the requirement in small claims courts, which

are intended to be simple and uncomplicated mechanisms for resolv-

ing small disputes.^^ It is doubtful, however, that Western Parks was
the right case for such a determination. Arguably, Western Parks

had waived any objection to nonattorneys appearing and represent-

ing Remove All. Western Parks no doubt was represented by an at-
torney at the outset of the proceedings and when Western Parks filed
its motion to dismiss for improper venue, no objection to a nonat-

torney representing the corporation was raised. In fact. Western
Parks did not raise the objection until after the default judgment

had been entered.^^ The appropriate time to have raised the objec-
tion was at the outset of the proceeding, not after the plaintiff had
proceeded with its case. In Indiana, want of jurisdiction can be waived

by a party failing to make a timely and specific objection,**^ and
Western Parks was an appropriate case to apply that reasoning.
This proposition is indirectly supported by decisions such as Jeffer-

son Park Realty, holding that corporations which have proceeded to
trial without being represented by an attorney are bound by

adverse judgments.^*^

The court in Western Parks cited and relied on the Illinois deci-
sion in Tom Edwards Chevrolet, Inc. v. Air-Cel, Inc.^^ In Edwards,
the defendant Air-Cel filed a motion to allow the corporation to be

represented by its president and minority shareholder, who was not
a licensed attorney. The motion was denied and a default judgment
entered. The judgment was affirmed on appeal with the court
holding that Air-Cel had' to be represented by an attorney .^^ Just as

Air-Cel was bound by its decision to proceed without an attorney.
Western Parks should have been bound when it filed its motion to
dismiss because it failed to object that the complaint was not filed
by an attorney. In Nicholson Supply Co. v. First Federal Savings &

*^In this respect, the supreme court might be well advised to adopt a rule permit-

ting corporations to appear by nonattorneys in small claims proceedings.

**If Western Parks, a corporation, was not represented by an attorney at the

outset, the claim for a waiver is even stronger.

«^IND. R. Tr. p. 12(A). See Pittsburgh C, C. & St. L. Ry. v. Gregg, 181 Ind. 42,
102 N.E. 961 (1913).

'"105 Ind. App. 313, 322, 12 N.E.2d 977, 981 (1938). Other cases holding corpora-

tions represented by nonattorneys bound by adverse results are: Jardine Estates, Inc.

V. KoppeH 24 N.J. 536, 133 A.2d 1 (1957); Cohn v. Warschauer Sick Support Soc'y Bnei
Israel, 19 N.Y.S.2d 742 (Sup. Ct. 1940); Phoenix Mut. Life Ins. Co. v. Radcliffe on the

Delaware, Inc., 439 Pa. 159, 266 A.2d 698 (1970).
''13 111. App. 3d 378, 300 N.E.2d 312 (1973), cited in 383 N.E.2d at 292.
^'13 111. App. 3d at 378-79, 300 N.E.2d at 312-13.



150 INDIANA LA W REVIEW [Vol. 13:133

Loan Associatioriy^^ which the court also relied on, a complaint signed
by the president of a corporation was stricken and held a nullity.^"
Consequently, the complaint could not have been amended after the
time for foreclosing a lien had lapsed by substituting an attorney's

signature for that of the president. Again, it is noteworthy that the

objection was raised at the outset of the proceeding.
Western Parks is the only decision discovered that has permitted

a party represented by an attorney to challenge a judgment for the
first time after the judgment has been rendered because the prevail-
ing corporation did not appear by an attorney. The closest decision
is City of Akron v. Hardgrove Enterprises,^^ in which the trial
court permitted a lay person to represent the defendant over the

city's objection. Under these circumstances, it would be unfair to
penalize the city for going ahead with the proceeding after the court

allowed the lay representation. That reasoning is more understand-
able than permitting the losing party to raise the issue after judg-

ment has been entered, even if judgment is by default.^^
Perhaps the Indiana Supreme Court felt that Western Parks

might be the only opportunity to establish the proposition that cor-

porations must be represented by attorneys, even in small claims
proceedings. The case was not really a proper vehicle for that deter-
mination, however, and the court probably would have been better

advised to have vacated the alternative writ of mandate and prohibi-
tion instead of making it permanent, because Western Parks had
waived any objection to lay persons appearing and proceeding for

Remove All.

C. Closely Held Corporations

The proposition that Indiana courts are willing to recognize the
unique nature of the closely held corporation was strengthened by
the decision in Cressy v. Shannon Continental Corp.^'' The Cressy
court held that the lower court correctly invoked its equity power to

^^84 So. 2d 438 (Fla. Dist. Ct. App. 1976), cited in 383 N.E.2d at 292.

''Id. at 442.

^^353 N.E.2d 628 (Ohio Ct. App. 1976).

''See also City of DeKalb v. Nehring Elec. Works, Inc., 40 111. App. 3d 726, 353
N.E.2d 150 (1976).

^'378 N.E.2d 941 (Ind. Ct. App. 1978). In Motor Dispatch, Inc. v. Buggie, 379

N.E.2d 543 (Ind. Ct. App. 1978), the court of appeals also recognized that a fiduciary in

a closely held corporation must deal "fairly, honestly and openly with the corporation

and his fellow shareholders and must not be distracted from the performance of official

duties by personal interest." Id. at 547. In Motor Dispatch, however, there was no
evidence that the defendant had done anything injurious to the financial interest of the

corporation or that he had failed to deal with his fellow shareholders fairly, honestly,

and openly.



1980] SUR VEY- CORPORA TIONS 151

accomplish the intent of the principal shareholders in organizing

Shannon,^^ but the court reversed and remanded on the issue of the

appropriate relief.^^

Cressy involved challenges to the validity of certain share trans-

actions made by each of the principal shareholders of Shannon which

altered control of the corporation. Cressy and Russell, the principal

shareholders, had each subscribed to and received 425 of the 1,000

common shares authorized by the articles of incorporation. The

dispute involved some of the remaining 150 authorized shares.

The affairs of the corporation did not prosper,'"" and the board

of directors eventually adopted a resolution authorizing Russell to

borrow money for the corporation and to sell additional authorized

but unissued shares if the money could not be borrowed. Cressy

testified that he knew shares could be sold, but that he did not

know how many or when shares would be sold or that Russell con-

templated selling thirty shares to his parents. The effect of this

transaction was to give Russell ownership or control of 455 shares.

Cressy challenged this transaction. Russell in turn challenged

Cressy's purchase of seventy-five Shannon shares from Shannon's

treasurer and accountant.'"' Cressy had not notified Russell or the

other shareholders of that purchase.

The litigation arose when Cressy was unable to transfer these
shares into his name. He filed two suits: the first sought to compel
the transfer of the shares to his name, and the second sought to set

aside the sale of the thirty shares to Russell's parents. Russell

counterclaimed, asserting that Cressy's shares were issued without
consideration, that the treasurer's shares were issued without con-
sideration, and that Cressy's purchase of those shares violated an

agreement between the treasurer and Russell.
The trial court concluded that Cressy and Russell had intended

to be "equal partners" when forming Shannon and that the court
should invoke its equity jurisdiction to secure such an intent. Hence,

the trial court entered an order amending Shannon's articles of in-
corporation to establish a second class of shares, which did not

possess voting rights but which were identical to the shares described
in the articles of incorporation in all other respects.'"^ The thirty
shares owned by Russell's parents and the seventy-five shares

««378 N.E.2d at 945.

''Id.

'""The two principals made personal loans to Shannon to help it meet its financial

obligations^and with their wives, personally guaranteed a loan received by the corpora-

tion.

'"'The remaining shares had been issued to other individuals.

'"^The decree declared the amendment and ordered the secretary of state to
reflect it in his records. 378 N.E.2d at 944 n.5.



152 INDIANA LA W REVIEW [Vol. 13:133

Cressy had acquired from the treasurer were then declared to be
nonvoting shares of the second class. The end result was that
Cressy and Russell were again in a position of equality with 425

voting shares each. Only Cressy appealed from the judgment.^°^

Cressy first challenged the ability of the court to recognize an

''incorporated partnership." The court of appeals rejected this con-
tention,^"" relying on Hartung v. Architects Hartung/Odle/Burke,
Inc.,^^^ which recognized that shareholders of closely held corpora-

tions owe a fiduciary duty to each other to deal fairly, honestly, and
openly when the parties plan to run the enterprise in a manner akin
to a partnership rather than strictly adhering to the traditional cor-

porate norm.'"^

Thus, the Cressy court places Indiana among those jurisdictions
which have concluded that the statutory norm imposed by a general
corporation act is not inflexible and can be varied by the principals

of the corporation. The court accepts the reality that, although per-
sons incorporate to obtain the various benefits afforded by the cor-

porate form of enterprise, "they often expect to act and to be

treated as partners in their dealings among themselves."^°^ The
premise is simple — when the principals of a corporation do not in-
tend to follow the corporate norm and no harm results to outsiders
thereby, there is no reason to frustrate the parties' intent. ^°^ The

'"^Pursuant to Ind. R. Tr. P, 52(D), the decision of the trial court was treated as
made on a general finding because no special findings were requested. See Arnette v.
Helvie, 148 Ind. App. 476, 267 N.E.2d 864 (1971). Consequently, the standard of review

on factual issues was the standard applicable to jury verdicts: a judgment should be af-
firmed if it is correct on any theory of law applicable to the evidence. See In re Estate

of Fanning, 263 Ind. 414, 333 N.E.2d 80 (1975); Notter v. Beasley, 240 Ind. 631, 166

N.E.2d 643 (1960).
""378 N.E.2d at 945.

'°n57 Ind. App. 546, 301 N.E.2d 240 (1973), discussed in Galanti, Business Associa-

tions, 1974 Survey of Recent Developments in Indiana Law, 8 Ind. L. Rev. 24, 42-46

(1974).

'n57 Ind. App. at 552, 301 N.E.2d at 243. The court concluded that the evidence

sustained the finding that Cressy and Russell intended equal ownership and control of

the business and that each had breached the concomitant duty of disclosing the

availability of outstanding shares and giving the other the chance to participate in the

purchase of the shares. 378 N.E.2d at 945. See generally Brudney, Fiduciary Ideology

in Transactions Affecting Corporate Control, 65 Mich. L. Rev. 259, 289-94 (1966).
'"^378 N.E.2d at 945. The court correctly noted that not all corporations with few

shareholders operate informally because the shareholders may well intend to operate
the corporation strictly in accordance with the corporate norm to both the world-at-

large and among themselves. Id. n.6. In other words, the court recognized that the in-
tent of the parties was to control and that this intent would be recognized whether it

was to follow or depart from the corporate norm.

'"*See generally Conway, The New York Fiduciary Concept in Incorporated Part-
nerships and Joint Ventures, 30 Fordham L. Rev. 297, 309-11 (1962); Hornstein,
Judicial Tolerance of the Incorporated Partnership, 18 L. & Contemp. Prob. 435 (1952).
Both articles were cited by the court. 378 N.E.2d at 945.



1980] SURVEY-CORPORATIONS 153

issue often arises in cases involving formal agreements restricting

the discretion of the board of directors of a corporation. '^^ There is

no reason, however, for a written agreement to be required, and a

court of equity should clearly have the authority to give effect to

the intention of the parties even when it is not reflected in a written
document.^^°

In addition to relying on Hartung in determining that Indiana

recognizes the incorporated partnership, the Cressy court also cited

the leading case of Helms v. Duckworth,^^^ in which Judge Burger,
now the Chief Justice of the United States Supreme Court, concluded
that in intimate business ventures in which there is no division be-

tween the shareholder-owners and the director-managers of the cor-
poration, the shareholders would bear the relation of trust and con-

fidence to each other which prevails in partnerships."^ The attitude
taken by the Cressy court certainly cannot be faulted. Rather, it

should be commended because it recognizes the considerable dif-
ference between the large publicly held corporation, for which the

strictures of the corporation act are necessary to protect the in-

terests of shareholders who are not actively involved in the running
of the corporation, and the small corporation, in which the principals

in fact operate the enterprise as if it were a partnership.
The only objection to Cressy is the court's statement that "the

imposition of such duties as the term 'incorporated partnership' im-
plies is a recognition that this form of business enterprise is a
hybrid.""^ Unfortunately, this statement can lead to the supposition

that there is some intermediate form of enterprise between the
partnership and the corporation. This supposition is not true. The
corporation involved in Cressy was in fact a corporation — it was not
a partnership. To maintain its status as a corporation, the corpora-
tion had to satisfy the requirements of the Indiana Act. Further-

more, if the parties had ignored corporate formalities and had
treated, the enterprise as a partnership, they could well have lost

the right to limited liability if a court had decided to "pierce the cor-

porate veil.""* A more accurate description of the status of Shannon

'"'See, e.g., Galler v. Galler, 32 111. 2d 16, 203 N.E.2d 577 (1964). Compare Mc-

Quade v. Stoneham, 263 N.Y. 323, 189 N.E. 234 (1934), with Clark v. Dodge, 269 N.Y.

410, 199 N.E. 641 (1936).

""See, e.g., Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505

(1975). But see Zidell v. Zidell, Inc., 277 Or. 423, 560 P.2d 1091 (1977).
'"249 F.2d 482 (D.C. Cir. 1957), cited in 378 N.E.2d at 945.

"'249-F.2d at 486.

"^378 N.E.2d at 945.

""C/. Edward Shoes, Inc. v. Orenstein, 333 F. Supp. 39 (N.D. Ind. 1971) (defendant
shareholder not liable for corporate debtor's liabilities incurred after the articles of in-

corporation revoked in the absence of allegations that the defendant acted knowingly,

wilfully, or with the intent to defraud in incurring the liabilities on the corporation's



154 INDIANA LA W REVIEW [Vol. 13:133

is that it was analogous to a partnership that had been incorporated.
This would recognize the right of the parties to operate the enter-

prise to some extent as they saw fit while reemphasizing that it was
in fact a corporation.

Furthermore, the unqualified use of the term "incorporated part-
nership" would seem to ignore the established principle that an ac-
tion by the principals directly contravening a requirement of a cor-

poration law is ineffective.^'^ Although this position can be

criticized/'*^ it does recognize that in adopting a corporation act the

legislature has spoken, and thus parties cannot ignore it entirely.''^

Cressy acknowledges the overriding impact of the Indiana Act

in holding that the trial court erred in amending Shannon's articles
of incorporation to provide for a new class of nonvoting shares.''^
The court noted that the only decisions discussing whether a court's
equity powers could give it authority to order amendments to ar-
ticles of incorporation have held that the courts do not have such

authority.*'^ The court concluded that, unless a statute exists which
specifically authorizes a court to order amendments, the procedure
for amending articles as set forth in the Indiana Act'^'^ must be
followed.'^' Of course, the court was noting that the legislature had
not granted the court authority to amend articles, but indirectly, the
court was acknowledging the ultimate authority of the legislature to
determine the manner in which corporations are operated.

Cressy's contention that the shares issued to Russell's parents

should have been invalidated because the meeting at which the sale

was authorized was improperly called and Cressy's additional con-
tention that he had not been afforded his preemptive rights, were
also rejected by the court. '^^ The court, in effect, treated the issue as
one of waiver because Cressy was present at the meeting in which
Russell was authorized to sell the shares and raised no objection.

behalf). For a general discussion of when the "corporate veil" will be pierced, see H.
Henn, supra note 19, § 146-149; 1, 2 G. Hornstein, supra note 19, §§ 31, at 751-59;

Hamilton, The Corporate Entity, 49 Tex. L. Rev. 979 (1971).

"'Somers v. AAA Temporary Servs., Inc., 5 111. App. 3d 931, 284 N.E.2d 462
(1972).

"'See R. Hamilton, Corporations 437-38 (1976).

'"See generally Bradley, Toward a More Perfect Close Corporation— The Need
for More and Improved Legislation, 54 Geo. L.J. 1145 (1966).

"«378 N.E.2d at 946.

'''Id. Disabled Am. Veterans v. Hendrixson, 9 Utah 2d 152, 340 P.2d 416 (1959);
Casper v. Kalt-Zimmer Mfg. Co., 159 Wis. 517, 149 N.W. 754 (1914). See generally 7A
W. Fletcher, Cyclopedia of the Law of Private Corporations § 3716 (perm. ed.
1978).

'^oiND. Code §§ 23-1-4-1 to -7 (1976).
•^'378 N.E.2d at 946.

'''Id.



1980] SURVEY- CORPORATIONS 155

Hence, Cressy was precluded from asserting either a claim for
preemptive rights to the shares or objecting to technical deficiency

in the meeting/^^

The court observed that the trial court could have required
Cressy and Russell ''to exercise their voting rights consistent with

their obligations"^^^ or could have ordered the sale by the corpora-

tion of an equalizing number of shares, instead of exceeding its
authority by attempting to amend the articles. Unfortunately, the
latter remedy of a forced sale would have presented a problem,
because at the time of the trial Shannon's 1,000 authorized shares

had been issued and the only way additional shares could be issued
would have been to amend the articles of incorporation. It would
seem possible, however, that the court, by exercising its equity
jurisdiction, could have ordered Cressy and Russell to take the steps

necessary to amend Shannon's articles of incorporation to carry out
their intended understanding themselves, doing indirectly what the

court could not do directly. '^^

D. Merger of Not-For-Profit Corporations

An interesting but questionable case involving the merger pro-
cedures for not-for-profit corporations was decided during the
survey period. In Knightstown Lake Property Owners Association
V. Big Blue River Conservancy District,^^^ the court of appeals af-
firmed a decision in a condemnation proceeding holding that Pioneer
Village Lot Owners Association, an Indiana not-for-profit corpora-
tion, had no interest in land being condemned by the Big Blue River
Conservancy District. '^^

In 1924 the property in question was conveyed to the
Knightstown Lake Property Owners Association, also a not-for-
profit corporation.'^* All the owners of lots in the Knightstown Lake
subdivision were members of Knightstown Lake. Knightstown Lake
apparently maintained its corporate existence from 1924 until 1932,

"'See Jones v. Milton & Rushville Turnpike Co., 7 Ind. 547 (1856); 18 Am. Jur. 2d
Corporations § 251 (1965). The court did not decide whether denying voting rights to
Russell's parents was improper because they had not assigned any errors.

'^"378 N.E.2d at 946.

'''See Weil v. Beresth, 154 Conn. 12, 220 A.2d 456 (1966).
'^'383 N.E.2d 361 (Ind. Ct. App. 1978). For another discussion of this case, see

Falender, Property, 1979 Survey of Recent Developments in Indiana Law, 13 Ind. L.

Rev. 343, 351-54 (1980).

'"383 N.E.2d at 367. The property in question consisted of public spaces conveyed

to a property owners association with the expectation that the property would be con-

veyed to a municipal corporation if the subdivision ever became a municipality. This

condition had not occurred.

'^^Knightstown Lake presumably was incorporated under the Indiana Voluntary

Association Act of 1901, ch. 127, 1901 Ind. Acts 289 (repealed 1929).



156 INDIANA LA W REVIEW [Vol. 13:133

but there was no evidence that it acted in any corporate capacity,
other than to pay taxes on the property, from 1932 until 1965.

Pioneer was organized in 1965, and paid the taxes on the property

thereafter. The trial court rejected Pioneer's contention that it owned
the property and held that the property, which had been originally

conveyed to Knightstown Lake, passed to the lot owners who were
the ultimate beneficiaries of the conveyance when the association
ceased to exist. The court of appeals affirmed. ^^^ Starting with the
premise that an appellate court will not weigh conflicting

evidence, '^° the court concluded that Pioneer had not sustained the

burden of asserting title to or showing an equitable interest in the

property.'^' Consequently, Pioneer had no interest in the property

other than reimbursement for the taxes it had paid.
Pioneer contended that it was a successor to Knightstown Lake

on the basis of either a 1976 statutory merger or a 1965 de facto
merger that occurred when Pioneer was organized and undertook to
pay the taxes. The Knightstown court rejected the first argument,
holding that the right to and procedures for merging not-for-profit

corporations were governed by statute and that there was no
evidence the two organizations had complied with the statutory re-
quirements. ^^^ There was no proof that the persons acting as officers
of Knightstown Lake, who purportedly carried out the merger, had
been duly elected; no annual reports had been filed with the

secretary of state with the exception of a "composite" report for ac-

tivities from 1971 to 1975. In fact, it would appear that Knightstown

Lake had ceased to exist for failing to file annual reports long
before 1976.'^^ Thus, even if the original members of Knightstown
Lake or their successors had attempted to elect officers and effec-
tuate a merger, the entity itself no longer existed.

The court of appeals also rejected the contention that there had
been a de facto merger of Knightstown Lake and Pioneer in 1965
because the organizations had failed to demonstrate compliance with

the statute.''^" Unfortunately, this seems to be a misunderstanding of

the de facto merger doctrine. The usual de facto merger involves a

'^^383 N.E.2d at 368.

'''Id. at 365. See State ex rel. Roberts v. Graham, 231 Ind. 680, 110 N.E.2d 855

(1953).

'^'383 N.E.2d at 366-67. See Aircraft Acceptance Corp. v. Jolly, 141 Ind. App. 515,

518, 230 N.E.2d 446, 449 (1967) (citing 73 C.J.S. Property § 17 (1951)).
'^'383 N.E.2d at 366-67. See generally H. Henn. supra note 19, § 346; 1 G. Horn

STEIN, supra note 19, § 362, at 470-71.

'^^Knightstown Lake had been obligated to file annual reports since 1949, and

failure to do so was grounds for forfeiture of its articles. See Ind. Code §§ 23-3-6-1 to -3

(1976).

'^"383 N.E.2d at 366-67.



1980] SURVEY- CORPORATIONS 157

corporate reorganization not originally structured as a merger,
which a court determines to be a merger in fact for purposes of the
right of shareholders to dissent and receive the appraised value of
their shares. ^^^ Application of the doctrine is also appropriate when
there has been a good faith attempt to follow the statutory merger
procedures which falls short of the requirements. ^^^ It is at least
arguable that the Knightstown court could have found that Pioneer
was the legal successor to Knightstown Lake. Apparently, in 1965
persons directly interested in the subdivision had attempted to form
a successor organization to Knightstown Lake to control the public
spaces of the subdivision. Although the effort was not as thorough
as required, it would appear that the attempt was close enough to
have justified the court holding in favor of Pioneer.

Certainly, Pioneer had the burden of proving title, but by

holding that Pioneer failed to sustain the burden, the court produced

the anomalous result that the organization created by the land-

owners to take control of the common spaces in the subdivision had
no title or interest in the property. The unfortunate consequence of
this conclusion is that Pioneer was entitled to be reimbursed by its
own members for the taxes it had paid. The members were entitled
to receive the proceeds of the condemnation proceeding, but the

court did not indicate how the proceeds should be divided. As a
purely practical matter, a decision in favor of Pioneer would have

expedited the distribution of the award.

E. Agent's Liability

The result in Brown v. Owen Litho Service, Inc.^^'^ vividly il-
lustrates the consequences of an agent's carelessness in conducting

business on behalf of his principal and indirectly describes the con-

sequences of careless operation of a corporate enterprise. In Brown,

the court of appeals affirmed a judgment that Brown, as an in-

dividual, was liable for what he claimed to be the debts of J.J,
Brown Publishing, Inc.^^^ The dispute was over payment of Owen

'^'See, e.g., Farris v. Glen Alden Corp., 393 Pa. 427, 143 A.2d 25 (1958). See

generally H. Henn, supra note 19, § 349, at 725-26.

'''See John Mohr & Sons v. Apex Terminal Warehouses, Inc., 422 F.2d 638 (7th
Cir. 1970); Smith v. Cleveland, C, C. & St. L. Ry., 170 Ind. 382, 81 N.E. 501 (1907). See
generally 15 W. Fletcher, supra note 119, §§ 7152-7155. This aspect of the de facto
merger doctrine is similar to the de facto corporation doctrine, which arises when an
attempt to organize a corporation falls short of the procedures mandated by the ap-
plicable corporation act, but is substantial enough to justify the conclusion that a cor-

poration exists for all purposes except when challenged by the state. See generally H.
Henn, supra note 19, § 140; 1 G. Hornstein. supra note 19, §§ 27-30.

^^^384 N.E.2d 1132 (Ind. Ct. App. 1979).

*^*M at 1136. The actual nature of the corporation is unclear. The court mentioned
that the corporation was "apparently" organized as a not-for-profit corporation, id. at



158 INDIANA LAWREVIEW [Vol. 13:133

Litho's charges for printing a magazine published by Brown. Brown
contended that he incurred the debts while acting as an officer and

agent of the corporation and therefore should be absolved from per-

sonal liability/^^

An established principle of agency law is that an agent normally
is not liable for the debts of his principal. ^""^ The issue before the
court, however, was whether Brown had met the burden of
establishing that he had disclosed the agency relationship and the

existence and identity of the principal to Owen Litho.^'*^ The court of
appeals concluded that Brown had not sustained his burden despite
his contention, contrary to the testimony of an Owen Litho sales
representative, that he had made full disclosure before the printing
agreement was reached. ^"^ Brown realized that the trial court was
free to disbelieve his testimony, ^''^ and so he attempted to rely on

three pieces of documentary evidence to establish disclosure as a
matter of law.

The first two documents were checks which were imprinted
with the name of the corporation and were drawn on its account.
The checks were signed by Brown and another officer of the cor-
poration. The court discounted this evidence because the face of the
checks did not indicate the capacity in which the signators signed.

Arguably, the court was wrong on this point because the important
factor under agency law is whether the persons were authorized to
sign the checks.^'*'' Indication of the signators' capacities on the check

is of little significance as proof of a disclosed principal. ^''^ However,
the conclusion in this instance that the checks did not give notice to

Owen Litho of the agency relationship appears well founded. The
issue in Brown was Owen Litho's awareness of the relationship at
the time of the transaction. The court followed the general and
preferred view that disclosure of the previously undisclosed prin-

cipal after the contract has been executed has no bearing on the

relationship created between the agent and the third party at the

1134, but because it appears to have been intended as a profit-making venture,
organization under the Indiana Not-For-Profit Corporation Act would not have been
appropriate. See Ind. Code § 23-7-l.l-2(d) (1976).

'^^384 N.E.2d at 1133. The opinion does not indicate whether the corporation itself
was held liable. Presumably, it was but the corporation probably had no assets.

•'"Restatement (Second) of Agency §§ 320-322 (1957).
•'•384 N.E.2d at 1133-34. See Vawter v. Baker, 23 Ind. 63 (1864). See also Restate

ment (Second) of Agency § 320, Comment b (1957).
'^^384 N.E.2d at 1136.

'"M at 1134. See Neel v. Cass County Fair Ass'n, 143 Ind. App. 339, 240 N.E.2d
546 (1968).

"'Restatement (Second) of Agency § 76 (1957).
'"^M §§ 26-27. The failure to designate the representative capacity can be signifi-

cant, however, under the Uniform Commercial Code. See Ind. Code § 26-1-3-403 (1976).



1980] SURVEY- CORPORATIONS 159

time of the transaction; thus, the subsequent disclosure will not

relieve the agent from personal liability on the contract. ^"^

The Brown court was particularly persuaded by decisions from
other jurisdictions holding that the existence of checks drawn on a
corporate account, standing alone, is insufficient to disclose an agency

relationship and the existence and identity of the principal.'*^ The
court did acknowledge Potter v. Chaney,^'^^ however, in which it was
held that the defendant had fully revealed his agency because the

corporate principal had existed at the time of the transactions and

the checks paying for goods were always signed by the defendant as
president of the corporation and were drawn on the corporate ac-
count/^^ The Potter transactions, however, occurred over a period of
four years as contrasted with a period of less than six months in
Brown. A court could rightly conclude that when a third party
receives and negotiates checks drawn on a corporate account over a
long perod of time, he can be presumed to know of the corporation's
existence and to know that he is in fact dealing with a corporation.
This is not necessarily true when the period of time is short, as in
Brown.^^^

The third piece of documentary evidence relied on by Brown

was a letter, signed in the name of the president and general
manager of Owen Litho, that was addressed to the corporation. This
letter was discounted because it was the only letter addressed to

the corporation. The balance of Owen Litho's correspondence was
addressed to Brown or to the magazine. Furthermore, although the
letter bore the signature of the president and general manager, his

secretary, who was authorized to write and sign such routine let-
ters, had in fact signed it.^^^ The court of appeals concluded that the

three documents could not support the inference that as a matter of

"'384 N.E.2d at 1135. The court cited and relied on Myers-Leiber Sign Co. v.
Wierich, 2 Ariz. App. 534, 410 P.2d 491 (1966); Olympic Elec. Serv., Inc. v. Craig, 286

So. 2d 182 (La. Ct. of App. 1973); Carter v. Walton, 469 S.W.2d 462 (Tex. Ct. App.

1971).

"'384 N.E.2d at 1135-36 (citing Diamond Match Co. v. Crute, 145 Conn. 277, 141
A.2d 247 (1958); Olympic Elec. Serv., Inc. v. Craig, 286 So. 2d 182 (La. Ct. of App.

1973); Darr v. Kinchen, 176 So. 2d 638 (La. Ct. of App.), cert, denied, 248 La. 386, 178

So. 2d 664 (1965); Giglio v. Lunsford, 165 So. 2d 60 (La. Ct. of App. 1964); Wilson v.

McNabb, 157 So. 2d 897 (La. Ct. of App. 1963)).
"«290 S.W.2d 44 (Ky. 1956), noted in 384 N.E.2d at 1136 n.5.
"«290 S.W.2d at 46.

^^"The transactions in Potter "were on a day-by-day basis." Id. at 46. The problem,
of course, is to draw the line between a few transactions in a short time period and
many transactions over an extended time period.

^^'For a discussion of when notice to and knowledge of an agent will be imputed to
the principal, see W. Seavey, Agency §§ 96-102 (1964); W. Sell, Agency §§ 86, 88-92
(1975).



160 INDIANA LA WREVIEW [Vol. 13:133

law Owen Litho knew, or a reasonable person would have known,
that Brown was acting as an agent for the corporation/^^

The lesson of Brown is painfully clear. A person acting for a
principal, whether an individual or a corporation, who fails to
disclose the capacity in which he acts and the existence and identity

of the principal acts at his peril.^^^ Although an undisclosed principal

is liable for obligations incurred on his behalf by the agent, ^^'^ the

agent is jointly liable with the principal and the third party may
choose which party to pursue for the obligation.^^^

As the court noted, to avoid personal liability, an agent is
obligated to disclose the existence and identity of the principal.^^^

The agent will not be relieved of this duty even when the third per-
son had knowledge of facts and circumstances which, if pursued,

would have disclosed the existence and identity of the principal. ^^^

The general rule is that an agent of a partially disclosed principal is
bound on a contract, ^^^ and the agent is presumed to be a party in
the absence of evidence otherwise. ^^^ In effect, the agent is obliged

to give the third person actual knowledge of the existence and iden-

tity of the principal or provide that knowledge which to a
reasonable person is equivalent to actual knowledge.^^° The nature of
the relationship between the principal and the third party — fully
disclosed, partially disclosed, or undisclosed — depends on the agent's
representations and the third party's knowledge at the time of the

transaction. These are factual issues to be determined by the cir-

cumstances surrounding the transaction.^®^

•^^384 N.E.2d at 1136.

'''See Polk v. Haworth, 48 Ind. App. 32, 95 N.E. 332 (1911).

'^^Watteau v. Fenwick, [1893] 1 Q.B. 346. See generally Restatement (Second) of
Agency § 186 (1957).

'^^Restatement (Second) of Agency § 337 (1957). Furthermore, even if Brown had
disclosed the principal, the court correctly noted that he would be relieved of liability

only for transactions subsequent to the disclosure. 384 N.E.2d at 1135. See Revere

Press, Inc. v. Blumberg, 431 Pa. 370, 246 A.2d 407 (1968).
'^''384 N.E.2d at 1135 (citing Polk v. Haworth, 48 Ind. App. 32, 95 N.E. 332 (1911)).

'"See Orient Mid-East Lines v. Albert E. Bowen, Inc., 458 F.2d 572 (2d Cir. 1972)

(construing New York law); Vander Wagen Bros., Inc. v. Barnes, 15 111. App. 3d 550,
304 N.E.2d 663 (1973); Mawer-Gulden Annis, Inc. v. Brazilian & Columbian Coffee Co.,
49 111. App. 2d 400, 199 N.E.2d 222 (1964).

'''See, e.g., Hagen v. Brozozowski, 336 S.W.2d 213 (Tex. Ct. App. 1960). See
generally W. Seavey, supra note 151, § 123, at 211-12; Restatement (Second) of
Agency § 321 (1957).

'^^See authorities cited in W. Seavey, supra note 151, § 70E, at 123 n.2.
'«°See Howell v. Smith, 261 N.C. 256, 260, 134 S.E.2d 381, 384 (1964).

'''See Chambliss v. Hall, 113 Ga. App. 96, 147 S.E.2d 334, 338 (1966); Matsko v.

Dally, 49 Wash. 2d 370, 301 P.2d 1074, 1077 (1956). See also 3A W. Fletcher, supra
note 119, § 1133.



1980] SURVEY- CORPORA TIONS 161

The Brown result is clearly correct. It might seem harsh
because Brown probably believed, in good faith, that he was acting
on behalf of and as an agent of the corporation. A person in Brown's
position of ''owning" the corporation might understandably refer to

it as "his" business and not as a separate corporate entity. The
court appropriately held Brown liable for the corporation's obliga-
tions, however, because he had failed to inform third persons that

any obligations incurred were those of the corporation. In general, a
third party is justified in holding an agent liable on a contract when
that party thinks the agent is the only party to be bound, even if an

undisclosed principal is also liable. Also, it would not have been ap-
propriate to have held Owen Litho to the general standard that a
third party, aware that a contract is to be made on behalf of a
known principal, is obligated to determine the credit worthiness of
the principal or suffer the consequences. Owen Litho was not aware
that anyone but Brown was involved, and thus could not have been
held responsible for determining the credit worthiness of a corpora-

tion which it did not know existed and which might not have been
acceptable as a creditor if known.

F. Statutory Developments162

1. Business Takeover Act. — The most significant legislative
development during the survey period was Public Law 235, enacting
a new Indiana Business Takeover Act^*^^ and repealing the old
takeover act.^^" The new Act clearly was passed in response to the
Fifth Circuit Court of Appeals decision in Great Western United
Corp. V. Kidwell,^^^ affirming a lower court decision^*^^ declaring the

Idaho Business Takeover Act unconstitutional^^^ because it was
preempted by the Williams Act amendments to the 1934 Act'^*^ and
was an impermissible burden on interstate commerce in violation of

'^^The author wishes to express his appreciation to Christine Ratliff Lundquist for

her assistance in preparing this section of the Survey.

'''Act of Apr. 6, 1979, Pub. L. No. 235, § 1, 1979 Ind. Acts 1122 (codified at Ind.

Code §§ 23-2-3.1-1 to -11 (Supp. 1979)) [hereinafter referred to as the new Act].
'''Ad of Apr. 6, 1979, Pub. L. No. 235, § 2, 1979 Ind. Acts 1129 (repealing Ind.

Code §§ 23-2-3-1 to -12 (1976)) [hereinafter referred to as the old Act]. The old Act was
discussed in Galanti, Business Associations, 1975 Survey of Recent Developments in

Indiana Law, 9 Ind. L. Rev. 33, 53-59 (1975) [hereinafter cited as 1975 Survey], and
Note, The Indiana Business Takeover Act, 51 Ind. L.J. 1051 (1976).

•'^577 F.2d 1256 (5th Cir. 1978), rev'd on other ground sub nom. Leroy v. Great W.
United Corp., 47 U.S.L.W. 4844 (U.S. June 26, 1979).

'*^'Great W. United Corp. v. Kidwell, 439 F. Supp. 420 (N.D. Tex. 1978). rev'd on
other grounds, sub nom. Leroy v. Great W. United Corp., 47 U.S.L.W. 4844 (U.S. June
26, 1979).

'''577 F.2d at 1286. The Idaho Business Takeover Act was codified at Idaho Code
§§ 30-1501 to -1513 (Supp. 1977).

''«577 F.2d at 1281. See 15 U.S.C. §§ 78m(d)-(e), 78h(d)-(f) (1976).



162 INDIANA LA WREVIEW [Vol. 13:133

the commerce clause. ^^^ Unfortunately, the Great Western litigation
ended not with a bang but with a whimper. The Supreme Court, in-
stead of deciding the case on the merits which would have resolved

the status of the many state takeover statutes, reversed the Fifth
Circuit on procedural grounds, ^^° holding that venue to challenge the
Idaho statute in the Northern District of Texas was improper.^^^

Justice Stevens, writing for the majority, concluded that section

28(a) of the 1934 Act^^^ did not impose a duty on Idaho securities of-

ficials, and consequently venue in the Texas court would not lie
under section 27.*^^ Although the interests of defendants must be
considered in venue cases, the unfortunate consequence of the

Court's decision is that a tender offeror wishing to challenge the

constitutionality of a state takeover statute must do so within that
state. As Justice White pointed out in his dissent, offerors might
forego making tender offers rather than undertaking to attack a
takeover act or defend an enforcement action in each state claiming

jurisdiction.^^* The sheer logistics of attacking statutes in different
states might be enough to discourage tender offers which, unfor-

tunately, is often the main purpose of state takeover laws.

The old Act undoubtedly would have been invalid if Great
Western had been affirmed. If the Supreme Court had reversed on
the merits, the old Act might have passed constitutional muster, but

this is now of academic interest only. The constitutionality of the
new Act, however, has been upheld^^^ without an in-depth discussion
of the substantive issues raised in Great Western.^^^

'''517 F.2d at 1286. See U.S. Const, art. I, § 8, cl. 3. Great Western is not the only

case challenging the constitutionality of business takeover acts. In Uarco Inc. v.

Daylin, Inc., No. 78-C-4246 (N.D. 111., filed Oct. 30, 1978), the court preliminarily en-

joined the Illinois Secretary of State from enforcing the Illinois Business Takeover Act

(codified at III. Ann. Stat. ch. 121 1/2, §§ 137.51.70 (Smith-Hurd Supp. 1979). The Illi-

nois Act was also enjoined in Mite Corp. v. Dixon, No. 79-C.-200 (N.D. 111., filed Jan. 19,

1979).

In Dart Indus. Inc. v. Conrad, 462 F. Supp. 1 (S.D. Ind. 1978), the court entered a

temporary restraining order enjoining enforcement of the old Act and the Delaware

Tender Offers Act, Del. Code tit. 8, § 203 (1976). Subsequently, the Indiana Securities

Commissioner issued an order exempting Dart's tender offer for the shares of P.R.

Mallory & Company from the old Act, and the Indiana officials were dismissed from
the case. The court thereafter held that the Delaware Act was preempted by the

Williams Act and was invalid under the commerce clause, and the court granted per-

manent injunctive relief. 462 F. Supp. at 14-15. Also, a challenge to a takeover statute

was declared moot when the offeror decided not to proceed in Tyco Labs., Inc. v. Con-
nelly, [1979] Fed. Sec. L. Rep. (CCH) 1 96,933 (D. Mass.).

""Leroy v. Great W. United Corp., 47 U.S.L.W. 4844 (U.S. June 26, 1979).
'''Id. at 4846-47.

'^'15 U.S.C. § 78bb(a) (1976).

'"47 U.S.L.W. at 4847. See 15 U.S.C. § 78aa (1976).
'^"47 U.S.L.W. at 4848 (White, J., dissenting).

"^City Investing Co. v. Simcox, No. 1P-79-462-C (S.D. Ind., filed July 27, 1979).

'^•^See notes 223-46 infra and accompanying text.



1980] SURVEY- CORPORATIONS 163

The definition section of the new Act,'" like the definition sec-
tion of the old Act/^*^ is jurisdictional in nature because it deter-

mines which tender offers are covered. Several definitions in the

two acts remain the same/^^ whereas others, though worded dif-

ferently, are identical in substance and form.'^° The definition of
"equity security," revised but still broadly defined, includes stock or

similar securities possessing the right to vote on corporate matters

at the time of the offer; securities convertible into such voting

securities; warrants or rights to purchase such securities, as well as

any other security denominated by regulations of the securities com-

missioner as necessary for investor protection. ^^' Thus, the new Act
is not limited to corporate common shares but includes all securities
that can influence control of the business enterprise.

A major change was made to the definition of "takeover offer."
The new Act still defines takeover as "an offer to acquire or an ac-
quisition of any equity security of a target company, pursuant to a

tender offer or request or invitation for tenders, if, after the acquisi-

tion, the offeror is directly or indirectly a record or beneficial owner
of more than ten percent ... of any class of the outstanding equity
securities of the target company ."'^^ Certain transactions are excluded
from the definition of a takeover, however, such as ordinary

brokerage transactions, diminimus offers or acquisitions not ex-

ceeding two percent of the class within the preceding twelve months,
or transactions determined by a ruling of the securities commis-

sioner to be takeover offers not having or intended to have the ef-

fect of changing or influencing the control of the target

corporation.
^^^

'"IND. Code § 23-2-3.1-1 (Supp. 1979).
'''Id. § 23-2-3-1 (1976) (repealed 1979).

'''Compare id. § 23-2-3-l(f) (1976) (repealed 1979), with id. § 23-2-3.1-l(f) (Supp. 1979)

(offeror). Compare id. § 23-2-3-l(g) (1976) (repealed 1979), with id. § 23-2-3.1-l(g) (Supp.
1979) (offeree). Compare id. § 23-2-3-l(h) (1976) (repealed 1979), with id. § 23-2-3.1-l(h)
(Supp. 1979) (person).

'''Compare id. § 23-2-3-l(d) (1976) (repealed 1979), with id. § 23-2-3.1-l(d) (Supp.

1979) (control).

'''Compare id. § 23-2-3-l(e) (1976) (repealed 1979), with id. § 23-2-3.1-l(e) (Supp.

1979).

"'Id. § 23-2-3.1-1(1) (Supp. 1979). Neither the 1934 Act nor the Williams Act amend-

ments define the term tender or takeover offer, but the meaning of the term has
become established to some extent under federal law. See generally Note, The
Developing Meaning of "Tender Offer" Under the Securities Exchange Act of 1934, 86
Harv. L. Rev. 1250 (1973). In February 1979, the SEC reaffirmed its position that
because of the dynamic nature of tender offers, "a definition of the term 'tender offer'

is neither appropriate or [sic] necessary." [1979 Transfer Binder] Fed. Sec. L. Rep.

(CCH) 1 81,935. The SEC, however, recently asked its staff to draft a rule to settle the
issue of what constitutes a tender offer. See The Wall Street Journal, July 18, 1979, at 5,
col. 1.

'"iND. Code § 23-2-3.1-l(i)(l)-(2), (4) (Supp. 1979).



164 INDIANA LA WREVIEW [Vol. 13:133

The new Act, as in the old Act, also excludes offers by the
target company to purchase its own equity securities. ^^"^ This exemp-
tion can be criticized because of the relatively recent phenomenon of
publicly held corporations "going private" a few years after going

public by buying the shares in the hands of a presumably unhappy
public. ^^^ These shareholders are entitled to protection, and the

takeover statute should be extended to include them. The exclusion
does permit a tender for securities to increase a supply of treasury

shares for corporate purposes, but if this were the sole purpose of
the exclusion, it should have been drawn more narrowly. Also, in
purchasing its own shares the corporation might be required to have
an "agent," as defined under the Indiana Securities Act,^^^ carry out

the acquisition, with such a transaction subject to the antifraud^^^

and criminal and civil penalty provisions of that act.^^^ For this type

of transaction, however, no information has to be disclosed —

a

critical omission if the new Act is designed to protect the investor
and not corporate management, which usually benefits from a "go-
ing private" transaction.

Under the old Act, any company with less than fifty owners of
record at the time of a takeover offer was excluded from the defini-
tion of a takeover. '^^ Under the new Act, the same result is achieved
by excluding "an issuer which does not have a class of equity

securities held of record by fifty ... or more persons as of the time
of the offer"^^° from the definition of a target company.

One major difference in the new Act is that tender offers in-
itiated or approved by the board of directors of the target company
are no longer excluded as they were under the old Act.^^^ Thus, the
so called "friendly" tender offer is now subject to regulation. This is
a decided improvement, limiting management from "selling out" the
shareholders. ^^^

'''Compare id. § 23-2-3-l(i)(4) (1976) (repealed 1979), with id. § 23-2-3.1-l(i)(3) (Supp.

1979).

'*^See generally 1975 Survey, supra note 164, at 55 n.lOl. The SEC recently
adopted rules relating to "going private" transactions which prohibit fraudulent acts.

[1979 Transfer Binder] Fed. Sec. L. Rep. H 82,166-67.
'««IND. Code § 23-2-l-l(b) (Supp. 1979).
''Ud. § 23-2-1-12 (1976).

•««M §§ 23-2-1-18.1 to -19 (1976 & Supp. 1979). A shareholder derivative suit might
afford some protection if there is abuse. See Perlman v. Feldman, 219 F.2d 173 (2d
Cir.), cert, denied, 349 U.S. 952 (1955). Procedural hurdles, however, decrease the effec-

tiveness of such a remedy. See generally H. Henn, supra note 19, §§ 358-359; 2 G.
HORNSTEIN, supra note 19, § 734.

^ND. Code § 23-2-3-l(i)(2) (1976) (repealed 1979).
'''Id. § 23-2-3.1-l(j)(5) (Supp. 1979).

'''See id. § 23-2-3-l(i)(5) (1976) (repealed 1979).

'^^One section of the new Act may cause a problem in this respect because it
authorizes the securities commissioner to exempt "a takeover offer that is not made



1980] SURVEY- CORPORATIONS 165

Perhaps the most significant change in the definition section of

the new Act is in the definition of "target company." The old Act
defined a target company as "a corporation or other issuer of
securities which is either organized under the laws of this state or

has its principal place of business or a substantial portion of its total

assets in this state."^^^ The new Act, however, defines "target com-
pany" as "an issuer of securities which is organized under the laws

of this state, has its principal place of business in this state, and has

substantial assets in this state."^^* In other words, the old Act ap-

plied if any one of the three elements — incorporation, principal place
of business, or substantial portion of assets — was satisfied, but the
legislature drastically narrowed the scope of the new Act by requir-
ing all three elements to coalesce. Whether this narrowing will pro-
tect the new Act from constitutional challenge remains to be seen.'^^

The definition of target company under the old Act was so broad
and had such extraterritorial scope that, theoretically, Indiana could

have applied the term to a Saudi Arabian making a tender offer for
English-owned shares of General Motors Corporation because of the

extent of General Motors' Indiana assets. Of course, the old Act used

the phrase "substantial assets," and the securities commissioner

could have determined that the assets of General Motors in Indiana,

though substantial in absolute terms, were not substantial relative
to the worldwide assets of General Motors; thus, such a tender offer

would have been exempt. ^^^

Also, a target company was defined under the old Act as "a cor-
poration or other issuer of securities,"'^^ whereas under the new Act
it is defined as "an issuer of securities."'^^ Although the language
has been changed, it still appears that noncorporate business enter-
prises are subject to the new Act.

Finally, the old Act excluded target companies such as insurance
companies, financial institutions, or public utilities for which a
takeover offer was subject to approval by a state or federal

for the purpose of, and not having the effect of, changing or influencing the control of
a target company." Id. § 23-2-3. 1-1(2)(4) (Supp. 1979). The commissioner thus has con-
siderable discretion to exempt friendly tender offers, and if a target's board of direc-
tors approved an offer, the commissioner might be favorably disposed to exempt the
offer as not "changing or influencing the control" of the target company.

'''Id. § 23-2-3-l(j) (1976) (repealed 1979) (emphasis added).

'''Id. § 23-2-3.1-l(j) (Supp. 1979) (emphasis added).

'^^ee notes 223-46 infra and accompanying text.

'^^Apparently, this was done in several tender offer filings under the old Act. See
Dart Indus. Inc. v. Conrad, 462 F. Supp. at 7 (S.D. Ind. 1978).

''iND. Code § 23-2-3-l(j) (1976) (repealed 1979).
'''Id. § 23-2-3.1-l(j) (Supp. 1979).



166 INDIANA LA W REVIEW [Vol. 13:133

regulatory agency /^^ This feature has been carried over to the new
Act.^°°

The key substantive provisions of the old Act have not been
changed. A takeover, as defined under either Act, is permitted only
if the offer has become effective or is exempted by regulation or
order of the securities commissioner.^"^ The new Act provides that
prior to a tender offer, the offeror must file a disclosure statement
with the Indiana securities commissioner and deliver a copy of the

statement to the president of the target company at its principal of-
fice by the same date.^°^

Perhaps the most significant difference between the new Act
and the old Act is in the nature of the disclosure statement. The
disclosure statement under the old Act was similar to the Indiana
Securities Act registration statement,^"^ including offerors subject to

the filing requirements of the Williams Act.^"" Under the new Act, in
a clear effort to avoid the Williams Act preemption ground found of-

fensive in Great Western, the detailed disclosure statement must be
filed only when the takeover is not subject to any requirement of
federal law.^°^ If a tender offer is subject to the Williams Act or any

other federal law, one copy of each document filed with the SEC or
any other federal agency will satisfy the requirement.^"'^ The require-
ment that the material terms of the proposed offer be publicly
disclosed when the disclosure statement is filed has been
eliminated.

^"^

The new Act provides that "[a] takeover offer may be made . . .
fifteen . . . business days after the date of filing the statement or

such shorter time as the commissioner orders."^"*^ Shares may not be
purchased or paid for within the first fifteen business days after the

'''Id. § 23-2-3-12 (1976) (repealed 1979). See generally Galanti, Business Associa-

tions, 1976 Survey of Recent Developments in Indiana Law, 10 Ind. L. Rev. 57, 86

(1976).

^""IND. Code §§ 23-2-3.1-l(j)(l)-(4) (Supp. 1979).

^''Compare id. § 23-2-3-2(a) (1976) (repealed 1979), with id. § 23-2-3.1-2 (Supp. 1979).

The offeror still must file a consent to service of process and pay a filing fee of $750.

Compare id. § 23-2-3-2(c), -7 (1976) (repealed 1979), with id. § 23-2-3.1-4 (Supp. 1979). An
Indiana attorney need no longer file the statement. See id. § 23-2-3-2(b) (1976) (repealed

1979).

''Hd. § 23-2-3.1-3 (Supp. 1979).

'"^Compare id. § 23-2-1-5 (1976) (Securities Act), with id. §§ 23-2-3-2(b)-(c) (1976)

(repealed 1979) (old Act).

^"n5 U.S.C. §§ 78m(b)-(c), 78n(d)-(f) (1976).

^°^IND. Code § 23-2-3.1-5 (Supp. 1979).

'''Id.

'""Id. § 23-2-3-2(b) (1976) (repealed 1979). This requirement prevented persons with

advance knowledge of the takeover from taking advantage of it on the securities

market.

''Ud. § 23-2-3.1-6 (Supp. 1979).



1980] SURVEY-CORPORATIONS 167

offer, or in violation of any order of the securities commissioner.^"^

Thus, there is a minimum of thirty days between the time when the
corporate management of the target company becomes aware of a
potential tender offer and the time when the shares can be purchased.
This obviously favors the target management because it eliminates
the quick tender offer known as the "Saturday night special," and
gives the target management an opportunity to defend a takeover.^^°

The new Act still has a pro-management title, but it is an im-
provement over the old Act. The old Act provided that a takeover
could not become effective until twenty days after the filing of the
disclosure statement or any amendment thereto, except by order of
the commissioner.^" It further provided that the effectiveness of an

offer could be delayed if the commissioner ordered, or the target

company requested, a hearing to determine whether the proposed
tender offer was fair and equitable to the security holders.^^^ By
carefully planned stalling tactics, the target corporation's manage-

ment could delay an offer for up to 100 days, not including the addi-
tional time available to appeal an unfavorable order by the commis-

sioner.^'^ This potential for delay could have given management an
opportunity to better the terms of the offer, benefiting the

shareholders, but it also could have been used to thwart an offer

which may have benefited the shareholders.
Under the new Act, the securities commissioner must hold a

hearing within fifteen days of the statement's filing date.^"* After

the hearing but within those fifteen days, if "the commissioner finds

that the takeover offer is unfair or inequitable to the holders of the

securities of the target company, or the takeover offer is not made
to all offerees on substantially equal terms, he shall by order pro-

hibit the purchase of shares tendered in response to the takeover of-

fer or condition purchase upon changes or modifications."^''^

The requirement under the old Act for the target company, as
well as the offeror, to file copies of materials sent to shareholders

with the securities commissioner has been eliminated.^'*' Similarly,

the antifraud provision of the old Act,^'^ which applied to both target

^''Id. § 23-2-3.1-8.

^'"The advance notice requirement still presents a problem even though the SEC
recently lengthened to 30 days the time a tender offer must remain open. [1979
Transfer Binder] Fed. Sec. L. Ref. (CCH) 1 81,935.

'"IND. Code § 23-2-3-2(e) (1976) (repealed 1979).
'''Id. § 23-2-3-2(e)-(f).

^'^S^e generally 1975 Survey, supra note 164, at 59.

'•"IND. Code § 23-2-3.1-7 (Supp. 1979).
^'^/d "Not less than five (5) business days' notice of a hearing must be given to the

target company and the offeror." Id. § 23-2-3. l-9(c).
'''Id. § 23-2-3-3 (1976) (repealed 1979).

'"Id. § 23-2-3-4.



168 INDIANA LA W REVIEW [Vol. 13:133

companies and offerors, does not appear in the new Act. The provi-
sion in the old Act which dealt with the securities of the target com-

pany that had been tendered was also deleted.^^^
The new Act gives the securities commissioner injunctive

powers and the right to obtain judicial relief against violations of

the Act similar to the powers granted under the old Act and the In-
diana Securities Act.^^^ The new Act, as did the old Act, authorizes
the target company, the offeror, or any offeree to bring suit to en-

join violations or to enforce compliance.^^"

Notwithstanding the order upholding the new Act entered in City
Investing Co. v. Simcox,^^^ the new Act's ultimate fate depends on
whether the rationale of the Texas district court and the Fifth Circuit

in striking down the Idaho Business Takeover Act in Great Western
would prevail if the proper case were to reach the Supreme Court.^^^ A
brief review of the case is necessary for an appreciation of the pros-

pects of the new Act.^^^
A two-fold rationale was behind the Fifth Circuit's decision in

Great Western. The first ground for striking down the Idaho statute
was that it conflicted with and frustrated the clear purpose of the
Williams Act amendments to the 1934 Act requiring disclosures by
companies making tender offers. ^^'^ As the court noted, the Williams
Act was intended to protect shareholders of target companies by re-
quiring disclosure while not unduly impeding cash takeover bids.^^^

The Idaho statute destroyed the "careful balance" between the in-
terests of the offeror and those of the management of the target
company by tilting the contest in favor of the management. Because
it favored management, the statute could have been detrimental to
shareholders by discouraging tender offers or by reducing the offer

price.
^^'^

^'*M § 23-2-3-5. See generally 1975 Survey, supra note 164, at 58.

'''Compare Ind. Code § 23-2-1-17.1 (1976) (Securities Act), with id. § 23-2-3-8 (1976)

(repealed 1979), and id. § 23-2-3.1-9(a), -10(a), (c) (Supp. 1979).

'"^Compare id. § 23-2-3-8(b) (1976) (repealed 1979), with id. § 23-2-3.1-10(b), (c) (Supp.

1979). The new Act's provision for judicial review of any final order of the securities

commissioner is a similar but more limited version of the old Act's comparable provi-

sion. Compare id. § 23-2-3-11 (1976) (repealed 1979), with id. § 23-2-3.1-11 (Supp. 1979).

'^'No. IP-79-462-C (S.D. Ind., filed July 27, 1979).

^^^The decisions cited in note 126 supra relied on Great Western in striking down

takeover acts.

^^^The discussion will focus on the Fifth Circuit's opinion, but the rationale of that

court and the trial court were basically the same. The Great Western decision was

first examined and discussed by this author in Galanti, Business Associations, 1977

Survey of Recent Developments in Indiana Law, 11 Ind. L. Rev. 27, 46 (1978) [herein-

after cited as 1977 Survey].
""15 U.S.C. §§ 78m(b)-(c), 78n(d)-(f) (1976).

"^577 F.2d at 1277.

^^^Great Western in fact reduced its initial bid by one dollar because of manage-



1980] SURVEY- CORPORATIONS 169

The court recognized that federal law did not and could not
totally occupy the field of securities regulation,^^^ but the court con-

cluded that the Idaho statute was so contrary to the Williams Act in
intent and purpose that it was preempted by the latter under the
supremacy clause of the Constitution.^^^ The statute was also struck
down under the commerce clause of the Constitution^^^ because it
had a substantial effect on interstate commerce and did not ac-
complish a legitimate local purpose.^^"

There are no hard and fast rules which determine when a par-
ticular state statute will be deemed preempted by federal legisla-
tion. The Supreme Court generally decides preemption cases on a
case-by-case basis.^^' The court will hold that a state statute or
regulation has been preempted by federal legislation or regulations
when it finds that Congress intended the federal law to be para-
mount.^^^ It should be noted, however, that recent Supreme Court

merit's opposition to the tender offer. See Business Week, Oct. 3, 1977, at 40. The bid

was eventually raised, however, when Great Western reached an accord with the

target company. See The Wall Street Journal, Oct. 6, 1977, at 16, col. 3.

^"Section 18 of the Securities Act of 1933, 15 U.S.C. § 77r (1976), and § 28(a) of the

1934 Act, 15 U.S.C. § 78bb(a) (1976), specifically allow state regulation of securities.

See SEC v. Nat'l Sec, Inc., 393 U.S. 453, 461 (1969). However, § 28(a) permits state
regulation only to the extent that it does not conflict with the federal regulatory

scheme.
^^«577 F.2d at 1275. See U.S. Const, art. VI, cl. 2.

^^'U.S. Const, art. I, § 8, cl. 3.
^^°577 F.2d at 1286. Most commentators have agreed with the Fifth Circuit's deci-

sion in Great Western. See generally Langevoort, State Tender-Offer Legislation: In-

terests, Effects, and Political Competency, 62 Cornell L. Rev. 213 (1977); Wilner &
Landy, The Tender Trap: State Takeover Statutes and Their Constitutionality, 45

FORDHAM L. Rev. 1 (1976); Note, Commerce Clause Limitations Upon State Regulation

of Tender Offers, 47 S. Cal. L. Rev. 1133 (1974). But see Note, Securities Law and the
Constitution: State Tender Offer Statutes Reconsidered, 88 Yale L.J. 510 (1979).

'^'See City of Burbank v. Lockheed Air Terminal, Inc., 411 U.S. 624 (1973), in

which the Court stated: "Our prior cases on pre-emption are not precise guidelines in

the present controversy, for each case turns on the peculiarities and special features of

the federal regulatory scheme in question." Id. at 638.

^^^The intent may be found from the express language of the statutes, see Gold-
stein V. California, 412 U.S. 546 (1973); Rice v. Santa Fe Elevator Corp., 331 U.S. 218

(1947); by inference from legislative history, see Ray v. Atlantic Richfield Co., 435 U.S.
151 (1978); Huron Portland Cement Co. v. City of Detroit, 362 U.S. 440 (1960); from the
comprehensive nature of the congressional legislative scheme, see City of Burbank v.

Lockheed Air Terminal, Inc., 411 U.S. 624 (1973); Rice v. Santa Fe Elevator Corp., 331

U.S. 218 (1947); from the need to promote a uniform national policy in a particular

area, see Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132 (1963); San
Diego Trades Council v. Garmon, 359 U.S. 236 (1959); or when the state statute or
regulation stands as an obstacle to the accomplishment and execution of the full pur-

poses and objectives of Congress, Hines v. Davidowitz, 312 U.S. 52 (1941).

It should be recognized that the Williams Act is not a pervasive regulatory

scheme, and it is conceivable that the Supreme Court could allow the state statutes to
stand as a second-line protection for investors. This would recognize the long-accepted



170 INDIANA LA W REVIEW [Vol. 13:133

decisions have reflected a hostility toward presuming or inferring
congressional intent to preempt a field, and this attitude would cer-
tainly help a state defending a takeover statute from a preemption
challenge.^^^

The Fifth Circuit in Great Western did not, as it could not, find
an express intent on the part of Congress to preempt the regulation
of tender offers and takeovers when it adopted the Williams Act
amendments. The Fifth Circuit relied on the test of Hines v.
Davidowitz,^^'^ which preempts state statutes or regulations when
they stand as obstacles to the accomplishment and execution of the

purposes and objectives of federal legislation. The court invalidated
the Idaho statute because its "fiduciary" approach, which examines

the fairness of the offer to the shareholders, collided with the

"market" approach of the Williams Act, which envisions a scheme
leaving the outcome of a takeover attempt to the marketplace by
providing adequate information to the offerees.^^^

Because many of the blatantly pro-management features, such as
the right of the target company to request a hearing by the
securities commissioner and the exemption of the friendly tender of-

fer, have been eliminated from Indiana's statute, the new Act is a
decided improvement over the old Act. Hov/ever, the new Act still
has a "fiduciary" cast to it that might conflict with the balanced

"market" approach of the Williams Act and thus prove fatal under

the reasoning of Great Western.

For example, the advance filing requirement gives the manage-

ment of the target company valuable additional time, not available
under the Williams Act, during which it can work to defeat the of-
£gj. 236 Furthermore, the right of the securities commissioner to block

a tender offer which he finds to be "unfair or inequitable to the

holders of the securities of the target company," or which "is not

made to all offerees on substantially equal terms" gives him the
power to stop a takeover attempt that has satisfied all the
disclosure requirements of the Williams Act.^^^

As already noted, one major difference between the two
takeover acts is that under the new Act the extensive disclosure re-
quirements apply only to takeover offers which are not subject to

state role in the securities area. See Merrill, Lynch, Pierce, Fenner & Smith, Inc. v.
Ware, 414 U.S. 117, 137 (1973). See generally Note, Securities Law and the Constitu-
tion: State Tender Offer Statutes Reconsidered, 88 Yale L.J. 510, 519-20 (1979).

'''See, e.g., Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 132 (1978);
DeCanas v. Bica, 424 U.S. 351 (1976); New York State Dep't of Social Serv. v. Dublino,
413 U.S. 405 (1973).

^'^312 U.S. 52 (1941).

'^^'577 F.2d at 1276-81.

'^^"IND. Code § 23-2-3.1-3 (Supp. 1979).
'''Id. § 23-2-3.1-7.



1980] SURVEY-CORPORATIONS 171

any requirement of federal law.^^^ The ultimate success of this
stratagem remains to be seen. Certainly, the burden imposed on of-

ferors subject to the Williams Act has been lessened, but this is ir-

relevant if the entire scheme of the new Act, which gives manage-
ment advance notice of the offer and which gives the securities com-
missioner authority to, in effect, regulate the substantive terms of

the tender offer, is still an "obstacle" in the way of the federal
scheme established by the Williams Act. It appears that the new
Act's scheme is such an obstacle. In fact, it is possible if not prob-
able that the only way to insure that a takeover statute would sur-
vive a preemption challenge would be to exclude tender offers for

target companies that are subject to the Williams Act.^^^
Even if the new Act can withstand a challenge on preemption

grounds, it might fall under the commerce clause rationale of Great
Western. The new Act's jurisdictional scope has been narrowed by
making it applicable only to target companies that are organized

under the laws of Indiana, have their principal places of business in

this state, and have substantial assets in this state.^"" The impact on
interstate commerce is much less than under the old Act, but it
might still be too much. Cash tender offers for such targets will con-

tinue to involve interstate commerce because the mail, telephones,
and other instrumentalities of interstate commerce will be used. The
new Act does not require the offerees to be citizens or residents of
Indiana, even though the target company must have close Indiana

-

ties. Thus, the new Act still has extraterritorial effects because it
applies to offers to persons who have no connection with Indiana
other than owning shares of an Indiana corporation.

Consequently, the requisite local public interest and benefit that

sustain state statutes affecting interstate commerce might be ab-
sent.^'" Protecting Indiana investors is a legitimate state interest,

but this interest might not be sufficiently pervasive to save a

statute which applies to investors in other states as well. A state's
interest in the benevolent management of a corporation, which can
influence the corporation's commitment to a community and the
nature of life in the community, was also recognized by the Fifth
Circuit in Great Western.'^^'^ This interest is laudable and legitimate,

but the burdens imposed on interstate commerce might be
disproportionate to the legitimate benefits. Of course, an intent to

'^^^See notes 203-07 supra and accompanying text.

'^^'Ifl other words, it might be necessary to exclude tender offers for companies

that are registered under § 12 of the 1934 Act. 15 U.S.C. § 781 (1976).

^*°See notes 193-95 supra and accompanying text,

'''See, e.g.. Pike v. Bruce Church, 397 U.S. 137 (1970); Huron Portland Cement Co.

V. City of Detroit, 362 U.S. 440 (1960).
^^'^577 F.2d at 1286.



172 INDIANA LAWREVIEW [Vol. 13:133

protect incumbent management or prevent the removal of local
businesses from Indiana is clearly not legitimate when a burden is
imposed on interstate commerce.^""^

The purpose of the new Act ostensibly is to provide Indiana
shareholders with adequate information about a tender offer and to

give them adequate time to respond intelligently. This again is
laudable, but the Act may have gone too far. It has been recognized
that "[sjtate tender offer regulations can permissibly promote this

legitimate local interest [protection of resident shareholders] only if

they are limited to the protection of state residents and the regula-

tion of essentially intrastate transactions."^'*'' In other words, to

withstand a commerce clause challenge, the takeover statute might
have to adopt the traditional Blue Sky approach, which would limit
application strictly to Indiana transactions.^"*^

Although the answer is far from certain, it is distinctly possible

that the new Act is constitutionally flawed. The Act maintains a
"fiduciary approach" as contrasted with the "market approach" of

the Williams Act, and could be preempted as an obstacle to the ac-
complishment of the purposes of the federal statute. Although the

jurisdictional scope of the new Act has been narrowed, which im-
proves its propsects under a commerce clause attack, the new Act
can operate to deprive shareholders in other states of an opportuni-

ty to accept a cash tender offer. This could place an intolerable

burden on interstate commerce even when balanced with the
benefits. The new Act thus appears designed to protect the "ins"
and "locals' from "outsiders" and "[l]ike most legislation which is

xenophobic and parochial, [the new Act like other] state bulwarks
against 'raiding' . . . [is] often offensive to common sense."^"*^

'"See Pike v. Bruce Church, Inc. 397 U.S. 137 (1970); 577 F.2d 1256.
^"^Note, Securities Laws and the Constitution: State Tender Offer Statutes Recon-

sidered, 88 Yale L.J. 510, 529 (1979).

^"^M See also E. Aranow & H. Einhorn, Tender Offers for Corporate Control
157 (1973); E. Aranow & H. Einhorn & G. Berlstein, Developments in Tender
Offers for Corporate Control 231 (1977). However, even if the Act were so

amended, it would still be necessary to determine whether it protected investors or

furthered other legitimate state interests without unduly burdening interstate com-

merce. It is not clear that commerce would not be burdened. An offeror might still
have to comply with other tender offer statutes, and although the right of manage-

ment to demand a hearing has been eliminated, the mandatory hearing requirement

can be burdensome to an offeror faced with similar hearing requirements under other

statutes. Furthermore, there is still the advance notification requirement which ap-

pears to benefit incumbent management rather than the shareholders. Protection of

management rather than shareholders is not a legitimate state interest; thus, it would

seem that the requirement would be an impermissible burden on interstate commerce.

^"^See generally Gould & Jacobs, The Practical Effects of State Tender Offer
Legislation, 23 N.Y.L. ScH. L. Rev. 399, 402 (1977).



1980] SURVEY- CORPORATIONS 173

2. Amendments to the General Corporation and Not-for-Profit
Corporation Ac^s. — Another significant legislative development was
the enactment of Public Law 233,^^^ which amends various sections
of the Indiana General Corporation Act^*^ and- the Indiana Not-for-

Profit Corporation Act.^'*^ Although some of the legislative changes
are sensible and noncontroversial, others are open to criticism.

One of the major statutory changes was an amendment to sec-
tion 23-l-2-ll(bP° of the Indiana Act. That section now permits a cor-
poration to have a one-member board of directors, regardless of the
number of shareholders.^^^ Previously, the section required that the
board of directors of a corporation have at least three members
unless there were fewer than three shareholders.^^^ The amendment
can be criticized with respect to form as well as substance.

In terms of form, the statute is deficient insofar as it indirectly,

rather than directly, authorizes a one-member board of directors.
Although the intent of the legislature and the effect of the new
amendment are clear, the language itself could have been more
precise. For instance, the legislature might have amended the initial
portion of section 23-1-2-1 Kb) to read: "The board of directors of a
corporation shall consist of one or more members. Unless otherwise
provided in the articles of incorporation, the number of the directors
shall be fixed by the bylaws . . . ."

The amendment is defective in substance as well as form. The
statutory language permitting a corporation to have only one direc-

tor when there is more than one shareholder might ease the task of
the estate planner whose client wishes to distribute corporate
shares to beneficiaries while maintaining complete control of the

corporation as the sole director, but the amendment puts the minori-
ty shareholders of such a corporation in an unfortunate position by

subjecting their interests to the ''dictatorial" actions of the sole

director. The director is bound by the general statutory re-

'"^Act of Apr, 9, 1979, Pub. L. No. 233, 1979 Ind. Acts 1089 (codified in scattered

sections of Ind. Code tit. 237). The Act is similar to a proposed bill drafted by the of-
fice of the Indiana Secretary of State for presentation by the Indiana Corporations

Survey Commission to the Indiana General Assembly during its 1978 session.
'"^IND. Code §§ 23-1-1-1 to -12-6 (1976 & Supp. 1979) [hereinafter referred to as the

Indiana Act].

nwD. Code §§ 23-7-1.1-1 to -66 (1976 & Supp. 1979).
'''Id. § 23-1-2-1 Kb) (Supp. 1979).

^^'Section 23-l-2-ll(b) now reads in pertinent part: "Unless otherwise provided in
the articles of incorporation, the number of the directors, whether one (II or more,
shall be fixed by the by-laws . . . ." Id. (emphasis added).

'''Id. § 23-l-2-ll(b) (Supp. 1978) (amended 1979). This former version provided that
when all the shares of a corporation were owned beneficially and of record by either
one or two persons, the number of directors could be less than three, but not less than
the number of shareholders. Id.



174 INDIANA LA W REVIEW [Vol. 13:133

quirements of good faith and due care, and the minority

shareholders can bring a derivative action against a director who
abuses his fiduciary power. Nevertheless, it is preferable to prevent

or at least lessen the likelihood of a directorial abuse of power than
to rely on remedies once it occurs. The old saw is appropriate — an
ounce of prevention is worth a pound of cure.

Prior to 1969 the Indiana Act required that a corporation have a
minimum of three directors regardless of the number of
shareholders. This requirement did not make a great deal of sense
for corporations having only one shareholder. In such corporations,

the requirement simply served to promote the formation of three-

member boards consisting of a sole shareholder, a spouse, and
perhaps an attorney or an in-law. Beginning in 1969, however, a cor-

poration with one shareholder could have a one-person board and a

corporation with two shareholders could have a two-person board.
The requirement of a minimum of three directors applied only to
corporations having three or more shareholders.^^^ Section
23-1-2-1 Kb), before it was amended, was sufficiently broad to take in-
to account both one- or two-shareholder corporations, as well as

larger corporations in which the interests of a greater number of
shareholders were implicated. In the latter case, the shareholders'
rights were protected by the requirement of a three-member board,
which insured that corporate decisions would be made on a collegial
basis.

The foregoing analysis is not blind to the reality that a majority
or controlling shareholder can influence the decisions of other direc-

tors who can be removed without cause under the Indiana Act.^^" In-
stead, it recognizes that other directors can make beneficial con-
tributions to the corporate decision-making process and can even act

as a brake on actions of the controlling shareholder that might be

detrimental to the interests of minority shareholders. Legislative

elimination of this potential check simply to expedite estate plan-

ning appears to be shortsighted.

It can be argued that the legislature has "modernized" the In-

diana Act by eliminating the requirement of a minimum number of

directors; the drafters of the Model Business Corporation Act

eliminated a similar requirement in 1969.^^^ However, the amend-

ment also can be labeled as further evidence that Indiana has joined

'^'IND. Code Ann. § 25-208 (Burns 1970) (currently codified at Ind. Code §
23-1-2-1 Kb) (1976) (amended 1979)).

'''See Ind. Code § 23-1-2-12 (1976).

^^^MODEL Bus. Corp. Act Ann. 2d § 36 (1971). The rationale for removing the mini-

mum requirement was that "[i]t was deemed wise to recognize in the statute the grow-
ing practice of one-man management in closed corporations." Id. t 2, at 777.



1980] SURVEY- CORPORATIONS 175

what Justice Brandeis' dissent in Ligget Co. v. Lee^^^ characterized

as a "race ... of laxity."^" It seems that every time the Model Act is

revised under the rubric of "modernization," the interests of

shareholders, as opposed to those of management, are sacrificed.^^^
The same subordination of shareholders' interests seems to be true
of recent amendments to the Indiana Act.^^^

Another possible problem with the one-member board is that
the director might have difficulty differentiating his individual in-

terests from the interests of the corporation. As a result, the for-
mality of the corporate structure might be compromised. In other

words, the sole director of a corporation might be subjected to per-

sonal liability if the "corporate veil" were pierced. If there were a
multimember board, however, the likelihood of personal liability in
the event of "piercing" would be reduced.^*^° Of course, it can be

assumed that in corporations with many shareholders, or few
shareholders who have personal interests to protect, multimember
boards will be the rule. Nevertheless, by permitting one person to

form a corporation which ultimately will have more than three
shareholders but which will have only one director, the legislature

has created a potential problem which does not appear to be war-

ranted simply for the sake of convenience for estate planners.

Another significant change in the Indiana Act relates to the pro-

cedures for reinstating a corporation whose term of existence as
fixed by its articles of incorporation has expired. In 1977, the

legislature adopted section 23-3-4-1.6,^^^ which governs the reinstate-

ment of those corporations whose terms of existence have expired
and whose articles of incorporation have been forfeited for failure to
file annual reports. The 1977 version required such corporations to

'^«288 U.S. 517 (1933).

^"/d. at 559 (Brandeis, J., dissenting).

^^^See generally Eisenberg, The Model Business Corporation Act and the Model
Business Corporation Act Annotated, 29 Bus. Law. 1407 (1974).

^^Tor example, § 23-1-2-11 of the Indiana Act, amended in 1979, was also amended
in 1977. Act of Apr. 22, 1977, Pub. L. No. 76, § 3, 1977 Ind. Acts 380 (current version

at Ind. Code § 23-1-2-11 (Supp. 1979)). At that time, the legislature adopted the affirma-
tive duty of care of a director described in § 35 of the Model Act. Model Bus. Corp.
Act Ann. 2d § 35 (Supp. 1977). That amendment, criticized in the 1977 Survey, supra
note 223, at 47-50, in effect reduced the duty of care of outside directors who might be
the only persons able to police management.

^*°Although the likelihood of personal liability is relatively low in the case of a

three-member board, it is fairly high in the case of a one-person corporation. Nonethe-

less, since 1969 the Indiana Act has permitted such a corporation to have only one

director.

'•''Act of Apr. 22, 1977, Pub. L. No. 76, § 10, 1977 Ind. Acts 397 (codified at Ind.

Code § 23-3-4-1.6 (Supp. 1977) (amended 1979)). See 1977 Survey, supra note 223, at
50-51.



176 INDIANA LAW REVIEW [Vol. 13:133

make application to the secretary of state for reinstatement.^^^ Upon
approval of the application, the corporation was "deemed to have
continuously existed since the date of termination of its existence as

fixed by its articles of incorporation."^^^

Also in 1977 the legislature amended section 23-1-7-4,^^* dealing
with dissolution by expiration of term of existence, to correspond

with section 23-3-4-1.6.^^^ Under the prior version of section 23-1-7-4,

a corporation whose term of existence had expired could extend its
duration by amending its articles of incorporation.^^^ Under the 1977
amendment, however, a corporation seeking to extend its term of
existence under section 23-3-4-1.6 had to apply to the secretary of

state for reinstatement.^^^

One problem with the 1977 versions of sections 23-3-4-1.6 and
23-1-7-4 was that the duration of reinstatement of a corporation
whose term of existence had expired was not clear. This problem
has been remedied in part by the new amendment to section
23-1-7-4, which provides that when a corporation whose term of ex-
istence has expired seeks to be reinstated it not only must make ap-
plication to the secretary of state for reinstatement but also it must
"amend its articles of incorporation to provide for an increase in its
term of existence."^^^

Section 23-3-4-1.6 was similarly amended. A corporation whose
term of existence has expired must include in its application for
reinstatement "[ajmendments to its articles of incorporation increas-

ing its term of existence."^^^

Nevertheless, the approach taken by the legislature raises a

new problem. It is arguable that the original version of section
23-3-4-1.6 automatically gave perpetual duration to a reinstated cor-

poration. An expired corporation applying for reinstatement is likely
to seek perpetual reinstatement, even when the original selection of
limited duration was deliberate.^^° Of course, if those responsible for

seeking reinstatement of the corporation wished to limit its dura-

tion, the articles of incorporation could be amended by the regular

amendment procedure of the Indiana Act. 271

2«^ND. Code § 23-3-4-1.6(a) (Supp. 1977) (amended 1979).

'''Id. § 23-3-4-1.6(c).

'^''Act of Apr. 22, 1977, Pub. L. No. 76, § 4, 1977 Ind. Acts 385 (codified at Ind.

Code § 23-1-7-4 (Supp. 1977) (amended 1979)).

'''iND. Code § 23-3-4-1.6 (Supp. 1977) (amended 1979).

'''Id. § 23-1-7-4 (1976) (amended 1977 & 1979).
''Ud. (Supp. 1977) (amended 1979).

'''Id. (Supp. 1979).

'"Id. § 23-3-4-1.6(a)(3) (Supp. 1979).

""See 1977 Survey, supra note 223, at 51. Admittedly, one problem with this ap-

proach would be that a corporation reinstated with automatic perpetual duration under

section 23-3-4-1.6 would still have a set of articles containing a limited term.

"Ind. Code §§ 23-1-4-1 to -7 (1976).



1980] SURVEY- CORPORATIONS 177

The 1979 amendment to section 23-3-4-1.6 resolves an additional
problem under the original version. As initially adopted, section
23-3-4-1.6(b) provided:

If the officer or director who files the affidavit [for
reinstatement] was not . . . named in the last preceding
timely-filed annual report, the affidavit shall also be signed

by a person who was an officer or director at such time, or

... be accompanied by evidence that notice of intent ... to

seek reinstatement has been sent to the last known address
of the resident agent and every officer named on the last
timely-filed annual report at least thirty . . . days prior to

the filing of the affidavit.^
272

275 -

The 1979 version adds a sentence to the above-quoted language to
provide for the situation in which no annual report has been filed. In

such a case, "notice of intent ... to seek reinstatement . . . [must be]

sent to all incorporators and directors named in the articles of incor-
poration of the corporation."^^^

A third worthwhile change secured by Public Law 233 was the
elimination of the requirement that annual reports of both domestic

and foreign corporations be signed by two principal officers and
acknowledged and sworn to before a notary public.^^'' Now, annual
reports need be signed only by any current officer of the corpora-

tion and verified and affirmed under penalties of perjury

Simplification of the reporting requirements of corporations is a

development worth encouraging. With simplified procedures, more
small corporations may "get into the habit" of filing the annual
reports required by law. Furthermore, any simplification will tend

to reduce the number of articles of incorporation — certificates of ad-
mission in the case of foreign corporations — which are revoked
because of carelessness and inattention to the requirements of the

Indiana Act.

No changes similar to the ones made in the Indiana Act provi-
sions on annual reports were made in the annual report provision of
the Indiana Not-for-Profit Corporation Act.^^^ However, none were
necessary because that section does not require the signature of the

two principal officers,^^^ and the annual report form which the
secretary of state has prepared can apparently be signed by any

current officer subject to the penalties of perjury. The amendments

^'Un. § 23-3-4-1.6(b) (Supp. 1977) (amended 1979).

'''Id. § 23-3-4-1.6(b) (Supp. 1979).

""M §§ 23-1-8-1, -11-7 (1976); id. § 23-3-4-1.
"^M §§ 23-1-8-1, -3-4-1 (Supp. 1979).
'''Id. § 23-7-1.1-36 (1976).

"7d.



178 INDIANA LA W REVIEW [Vol. 13:133

to the annual report provisions do not change the requirement that

annual reports of corporations must be made on forms prescribed
and furnished by the office of the secretary of state.^^^

Public Law 233, by an amendment to section 23-3-4-1, also
clarified and ratified the authority of the secretary of state to

revoke the articles of incorporation of domestic corporations and the

certificates of admission of foreign corporations which fail to file an-

nual reports for a period of two years.^^^ Before section 23-3-4-1 was
amended, it was not absolutely clear that the secretary of state had
the authority to revoke certificates of admission of foreign corpora-

tions. Arguably, he did not, although no one apparently challenged

the practice. The amendment to section 23-3-4-1 also clarified the
notification requirements and procedures which must be followed
before articles of incorporation or a certificate of admission may be
revoked. The secretary of state must give at least thirty-days notice
by first-class mail to a corporation which has not filed annual

reports for two years that its articles or certificate may be revoked.
If the corporation fails to make the necessary filings within the
thirty-day period, notice must be "published in a newspaper of

general circulation in the county in which [the] corporation's prin-

cipal office is located."^^° If the corporation has not yet made the re-
quired filings within thirty days after such publication, the

secretary of state is charged with revoking the rights and privileges

and declaring that the articles of incorporation or certificate of ad-

mission of the corporation are forfeited.^^'

The 1979 amendment to section 23-7-1.1-2 of the Indiana Not-for-

Profit Corporation Act substitutes the term "acceptance" for

"reorganization" to denote the process whereby not-for-profit cor-

porations formed before the effective date of the Act may elect to

accept its provisions.^^^ There was no reason for that change. "Ac-

ceptance" rather than "reorganization" should have been the term

used in the Act as originally passed because "reorganization" was

not used in any other portion of the Act. Now, however, section

23-7-1.1-9 of the Act also employs the term "reorganization."'^^^ Public

'^'[1950] Op. Ind. Att'y Gen. 22, 24.

"'IND. Code § 23-3-4-1 (1976 & Supp. 1979). The amendment to this section
specifically refers to not-for-profit as well as for-profit corporations. The secretary of

state should have authority to revoke the articles of delinquent not-for-profit corpora-

tions, but it might have been better to have explicitly stated that authority in §
23-7-1.1-36 of the Indiana Not-for-Profit Corporation Act rather than in the annual

report statute, which is, or at least arguably is, directed only at for-profit corporations.

'''Id. § 23-3-4-1 (1976 & Supp. 1979).
^^'M The secretary of state must endorse the articles of incorporation or the cer-

tificate of admission to indicate forfeiture for failure to file annual reports. Id.

''Ud. §§ 23-7-1. l-2(a), -2(c).

''Ud. § 23-7-1.1-9.



1980] SURVEY- CORPORATIONS 179

Law 233 changes the quorum ^^^ and voting^^^ requirements with
respect to meetings called for the purpose of accomplishing fun-

damental changes in not-for-profit corporations. These fundamental

changes include reorganizations. The discrepancy in terminology

should not cause any problems because "reorganization" as

employed in section 23-7-1.1-9 encompasses ''articles of acceptance."

Nevertheless, the Bill should have been examined for internal con-
sistency before it was adopted. Housekeeping amendments remedying
the inconsistency are in order .^^^

The substantive changes in the voting provision^^^ can be criti-
cized because they create the potential for a small group of insiders

to gain virtual control of a not-for-profit corporation. The changes
do, however, solve the problem created by large or lethargic

memberships which cannot be motivated to attend meetings during
which important corporate changes are to be considered. The
methods provided for alleviating the problem are the right to

establish voting rights^^^ and to define a quorum^^^ when the corpora-
tion is formed. Previously, however, if the articles of incorporation

did not anticipate the problem, for example when they provided that
the bylaws were to be adopted by the members and not by the
board of directors, a majority of the members would have had to ap-
prove an amendment vesting that authority in the board of direc-
tors.^^° In other words, if a "mistake" were made when the corpora-
tion was first formed, it might be difficult, if not impossible, to
remedy without the changes to section 23-7-1.1-9. There is the risk

'''Id. § 23-7-l.l-9(f) (Supp. 1979) provides:

in cases of a meeting called for the purpose of voting on a proposed amend-

ment to the articles of incorporation, merger, consolidation, reorganization,

special corporate transaction, or voluntary dissolution, ... a quorum shall be
constituted by those members that are otherwise entitled to vote in respect
thereof and that are present, in person or by proxy, at the meeting at which

such vote is conducted.

^'^Id. § 23-7-1. l-9(e) provides that members entitled to vote on fundamental
changes include "only those members that are otherwise entitled to vote with regard
to such matter and who are present, in person or by proxy, at the meeting at which
such vote is conducted, and whose presence at such meeting constitutes a quorum as
defined in subsection (f)." See note 217 supra.

^*®A possible solution to the conflict between the language added to Ind. Code §§
23-7-1. l-9(c), -9(f) (Supp. 1979), and that of the definition section, id. § 23-7-1.1-2 (1976 &
Supp. 1979), would be to amend the former sections to substitute the term "acceptance"
for "reorganization," because the act in fact contemplates the use of articles of accep-

tance wfien a corporation formed under some other not-for-profit corporation statute

becomes subject to the Indiana Not-for-Profit Corporation Act.

^^^See note 285 supra.

^««lND. Code § 23-7-l.l-9(e) (Supp. 1979).
'''Id. § 23-7-l.l-9(f).

'''Id. § 23-7-l.l-9(e) (1976) (amended 1979).



180 INDIANA LA WREVIEW [Vol. 13:133

that insiders may lock themselves into a control position, but the
benefits of relaxing the voting and quorum requirements would
seem to offset the risk. Even if the insiders get out of hand, there is
nothing to stop all members from attending a meeting to remedy
the situation.

Section 23-7-1.1-9 as amended does present a real problem
because it seems to conflict at least with section 23-7-1.1-23,^^^ which

defines members entitled to vote on proposed amendments to the
articles of incorporation. In some situations, members who are not
present at a meeting would seem to have a statutory right to vote
on proposed amendments. A cleaner approach to solving the problem
of the lethargic membership would have been to amend the provisions
relating to the voting requirements for particular changes rather than

to amend section 23-7-1. l-9(e), which is the general franchise provision
of the Indiana Act.

Section 23-7-1.1-10 of the Indiana Not-for-Profit Corporation

Act^^^ was amended to eliminate the requirement that directors of
such corporations be members. The change makes the provision con-
sistent with the analogous provision of the Indiana General Corpora-

tion Act.^^^ This area may not be one in which consistency is ap-
propriate. Many times an outsider who does not own shares of a for-
profit corporation is a worthwhile addition to the board of directors.

This is not necessarily true of a not-for-profit corporation, and

perhaps such an organization should be run by its members. This

would be true, for example, of a neighborhood civic league.^^" On the
other hand, it might be appropriate to permit nonmember directors
of, for example, a trade association with corporate but not individual

members.

The final change accomplished by Public Law 233 is an amend-
ment to section 23-7-1. 1-12^^*^ permitting the articles of incorporation
or bylaws of a not-for-profit corporation to "provide that officers are
to be elected by the members of the corporation instead of by the
board of directors."^^*^ This method of electing officers was available

'^'M § 23-7-1.1-23 (1976). Section 23-7-1.1-9 does not seem to conflict with the provi-
sions relating to "special corporate transactions," id. § 23-7-1.1-31, or dissolution, id. §
23-7-1.1-33(2). Those sections respectively refer to the vote of "the members entitled to
vote in respect thereof" and the vote of "a majority of the members entitled to vote
thereon." Id. A proposed merger is an in-between category because under certain cir-
cumstances members not present at a meeting of the not-for-profit corporation would
be entitled to vote as in cases of amendments to the articles. Id. § 23-7-1. l-42(b).

'''Id. § 23-7-1.1-10 (Supp. 1979).

""'Id. § 23-l-2-ll(a)(l).

^^"Of course, the articles of such an organization can require that directors be

members.

'^^IND. Code § 23-7-1.1-12 (Supp. 1979).
'''Id.



1980] SURVEY-CORPORATIONS 181

under the predecessor to the current act.^^^ Although there is not

clear evidence that many not-for-profit corporations will adopt this
alternative, there certainly is no harm in making it available.

3. Executive Committees, Mergers and Consolidations. — Public
Law 234 is the third piece of legislation affecting the corporate area
adopted during the 1979 session of the Indiana General Assembly .^^^

An amendment to the merger and consolidation provisions of the In-
diana Act,^^^ to provide that shares and other securities or obliga-

tions of foreign as well as domestic corporations could be issued in

connection with mergers or consolidations, was a noncontroversial
but perhaps unnecessary change. The references to "any corpora-
tion" in the merger provision^"" and to "any other corporation" in

the consolidation provision,^''^ which had been the operative language

of the merger and consolidation provisions since 1969, were broad
enough to include both domestic and foreign corporations. Nothing

in these sections intimated that the shares, securities, or obligations

had to be those of an Indiana corporation. By making the language
express, though, the provisions eliminate a remote ground for an at-

tack on a merger or consolidation because securities of a foreign cor-
poration were issued.

In 1969 the drafters of the Model Act amended the merger and
consolidation provisions'"^ to permit the conversion of shares of

merging or consolidating corporations into shares, other securities,
or obligations of the surviving corporation, the new corporation, or
''any other corporation.''^^^ It is difficult to believe that the revisers
of the Model Act would have omitted the terms "domestic or
foreign" while liberalizing the Act if they had any doubts about the

sufficiency of the phrase "any other corporation."'""

''Ud. § 23-7-1.1-17 (1971) (current version at id. § 23-7-1.1-12 (Supp. 1979)).

'''Act of Apr. 10, 1979, Pub. L. No. 234, § 1, 1979 Ind. Acts 1106.
^'^IND. Code §§ 23-l-5-2(a)(3), -3(a)(3) (1976 & Supp. 1979).
'''Id. § 23-l-5-2(a)(3) (1976) (amended 1979).
'''Id. § 23-l-5-3(a)(3).

'"^ODEL Bus. Corp. Act Ann. 2d §§ 71(c), 72(c) (1971).
'"Id. Before the amendment, these sections only permitted conversion into shares,

other securities, or obligations of the surviving or new corporation which, according to
the comments, "seemed to be needlessly restrictive and out of harmony with modern
practices." Id. \ 2, at 352.

^""The merger provision of the Indiana Financial Institutions Act, Ind. Code §§
28-1-7-1 to -24 (1976), was amended in 1979 to permit the conversion of shares into
those ol'any other corporation." Act of Apr. 6, 1979, Pub. L. No. 257, § 16, 1979 Ind.
Acts 1283 (codified at Ind. Code § 28-1-7-2 (Supp. 1979)). The legislature did not use the
current language of Ind. Code § 23-1-5-2 (Supp. 1979) as the model for the Indiana
Financial Institutions Act, but instead used the language of
§ 23-1-5-2 as it existed prior to 1972. If the difference between the language of §
28-1-7-2 and § 23-1-5-2 (as amended) reflect a public policy, then only shares of domestic
corporations can be issued in a merger of financial institutions. Of course, one possible



182 INDIANA LA W REVIEW [Vol. 13:133

The wisdom of another provision of Public Law 234 can be ques-
tioned. The Act amends section 23-l-2-ll(g) of the Indiana Act per-
taining to executive and other committees of the board of directors.

The new provision appears to be based in part on the 1975 revision
of section 42 of the Model Act,^°^ but the provision goes beyond the
Model Act in one significant respect.^"^ Under the Model Act, an ex-
ecutive committee has limited authority over the sale or issuance of

securities in instances in which the board of directors generally has

authorized the specific transaction in a resolution or by adoption of

a stock option plan. Under the Indiana provision, however, complete
authority may be given to an executive committee to sell or issue
securities without any prior action by the board of directors.^''^

Such authority is not the kind that should be delegable to an ex-

ecutive committee. Apparently, this is the attitude of the drafters of

the Model Act. The Model Act provides a standard that prohibits
delegation of authority over actions "substantially affecting the

rights of shareholders among themselves . . . matters of a character

explanation for the different language, which receives credence from the fact that

§ 28-1-7-1 1(c) of the Indiana Financial Institutions Act pertaining to consolidations of

financial institutions was not amended at the same time, is poor legislative drafting in
which obsolete language was used as a model.

^"'MoDEL Bus. Corp. Act Ann. 2d § 42 (Supp. 1977).
^"^Section 23-l-2-ll(g) of the Indiana Act now provides in pertinent part:
[T]o the extent provided in the resolution, the articles of incorporation, or

the by-laws, [an executive or other committee] may exercise all the authority
of the board of directors including, but not limited to, the authority to issue

and sell or approve any contract to issue and sell, securities or shares of the

corporation or designate the terms of a series of a class of securities or

shares. The terms which may be affixed by that committee include, but are
not limited to, the price, dividend rate, and provisions of redemption, a sink-

ing fund, conversion, voting, or preferential rights or other features of

securities or class or series of a class of shares. The committee has full

power to adopt a final resolution which sets forth those terms and to author-

ize a statement of terms to be filed with the secretary of state.

IND. Code § 23-l-2-ll(g) (1976 & Supp. 1979).
Section 42(viii) of the Model Act provides that

no . . . [executive] committee shall have authority to . . . authorize or approve

the issuance or sale of, or any contract to issue or sell, shares or designate

the terms of a series of a class of shares, provided that the board of direc-

tors, having acted regarding general authorization for the issuance or sale of

shares, or any contract therefor, and in the case of a series, the designation

thereof, may, pursuant to a general formula or method specified by the board

by resolution or by adoption of a stock option or other plan, authorize a com-

mittee to fix the terms of any contract for the sale of the shares and to fix

the terms [of the transaction] ....

Model Bus. Corp. Act Ann. 2d § 42(viii) (Supp. 1977).
^"^Originally, § 42 of the Model Act appears to have permitted the delegation of

such authority to an executive committee, but this authority was restricted in 1975.

See Model Bus. Corp. Act Ann. 2d § 42 1 2 (Supp. 1977).



1980] SURVEY-CORPORATIONS 183

of immediate and irrevocable effect (such as the declaration of a

dividend) . . . matters which may well become irrevocable without
swift action, and . . . matters which will cause changes of position by

others which cannot be rectified."^°** The Model Act recognizes that a

decision to sell or issue securities is not one that the entire board of

directors easily can reverse or rescind. Furthermore, the delegation

of such a decision can aggravate the conflict created when one fac-
tion of a divided board controls the executive committee and uses

the authority to further enhance its position in the corporation.^"^

Public Law 234 also amended the statutory restrictions on the
authority of an executive committee. Six specific actions are beyond

the authority of an executive committee.^'" These restrictions are

similar to the restrictions of the Model Act,^'' except in one respect.
Whereas the Model Act prohibits an executive committee from ap-
proving or recommending to shareholders actions or proposals re-
quiring shareholder approval, or from approving plans of merger not
requiring shareholder approval,^'^ section 23-l-2-ll(g), as amended,
only prohibits an executive committee from approving a plan of

merger or consolidation.^'^ If the drafters of the new provision in-
tended to parallel the Model Act, they managed to open a rather
large gap. Under the Model Act, an executive committee cannot ap-
prove a merger, consolidation, or sale of all or substantially all of

the corporation's assets because such a sale requires shareholder ap-

proval. Under section 23-1-2-1 1(g)(3), mergers or consolidations can-
not be approved by an executive committee, but a sale of all the

assets of the corporation^''' can be recommended by an executive
committee because there is no restriction pertaining to matters re-

quiring shareholder approval. Before the 1979 amendment, section
23-l-2-ll(g) restricted the executive committee from proposing

special corporate transactions.^'^ If the legislature intended to omit

special corporate transactions, it again made an unwise decision
because such transactions can substantially affect the rights of

^°*/d Admittedly, the drafters of the Model Act permit the delegation of some

authority to act with respect to matters arising outside the ordinary course of busi-

ness, but the authority delegated by § 23-l-2-ll(g) involves transactions that are more

appropriately left to a determination by the entire board of directors.

^°^An executive committee may be prohibited from pursuing this type of action,
however. There is authority that the issuance of shares simply to thwart a shift of con-

trol is a breach of fiduciary duty. See, e.g., Condec Corp. v. Lunkenheimer Co., 43 Del.

Ch. 353, 230 A.2d 769 (1967).

^^°IND. Code §§ 23-1-2-1 l(g)(l)-(6) (Supp. 1979).
'"Model Bus. Corp. Act Ann. 2d §§ 42(i)-(viii) (Supp. 1977).
''Hd. §§ 42(ii), (v).

^'^'IND. Code § 23-l-2-ll(g)(3) (1976 & Supp. 1979).
'''Id. §§ 23-1-6-1 to -5.

''"Id. § 23-l-2-ll(g) (1976) (amended 1979).



184 INDIANA LA W REVIEW [Vol. 13:133

shareholders. If the legislature did not so intend and felt that it was
paralleling the restrictions of the Model Act, it can be charged with
poor legislative drafting.^'^

The basic procedures for establishing executive committees
were also changed by Public Law 234. For some inexplicable reason,
the phrase "or the bylaws" was added to the first sentence of sec-
tion 23-l-2-ll(g), which now reads:

Unless otherwise provided in the articles of incorporation or

the bylaws, the board of directors may, by resolution

adopted by a majority of the actual number of directors
elected and qualified, from time to time, pursuant to a provi-

sion of the by-laws, designate from among its members and
executive committee . . . .^^^

The amendment is inexplicable because under the prior language an
executive committee could be appointed pursuant to a bylaw, unless

otherwise provided in the articles of incorporation. The new
statute's provision that the authority to appoint an executive com-

mittee can be restricted by a bylaw provision is unnecessary

because a bylaw provision is always essential for implementing the

appointment of an executive committee. Under the old statute, if the
corporation did not want an executive committee, it simply refused
to adopt a bylaw. The added language is superfluous. The drafters
of the Indiana legislation might have been influenced again by sec-

tion 42 of the Model Act, which does refer to bylaws. If this was the
case, the drafters failed to make a thorough reading of the Model
Act, which authorizes the appointment of an executive committee if

the articles of incorporation or the bylaws so provide.^'^ The Indiana
Act, in contrast, provides that the board of directors has the power

to appoint an executive committee unless restricted by the articles

of incorporation or the bylaws.^'^

Finally, section 23-l-2-ll(g) was amended by adding a paragraph
that provides: "A member of the board of directors is not liable for

^'"Unfortunately, the latter might be the case because id. § 23-1-2-1 1(g)(5) restricts

an executive committee from authorizing or approving "the reacquisition of shares

unless pursuant to a general formula or method specified by the board of directors,"

which is identical to § 42(vii) of the current version of the Model Act. There was no

such restriction in the prior language of § 23-1-2-1 Kg). The drafters of the Model Act

apparently considered the reacquisition transaction the mirror image of the issuance of

shares, which is restricted. This further demonstrates the anomaly of permitting ex-

ecutive committees of Indiana corporations to approve and authorize security transac-

tions unless restricted in the resolution, articles of incorporation, or bylaws.

^'Tnd. Code § 23-l-2-ll(g) (1976 & Supp. 1979).

3"*M0DEL Bus. Corp. Act Ann. 2d § 42 (Supp. 1977).

3'«lND. Code § 23-l-2-ll(g) (1976 & Supp. 1979).



1980] SURVEY- CORPORATIONS 185

any action taken by a committee if he is not a member of that com-
mittee and has acted in good faith and in a manner he reasonably
believes is in the best interest of the corporation."^^^ On its face, this
provision appears less restrictive than the comparable language in
section 42 of the Model Act.^^' The effect of the two provisions will
probably be similar, however, because under section 42 a noncom-
mittee director does not automatically incur liability if the executive

committee action fails to meet the statutory standard of care.^^^ Lia-
bility will probably depend on such factors as the care used in the

delegation to and the surveillance of the executive committee and

the knowledge about the particular matter available to the noncom-

mittee director.^^^

^^'The Model Act provides:

Neither the designation of any such committee, the delegation thereto of

authority, nor action by such committee pursuant to such authority shall

alone constitute compliance by any member of the board of directors, not a
member of the committee in question, with his responsibility to act in good
faith, in a manner he reasonably believes to be in the best interests of the

corporation, and with such care as an ordinarily prudent person in a like

position would use under similar circumstances.

Model Bus. Corp. Ann. 2d § 42 (Supp. 1977).
^^^Id. t 2. The comment to § 42 of the Model Act points out that directors may not

abdicate their responsibilities and receive exoneration from liability simply by dele-

gating authority to an executive or other committee of the board of directors. Id.

''Ud.