Indiana Law Review 1973] SURVEY OF RECENT DEVELOPMENTS 77 V. Corporations Paul J. Galanti* A. Shareholder Actions—Necessary Parties Procedural problems and necessary parties in shareholder ac- tions involving corporations in receivership were the issues re- solved by the Indiana Supreme Court in Sacks v. American Fletcher National Bank & Trust Co. ] The suit arose out of a financing agreement between JJS Co., an Indiana corporation, and the American Fletcher National Bank and Trust Com- pany. The loan was personally guaranteed by plaintiff-appellant Sacks, one of the three shareholders of JJS Co., and defen- dant-appellee Blue, another shareholder. AFNB refused to renew the original loan or to extend additional credit when the loan re- mained unpaid at maturity. Rather, it brought suit in the Su- perior Court of Marion County to foreclose the security interests it held on the loan and for the appointment of a receiver. After his petition to the superior court for leave to sue in another forum was denied, Sacks brought the instant suit in Marion County Cir- cuit Court. His second amended complaint asserted a shareholder derivative suit charging Blue and AFNB with misrepresentation, deceit, and breach of fiduciary obligations. 2 Sacks' principal asser- tion was that he had been assured that AFNB would provide con- tinual financing for the corporate venture. Appellees filed motions to dismiss pursuant to Trial Rule 12(B) (7) and argued that the receiver, an indispensable party, had not properly been made a party to the suit since leave of the receivership court had been denied. The appellees' motions to dismiss were sustained, and Sacks appealed. The judgment was affirmed in part, reversed in part, and remanded with instructions. Appellant contended that (1) the receiver was not an in- dispensable party under Trial Rule 19 and (2) even if the deriva- tive action was properly dismissed for failure to join an in- dispensable party, the entire action should not have been dismissed because appellant also had a personal action against the appellees. 3 The supreme court accepted appellees' contention that there was a *Associate Professor of Law, Indiana University Indianapolis Law School B.A., Bowdoin College, 1960; J.D., University of Chicago, 1963. The author wishes to express his appreciation to Rex Cowan and Scott Koves for their assistance in the preparation of this discussion. '279 N.E.2d 807 (Ind. 1972). Justice Hunter wrote the opinion. Justice DeBruler did not participate. 7 Id. at 809. 3 Id. at 810. 78 INDIANA LAW REVIEW [Vol. 7 failure to join an indispensable party according to Trial Rule 19 when the receivership court denied Sacks leave to sue. The hold- ing was premised on the well-established principle that the cor- poration is not merely a proper party to a derivative suit but an essential, indispensable party. The failure to make the corporation a party destroys the shareholder's cause of action and deprives the court of jurisdiction. 4 The supreme court emphasized that one of the reasons mandating joinder of the corporation was that it must be a party to receive the fruits of any recovery by the plaintiff. 5 There is, of course, a second major reason for the principle in that the corporation must be bound by the judgment in a derivative action and not be free to institute its own subsequent suit against the same defendants for the same alleged misdeeds. 6 The corpora- tion is, in reality, the real party plaintiff in the suit, but enters the litigation as a nominal party defendant. 7 The application of the principle in the Sacks case was com- plicated by the receivership of JJS Co. The supreme court ruled that under such circumstances the receiver, as the representa- tive of the corporation, was the necessary party. No Indiana authority was cited for the proposition, but it does comport with the general rule obtaining in other jurisdictions. However, the determination that the receiver was a necessary party did not 4Ind. R. Tr. P. 19(B). See Carter v. Ford Plate Glass Co., 85 Ind. 180 (1882); 13 W. Fletcher, Private Corporation § 5997, at 456 (perm. repl. ed. 1970) [hereinafter cited as Fletcher] ; H. Henn, Law of Corporations § 369 (1970) [hereinafter cited as Henn] ; N. Lattin, Corporations § 106, at 425-26 (2d ed. 1971) [hereinafter cited as Lattin]. The courts do recognize an excep- tion to this rule when a corporation's existence has been completely terminated prior to the commencement of the action. Weinert v. Kinkel, 296 N.Y. 151, 71 N.E.2d 445 (1947) ; Henn § 369, at 777; Lattin § 106, at 425-26. Lattin points out that the rule requiring joinder can cause injustice when the real party defendants are in a jurisdiction in which the corporation itself cannot be personally served. 513 Fletcher § 5997, at 456. See also Henn § 369, at 777; Lattin § 106, at 425-26. 6Philipbar v. Derby, 85 F.2d 27 (2d Cir. 1936) ; Turner v. United Mineral Lands Corp., 308 Mass. 531, 33 N.E.2d 282 (1941) ; Dean v. Kellogg, 294 Mich. 200, 292 N.W. 704 (1940) ; 13 Fletcher § 5998; Henn §369, at 777; Lattin § 106, at 426. 7 13 Fletcher §5997; Henn §§364-67; Lattin §106, at 425. Indiana Rule of Trial Procedure 23.1 establishes the conditions precedent to a share- holder derivative action. The Trial Rule parallels Federal Rule of Civil Procedure 23.1 except that the shareholder demand requirement has been eliminated. See generally 13 Fletcher §6008; 2 W. Harvey, Indiana Practice 365-89 (1970) [hereinafter cited as Harvey]; Henn §§364-66; Lattin § 105. 1973] SURVEY OF RECENT DEVELOPMENTS 79 resolve the issue entirely since it was further complicated by the receivership court's denial of Sacks' petition for leave to sue the receiver in another court. 8 The supreme court resolved this point, albeit with some de- gree of confusion, by essentially advising Sacks that he was in the wrong court and that the derivative action should have been brought in the receivership court itself. 9 The starting point for the supreme court was the doctrine that leave to sue a receiver must be obtained from the receivership court as a condition prece- dent to the action. 10 Justice Hunter then qualified this statement by noting that "this [the failure to obtain leave] alone is not suf- ficient to sustain a motion to dismiss. One must also determine whether it is feasible to join the necessary party." 11 Since leave to sue had been denied, it was clear that it was impossible to join the receiver as a party to the circuit court proceeding. Although there are later cases, the leave issue, at least in recent years, apparently has not been a significant problem in Indiana. The most recent decision is Malott v. State ex rel. Board of Commissioners^ 2 decided in 1902. The Malott decision held that a receiver cannot be sued without leave of the appointing court and the effect of the failure to obtain permission to sue the receiver vitiates jurisdiction. Thus, Indiana may be classified as adhering to the majority rule that although leave to sue is generally re- quired, failure to secure permission to sue a receiver appointed by a state court does not affect the jurisdiction of the court in which suit is brought, when the suit is brought in the receivership court or when the receiver was appointed by a court of the United States. 13 The controlling authority, Curtis v. Mauger, XA stated that 6See e.g., Coyle v. Skirvin, 124 F.2d 934 (10th Cir.), cert, denied, 316 U.S. 673 (1942) ; 13 Fletcher § 5999; Henn §369, at 777. 9279 N.E.2d at 811. }0See Malott v. State ex rel Board of Comm'rs, 158 Ind. 678, 64 N.E. 458 (1902) ; Keen v. Breckenridge, 96 Ind. 69 (1884). See also Fields v. Fidelity Gen. Ins. Co., 454 F.2d 682 (7th Cir. 1971); Annot., 29 A.L.R. 1460 (1924). n 279 N.E.2d at 811. See 2 Harvey 262-65. 12 158 Ind. 678, 64 N.E. 458 (1902). 13Annot., 29 A.L.R. 1460 (1924). See Curtis v. Mauger, 186 Ind. 118, 114 N.E. 408 (1916). The Curtis case was cited in Merryweather v. United States, 12 F.2d 407, 409 (9th Cir. 1926), which held that the failure to obtain leave from a state receivership court barred an action by the United States against the receiver in a federal court. 14 186 Ind. 118, 114 N.E. 408 (1916). 80 INDIANA LAW REVIEW [Vol. 7 the roots of the distinction between suits brought in the receiver- ship court and suits brought in other courts arose from the United States Supreme Court's decision in Barton v. Barbour S 5 The Bar- ton Court held that leave of the court appointing the receiver must be obtained as a jurisdictional prerequisite to maintaining an ac- tion against the receiver in another jurisdiction. Curtis described the rationale of the doctrine as the necessity of preventing one set of creditors from gaining an advantage in the enforcement of their claims by proceeding against an estate in a jurisdiction where property could be found but where the receivership court would be without power to prevent injustice to other creditors. 16 Although the doctrine arises out of suits brought in different jurisdictions, it is certainly appropriate for different courts within the same jurisdiction. As a corollary, leave is not required if the action is brought in the receivership court, and the lack of an allegation that leave has been granted will not be fatal to the court's jurisdiction over the derivative action. 17 Thus, Sacks was not without remedy, but the derivative action should have been brought in the Superior Court of Marion County. As the receiver was not properly a party to the derivative action in the circuit court, sustaining the motions to dismiss under Trial Rule 19(B) as to the derivative aspect of the complaint was correct. Shareholder Sacks was not entirely without success. His con- tention that it was erroneous to sustain the motions to dismiss because the complaint asserted a personal cause of action against appellees was accepted in part. The court recognized that the primary thrust of the suit was that the corporation had been injured by the alleged derelictions of appellees Blue and AFNB, but noted that Sacks' personal guarantee of the loan to JJS Co. could possibly impose liability on him for the principal amount and be the basis of a personal cause of action. 13 The court relied on the Seventh Circuit's decision in Buschmann v. Professional Men's Association™ and the Fifth Circuit's decision in Schaffer v. Universal Rundle Corp.™ These cases recognized that the same con- 15 104 U.S. 126 (1881). Accord, Keen v. Breckenridge, 96 Ind. 69 (1884). ,6186 Ind. at 121, 114 N.E. at 409. wId. ,8279 N.E.2d at 811-12. 19405 F.2d 659 (7th Cir. 1969). 20397 F.2d 330, 335 (5th Cir. 1972). 1973] SURVEY OF RECENT DEVELOPMENTS 81 duct can result in both a derivative cause of action on behalf of an injured corporation and a personal cause of action for a share- holder when there is a breach of a duty owed specifically to that shareholder separate and distinct from the duty owed to the cor- poration. 21 The Sacks case was cited with approval on this point by the Fifth Circuit in Empire Life Insurance Co. of America v. Valdak Corp.22 The Empire Life court relied on the general rule that a shareholder suing for corporate mismanagement must bring the suit derivatively in the name of the corporation unless there is a violation of a duty owing directly to him. In further expounding on this point, the court referred to its earlier Schaffer decision in which it said: [The] exception to the general rule does not arise, how- ever, merely because the acts complained of resulted in damage both to the corporation and to the stockholder, but is confined to cases where the wrong itself amounts to a breach of duty owed to the stockholder personally.23 The supreme court concluded that it was not clear that Sacks was not entitled to any relief on his complaint,24 and consequently it reversed the judgment in part and remanded with instruction to treat the motions to dismiss by appellees Blue and AFNB as mo- tions for a more definite statement under Trial Rule 12(E) and to proceed accordingly. 25 B. Inspection of Shareholder Lists In a three to two decision, the Indiana Supreme Court in State ex rel. Great Fidelity Life Insurance Co. v. Circuit Court 76 21 279 N.E.2d at 811. 22468 F.2d 330, 335 (5th Cir. 1972). 23397 F.2d at 896. ^Compare Buschman v. Professional Mens' Ass'n, 405 F.2d 659 (7th Cir. 1969), with Smith v. Parker, 148 Ind. 127, 45 N.E. 770 (1897), which involved an action for a breach of contract to furnish new capital to a corporation. The court held that the suit was properly dismissed since defendant's promise ran only to the corporation, and the shareholder- plaintiff, who was a guarantor of the loan, had sustained no damage separate from that sustained by the corporation. See John Walker & Sons v. Tampa Cigar Co., 197 F.2d 72, 73 (5th Cir. 1952) ; 1 Harvey 605. 25The court affirmed the granting of the receiver's motion to dismiss AFNB's contention that personal jurisdiction had not been obtained was rejected because, even if it were true, there was no showing that such jurisdiction could not be obtained. Therefore, this was not a proper basis for a motion to dismiss. 26288 N.E.2d 143 (Ind. 1972). Justice Givan wrote the majority opinion with Chief Justice Arterburn and Justice Hunter concurring. Justice De- Bruler dissented in an opinion with which Justice Prentice concurred. 82 INDIANA LAW REVIEW [Vol. 7 held that shareholders of an Indiana insurance company were not entitled to judicially compelled examination of the company's books and records, particularly shareholder lists, and that the In- diana Department of Insurance had sole jurisdiction under the provisions of title 27 of the Indiana Code to compel the production of such documents. Relators were Great Fidelity Life Insurance Co., a corporation organized under the insurance laws of Indiana, its officers and directors, and Southern Securities Corp., which owned over fifty per cent of Great Fidelity. The case was initiated by a minority shareholder of Great Fidelity who filed a derivative action alleging a fradulent conspiracy, gross negligence, and mis- management of the affairs of the company, and a companion mandamus action against relators seeking the production of the shareholder lists of Great Fidelity and its parent, Southern Securities. 27 Relators then petitioned the supreme court to issue a writ of prohibition commanding the Circuit Court of Posey County and its judge to refrain from proceeding further in both suits. In resolving dispute, the supreme court, relying on Lowery v. State Life Insurance Co.,™ determined that the derivative action could produce an "order, judgment or decree" interfering with the operation of the business of Great Fidelity contrary to Indiana Code section 27-1-20-23.29 The Lowery court indicated that the rationale behind a similar statute was to preclude suits interfering with "the management of the corporate affairs, and which might produce hopeless confusion, and might impair the efficiency of the company, if not wreck it."30 Lowery, it should be noted, involved an action against an insurance company, but the majority held that the bar applied to actions brought on behalf of insurance companies as well as against them.31 In fact, the majority, citing State ex rel. Mid- 27Id. at 144-45. Plaintiffs petitioned the Indiana Department of Insur- ance to enter the derivative action against the relators, but the Department declined to do so. 2a153 Ind. 100, 54 N.E. 442 (1899). 29Ind. Code §27-1-20-23 (1971) provides as follows: No order, judgment, or decree providing for an accounting or en- joining, restraining or interfering with the operation of the business of any insurance company, association, or society, to which any pro- vision of this act is applicable, or for the appointment of a temporary or permanent receiver thereof, shall be made or granted otherwise than upon the application of the department, except in an action by a judgment creditor or in proceedings supplemental to execution. 30153 Ind. at 106, 54 N.E. at 444. 3 '288 N.E.2d at 145. See State ex rel. Mid-West Ins. Co. v. Superior Court, 231 Ind. 94, 106 N.E.2d 924 (1952). 1973] SURVEY OF RECENT DEVELOPMENTS 83 West Insurance Co. v. Superior Court 32 stated that the bar was so complete that the Department of Insurance would have to initiate any proceedings and could not intervene for a plaintiff subsequent to the filing of a legal action. The majority emphasized that the Department of Insurance has specific authority under the Indiana Insurance Law33 to order an insurance company to discontinue improper or unsafe practices, and to bring judicial actions against the company, its officers, and agents to obtain compliance. 34 Refusal or inability to return to sound business practices can result in a take-over of the property and business of the insurance company by the Department of In- surance for purposes of rehabilitation. 35 In the event of such a takeover, the Insurance Law provides that the Department of Insurance can bring actions against directors, officers, owners, and agents of the company to enforce claims vested in the com- pany, its shareholders, members, policyholders, or creditors.36 Thus, the shareholders of Great Fidelity were not without protec- tion, but any malfeasance by Great Fidelity's officials or by South- ern Securities that injured Great Fidelity could only be remedied by the Department of Insurance and not in a derivative action. Rely- ing on Sacks v. American Fletcher National Bank & Trust Co., 37 the supreme court ruled that the entire derivative action failed, even as to Southern Securities, when Great Fidelity could not be joined as a party defendant. The second issue before the court was the propriety of the mandate action for the production of the shareholder lists. Plaintiffs apparently proceeded under the provision of the Indiana General Corporation Act35 requiring Indiana corporations to keep books and records, including shareholder lists, and to make such records and lists available for inspection by shareholders for "proper purposes."39 The majority noted that insurance companies 32231 Ind. 94, 106 N.E.2d 924 (1952). 33Ind. Code §§27-1-1-1 to -22-24 (1971). 34 Id. §27-1-3-19. S5 Id. § 27-1-4-1. See Department of Ins. v. Travelers Assur. Co., 115 Ind. App. 285, 58 N.E.2d 761 (1945). 36Ind. Code §27-1-4-21 (1971). 37279 N.E.2d 807 (Ind. 1972). See discussion of the Sacks case at p. 77 supra. 35Ind. Code §§23-1-1-1 to -12-6 (1971). 39 Id. §23-1-2-14. 84 INDIANA LAW REVIEW [Vol. 7 are specifically excluded from the General Corporation Act40 and that the comparable provision in the Indiana Insurance Law did not require that shareholder lists be open for inspection.41 If this omission was considered an obstacle to inspection of the lists, it was more apparent than real because the court recog- nized that the failure to specify shareholder inspection rights in the pertinent statute does not necessarily deny or limit those rights. 42 This is not to say that a shareholder seeking a share- holder list of an insurance company has no problems. As with general corporations, the issue is not so much the right to inspect as it is the recourse available when the corporation denies the right. It is well established that mandamus action is appropriate to test such a refusal by a general corporation,43 but the majority, consistent with its resolution of the derivative action issue, held that it is for the Department of Insurance to decide whether or not the shareholder wishes to see the records for a "proper purpose."44 40 Id. §23-1-2-1. 4 Ud. §27-1-7-16. 42For authorities on this point and for general discussions of shareholder inspection rights, see 5 Fletcher §2213; Henn §199; Lattin §88; 2 ABA- ALI Model Bus. Corp. Act Ann. § 52 (1971) ; Note, Shareholders' Right to Inspection of Corporate Stock Ledger, 4 Conn. L. Rev. 707 (1972) ; Annot., 15 A.L.R.2d 11 (1951). 43Charles Hegewald Co. v. State ex rel. Hegewald, 196 Ind. 600, 149 N.E. 170 (1925). See also Indianapolis St. Ry. v. State ex rel. Cohen, 203 Ind. 534, 181 N.E. 365 (1932) ; S.F. Bowser & Co. v. State ex rel. Hines, 192 Ind. 462, 137 N.E. 57 (1922). 44The majority cited the Hegewald case for this proposition. The Hegewald case did not refer to "proper purpose" in so many words but rather formulated the test that a shareholder is entitled to inspect books, records, and shareholder lists when the "purpose is germane to his in- terest as [a] stockholder," 196 Ind. at 605, 149 NE. at 173, and "the privilege is sought in good faith for the protection of the interests of the corporation or in his own interests as a stockholder." Id. Of equal importance to the "proper purpose" test is the burden of proof. Indiana is in accord with the jurisdictions that require the corporation to prove that the shareholder does not have a "proper purpose." Indianapolis St. Ry. v. State ex rel. Cohen, 203 Ind. 534, 181 N.E. 365 (1932). See Note, The Burden of Proof as to the Proper Purpose Qualification of the Right of Shareholders to Inspect The Corporate Books and Records in Ohio, 24 U. ClN. L. Rev. 556 (1955). See generally authorities cited note 42 supra. Although the court is silent on this point, presumably the common law and statutory standards applicable to general corporations will obtain with respect to in- surance companies. 1973] SURVEY OF RECENT DEVELOPMENTS 85 The majority appeared to be unmindful of a distinction made in recent years between the right to inspect corporate books and records and the right to inspect shareholder lists. Generally, fewer restrictions are now imposed on the right to inspect shareholder lists than the right to inspect corporate books and records. The distinction recognizes that there is less opportunity to abuse in- formation obtained from shareholder lists, in contrast to books and records, and that inspection of such lists does not result in as much inconvenience to the continued operation of the cor- portion. 45 Of course, it must be recognized that the need for shareholders to personally supervise the management of their investment is not as compelling with insurance companies as with general corporations because the former are subject to sub- stantial regulation and control by the Department of Insurance.46 Plaintiffs were also denied access to the shareholder lists of Great Fidelity's parent, Southern Securities. Again the ma- jority concluded that the Department had jurisdiction over the matter even though Southern Securities was not an insurance company. The court's reasoning was threefold. First, the De- partment must necessarily have control over a parent of an in- surance company with respect to business with the subsidiary; second, the policy of Indiana Code section 27-1-20-23 would be thwarted if actions could be maintained against insurance com- panies indirectly when they could not be maintained directly; and third, plaintiffs admittedly were seeking control of Great Fidelity and Southern Securities through a proxy contest with- out having obtained the consent of the Department as required by Indiana Code section 27-1-23-2.47 Concluding that the De- 45Durnin v. Allentown Fed. Sav. & Loan Ass'n, 218 F. Supp. 716, 718 (E.D. Pa. 1963). For a recent discussion of this trend, see Note, Share- holders' Right to Inspection of Corporate Stock Ledger, 4 Conn. L. Rev. 707, 710-13 (1972). See generally Henn §199; Lattin §88. 46Ind. Code §§27-1-1-1 to -22-24 (1971). But see Orloff v. Cosmopolitan Mut. Ins. Co., 31 App. Div. 2d 263, 296 N.Y.S.2d 801 (1969). 47Ind. Code §§ 27-1-23-1 to -13 (1971). Section 27-1-23-2 provides in part: [N]o person shall enter into an agreement to acquire control of a domestic insurer or of any corporation controlling a domestic insurer unless, at the time any such offer, request, or invitation is made or any such agreement is entered into, or prior to the acquisition of such securities if no offer or agreement is involved, such person has filed with the commissioner and has sent to such insurer and any such controlling corporation a statement containing the informa- tion required by this section and such offer, request, invitation, agree- ment or acquisition has been approved by the commissioner in the manner hereinafter prescribed. 86 INDIANA LAW REVIEW [Vol. 7 partment of Insurance had sole jurisdiction in the matter, the majority made the lower court's writ of prohibition permanent and mandated the circuit court to grant relators' motions to dismiss. The dissenting justices recognized that Indiana Code section 27-1-20-23 bars, in effect, suits seeking "broad, equitable court orders, judgments and decrees, the effect of which would be to de- stroy or substantially impair the ability of an insurance company to continue operating as an ongoing business."43 However, because the statute focused on remedies and not jurisdiction, they con- strued it as not prohibiting actions that would not materially dis- rupt the operations of an insurance company or would only do so indirectly. A mandate order directing that a shareholder list be made available to a shareholder for a proper purpose was clearly in the nondisruptive category to the dissenters. 49 As to Southern Securities the dissenters conceded that, in part, the derivative suit requested remedies prohibited by Indiana Code section 27-1-20-23, and that, to the extent of the statutory prohibition, the trial court had no jurisdiction. However, since Southern Securities was not an insurance company as such, al- though it owned a majority of Great Fidelity's stock, not all or- ders would be barred by the statute.50 Citing State ex rel. Mid- West Insurance Co. v. Superior Court,51 as did the majority, the dissenting justices asserted that the circuit court had jurisdiction over suits requesting both prohibited and permitted remedies, as long as the prohibited remedies were denied. Consequently, they concluded that the majority erred in mandating the dismissal of the entire suit. 52 The majority appears to have stretched the provision to some degree. Merely obtaining a shareholder list to obtain information is not tantamount to entering into agreements to acquire control of the company through the tender offers or exchange offers which are to be contemplated by the provision. Of course, the court was probably right in anticipating that eventually a trans- action clearly encompassed in the section would arise. 4S288 N.E.2d at 147. The dissenters, interestingly, did not point out that Lowery v. State Life Ins. Co., 153 Ind. 100, 54 N.E. 442 (1899), relied on by the majority, clearly involved direct interference with the operation of the company and not merely the production of a shareholder list. 49288 N.E.2d at 148. 50State ex rel Meade v. Marion Superior Court, 242 Ind. 22, 174 N.E.2d 208 (1961). Specifically, plaintiff's request that the annual meeting of Great Fidelity be restrained was categorized as a prohibited remedy. 51 231 Ind. 94, 106 N.E.2d 924 (1952). 52288 N.E.2d at 148-49. 1973] SURVEY OF RECENT DEVELOPMENTS 87 C. Receivers Receivership was also the issue in the Indiana Supreme Court's decision in Inter-City Contractors Service, Inc. v. Jolley. 52 More specifically, the court had to judge the propriety of an order of the Superior Court of Lake County appointing a receiver for Inter-City without notice. The complaint filed by appellee Jolley sought damages for an alleged breach of a merger agreement and requested the appointment of a receiver for the corporation with- out notice. The trial court appointed a receiver without afford- ing Inter-City an opportunity to be heard. After Inter-City's mo- tion to vacate the trial court order was denied, it perfected an appeal from the trial court's ruling. 54 The supreme court, par Justice Givan, held that the facts alleged in Jolley's complaint were not sufficient to justify the appointment of the receiver and reversed and remanded the judgment with instructions to vacate the appointment order. The court agreed with Inter-City's con- tention that Jolley had not satisfied the requirements of section 34-1-12-9 of the Indiana Code, which prohibits the appointment of receivers without notice "except upon sufficient cause shown by affidavit." The statute is silent as to what constitutes "suffi- cient cause," but the elements have been established by several supreme court decisions, primarily State ex rel. Red Dragon Diner v. Superior Court55 and Albert Johann & Sons v. Bergess56 Johann, the leading decision, clearly outlined the foundational showing required to warrant summarily wresting a person's prop- erty from him by the appointment of a receiver without the op- portunity to be heard in defense. Johann, consolidating several earlier rulings into one pleading requirement, established that the appointment of a receiver without notice is appropriate only when a verified complaint or other form of affidavit affirmatively shows: (1) that plaintiff will probably prevail in the action, (2) that there exists cause for the appointment without notice, and (3) that plaintiff's rights cannot adequately be protected by a restraining order or other remedy and, if this is shown, that the emergency necessitating the appointment could not have been 53277 N.E.2d 158 (Ind. 1972). 54Ind. Code § 34-1-12-10 (1971) provides for direct interlocutory appeal to the supreme court from decisions appointing or refusing to appoint a re- ceiver for the stay of the receiver's authority until the final determination of such appeal. 55239 Ind. 384, 158 N.E.2d 164 (1959). 56238 Ind. 265, 150 N.E.2d 568 (1958). 88 INDIANA LAW REVIEW [Vol. 7 anticipated in time to give notice or that waste, destruction, or loss is threatened, and that delay until notice can be given would defeat the object of the suit. 57 The court in Red Dragon Diner emphasized that the com- plaint requesting receivership must contain specific facts to es- tablish the ultimate facts as required under Johann. Mere con- clusions do not suffice. 58 It was this latter requirement that proved fatal to Jolley's case in Inter-City. The supreme court re- viewed the complaint, and concluded that the allegations essen- tially contending that Inter-City's financial condition was so pre- carious that irreparable damage would result if a receiver was not appointed were mere conclusions and, not being supported by specific statements of facts, were insufficient to sustain the order under Indiana Code section 34-1-12-9.59 D. Record Ownership and Transfer of Shares A dispute over the record ownership of corporate stock was the issue in Traylor v. By-Pass 46 Steak House, Inc.60 The Indi- ana Supreme Court affirmed an order of the Superior Court of Vanderburgh County granting temporary injunctive relief in ac- tions brought by the officers and directors of five corporations seeking to regain control over the business affairs of the corpora- tions from defendant-appellants Traylor and Property Developers, Inc. Plaintiffs also sought the records, accounts, and documents of the corporations in defendants' possession and an accounting for the period of time during which they controlled the corpora- tions. 6 ' How Traylor, who was a shareholder of the various corporate plaintiffs but not an officer or director of any of them, gained dominion and control over the books, records, and management 57Id. at 268, 150 N.E.2d at 569-70. See Fagan v. Clark, 238 Ind. 22, 148 N.E.2d 407 (1958) ; Morris v. Nixon, 223 Ind. 530, 62 N.E.2d 772 (1945); Tormohlen v. Tormohlen, 210 Ind. 328, 1 N.E.2d 596 (1936). For a discussion of the reasons for appointing receivers, see Henn § 375. 58239 Ind. at 386, 158 N.E.2d at 165. 59277 N.E.2d at 160. Appellee was not alone in failing to secure the appointment of a receiver without notice. Johann is replete with cases in which such appointments were set aside. 60285 N.E.2d 820 (Ind. 1972). 6i Id. at 820-21. Appellees were required to post bond of $60,000 as se- curity for costs and damages under Indiana Rules of Trial Procedure 65(C). 1973] SURVEY OF RECENT DEVELOPMENTS 89 was not disclosed in the opinion. 62 But it was clear that the five appellee corporations, through their officers and directors who were parties to the suit, had refused Traylor's request that the shares standing in his name be transferred to Property Developers, Inc. 63 Appellants made a two-pronged attack on the order of the superior court and contended that: (1) the corporation had "failed to follow the law" by refusing to transfer the shares on the cor- porate books, and (2) plaintiffs, because they had refused to trans- fer the shares, were not entitled to the extraordinary remedy of injunctive relief under the equitable "clean hands" doctrine. 64 The supreme court did not really separate the two issues other than to note that the individual appellees were the duly acting officers and directors of the corporations "and as such are en- titled to control the business affairs and assets of the corporations" as provided by the Indiana General Corporation Act. 65 This is unassailable as a general proposition, 66 but there are exceptions recognized in both the statutes and judicial decisions. For example, the General Corporation Act provides that the "power to make, alter, amend or repeal the by-laws of a corporation" is vested in the board of directors unless "otherwise provided in the articles of incorporation." 67 Thus, shareholders can reserve a power ordi- narily exercised by the directors of a corporation. Furthermore, there is the now generally accepted concept that shareholders of 62285 N.E.2d at 821. 63Ind. Code § 23-1-2-6 (g) (1971) provides that the bylaws of a corpora- tion can regulate the manner in which shares are transferable. Another share- holder of one of the corporations and another shareholder of two of them also attempted, without success, to have their shares transferred to Property Developers, Inc. For a general discussion of record ownership and the procedures for transfer of ownership on the share ledgers of the corpora- tion, see 12 Fletcher §5492; Henn §§176-77; Lattin §141. 64285 N.E.2d at 821. 65Ind. Code §23-7-1.1-16 (1971). Since that particular provision relates to the incorporation of not-for-profit corporations, the citation apparently is in error. Presumably the court was referring to section 23-1-2-11 (a) which provides that "business of every corporation shall be managed by a board of directors." There is no indication that the corporations were anything other than for-profit corporations. bbId. §23-1-2-11 (a). National State Bank v. Sanford Fork & Tool Co., 157 Ind. 10, 60 N.E. 699 (1901); National State Bank v. Vigo County Nat'l Bank, 141 Ind. 534, 42 N.E. 924 (1895). See 3 Fletcher §990; Henn §207, at 416; Lattin §71; 1 ABA-ALI Model Bus. Corp. Act Ann. §33 (1971). 67Ind. Code §23-1-2-8 (1971). 90 INDIANA LAW REVIEW [Vol. 7 close corporations can agree among themselves to limit the board of directors, and reserve more authority to themselves than is normally contemplated by the corporation act of jurisdiction, pro- vided that the departure from the corporate norm is not excessive and the interests of creditors or minority shareholders are not jeopardized.' 66 The key question for the supreme court was whether or not plaintiffs' refusal to transfer the Traylor shares and the shares of the other two shareholders complied with the equitable maxim that one who seeks equity must do equity.69 The court construed that doctrine as requiring intentional or wilful misconduct, and not mere negligence, to bar a plaintiff from otherwise proper equitable relief. 70 It impliedly recognized that a refusal to transfer shares by corporate officers upon request of a shareholder could, under some circumstances, make the officers guilty of "unclean hands." However, the court concluded that the record in this case indicated there was litigation in another tribunal which disputed defendants' ownership of the shares of the five corporations, and hence the refusal was not such a disregard of defendants' rights as to justify application of the doctrine. Defendants did not seek resolution of the stock ownership dispute in this proceeding, but rather asserted the issue of the ownership only as a defense to the equitable action. This conten- tion was summarily dismissed with the court concluding that the corporate officers were entitled to refuse to transfer the shares until the ownership issue was completely resolved. Even if it was ultimately determined that defendants were entitled to the share transfers, the court felt that the refusal by the plaintiffs would be at worst negligence or a misapprehension of their legal rights. Such conduct could not reasonably be considered a "wilful disregard of the right of appellants," 71 which would justify denying plaintiffs' 66See Galler v. Galler, 32 111. 2d 16, 203 N.E.2d 577 (1964) ; Katcher v. Ohsman, 26 N.J. Super 28, 97 A.2d 180 (1953) ; Clark v. Dodge, 269 N.Y. 410, 199 N.E. 641 (1936). See generally Henn §213; Lattin §95; 1 F. O'Neal, Close Corporations §§ 5.16-.17 (1958). See Delaney, The Corporate Director: Can His Hands Be Tied in Advance?, 50 Colum. L. Rev. 52 (1950) ; Comment, "Shareholder Agreements'* and the Statutory Norm, 43 Cornell L.Q. 68 (1957). Cf. Benner-Corydell Lumber Co. v. Indiana Unemployment Comp. Bd., 218 Ind. 20, 29 N.E.2d 776, cert, denied, 312 U.S. 698 (1940). 69285 N.E.2d at 822. See Ferguson v. Boyd, 169 Ind. 537, 81 N.E. 71 (1907). 70285 N.E.2d at 822. 7 "Id. 1973] SURVEY OF RECENT DEVELOPMENTS 91 equitable recourse to regain control of the corporate affairs from defendants and the return of the books and records, and to obtain the requested accounting. E, Ownership and Management of Close Corporations A falling out among family members over the ownership and control of a close corporation culminated in the decision of the court of appeals in Grothe v. Herschbach. 72 The issue on appeal was the propriety of a preliminary injunction entered by the Cir- cuit Court of Jasper County, in a consolidated action, 73 restraining certain corporate claimants from interfering with the operation of the corporation by the president and chief executive officer. The circuit court ruled that the president, Henry Herschbach, had the sole right to draw checks upon the corporation's bank account, and required the president's son to deliver the key to a safe deposit box containing some assets of the corporation. The court of appeals affirmed the preliminary injunction, which essentially preserved the status quo pending a decision on the merits and held that on the record the trial court had not abused its discretion in granting injunctive relief. 74 The dispute centered around the consequences of a special meeting held on May 11, 1971, particularly as to who was entitled to vote 1299 of the 2000 issued and outstanding shares of the corporation. The record showed that the stock transfer book indicated that the 1299 shares 72286 N.E.2d 868 (Ind. Ct. App. 1972). 73As often occurs when discord reigns in family corporations, there was a proliferation of law suits, filings and hearings. The actions involved in the instant case were initiated in 1970 when Jack and Henryelta Herschbach Grothe, the son and daughter of the founder (or one of the co-founders) of an automobile dealership, filed an action to have their father Henry Hersch- bach and his second wife removed as officers of the corporation; for the ap- pointment of a receiver and for an unspecified permanent injunction. The individual defendants, the corporate trustee under a testamentary trust established by plaintiffs' mother, and the corporation filed a counter com- plaint. The counter defendants responded with another complaint seeking injunctive and monetary relief against the counter claimants. This action was later consolidated with the initial litigation. The son Jack had also filed suits to have a trust which owned 1299 of the 2000 issued and outstand- ing shares of the corporation invalidated. The father, who was over 80 when the case was decided, was the trustee. Neither of those cases had been resolved at the time the order in issue was entered. Id. at 869-70, 873. 74See Ind. R. Tr. P. 65; Public Serv. Comm'n v. New York Cent. R.R., 247 Ind. 411, 216 N.E.2d 716 (1966) ; Indiana Annual Conference Corp. v. Lemon, 235 Ind. 163, 131 N.E.2d 780 (1956). See also Public Serv. Comm'n v. Indianapolis Rys. 225 Ind. 30, 72 N.E.2d 434 (1947). 92 INDIANA LAW REVIEW [Vol. 7 were owned by Henry Herschbach as trustee under a trust created on August 17, 1965. 75 The Indiana General Corporation Act pro- vides that a corporation need only look to its stock transfer book to ascertain the shareholders entitled to vote at shareholder meet- ings. 76 The court did not, however, rely solely on the record owner- ship in upholding the injunction. Rather, it examined the trial record and concluded that Henry Herschbach was at least the de facto president and director of the corporation and hence was en- titled to preliminarily enjoin pretenders to his office. 77 In uphold- ing Henry Herschbach's claim, the court relied on Ziffrin v. Ziffrin Truck Lines, Inc.,™ which in turn applied the rule of Schepp v. Evansville Television, Inc. 79 In Ziffrin, the Indiana Supreme Court held that the evidence sustained the lower court's finding that the board of directors of the truck company was in possession of the corporate "offices, books, bank accounts and other physical properties."80 Conse- quently, the board members were de facto officers of the corpora- tion with sufficient color of title to authorize the corporation to bring an action to enjoin other claimants from acting as officers until their entitlement was established by law. The Schepp court, in expounding on the rights of incumbent office holders, phrased the pertinent principle as follows : The rule is well settled that a claimant to an office may be enjoined by one occupying the office under a claim 75286 N.E.2d at 877. The 1299 shares had previously been owned by the president's son, Jack Herschbach. 76Ind. Code § 23-1-2-9 (h) (1971). See State ex rel. Breger v. Rusche, 219 Ind. 559, 39 N.E.2d 433 (1942). Indiana is in accord with the prevailing view in this respect. See 5 Fletcher §2033; Henn § 176, at 328; Latttn §89. 77286 N.E.2d at 873-74. At the May 11, 1971, meeting two conflicting sets of minutes were prepared. One set, prepared at the instance of Henry Herschbach disclosed that the shareholders took no action to remove of- ficers or directors and elected no new directors. The second set, prepared at the instance of the claimants, indicated that Jack Herschbach, the presi- dent's son, purported to vote the 1299 shares for himself and 640 shares as proxy for his sister, and elected his wife, his sister and the former officer of the corporation as the three directors of the corporation. His wife was then purportedly elected president. She spent no time on the premises of the corporation and her only act as "president" was to direct a letter to the bank asserting her claim to the office and warning them not to honor the signature of Henry Herschbach. 78239 Ind. 468, 158 N.E.2d 793 (1959). 79236 Ind. 472, 141 N.E.2d 437 (1957). 80239 Ind. at 472, 158 N.E.2d at 795. 1973] SURVEY OF RECENT DEVELOPMENTS 93 of right until the former shall have established his title in an action at law. Thus will equity protect the possession of the incumbent from any unlawful intrusion. 81 It is well-established that to determine the title of officers or di- rectors or to test the validity of an election of corporate officers, quo warranto actions, or information in the nature of quo war- ranto, is the proper remedy. 62 Hence, injunctive relief is merely a device to maintain the status quo until the title issue is resolved. The primary element of the rule protecting possession of cor- porate office is that the incumbent acting as de facto officer must be doing so under color of title. The Seventh Circuit in In re Bankers Trust63 cited Schepp as being in accord with the proposi- tion that "color of right or title merely means 'authority derived from an election or appointment, however irregular or informal, so that the incumbent not be a mere volunteer.' "84 The authorities generally specify that there must be an exercise of the assumed authority before the de facto doctrine applies.* 65 The Herschbach opinion did not make it absolutely clear that Henry Herschbach took office because of an election. It is not un- likely that he did, since he was the only person who had acted as president of the corporation for forty years. In essence, the court gave great weight to Herschbach's past performance of duties and possession of corporate property prior to the contested meeting in determining his de facto status for purposes of passing on the pre- liminary injunction.86 S1 236 Ind. at 481-82, 141 N.E.2d at 441 (emphasis added). See Felker v. Caldwell, 188 Ind. 364, 123 N.E. 794 (1919); Carmel Natural Gas & Improvement Co. v. Small, 150 Ind. 427, 47 N.E. 11 (1897). 82 Smith v. Bank of State of Indiana, 18 Ind. 327 (1862) ; 2 Fletcher §387; Henn §§206, 222; Lattin §76. 83403 F.2d 16 (7th Cir. 1968). &4Id. at 20 quoting from 2 Fletcher § 374, at 203. See also Henn § 206, at 222; Lattin § 76. 852 Fletcher § 374; Henn §§ 206-22; Lattin § 76. 86286 N.E.2d at 877. Although it did not appear to be in issue, it should be noted that there is some authority that an officer elected by an illegally constituted board of directors is without color of right or title and is not entitled to the salary provided for him even if he renders services in good faith believing he has de jure status. Waterman v. Chicago & I.R.R., 29 N.E. 689 (1892). Lattin criticizes this as a "dubious and unjust principle." Lattin § 77, at 264. 94 INDIANA LAW REVIEW [Vol. 7 The court distinguished Hutton v. School City,67 relied on by the Herschbach children. In Hutton the court stated that: The general rule is that mandatory injunctions will not issue to deprive a person of property of which he is in possession under claim of ownership, until after the cause has been fully heard, when it comes up for final decree. And in the absence of extraordinary circumstances, of a character not shown to exist in the case at bar, such an order should not issue. 88 The reasoning behind asserting that Hutton supported the chil- dren's position is not clear since there was little doubt that Henry Herschbach, and not the children, had possession and control of the corporation except to the extent that it had been usurped by the children. Perhaps it was merely cited for the proposition that courts should exercise judicial restraint in issuing mandatory in- junctions, particularly since Henry Herschbach's daughter-in-law at least claimed that she had been elected president at the May 11th meeting.89 In addition, the court of appeals concluded that Henry Herschbach's petition for preliminary injunctive relief demon- strated an "impending injury" or "urgent necessity" which de- manded the immediate interposition of injunction within the rule of Public Service Commission v. New York Central Railroad,90 Henry Herschbach's age, the claimants impeding of the normal operation of the corporation, including the payment of bills and the purchase of automobiles, and their asserted ownership claim to sub- stantial bank accounts and negotiables satisfied this requirement with no difficulty. 91 F. Earnings and Dividends The Appellate Court of the State of Illinois applied Indiana law in Kern v. Chicago & Eastern Illinois Railroad,92 an action seek- a7194 Ind. 212, 142 N.E. 427 (1924). 66 Id. at 219, 142 N.E. at 430. 69See note 77 supra. 90247 Ind. 411, 421, 216 N.E.2d 716, 723 (1966). 91 286 N.E.2d at 871, 874. 92285 N.E.2d 501 (111. App. 1972). The court held that the law of Indi- ana, the state of incorporation, applied. See Guttmann v. Illinois Cent. R.R., 91 F. Supp. 285 (E.D.N.Y. 1950), aff'd, 189 F.2d 927 (2d Cir. 1951). 1973] SURVEY OF RECENT DEVELOPMENTS 95 ing to compel the payment of a dividend on preferred stock for the year 1959. The issue on appeal was the correctness of the C. & E.I.'s computations supporting its conclusion that there were no net earnings available for dividends on the Class A preferred shares. The C. & E.I. was incorporated in Indiana in 1939 pursuant to a reorganization proceeding supervised by the Interstate Com- merce Commission. The reorganization provided for a Class A preferred stock with a par value of forty dollars per share and a maximum annual dividend rate of two dollars. The dividends were cumulative to the extent earned. 93 During March 1965, the C. & E.I. made an exchange offer to Class A preferred shareholders offering forty dollars in C. & E.I. common shares plus six dollars in divi- dends that had been accrued and unpaid on the Class A shares. The Class A shares that were not exchanged pursuant to the offer were called for redemption in July 1965 at a price of $47.17. 94 The terms of both the exchange offer and the redemption notice stated that no dividends for the year 1959 had been accrued and unpaid on the Class A shares. In fact, the railroad's records indicated a deficiency in net earnings available for dividends in 1959. Plaintiffs con- tinued to hold their shares and had neither exchanged them nor delivered them upon redemption. 95 Plaintiffs urged two theories in support of their claim for the two dollars dividend : ( 1 ) that the undistributed 1959 earnings of a C. & E.I. wholly owned subsidiary, Chicago Heights Terminal Transfer Railroad Co. (C.H.T.T.), should have been included in the 93The C. & E.I. articles of incorporation provided that: If in any year there shall not be net earnings available for dividends, or if the amount of net earnings available . . . shall be less than the maximum dividend requirement . . . the deficiency shall not be made good in any subsequent year, nor shall any dividends accumulate with respect thereto. 285 N.E.2d at 502. As Henn points out, "cumulative-to-the-extent-earned" preferred stock is a hybrid variety of dividend preference "under which unpaid dividends accumulate during past fiscal periods only to the extent that there were then funds legally available to pay such dividends." Henn § 124, at 209. See also id. §§ 324-25. 94The redemption price represented the $40 par value of the share plus $7.17 in dividends which were then "accrued and unpaid." 95285 N.E.2d at 503. The suit claimed dividends for persons who had exchanged or who had had their Class A shares redeemed or who, like plaintiffs, continued to hold them. Id. at 502. 96 INDIANA LAW REVIEW [Vol. 7 C. & E.I. income accounts;96 and (2) that Illinois real estate tax refunds for the year 1959 were credited to the income accounts of the years received whereas the accounts for the year 1959 should have been reopened and adjusted. 97 Plaintiffs' first theory required an interpretation of C. & E.I.'s articles of incorporation. Indiana, as the court noted, is in accord with most jurisdictions and recognizes that the rights of preferred shareholders are contractual in nature with the articles of incorporation serving as the contract. 93 The pertinent provisions of the C. & E.I. articles provided that "net earnings available for dividends" to Class A shareholders were the same as ' 'income available for contingent charges"99 as computed in accordance with the 1939 Uniform System of Accounts for railroads adopted by the Interstate Commerce Commission. 100 The Uniform System of Accounts in turn provided that: Income accounts are those designed to show, as nearly as practicable, for each fiscal period . . . the returns accrued upon investments. . . . The net balance of income (or loss) shall be carried to Profit and Loss. 101 The crux of the decision was whether the undistributed earn- ings of C.H.T.T. had accrued to C. & E.I., which in turn depended on whether or not the "corporate fiction" of C.H.T.T. would be disregarded. The appellate court upheld the circuit court's conclu- sion that C.H.T.T. had been operated as a separate entity from C. & E.I. in 1959, and, consequently, the only "return accrued upon investment" was the $300,000 dividend that had been declared in 1959 and not the undistributed income. 102 This result reflects the 96The C.H.T.T. had net earnings of $392,193 for 1959 of which $300,000 was paid out as a dividend to the parent corporation. Thus sum was included in C. & E.I.'s income accounts for 1959. The balance of $92,193 in un- distributed earnings was not considered by C. & E.I. as income nor as net earnings available for dividends. Id. at 503. 97 It was stipulated that the net tax refunds were sufficient to pay the $2 dividend for 1959. Id. at 505. 98Rubens v. Marion-Washington Realty Corp., 116 Ind. App. 55, 59 N.E.2d 907 (1945). See Henn §124; Lattin §§129-30. "285 N.E.2d at 503. Income available for contingent charges was defined as income less fixed charges less certain specified sums. 100ICC Reg. C, 49 C.F.R. §514 (1972). 102285 N.E.2d at 504. 1973] SURVEY OF RECENT DEVELOPMENTS 97 well-established rule that there is no "dividend" nor is there a right for a shareholder to demand or receive a dividend until it has been declared by proper action of the corporation's board of directors, 103 except under extraordinary circumstances such as refusing to declare preferred dividends when funds are legally available and the refusal indicates bad faith or oppressive conduct on the part of the board. In such cases equity will compel the board to act. 104 The Illinois court appeared to recognize that a contrary result would be appropriate if the facts justified disregarding the cor- porate fiction of C.H.T.T. and treating the two entities as one. However, there was little doubt that C. & E.I. had maintained its wholly owned subsidiary as a separate entity. In fact, support for the conclusion was drawn from C. & E.I.'s efforts to effect a merger of the two companies. The efforts failed when the ICC refused to approve the proposals and specified that C.H.T.T. was to be maintained as a distinct corporate entity. 105 Thus, a conclu- sion that the two corporations were in fact one would require the conclusion that C. & E.I. had violated the Interstate Commerce Act. 106 The trial court record also indicated that the Director of Accounts of the ICC had advised C. & E.I. that the Uniform Sys- tem of Accounts did not require the transfer of earnings from a subsidiary to its parent. 107 The conclusion was further buttressed by affidavits showing that C.H.T.T. had always maintained sepa- rate books and records from its parent. 108 The second theory of plaintiffs also failed to persuade the appellate court. Again it was the Director of the Bureau of Ac- 103Rubens v. Marion-Washington Realty Corp., 116 Ind. App. 55, 63, 59 N.E.2d 907, 910 (1945) ; See also Franklin County Distrib. Co. v. C.I.R.R., 125 F.2d 800, 805 (6th Cir. 1942); Cintas v. American Car & Foundry Co., 131 N.J. Eq. 419, 25 A.2d 418, 422 (1942); Henn §§327-28; Lattin §146. 104W.Q. O'Neall Co. v. O'Neall, 108 Ind. App. 116, 25 N.E.2d 656 (1940). See Rubens v. Marion-Washington Realty Corp., 116 Ind. App. 55, 59 N.E.2d 907 (1945) ; Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919) ; Henn §328. 105 Chicago & 111. R.R. Merger, 312 I.C.C. 564 (1961). 10649 U.S.C. §5(1) (1970). Courts are reluctant to disregard the cor- porate fiction when to do so will require a conclusion that the corporations have acted unlawfully. See Berkey v. Third Ave. Ry., 244 N.Y. 84, 155 N.E. 58 (1926) (Cardozo, J.). 107285 N.E.2d at 504. C. & E.I.'s independent auditor concurred in this judgment. Id. 108 Id. 98 INDIANA LAW REVIEW [Vol. 7 counts for the ICC that thwarted their efforts to establish that there were sufficient net earnings in 1959 to fund the Class A dividends. In this respect the record indicated that it would be inappropriate to reopen and adjust the accounts for 1959 "for the purpose of recording subsequent years transactions (the refunds). . . . Adjustments of this kind should be lodged in either current income or expense accounts of appropriate retained income ac- counts." 109 C. & E.I.'s auditors opined that the refunds should be credited to the retained earning account to preclude a material distortion of the income account. 110 The court also rejected plaintiffs' contention that a provision in the articles providing that adjustments to "income accounts of prior years shall be treated as income items for the year in which entered on the books" ]U referred to the year of the original entry and held that the reference was to the year in which the adjusting entry was made. Thus, an express provision of the articles refuted plaintiffs' argument that prior year accounts were to be re- opened. 112 G. Statutory Developments The 1973 Session of the Indiana General Assembly enacted several pieces of legislation significantly amending the Indiana General Corporation Act and the Indiana Insurance Law.113 ' 09 Id. at 505. no /d. 11 y Id. (emphasis in original). ,,2/d. at 505-06. In fact, the court noted that "net earnings available for dividends" in 1959 were enhanced by refunds received in 1959 from real estate taxes paid in prior years. In other words, plaintiffs perhaps should have taken pleasure from the fact that the deficiency in 1959 would have been greater if the accounts for prior years had been reopened. 113 Other enactments by the General Assembly in the corporate area in- clude: (1) Ind. Pub. L. No. 269 (April 12, 1973), which intriguingly amended Ind. Code § 27-1-2-2 (1971) to provide that the Indiana Insurance Law does not apply to not-for-profit corporations that pay death benefits to owners of valuable registered horses; (2) Ind. Pub. L. No. 248 (April 10, 1973), which amended Ini>. Code § 23-7-1.1-7 (1971) to provide that loans to not- for-profit corporations by members can bear "reasonable interest at a rate not in excess of current market rates." The prior language limited interest rates to not in excess of 6% per annum. The amendment does not define "reasonable" or "current market rates" so it does present some potential con- struction problems. The legislature no doubt intended to liberalize the in- terest provision and the courts will probably interpret it accordingly. One possible guideline would be the interest rates given by comparable corporate 1973] SURVEY OF RECENT DEVELOPMENTS 99 1. Insurance Company Mergers and Consolidations The Indiana Insurance Law relating to mergers114 and con- solidations 1 ' 5 of domestic insurance companies was amended116 to bring it into substantial conformance with the merger and con- solidation provisions of the Indiana General Corporation Act. 117 ventures in the regular bond or debenture market; (3) Ind. Pub. L. No. 64 (April 6, 1973), which amended the Public Service Commission Law,. Ind. Code §§ 8-1-1-1 to -23-5 (1971) by adding a new chapter numbered 24 which eliminated the requirement that the Indiana Public Service Commission ap- prove the issuance of securties of federally-regulated gas pipeline companies or the sale or other transfer of the facilities of such companies and exempted such companies from Commission regulation with respect to their securities; (4) Ind. Pub. L. No. 245 (April 16, 1973), which amended Ind. Code §§23-1- 11-1 to -16 (1971) by adding a new section numbered 1.5, which provided that foreign financial institutions purchasing evidence of indebtedness from domes- tic investing or lending institutions are not for that reason alone "transacting business" in the state for purposes of qualification; (5) Ind. Pub. L. No. 266 (April 13, 1973), which amended Ind. Code §26-1-8-102 (1971) and reduced the stock ownership requirement of "clearing corporations" from 100% to 90% provided that the remaining stock is owned by directors of such corpo- rations and only to the extent such ownership is necessary to permit them to qualify as directors; (6) Ind. Pub. L. No. 277 (April 19, 1973), which amended Ind. Code § 27-1-13-3(2) (c) (1971) to permit casualty, fire, and marine insurance companies to invest in bonds, notes, or other evidence of indebtedness issued and guaranteed by a local governmental unit of a state, territory, or possession of the United States, the District of Columbia, or a province of the Dominion of Canada under certain conditions; (7) Ind. Pub. L. No. 279 (April 23, 1973), which amended Ind. Code §§ 27-6-8-17, -18 (1971) by extending from 90 days to 6 months the automatic stay of legal proceed- ings wherein an insolvent insurance company is a party or is required to defend a party, and to clearly require the liquidator or receiver of an in- solvent insurance company to make records available to the Board of the Indiana Insurance Guarantee Association. The Association is responsible for the quick payment of claims against insolvent insurance companies and for the detection and prevention of such insolvencies. 114Ind. Code § 27-1-9-3 (a) (3) (1971). " 5 Id. §§27-1-9-1 to -15. n6Ind. Pub. L. No. 272 (April 17, 1973). The Act was deemed an emer- gency measure and became effective upon passage. 117Ind. Code § 23-1-5-2 (a) (3) (1971) (mergers); id. § 23-1-5-3 (a) (3) (consolidations) . The Indiana Insurance Law and the General Corporation Act now com- port with the approach to mergers and consolidations adopted by the drafters of the 1969 revision of the Model Business Corporation Act. 2 ABA-ALI Model Bus. Corp. Act Ann. §§71, 72 (1971). The prior Model Act provisions, 2 ABA-ALI Model Bus. Corp. Act Ann. §§ 65, 66 (1960), like prior Indiana law, limited conversions to the shares, obligations, or other securities of the surviving or new corporation. This restriction was 100 INDIANA LAW REVIEW [Vol. 7 The major revision was the addition of language permitting the agreement of merger or consolidation to provide for the conversion of the shares of participating stock corporations into something other than the "shares or other securities" of the surviving or new corporation. Conversions into such securities are still permitted, but the Insurance Law now provides that the shares of each party to a merger, other than the surviving corporation, and the shares of each party to a consolidation can be converted "in whole or in part, into cash, property, shares or obligations of any other cor- poration." 118 The only significant difference remaining between the cur- rent merger and consolidation provisions of the Insurance Law and the General Corporation Act is that the Insurance Law merger provision still contains the phrase "other than the surviving cor- poration" as a limitation on its conversion authority. 119 It is unclear why this restrictive language was carried over from the previous merger provision. Since the term "merger" means the absorption of one or more corporations by an existing corporation which con- tinues to survive, the phrase seems redundant. 120 If the shares of the "surviving corporation" are changed or converted, i.e. a new corporation is created, 121 then the fundamental corporate change is not a merger, but rather a consolidation. Perhaps the retention of the phrase can be explained as a legislative oversight. The Gen- eral Corporation Act, prior to the 1969 amendment broadening the conversion provision of the merger section, 122 also contained the phrase. It was initially carried over into the 1969 amendment but eventually was deleted. 123 A similar deletion in section 27-1-9- 3(a)(3) of the Insurance Law might be anticipated in the future. characterized as "needlessly restrictive and out of harmony with modern practices." 2 ABA-ALI Model Bus. Corp. Act Ann. §§ 71, 72, at 352 (1971). n8This is the language added to the consolidation provision, Ind. Code § 27-1-9-4 (a) (3) (1971). The amendment to the merger provision, id. § 27-1-9-3 (a) (3), was identical except that the word "other" before the word "corporation" was omitted. The same difference is found in the merger and consolidation provisions of the General Corporation Act. U9 Id. §27-1-9-3 (a) (3). 120Henn §346, at 713; Lattin §170, at 613. See 2 ABA-ALI Model Bus. Corp. Act Ann. §§71, 72 (1971). For an extensive bibliography on mergers and consolidations, see Henn § 346, at 713 n.l. 121 Henn § 346, at 713; Lattin § 170, at 613. 122Ind. Code § 23-1-5-2 (a) (3) (1971). 123Ind. Pub. L. No. 179, § 2(a) (3) (Feb. 16, 1972). 1973] SURVEY OF RECENT DEVELOPMENTS 101 The effect of the amendments, as they refer expressly to "cash, property, shares or obligations of other corporations," will be to increase the flexibility available in planning the merger or con- solidation of Indiana insurance companies. For example, the share- holders of merged corporations are now permitted to receive secur- ities of the surviving corporation's parent which might have marketability or other advantages over the shares, obligations or securities of the surviving corporation. 2. Insurance Company Short Form Mergers 9* Also adopted by the General Assembly was a new "short form acquisition provision authorizing a parent corporation that owns (directly or indirectly) ninety-five per cent of the voting stock of a domestic insurance company to acquire the minority interests with- out the approval of the shareholders of either corporation.' 24 The new provision, which applies to both foreign and domestic parent corporations, provides for the adoption of a plan of acquisition by the board of directors of the parent whereby the minority interests of the subsidiary will be acquired in exchange for the "shares or other securities of the parent corporation, or cash, other considera- tion, or any combination of the foregoing. . . ." 125 Since insurance companies are involved, the merger plan re- quires approval by the Indiana Insurance Commissioner before it can become effective. Such approval is contingent on satisfying the Commissioner "that the terms and conditions of the plan of acquisition are fair and reasonable."' 26 In this respect the enact- ment differs significantly from the short form merger provision of the Indiana General Corporation Act' 27 and accords minority shareholders greater protection of their interests. The two acts 124Ind. Pub. L. No. 278 (April 12, 1973). This was deemed an emer- gency measure and became effective immediately on passage. Specifically, this act amended Ind. Code §§ 27-3-1-1 to -2-9 (1971) by adding an additional chapter numbered 3. 125Ind. Pub. L. No. 278 (April 12, 1973). Interestingly, the exchange pro- vision is less flexible than the amendments to the general merger and con- solidation provisions of the Insurance Law which now permit the conversion of minority shares into shares of "other" corporations. See discussion of amended Ind. Code §§ 27-1-9-3 (a) (3), -4(a)(3) (1971) p. 100 supra. The new pro- vision is also more restrictive than the short form merger section of the General Corporation Act, Ind. Code §23-1-5-8 (1971). 126Ind. Pub. L. No. 278 (April 12, 1973). 127Ind. Code §23-1-5-8 (1971). For general discussions of short form mergers, some critical of the device, see 2 ABA-ALI Model Bus. Corp. Act Ann. §75, Annot. 2 (1971); Henn §346, at 715 n.8; Note, Elimination of 102 INDIANA LAW REVIEW [Vol. 7 also differ with respect to the procedures and methods for ap- praising the value of the shares of shareholders dissenting from the acquisition plan, and the consideration offered thereunder. 128 Under the provisions of the new enactment, dissenting share- holders have thirty days after receipt of the plan, or a summary of it, to notify the company in writing of their dissent from the plan and to demand the "fair value ... [of the voting stock] as of the day prior to the date on which the plan of acquisition was adopted by the board of directors of the parent corporation, ex- cluding any appreciation or depreciation in anticipation of, or resulting from, that corporate action." 129 The Act further provides for judicial appraisal of the shares of the subsidiary if the share- holder does not agree with the value deemed fair by the subsidiary. Although the appraisal remedy has been criticized at times as having questionable value for shareholders of publicly held corpora- tions, 130 it is certainly not inappropriate when minority share- holders have no established market through which they can dis- pose of their holdings. Section 4 of the new act provides that the parent corporation and the now wholly-owned subsidiary insurance company shall be deemed separate and distinct corporations with neither "having any liability to the creditors, policy holders, if any, or shareholders of the other, notwithstanding any actions or omissions of the officers, directors or shareholders of either or both of the corpora- tions." 131 This legislative restriction on disregarding the corporate fiction is also found in the provision relating to the exchange of insurance securities of other than ninety-five per cent owned sub- sidiaries. 132 Minority Share Interests by Merger: A Dissent, 54 Nw. U.L. Rev. 629 (1959) ; Comment, The Short Merger Statute, 32 U. Chi. L. Rev. 59 (1965). Al- though they have been attacked, short form merger statutes have been up- held as constitutional. Coyne v. Park & Tilford Distillers Corp., 37 Del. Ch. 558, 146 A.2d 785 (1958) ; Alpren v. Consolidated Edison Co., 168 Misc. 381, 5 N.Y.S.2d 254 (Sup. Ct. 1938). 128Ind. Pub. L, No. 278 (April 12, 1973). 129 /d. ]30Compare Manning, The Shareholder's Appraisal Remedy: An Essay for Frank Coher, 72 Yale L.J. 223 (1962), with Eisenberg, The Legal Roles of Shareholders and Management in Modern Corporate Decisionmaking, 57 Calif. L. Rev. 1 (1969). See also Banks, A Selective Inquiry into Judicial Stock Valuation, 6 Ind. L. Rev. 19 (1972). ,3, Ind. Pub. L. No. 278 (April 12, 1973). 132Ind. Code §27-3-1-7 (1971). 1973] SURVEY OF RECENT DEVELOPMENTS 103 3. Corporate Fees Of particular interest in the corporate area was the amend- ment to Indiana Code section 23-3-2-1 133 increasing fees for certain corporate activities effective May 1, 1973. 134 A fee schedule re- flecting these increases is available from the Office of the Secretary of State of Indiana. 4. Indemnification of Corporate Personnel The General Assembly altered in several respects the pro- visions of the Indiana General Corporation Act relating to the indemnification of corporate personnel against expenses incurred in defending liability claims and for insurance covering such claims. 135 It also extended similar protection to insurance corpora- tion personnel by adding nearly identical language to the powers section of the Indiana Insurance Law. 136 The General Assembly extended the corporate power to indemnify corporate personnel and clearly authorized the purchase and maintenance of insurance on behalf of such persons against any liability asserted against or incurred by them even though the corporation itself might lack the power to indemnify them otherwise. The first significant change effected by the legislation was the inclusion of past or present "employees and agents" among those persons who may be indemnified by the corporation or on whose behalf liability insurance may be obtained. Previously, only past or present "directors or officers" of the corporation were covered. In making this change, Indiana adopted the position of the drafters of the indemnification provision of the Model Busi- 133Ind. Pub. L. No. 247 (April 17, 1973). This was deemed an emer- gency measure and became effective on May 1, 1973. 134There were also some minor style and form changes in the provisions of Ind. Code §§23-3-2-1 to -5 (1971). However, these have no substantive effect. ™5Id. §§23-1-1-2 (b)(9) to -2(b) (10), as amended Ind. Pub. L. No. 244 (April 10, 1973). ' 36 Id. §27-1-7-2 (b)(8) to -2(b)(9), as amended Ind. Pub. L. No. 271 (April 13, 1973). Indiana Public Laws 244 and 271 were designated emer- gency measures and became effective immediately after passage. Since the language of the Insurance Law provisions is identical to the two relevant sections of the General Corporation Act (except for some minor dif- ferences required by the differences between insurance and general cor- porations) the discussion will focus on amended section 23-1-2-2 (b) (9) and the new section 23-1-2-2 (b) (10) of the General Corporation Act. The pro- visions authorize corporations 104 INDIANA LAW REVIEW [Vol. 7 ness Corporation Act137 and joined the minority of jurisdictions138 recognizing the need to indemnify personnel below the top echelons of the corporate structure in order to attract and keep competent enployees. 139 to indemnify any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses reasonably incurred by him in connection with the defense of any action, suit or proceeding, civil or criminal, in which he is made or threatened to be made a party by reason of being or having been in any such capacity, or arising out of his status as such, except in relation to matters as to which he is adjudged in such action, suit or proceeding, civil or criminal, to be liable for negli- gence or misconduct in the performance of duty to the corporation: Provided, however, that such indemnification shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any provision of the articles of incorporation, by-laws, resolution, or other authorization heretofore or hereafter adopted, after notice, by a majority vote of all the voting shares then issued and outstanding; [and] ... to "purchase" and "maintain" insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, part- nership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the "power to indemnify" him against such liability un- der the provisions of this section. . . . Ind. Pub. L. No. 244, §§ 2(b) (9)-(10) (April 10, 1973); Ind. Pub. L. No. 271 §§ 2(b) (8) -(9) (April 13, 1973). 137 1 ABA-ALI Model Bus. Corp. Act Ann. §5 (1971). The Annota- tion observes that the development of indemnification statutes was prompted by the decision in New York Dock Co. v. McCollom, 173 Misc. 105, 16 N.Y.S.2d 844 (Sup. Ct. 1939), which denied a common law right of indem- nification. Solimine v. Hollander, 129 N.J. Eq. 264, 19 A.2d 344 (1941) ; Mooney v. Willys-Overland Motors, Inc., 204 F.2d 888 (3d Cir. 1953). 138The Model Act Annotation lists Connecticut, Massachusetts, and Min- nesota as authorizing indemnification of agents and employees as well as officers and directors. California, Ohio, Rhode Island, and South Carolina include employees in their statutes. Connecticut goes still further and pro- tects shareholders of the corporation as does North Carolina under some circumstances. 139Recognized is a need for protection apart from whatever protection is enjoyed by them under the general principles of agency law. See Henn § 379, at 800 n.2; W. Seavey, Law of Agency § 168 (1964) ; Restatement (Second) of Agency §§439-40 (1958). 1973] SURVEY OF RECENT DEVELOPMENTS 105 A related change effected by the legislation was the extension of indemnification to persons serving, or who had served, as di- rectors, officers, employees, or agents of another "corporation, partnership, joint venture, trust or other enterprise" if the person is or was serving at the request of the indemnifying corporation. The previous language of section 23-1-2-2 (b) (9) encompassed only persons serving as "directors or officers" of other corporations. Thus while the old provision extended protection to persons serving in top managerial positions of corporations such as subsidiaries, the current provision recognizes that other forms of business enter- prise beside the corporate are appropriate in many instances 140 and accordingly extends the indemnification power. It should be pointed out that the former statutory provision did not preclude indemnification of employees or agents, or cor- porate personnel serving in other business enterprises. It specifi- cally provided that the indemnification authority granted by the General Corporation Act was not "exclusive" and permitted in- demnification pursuant to the "articles of incorporation, bylaws, resolution, or other authorization heretofor or hereafter adopted, after notice, by a majority vote of all the voting shares then issued and outstanding." 141 Consequently, the benefits of indemnification could be accorded by director or shareholder action in situations not encompassed within the provision itself, including those sit- uations now covered by the amended provisions. The nonexclusive feature of most statutes has been criticized as lessening the protec- tion given to the interests of the corporation's owners. Having the scope of indemnification specified in the General Corporation Act is a more satisfactory procedure because the limits of proper in- demnification are set forth. 142 140For a general discussion of such other forms of doing business, see Henn §§ 16-76. 141 Ind. Code § 23-1-2-2 (b) (9) (1971). The Model Act indemnification provision is nonexclusive, as apparently are the statutes in the majority of jurisdictions. 1 ABA-ALI Model Bus. Corp. Act Ann. § 5, at 225 (1971). See Henn §379, at 806; Lattin §§78, at 281, 114, at 449-50. See also L. Ratner, Protecting the Corporate Officer and Director from Lia- bility (1970) ; Jervis, Corporate Agreements to Pay Directors' Expenses in Stockholder Suits, 40 Colum. L. Rev. 1192 (1940). 142See Henn §§379-80; Lattin §§78, 114. It is important to note that there is authority cautioning against overreliance on such provisions when indemnification goes substantially beyond the statute or when it could be characterized as unjust or inequitable. Teren v. Howard, 322 F.2d 949 (9th Cir. 1963); cf. Koster v. Warren, 297 F.2d 419 (9th Cir. 1961). Another risk is that any bylaw or other provision concerning indemnification could be deemed, if poorly drafted, as restricting rather than expanding available 106 INDIANA LAW REVIEW [Vol. 7 One change effected by the amendment that might be of ques- tionable wisdom was the deletion of "actually" with respect to the expenses covered by the provision, leaving "reasonably incurred" as the only limit on the expenses covered. The problem is not that the standard of accounting has been reduced in fact, rather, it is that it might appear that the standard has been reduced. This appearance of a reduced standard could encourage a less careful attitude in defending claims or actions brought against corporate personnel. Of course, one argument in favor of deleting "actually" is that the statute now clearly permits the corporation to make advances to a covered person to finance his defense or to make payments directly to a third party such as an attorney rather than having the indemnified person pay the expense and in turn seek reimbursement. Unfortunately, the General Assembly did not take the opportunity to specify whether or not settlement expenses are covered. 143 Another change according more protection to corporate per- sonnel is the extension of the indemnification right to expenses incurred in defending claims or actions "arising out of his status" as an officer, director, employee, or agent. Previously, indemnifi- cation was limited to claims arising out of acts done in the person's capacity as an officer or director. Consequently, indemnification is now available in proper cases for third party actions. 144 indemnification. Essential Enterprises Corp. v. Dorsey Corp., 40 Del. Ch. 343, 182 A.2d 647 (1962). See also Loftin, Indemnification of Corporate Executives, 1 Liabilities of Corporate Offices and Directors 69 (1968). 143 Some statutes specifically refer to settlements. See Henn §380, at 811 nn.46-49. It is possible that settlements would be included as an ex- pense "reasonably incurred" in defending a claim, Henn § 380, at 812. They might also be covered in a provision of the articles of incorporation, or the bylaws or otherwise as authorized by the nonexclusive proviso of Ind. Code §23-1-2-2(9) (1971). 144 C/. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), in which the liability arose because the defendants were insiders, not because they were acting as officers or directors. See 1 ABA-ALI Model Bus. Corp. Act Ann. § 5, at 219-20 (1971) ; Knepper, Corporate Indemnification and Liability Insurance for Corporate Officers and Directors, 25 Sw. L.J. 240 (1971). However, it is unlikely that the defendants in Texas Gulf Sulphur would have been entitled to indemnification under the new Indiana statutory provision since they were deemed to have violated their duty to the corpo- ration in using information that properly should have been used only for corporate purposes. See SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2d Cir. 1971) ; Diamond v. Oreamuno, 23 N.Y.2d 494, 248 N.E.2d 910 (1969). 1973] SURVEY OF RECENT DEVELOPMENTS 107 The Indiana statute in this respect is not as generous as some, including the Model Act, 145 in that it permits indemnification "except in relation to matters as to which he is adjudged in such action, suit or proceeding, civil or criminal, to be liable for negli- gence or misconduct in the performance of duty to the corpora- tion." 146 The approach of the drafters of the Model Act is to permit indemnification of persons who have not been completely successful in their defenses if they have at least met prescribed standards. Typically the person entitled to indemnification must have "acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with re- spect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful." 147 To prohibit wrongdoing directors from attempting to indemnify themselves for the ex- penses of their unsuccessful defenses, it is crucially important that there be an independent determination that indemnification is proper. The statutes have adopted several techniques to accom- plish this, including advice of independent legal counsel, ratifica- tion by disinterested directors or the shareholders of the corpora- tion, or order of the court hearing a derivative action. 1148 Separate and apart from the expansion of the corporate power to indemnify officers, directors and employees, Indiana Public Laws 244 and 271 added a new subsection to the general powers provisions of the General Corporation Act149 and the Insurance Law150 clearly authorizing the purchase by the corporation of lia- bility insurance for corporate personnel. Although the indemnifica- tion provisions of the two Acts are not as liberal or as favorable to management as the indemnification provision of the Model Busi- 145 1 ABA-ALI Model Bus. Corp. Act Ann. §5, at 224-37 (1971) ; Henn §380. 146See note 25 supra. 147 1 ABA-ALI Model Bus. Corp. Act Ann. §§5(a)-(b), at 224 (1971). See generally Henn § 380, at 809-11. In this respect the business judgment rule has afforded a great deal of protection against liability for errors in conduct. See Freeman v. Hare & Chase, Inc., 16 Del. Ch. 207, 142 A. 793 (1928) ; Symposium, Officers* and Directors' Responsibilities and Liabilities, 27 Bus. Law. 1, 130 (1972). 148 For the jurisdictions adopting the various techniques, see 1 ABA-ALI Model Bus. Corp. Act Ann. § 5, at 231-35 (1971) ; Henn § 380, at 810 n.38. 149Ind. Code §23-1-2-2(10) (1971). 150 /d. §27-1-7-2(9). 108 INDIANA LAW REVIEW [Vol. 7 ness Corporation Act, the newly adopted insurance provisions are identical to the Model Act. 151 In clearly allowing for liability insurance, Indiana joins a growing list of jurisdictions recognizing that the corporation's right or power to indemnify personnel for expenses of defending actions arising out of their corporate status might not adequately protect their interests. 152 Director and officer, commonly "D & 0," insurance does afford this added protection. Although the former indemnification provision of the General Corporation Act did not refer to liability insurance, the purchase of such insurance was probably permitted in implementing the right to indemnification, at least to the extent indemnification was permitted, or under the inherent power of a corporation to compensate corporate personnel. 153 The intriguing aspect of the insurance provision is that it clearly authorizes the purchase of insurance covering liability that could not be indemnified by the corporation itself. Consequently, the issue is raised whether or not insurance can be purchased by the corporation which has the effect of freeing corporate personnel from the fear of civil liability for breaching their duty to show good faith in dealings with the corporation. 154 Although the language of the provision does seem to raise that possibility, it is not unlikely that public policy would preclude insuring against gross negligence, self-dealing, or conduct amounting to total abdica- tion of corporate responsibility. A more appropriate interpretation of the new section would be to limit insurance to situations involving, for example, ordinary negligence in the performance of a duty to the corporation. Such liability would bar indemnifica- tion by the corporation but since it does not amount to grave wrongdoing, there is no more harm to the public interest than is caused by automobile liability insurance. 155 In this respect it should be noted that the Securities and Exchange Commission has been particularly hostile to indemnification and insurance for liabi- 151 1 ABA-ALI Model Bus. Corp. Act Ann. §5(g) (1971). 152Henn § 380, at 812; Knepper, supra note 35. 153Note, Liability Insurance for Corporate Executives, 80 Harv. L. Rev. 648 (1966). }54See Bishop, Sitting Ducks and Decoy Ducks; New Trends in the In- demnification of Corporate Directors and Officers, 77 Yale L.J. 1078, 1087 (1968) ; Note, Public Policy and Directors' Liability Insurance, 67 Colum. L. Rev. 716 (1967). 155See note 42 supra. 1973] SURVEY OF RECENT DEVELOPMENTS 109 lity arising under the Securities Act of 1933 156 and has severely restricted the indemnification of officers, directors, and controlling persons. 157 This hostility does not appear to bar all indemnification or insurance under the Securities Act but clearly does bar any indemnification or insurance defeating the objectives of statutory liability under sections 11 and 12 of the Act. 158 Of course, authorization to purchase insurance covering even total breaches of corporate responsibility does not guarantee find- ing an insurance company ready and willing to insure against such risks. As Professor Bishop points out, the existence of such insurance might well increase the risks insured against, 159 and insurers are not inclined to develop or retain insurance policies that have that result. Thus the self-interest of insurance com- panies would insure that "D & 0" insurance would not be counter- productive. 5. Professional Corporations—Officers A serious obstacle to the development of solely-owned pro- fessional corporations in Indiana was eliminated by the simple expedient of amending the shareholder qualification provisions of the General Professional Corporation Act, 160 the Professional Medi- 15615 U.S.C. §§77a-aa (1970). 15717 C.F.R. §230.460, Note (a) (1972). See Kroll, Some Reflections on Indemnification Provisions and S.E.C. Liability Insurance in the Light of Barchris and Globus, 24 Bus. Law. 681, 687-92 (1969). 15815 U.S.C. §§ 77k, 1 (1970). See Kroll, supra note 157, at 691-92. 159Bishop, supra note 42, at 1094. For a discussion of the terms of a typical D & O policy and an evaluation checklist, see Hinsey & DeLancey, Directors and Officers Liability Insurance—An Approach to its Evaluation and a Checklist, 23 Bus. Law. 869 (1968). 160Ind. Code §§23-1-13-1 to -11 (1971), as amended Ind. Pub. L. No. 246 (April 9, 1973). Although there are other benefits resulting from the incorporation of a professional practice, such as unlimited duration and limited liability, the prime motivation for utilizing the corporate form has been to enjoy the tax benefits available to corporations and their employees which traditionally have been unavailable to sole proprietors and members of partnerships. See generally Henn § 77. The legal periodicals are replete with articles discussing the tax considerations for incorporation. See, e.g., Levenfeld, Professional Corporations and Associations, 8 Houston L. Rev. 47 (1970) ; Overbeck, Current Status of Professional Associations and Pro- fessional Corporations, 23 Bus. Law. 1203 (1968) ; Weinberg, A Brief Look at the Advantages and Disadvantages of Professional Corporations, 6 Creigh- ton L. Rev. 17 (1973) ; Incorporating a Private Practice—A Complete Check- list, 16 Prac. Law., May 1970, at 69. Of course, it should be noted that the liberalization of benefits available for self-employed persons under the Keogh 110 INDIANA LAW REVIEW [Vol. 7 cal Corporation Act, 161 and the Professional Dental Corporation Act162 to permit the same person to serve as both president and secretary. 163 The problem can be traced back to the adoption of the Professional Medical Corporation Act in 1963 and the General Professional and Professional Dental Corporation Acts in 1965. Recognizing the inefficiency of restating the formalities required for organizing corporations and the provisions relating to the general powers, privileges, duties, or liabilities of domestic corpor- ations under the Indiana General Corporation Act, 164 the General Assembly simply incorporated them by reference except when inconsistent with the specific provisions and purposes of the professional corporation acts. 165 One of the provisions incorporated by reference was Indiana Code section 23-1-2-13 relating to the election of officers of general corporations and their duties and responsibilities. This section provides that when the bylaws of the corporation permit, "two or more offices may be held by the same person, except that the duties of the president and secretary shall not be performed by the same person." 166 Since many corporate documents or instru- ments must be acknowledged or verified by two officers, it does make sense to have different persons serving as the chief execu- tive officer and the ministerial officer whose primary function is Act, 26 U.S.C. §§401-04 (1970), has somewhat reduced the drive towards professional incorporation. 16, Ind. Code §§23-1-14-1 to -21 (1971). 162 /ci §§23-1-15-1 to -21. 163The pertinent sections, in the order mentioned, are id. §§ 23-1-12-1 to -6, -13-4. 164 Id. §§ 23-1-1-1 to -10-6, -12-1 to 6. }65Id. §§23-1-14-5 (medical) , -15-5 (dental). A slightly different approach was used for the General Professional Act. Instead of referring to the Gen- eral Corporation Act, section 23-1-13-11 incorporates the provision of the Medical Professional Corporation Act which in turn relates to the General Corporation Act. Such an incorporation by double reference would not normally make sense, but it should be pointed out that section 23-1-13-11 also incorporates other provisions of the Medical Professional Corpora- tion Act, for example, those relating to limitation of purposes (§ 23-1- 14-6) the necessity for a certificate of registration (§ 23-1-14-8) and renewal thereof (§23-1-14-9), the limitation on issuance and transfer of shares (§23-1-14-10). 166This is not an uncommon restriction in corporation statutes. See 1 ABA-ALI Model Bus. Corp. Act Ann. § 5, at 91-4 (1971) ; Henn § 270 at 434, n.7. 1973] SURVEY OF RECENT DEVELOPMENTS 111 to certify copies of corporate records and to keep and attest the corporate seal. 167 This requirement does not create any difficulty for general corporations even when there is only one shareholder and, as permitted by the General Corporation Act in such situa- tions, one director. 163 A spouse, a family member, an employee, or the attorney for the corporation can always serve as the secre- tary. However, the professional corporation situation was compli- cated by the requirement of the three Acts that only individuals holding unlimited licenses to practice the relevant profession could be officers, directors, or shareholders of professional corpor- ations. 169 Thus the sole practitioner wishing to incorporate was forced to find another licensed professional to serve as the secre- tary of the corporation. Finding someone willing to undertake this responsibility for another practitioner might be difficult even in a sizable metropolitan area, but doubtless it would be impossible in small communities where there might be only one doctor, lawyer, or dentist. Certainly there was no legislative intent to limit professional corporations to what were, or would be in the absence of the statutes, partnerships. To the contrary, all three Acts provide that "an individual" can organize and be- come a shareholder of a professional corporation. 170 New legislation 171 eliminated the difficulty by eliminating the restriction. In so doing, Indiana joins those jurisdictions which have resolved the problem of the solely-owned professional corpor- ation by eliminating the restriction against the same person's serving in two capacities172 or by eliminating the requirement that certain officers be licensed professionals. 173 It is possible that the enactment was not really necessary. All three professional cor- poration acts provide that the General Corporation Act provisions ^Citizens' Dev. Co. v. Kypawva Oil Co., 191 Ky. 183, 229 S.W. 88 (1921) ; Henn § 225, at 434 n.7; Lattin § 75. 168Ind. Code § 23-1-2-11 (b) (1971) provides that the number of directors shall not be less than three unless there are only one or two shareholders when, respectively, one or two directors are permitted. 1697d §§23-1-13-6 (general), -14-12 (medical), -15-12 (dental). woId. §§23-1-13-6 (general), -14-4 (medical), -15-4 (dental). 17, Ind. Pub. L. No. 246 (April 19, 1973). }72E.g., Tex. Rev. Civ. Stat. Ann. art. 1528f, §9(g) (Cum. Supp. 1972) (any one person may serve in more than one office, provided that the presi- dent and secretary are not the same person unless the professional association has only one member). 112 INDIANA LAW REVIEW [Vol. 7 apply "except where inconsistent with the provisions and purpose of this Act," and that the professional corporation act "shall take precedence in the event of any conflict with the Indiana General Corporation Act." 174 Since the professional corporation acts con- template sole ownership and require that all officers be licensed professionals, it is not inconceivable that a court would rule that the General Corporation Act was impliedly amended to permit one person to hold the offices of president and secretary when there is no other eligible person involved in the corporation. 175 W3E.g., Ala. Code tit. 46 § 336 (Cum. Supp. 1971) ; Ga. Code Ann. §84- 5404(c) (Supp. 1972); S.C. Code Ann. §56-1606 (Supp. 1971). 174Ind. Code §§23-1-13-11 (general), -14-5 (medical), -15-5 (dental) (1971). 175 C/. Christian v. Skideler, 382 P.2d 129 (Okla. 1963), in which the court held that the three director requirement of the Oklahoma general cor- poration law did not apply when only two persons were incorporating and a third qualified director might not be available. VI. Criminal Procedure William A. Kerr* On January 1, 1972, the Indiana Court of Appeals acquired jurisdiction over criminal appeals, thus marking a major change in Indiana criminal procedure. 1 Under the new procedure, the court of appeals has jurisdiction over all criminal appeals except for a limited number of cases over which the Indiana Supreme Court has retained exclusive jurisdiction such as appeals from judgments imposing a sentence of death, life imprisonment, or a minimum sentence of greater than ten years, and appeals involving cases in which a state or federal statute has been declared uncon- stitutional in whole or in part.2 Since there are only a few offenses *Associate Professor of Law, Indiana University Indianapolis Law School. A.B., West Virginia University, 1955; J.D., West Virginia University, 1957; LL.M., Harvard University, 1958; B.D., Duke University, 1968. *See Ind. R. App. P. 4 (adopted by the Indiana Supreme Court pursuant to Ind. Code § 33-2.1-3-1 (1971) and the amendment to article 7 of the Indiana Constitution which was approved on November 3, 1970) . 2Ind. R. App. P. 4(A) (7) -(8), (B).