Indiana Law Review


II. Business Associations

Paul J. Galanti*

A. Shareholder Derivative Actions

Neese v. Richer,^ decided during the survey period, should be of

particular interest to attorneys who represent closely held corpora-
tions and to attorneys who represent minority shareholders of such
corporations. In Neese, the court of appeals affirmed an order of the

Montgomery Circuit Court that awarded attorney fees and expenses
to the plaintiff, Richer, in a shareholder derivative action.^ The plain-
tiff sought an accounting and damages, alleging mismanagement of
the corporate defendant, improper recordkeeping, fraud, and conver-

sion of corporate funds to the directors' personal use.^

The trial court had ordered an audit of the corporation's books
by an independent accounting firm/ Following receipt of the independ-

ent accountant's report, the trial court found that Richer had failed

to prove the defendants were guilty of fraud, mismanagement, or con-
version even though Richer had proven that the defendants were

guilty of certain "improper" acts.^ However, the court then concluded
that Richer had been justified in filing the suit because the defend-

ants had failed to keep correct and complete financial books and

records of account as required by the Indiana General Corporation

Act,^ and because the defendants' dealings with the corporation "were

sufficiently susceptible of an interpretation of wrongdoing."^ Conse-

quently, the trial court ordered the corporation to pay Richer's ex-

penses, the costs of the action, and the accountant's fee, even though

the suit did not generate a financial recovery for the corporation.^

The first issue resolved on appeal was the propriety of ordering
the corporation to pay for the independent accounting. Relying on

Atwood V. Prairie Village, Inc.,^ the Neese court held that allowing

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

'428 N.E.2d 36 (Ind. Ct. App. 1981).

Ud. at 43.

Hd, at 37.

Vd. Defendants had unsuccessfully attempted to secure a writ of mandate and
prohibition preventing the trial judge from acting in connection with the independent

accounting order. See State ex rel. Neese v. Montgomery Circuit Court, 399 N.E.2d
375 (Ind. 1980).

M28 N.E.2d at 37.
«IND. Code § 23-1-2-14 (1982).
'428 N.E.2d at 38.

'Id.

MOl N.E.2d 97 (Ind. Ct. App. 1980). The Atwood court in turn had relied on an
earlier related Indiana Supreme Court decision. State ex rel. Neese v. Montgomery
Circuit Court, 399 N.E.2d 375 (Ind. 1980).

25



26 INDIANA LAW REVIEW [Vol. 16:25

costs in an equitable action, such as an accounting, is within the discre-

tion of the trial court, and the court of appeals will not interfere unless

this discretion is manifestly abused. ^° In Atwood, it made no difference
that the accountant's fee was assessed against the unsuccessful plain-
tiff. Clearly, this factor should not make a difference in determining
who pays the accountant's fee; the main issue is which party equitably
should bear the expenses. The Neese court was satisfied that assess-
ing the fee against the corporation was proper in light of the trial
court's "findings that the corporation's accounting procedures were
sloppy, disorganized, and extremely difficult to follow"^^ in substan-

tiating and reconciling the accounts and records that were available.

The message of this aspect of Neese is clear, unambiguous, and
should be brought home to corporate clients who take a cavalier
attitude toward proper bookkeeping and recordkeeping. The Indiana
General Corporation Act requires corporations to keep correct and

complete books of account. ^^ Those that fail to comply with the

statutory mandate at least face the prospect of paying for an independ-

ent audit if a minority shareholder brings a colorable, although not

totally successful, action for an accounting. A much wiser course is
to avoid the Neese problem by keeping the proper books and records.

An even more significant aspect of Neese is the fact that the ap-
pellate court affirmed the award of attorney fees and expenses.
Indiana has long recognized the propriety of such an award where

a shareholder has successfully prosecuted a derivative suit that

resulted in some actual pecuniary benefit to the corporation.^^ There
are two policies for this rule: (1) shareholders who benefit from another
shareholder's efforts to recover a fund for the corporation would be

unjustly enriched if they did not contribute to the litigation expenses,

and (2) failure to reimburse the shareholder's expenses would
discourage shareholders from bringing meritorious derivative suits if

the fees and expenses would exceed any potential increase in the value

of their shares.^*

•0428 N.E.2d at 38-39.

'Ud. at 39.

•^IND. Code § 23-1-2-14 (1982).

''See Cole Real Estate Corp. v. Peoples Bank & Trust Co., 160 Ind. App. 88, 310
N.E.2d 275 (1974), discussed in Galanti, Business Associations, 197Jf Survey of Recent

Developments in Indiana Law, 8 Ind. L. Rev. 24, 35-42 (1974). See also Princeton Coal

& Mining Co. v. Gilchrist, 51 Ind. App. 216, 99 N.E. 426 (1912). See generally authorities
cited infra note 14.

•"428 N.E.2d at 39. See generally 13 W. Fletcher, Cyclopedia of the Law of
Private Corporations § 6044 (rev. perm. ed. 1980). Professor Hornstein's four articles

on counsel fees in derivative actions are considered to be the leading commentary on
the issue. See Hornstein, The Counsel Fee in Stockholder's Derivative Suits, 39 Colum.

L. Rev. 784 (1939); Hornstein, Problems ofProcedure in Stockholder's Derivative Suits, 42

Colum. L. Rev. 574 (1942); Hornstein, New Aspects of Stockholder's Derivative Suits, 47



1983] SURVEY-BUSINESS ASSOCIATIONS 27

Defendants first argued that the award was inappropriate because

Richer's suit was "not successful." This argument was summarily

rejected in that the trial court specifically had found that an account-

ing was proper under the circumstances even though the defendants

were not guilty of fraud, mismanagement, or conversion of corporate

assets. Thus, Richer's suit was "successful."'^
Defendant's second argument was that Richer could not recover

his expenses because the corporation derived no pecuniary benefit

from the suit. In rejecting this contention, the Neese court placed In-

diana squarely among those jurisdictions that have extended the "com-
mon benefit" rule for awarding fees and expenses for cases such as:
where a fund was brought within the court's control; where a fund

was established from which others would benefit although without the
court's control;'^ and where the derivative action has produced a
nonpecuniary benefit for the corporation.'^

The court in Neese relied upon and quoted substantially from the
United States Supreme Court opinion in Mills v. Electric Auto-Lite
Co}^ to reach this result. In Mills, the Court affirmed an interim award

of litigation expenses and reasonable fees to plaintiffs in a derivative

action challenging a corporate merger under section 14(a) of the
Securities Exchange Act of 1934.'^ To a certain extent. Mills recognized
a second theory for awarding fees in a derivative action. The Court
stated at one point that "the stress placed by Congress on the impor-

tance of fair and informed corporate suffrage leads to the conclusion

that, in vindicating the statutory policy, petitioners have rendered a

substantial service to the corporation and its shareholders."^" This

COLUM. L. Rev. 1 (1947); Hornstein, Legal Therapeutics: The "Salvage" Factor in Counsel
Fee Awards, 69 Harv. L. Rev. 658 (1956). See also other authorities cited in W. Gary &
M. EiSENBERG, Cases and Materials on Corporations 942-43 (5th ed. unabr. 1980).

'M28 N.E.2d at 39.

'^See, e.g., Sprague v. Ticonic Nat'l Bank, 307 U.S. 161 (1939).
"428 N.E.2d at 39-40. See generally W. Cary & M. Eisenberg, supra note 14, at 939.
•«396 U.S. 375 (1970).
•'15 U.S.C. § 78n(a) (1976). There is an ironic ending to Mills. As noted, the fees

upheld by the Court were interim fees. On remand, the district court awarded damages
and prejudgment interest to the plaintiffs, but on appeal the Seventh Circuit found
that the terms of the challenged merger were fair; thus, the plaintiffs could recover
nothing and were not entitled to fees and expenses incurred subsequent to their vic-
tory in the Supreme Court. Mills v. Electric Auto-Lite Co., 552 F.2d 1239, 1249-50 (7th
Cir.), cert, denied, 434 U.S. 922 (1977). The court relied on Alyeska in denying fees and
expenses. 552 F.2d at 1238. The plaintiffs who had won the battle thus lost the war,
and those who continued the fight following the Supreme Court's decision were left
to their own devices and pocketbooks. The Seventh Circuit is not totally "heartless"
and recently awarded a fee of $27,900 to an outside attorney who had done some work
on Mills while it was before the Supreme Court. Mills v. Electra Corp., 663 F.2d 760
(7th Cir. 1981) (attorney requested $500,000).

'"396 U.S. at 396 (emphasis added).



28 INDIANA LAW REVIEW [Vol. 16:25

second theory is that fees can be awarded where the plaintiffs were
in effect "private attorney generals" helping to enforce the federal

securities laws.^^ In Alyeska Pipeline Co. v. Wilderness Society,^^

however, the Court specifically rejected the private attorney general

theory of awarding attorney fees in suits brought under federal

statutes unless provided by specific statutory authorization. The Court
in Mills did emphasize that benefits were conferred on the other
shareholders by plaintiffs' suit; therefore, the Mills decision, which

on its face is based on the common benefit theory, survives AlyeskaP
As the court in Neese recognized, fees and expenses cannot be

awarded to a plaintiff in all instances where defendants have done
"some wrong," for to do so would invite the nuisance strike suit.^*

Such an award is only proper where the corporation receives a
substantial benefit which " 'maintain[s] the health of the corporation

and raise[s] the standards of "fiduciary relationships and of other

economic behavior" ' or which 'corrects or prevents an abuse which

would be prejudicial to the rights and interests of the corporation or

affect[s] the enjoyment or protection of an essential right to the

stockholder's interest.'
"^^

A court must establish a balance between the interests of the cor-
poration and the interests of the minority shareholders. To award fees
where there have been only insignificant wrongs would be unjust to
the corporation, but to deny fees unless the corporation received some
economic or monetary benefit could effectively foreclose minority

shareholders from bringing derivative actions to correct improper

corporate conduct.^^ The Neese court was satisfied that the corpora-
tion had received a substantial nonpecuniary benefit.^^ Albeit unlike-

ly, the failure to keep correct and complete financial books and records

could have subjected the corporation to fines. ^* Thus, the independ-

ent accounting ordered by the court improved the "health" of the cor-

^The concept of the private attorney general in part implies a cause of action

for a violation of the SEC's proxy rules. See J.I. Case Co. v. Borak. 377 U.S. 426 (1964).

^421 U.S. 240 (1975).

^^The philosophical attitude of the Court to securities' suits had changed from

1970 to 1975, and although Alyeska cited Mills with approval, as Professors Cary and

Eisenberg point out, it is open to question whether the Court would again go as far

as it did in Mills in determining what constitutes a benefit for purposes of awarding

fees under the common fund theory. W. Cary & M. Eisenberg, supra note 14, at 939.
^"428 N.E.2d at 42.

Hd. (quoting Bosch v. Meeker Coop. Light & Power Ass'n, 257 Minn. 362, 364-67,
101 N.W.2d 423, 426-27 (I960)).

^428 N.E.2d at 42.

^*A corporation that fails to do any act required by the Indiana General Corpora-

tions Act commits a Class B infraction, subjecting it to a possible fine. Ind. Code §§
23-l-10-l(a), 34-4-32-4(b) (1982).



1983] SURVEY-BUSINESS ASSOCIATIONS 29

poration by bringing it in line with the requirements of the General

Corporation Act.^^

Neese is a caveat to anyone controlling a closely held corporation

who might be taking, or be tempted to take, ''slight" advantage of
minority shareholders. No longer can a majority shareholder test the
line between the rightful exercise of control and the abuse of minority

shareholder interests with the notion that the minority shareholders

are unlikely to balk, that is, sue, because it would not be worth their

financial while. Now, such majority shareholders must keep in mind
that improper conduct, even though not fraudulent, can result in fees

and expenses being assessed to the corporation. This decision means
they will pay something for their misdeeds.

B. Creation of Limited Partnerships

Perhaps the most interesting thing about the Indiana Uniform
Limited Partnership Act (I.U.L.P.A.P is that the relevant, reported

cases interpreting the I.U.L.P.A. are decided by courts in other

jurisdictions.^^ The decision of the Illinois Appellate Court in Allen
V. Amber Manor Apartments Partnership^^ is such a case. In Allen,
the court of appeals reversed the trial court's grant of plaintiff Allen's

motion for partial summary judgment in an action to determine if
Allen was a limited partner in an Indiana limited partnership that
owned an apartment complex in Hobart, Indiana.^^

The Allen court held that summary judgment was precluded in
this case, because there were factual issues as to whether the parties
intended to form a limited partnership and, if so, when the limited
partnership was formed.^* Allen became involved in the project in late
1974, when he and other investors entered into an agreement to con-
tribute $500,000 to the capital of the partnership.^^ The term "capital"
is used advisedly because the agreement provided that the payments,

^M28 N.E.2d at 43. Although not in issue in Neese, Professors Gary and Eisenberg

briefly describe the methods for determining fees in a successful shareholder derivative

suit. W. Gary & M. Eisenberg, supra note 14, at 940-41; see also Mowrey, Attorney Fees
in Securities Class Action and Derivative Suits, 3 J. Gorp. L. 267 (1978). It is likely that

the value of the attorney's time rather than the value of the benefit produced will

be emphasized in cases involving nonpecuniary benefits because of the difficulty of

quantifying such benefits. Id. at 316-19.

^"IND. GODE §§ 23-4-2-1 to -31 (1982).
^'See, e.g.. Plaza Realty Investors v. Bailey, 484 F. Supp. 335 (S.D.N.Y. 1979), discuss-

ed in Galanti, Business Associations, 1980 Survey of Recent Developments in Indiana Law,
14 IND. L. Rev. 91, 101-08 (1981).

^^95 111. App. 3d 541, 420 N.E.2d 440 (1981).

''Id. at 552, 420 N.E.2d at 448.

''Id. at 551, 420 N.E.2d at 448.

"Id. at 543, 420 N.E.2d at 442.



30 INDL-LXA LAW REVIEW [Vol. 16:25

which included a loan of $50,000 to the general partners, were to be
evidenced by promissory notes.^ The agreement further provided that

the purported capital contributions were due and payable within thirty

days following notice of the completion of the project, which notice

had to be given between June 15, 1975, and January 31, 1976.^'

The limited partnership is a noncorporate form of business enter-
prise that permits persons who are limited partners to invest money
without the risk of unlimited liability, which risk persons who are
general partners encounter. To achieve this limited liability status,
however, the limited partner must place his contribution to capital

at risk.^ The Allen court found that the contribution made by a limited
partner is "limited to the contribution made by a limited partner at
the time offormation of the partnership for the benefit of the part-

nership's creditors."^^ This finding does not mean that the actual pay-
ment has to be made in toto at the time of the formation of the part-
nership. Rather, it requires an absolute commitment to contribute
capital to the venture and to place that contribution at risk.^ Of course,

as a general matter, this contribution is made at the outset to finance
the venture. Because the limited partner's investment must be at risk,

it is improper for a limited partner to take collateral to secure repay-

ment of his investment or to guarantee a return to himself.^^
A limited partnership, like a general partnership, is a contractual

relationship to which contract law principles apply, subject to the

formal requirements of the I.U.L.P.A. The Allen court recognized this
truism^ and then further recognized that an agreement, in and of itself,

will not create a partnership unless the agreement reflects the par-

ties' mutual assent to the terms of the agreement.'^ Failure to agree

to or to discuss an essential term of a contract may be evidence that
the requisite mutual assent w^as lacking and that no partnership, or

at least no limited partnership, in fact had been formed.

^7c?. at 543-44, 420 N.E.2d at 442-43.

""Id. at 543-44. 420 N.E.2d at 443. This agreement also provided that the new
limited partners were to be admitted to the partnership as of January 1, 1974, and
specified the parties' participation in the profits and losses of the venture. Id.

""Id. at 547, 420 N.E.2d at 445. See Kramer v. McDonald's System, Inc.. 77 111.
2d 323. 396 N.E.2d 504 (1979).

^5 111. App. 3d at 547, 420 N.E.2d at 445 (emphasis added i.
'The I.U.L.P.A. provides that a limited partner is liable to the partnership: "(a)

For the difference between his contribution as actually made and that stated in the
certificate as having been made, and ib> for any unpaid contribution which he agreed
in the certificate to make in the future at the time and on the conditions stated in
the certificate." Ind. Code § 23-4-2-17 (1982).

'Tnd. Code § 23-4-2-16(1 » (1982).
'^5 111. App. 3d at 549, 420 N.E.2d at 446.
*'Id.



1983] SURVEY-BUSINESS ASSOCIATIONS 31

The Illinois Appellate Court concluded that there was a factual
issue as to whether a partnership, in fact, had been created."* Defend-

ants' position was that Allen's interests, if any, depended on the pro-

ject's completion by January 31, 1976. Allen's position was that his

status as a limited partner did not depend on the completion date

of the project. Thus, there was a major factual issue as to whether
the parties contemplated the formation of the limited partnership to

occur at the time the agreement was executed or when the project
was completed.''^

It is obvious that the court was not particularly sympathetic to
Allen's position because it observed that Allen's interpretation of the

agreement would give him the status of a limited partner while not

putting his investment at risk.*^ Under Allen's approach, Allen could
escape all liability if the project was not completed before January

1, 1976, which was when his obligation to contribute ended. '^^ Defend-
ants, on the other hand, argued that no limited partnership could be

formed because Allen had not made a capital contribution. These dif-
fering interpretations of the agreement meant that there were triable
issues, and thus summary judgment was inappropriate.***

The decision in Allen emphasizes that care is needed in drafting
partnership documents to ensure that the intentions of the parties
purporting to create a limited partnership are specified clearly and

that there is agreement on all the pertinent elements of the relation-

ship. The intriguing question left unanswered by the Allen court was
that if Allen had not entered into a limited partnership, what was
the relationship among the parties? Presumably, Allen would be a
general partner subject to unlimited liability as a member of "an
association of two or more persons to carry on as co-owners a business
for profit," which is the definition of a partnership under the Indiana

Uniform Partnership Act."*^ Although the opinion in Allen does not

point out the context in which the litigation arose, it is distinctly possi-

ble that the project had failed and there was potentially unlimited
liability. This would explain why Allen was attempting to obtain a
determination that he was a limited partner and why the partnership
and the individual general partners were appealing. If Allen was a

''Id. at 551. 420 N.E.2d at 448.

''Id. at 549-50, 420 N.E.2d at 447.

''Id. at 550, 420 N.E.2d at 447.

"Id. at 549, 420 N.E.2d at 447.

^*The court was also unable to determine if the $50,000 the new limited partners
advanced to the enterprise was a loan or a contribution to the capital. It observed
that it was just as reasonable to infer that the money was intended as a loan as it
was to infer that it was intended as a secured capital contribution which would con-
travene the I.U.L.P.A. 95 111. App. 3d at 550-51, 420 N.E.2d at 447 48.

^'IND. Code § 23-4-1-6(1) (1982).



32 INDIANA LAW REVIEW [Vol. 16:25

general partner, the individual general partners would have the right

of indemnification provided for by section 23-4-l-18(b) of the Indiana

Uniform Partnership Act.^°

One point in Allen that is worthy of note was the court's state-
ment that the pleadings "contain a reference that due to some failure
to comply with formal requisites of Indiana partnership law . . . [three

individuals] became general partners."^^ These individuals entered the

venture after the partnership was formed, purportedly as limited part-

ners. Presumably, when these three individuals were admitted to the
partnership, the partnership failed to comply with the I.U.L.P.A.

requirement that when an additional limited partner is admitted,^^ an
.amended limited partnership certificate must be filed for record in

the office of the recorder of the county where the partnership's prin-

cipal place of business is located.
^^

The reason for this filing requirement is obvious. The purpose for
the certificate of partnership is to give notice to third persons of the

essential features of the limited partnership;^^ the purpose for the

amended certificate is to ensure that public information of record is
current and up to date.^^ The failure to file an amended certificate
in Allen meant that, potentially, the three individuals were subject to
unlimited liability as general partners.^^

This aspect of Allen is not significant to the actual case, but it

should remind attorneys representing limited partnerships to ensure
that all statutory requirements are satisfied to avoid the very

undesirable consequence of unlimited liability to persons believing

themselves to be limited partners.

C. Securities Act—Receiver

The authority of the Indiana Securities Commissioner to seek a
court-appointed receiver was clarified in State ex rel. Higbie v. Porter
Circuit Court.^'^ In Higbie, the judgment creditors of an attorney and

^Id, at § 23-4-l-18(b). See generally J. Crane & A. Bromberg, Partnership § 65(b)
(1968).

"95 III. App. 3d at 542 n.l, 420 N.E.2d at 442 n.l.

^^IND. Code §§ 23-4-2-8, -24(2)(c) (1982).
^Id. at § 23-4-2-25(5). It is possible, however, that the problem was with the form

of the amended certificate because the court does note that an amended limited partner-
ship certificate was filed with the Lake County Recorder on December 30, 1974. 95
111. App. 3d at 545. 420 N.E.2d at 444.

"5ee Klein v. Weiss, 284 Md. 36, 395 A.2d 126 (1978).
^/d. at 62, 395 A.2d at 141.

*0f course, if they claimed they erroneously believed themselves to be limited

partners, then they could escape unlimited liability by renouncing their interests in

the profits of the business or other compensation by way of income. Ind. Code §
23-4-2-11 (1982). However, the liability of these three individuals was not in issue in Allen.

"428 N.E.2d 782 (Ind. 1981).



1983] SURVEY-BUSINESS ASSOCIATIONS 33

an accountant had been thwarted in their efforts to satisfy a judg-

ment because of a court order appointing a receiver for the debtors.
It appears that in a prior action the Indiana Securities Commissioner

had successfully prosecuted a suit against the debtors, charging them
with violating the Indiana Securities Act.^^ As a result of this suit,
the Porter Circuit Court had appointed a receiver for the debtors,

individually and as partners, to prevent the debtors from "dissipating,

wasting, transferring or otherwise disposing of their assets absent the

consent of such conservator or receiver or as a result of an appropriate

order to this court following a hearing to that end."^^

In an original action before the supreme court, the judgment
creditors contended that the Porter Circuit Court had no jurisdiction

to appoint a receiver for the assets of the individual debtors because

there was no lien upon such assets in favor of the Indiana Securities
Commissioner who had sought the receivership.^"

The circuit court's contention, which was accepted by the Indiana
Supreme Court, was that, even though the Securities Commissioner
was not a creditor, he had authority to apply for a receiver, and that
the circuit court had proper jurisdiction, pursuant to section
23-2-1-17. 1(a) of the Indiana Securities Act. This provision authorizes

the Securities Commissioner to issue cease and desist orders against
persons violating the Indiana Securities Act and further authorizes

that he may "bring action in the name and on behalf of the State of
Indiana ... to enjoin that person from continuing or doing any act

furthering a violation of this chapter and may obtain the appointment
of a receiver or conservator."^^

The Indiana Supreme Court construed section 23-2-1-17. 1(a) as
authorizing the appointment of a receiver, once it is clear that a viola-

tion of the Securities Act has or is about to occur.^^ The required show-
ing of unlawful conduct serves the same legal function as a lien or
an interest in property when a creditor seeks a receiver for a debtor,^^

because the violation establishes the state's interest in the violators'

property, which has a nexus to their business conduct.

To require a lien before a receiver can be appointed would not
only contradict the express statutory language of the Securities Act,

but would also severely hamper the effective enforcement of the
Securities Act. Seizing and preserving the assets of a violator would

ensure "that justice be done between the violator and the investor,
and that public confidence be maintained in the effectiveness of the

^IND. Code §§ 23-2-1-1 to -24 (1982).
^M28 N.E.2d at 783 (emphasis added).

«°/d. See McKain v. Rigsby, 250 Ind. 438, 237 N.E.2d 99 (1968).
«'IND. Code § 23-2-l-17.1(a) (1982).
'M28 N.E.2d at 783.

''Id. at 784.



34 INDIANA LAW REVIEW [Vol. 16:25

government regulation of the securities industry."^'' It would not be

at all surprising if persons engaging in improper securities transac-

tions kept poor, if any, books and records and commingled individual

assets with "business" assets. Construing section 23-2-17. 1(a) restric-

tively, by permitting individual creditors access to individual assets

before malefactors' affairs are straightened out, would clearly thwart

the interests that are to be protected by the Indiana Securities Act.

Section 23-2-1-17.1 of the Indiana Securities Act is patterned after
and similar to section 408 of the Uniform Securities Act.^^ Although

the language differs, both the Indiana Act and the Uniform Act clearly

intend to authorize the appointment of a receiver where the receiver
will facilitate enforcement of the act and will protect the interests

of the investor.^^ In fact, the importance of a receiver in enforcing

securities laws had led two commentators to posit that language such

as "in addition to any other remedies" may be sufficient to infer
statutory authority for the appointment of a receiver in securities

cases in those states that do not expressly authorize the enforcement

agency to do so.^^

Although the language of section 23-2-1-17.1 of the Indiana

Securities Act appears, on its face, to be clear, the supreme court's
decision in Higbie resolves any doubts as to the Securities Commis-
sioner's authority to seek a receiver.

D. Indiana Takeover Offers Act

The Indiana Takeover Offers Act^^ was at issue before the Indiana
Court of Appeals in In re CTS Corp.^^ Unlike most suits involving

''Id.

®^Unif. Securities Act § 408, 7A U.L.A. 663 (1958). The Indiana provision is taken
in part from section 408, which pertains to injunctive relief, and in part from section

407, which authorizes the agency enforcing the Act to conduct investigations and issue

subpoenas. Id. at 660.

^^Surprisingly, there are not many reported cases under the Uniform Securities

Act or similar legislation involving the appointment of a receiver. See Commonwealth

V. Ramco Petroleum, Inc., 3 Blue Sky L. Rep. (CCH) 1 71,525 (Mass. Sup. Ct. 1980);
Commonwealth ex rel. Pennsylvania Sec. Comm'n v. Allamanda Inv. Co., 388 A.2d 1141

(Pa. Commw. Ct. 1978). Of course, authority for the appointment of a receiver does
not automatically mean one will be appointed. See Pennsylvania Sec. Comm'n v. Con-

tinental Mfg. Co., 465 Pa. 411, 350 A.2d 831 (1976) (proper to refuse to appoint a receiver

where defendants agreed to cease questioned transactions until a final determination

if such transactions constituted a sale of securities).

"See lie H. Sowards & N. Hirsch, Business Organizations -Blue Sky Regula-
tion § 10.05[2] (1982).

'«IND. Code §§ 23-2-3.1-0.5 to -11 (1982). The Takeover Offers Act is discussed in

Galanti, Corporations, 1979 Survey of Recent Developments in Indiana Law, 13 Ind. L.

Rev. 133, 161-72 (1980).

«M28 N.E.2d 794 (Ind. Ct. App. 1981).



1983] SURVEY-BUSINESS ASSOCIATIONS 35

takeover statutes/" the litigation in CTS was not a challenge by a
tender offeror who was frustrated by a state takeover act. Instead,
CTS was an appeal by the target company, CTS, from a determina-
tion by the Indiana Securities Commissioner that the offeror. Dynamics

Corporations of America (DCA), had not engaged in any act or practice

violating the Takeover Offers Act.^' CTS contended that the Securities
Commissioner's conclusion was not supported by the evidence and was
contrary to law. In addition, CTS claimed that the Securities Com-
missioner had erred in refusing to reopen the record to receive addi-

tional evidence.
^^

The Securities Commissioner initially issued an ex parte cease and

desist order against DCA but vacated the order after the Seventh
Circuit's decision in City Investing Co. v. Simcox,''^ which had held that

ex parte orders were specifically prohibited by the Takeover Offers

Act. Then, at a contested hearing, CTS sought to establish that a
brokerage firm buying relatively large blocks of CTS stock for DCA
was engaged in a creeping tender offer, which was in violation of the
Takeover Offers Act. The Securities Commissioner rejected that con-
tention and subsequently refused to reopen the proceeding to receive

"newly discovered evidence" because it found that CTS's evidence was

cumulative and not "newly" discovered. Relying on the provisions of

the Takeover Offers Act pertaining to appeals,^'' and the provisions
of the Indiana Administrative Adjudication Act pertaining to the

admission of newly discovered evidence,^^ the CTS court refused to
reweigh the evidence and concluded that the Securities Commissioner

did not err in denying CTS's request to reopen the record.^^

On the issue of whether DCA had made a tender offer, the
Securities Commissioner clearly had followed the approach taken in

City Investing and had looked to cases under the Williams Act amend-

'"See, e.g., City Investing Co. v. Simcox, 476 F. Supp. 112 (S.D. Ind. 1979), aff'd,

633 F.2d 56 (7th Cir. 1980), discussed in Galanti, supra note 31, at 112-17; In re City

Investing Co., 411 N.E.2d 420 (Ind. Ct. App. 1980), discussed in Galanti, Business Associa-

tions, 1981 Survey of Recent Developments in Indiana Law, 15 Ind. L. Rev, 31, 39-47

(1982).

^'428 N.E.2d at 795.

''Id.

^^633 F.2d 56, 58 (7th Cir. 1980).

'"Ind. Code § 23-2-3.1-11 (1982). The court actually referred to section 23-2-3-11 in
the Indiana Business Takeover Act; however, that provision was repealed when the
Indiana Takeover Offers Act was enacted in 1979 and before DCA started acquiring
CTS shares. 428 N.E.2d at 802.

'^Ind. Code § 4-22-1-15 (1982). The evidence must be discovered after the hearing.
Also, there is a presumption that newly discovered evidence might have been discovered

in time to be used at trial. See Shaw v. Shaw, 159 Ind. App. 33, 304 N.E.2d 536 (1973);
Kelly V. Bunch, 153 Ind. App. 407, 287 N.E.2d 586 (1972).

'«428 N.E.2d at 802.



36 INDIANA LAW REVIEW [Vol. 16:25

merits to the Securities Exchange Act of 1934^^ to determine what

constituted a tender offer. The courts in the Williams Act cases have
looked at eight factors, which focus on the presence or absence of

the substantive evils that the Williams Act was intended to prevent, in

order to decide whether a tender offer has been made. The primary

evil seems to be pressuring shareholders to make uninformed, ill
considered decisions to tender their shares.^^

Although some courts^^ and commentators^" have criticized this
approach, it was accepted in City Investing. Thus, on appeal, the court
in CTS was not willing to disturb the Securities Commissioner's find-
ing that five of the eight commonly used criteria indicated there was
no tender offer and that these five factors outweighed the three factors

which tended to show there was a tender offer.^^
Although not argued by the parties, the CTS court observed that

the Securities Commissioner could have relied on sections 23-2-3-l(i)(l)

and (6), which give him the discretion to determine that certain

acquisitions did not constitute takeover offers.^^ Presumably, these pro-

visions were not argued because they were repealed in 1979 when
the current Indiana Takeover Offers Act was adopted, and there are
no comparable provisions in the current Takeover Offers Act. Also,

the offeror had not acquired CTS shares until after the previous
Takeover Offers Act was repealed.

Of course, the most interesting aspect of the Takeover Offers Act
that was not considered by the CTS court was its constitutionality.
The Takeover Offers Act had been upheld in City Investing Co. v.
Simcox,^^ but the recent decision of the United States Supreme Court
in Edgar v. Mite Corp.^^ raises considerable doubt as to the viability
of the Indiana Act as well as to similar statutes in other states. The
Court in Edgar held that the Illinois Business Takeover Act^^ was un-

"15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f) (1976).
^*428 N.E.2d at 799-800. See generally Note, The Developing Meaning of "Tender

Offer" Under the Securities Exchange Act of 193J,, 86 Harv. L. Rev. 1250 (1973).

'M28 N.E.2d at 800. See, e.g., Brascan Ltd. v. Edper Equities Ltd., 477 F. Supp.

773 (S.D.N.Y. 1979).

*°5ee Note, Private Solicitations Under the Williams Act, 66 Cornell L. Rev. 361

(1981).

**428 N.E.2d at 801. The court was unwilling to disturb the Securities Commis-

sioner's decision because it was supported by the evidence, see City of Mishawaka v.

Stewart, 261 Ind. 670, 310 N.E.2d 65 (1974), and because it is inappropriate for a court

to substitute its judgment for that of the Securities Commissioner who is charged with

enforcing the Takeover Offers Act. See Department of Financial Inst. v. Colonial Bank

& Trust Co., 176 Ind. App. 368, 375 N.E.2d 285 (1978).
^^428 N.E.2d at 798 n.2.

«^476 F. Supp. 112 (S.D. Ind. 1979), aff'd, 633 F.2d 56 (7th Cir. 1980).

^102 S. Ct. 2629 (1982).

'"The Illinois Business Take-Over Act, III. Rev. Stat. ch. 121 V2, f1 137.51 to .70

(Supp. 1982).



1983] SURVEY-BUSINESS ASSOCIATIONS 37

constitutional because it imposed an undue burden on interstate

commerce.^^

It is, of course, possible that state takeover statutes can be drafted

so that the statute will not impose a "substantial burden" on interstate

commerce, but it may not be worthwhile. For example, the Takeover
Offers Act currently exempts from the filing requirements®^ "an

acquisition of equity securities of a target company having seventy-
five (75) or fewer holders of record of equity securities at the time

of the takeover offer."®* If a state can regulate only tender offers for

corporations in which the majority of shareholders are residents, it

is interesting to wonder how many Indiana corporations exist with
more than seventy-five shareholders, most of whom live in this state.

E. Corporate Service of Process

A financing corporation's attempt to insulate itself from the
judicial process failed in General Finance Corp. v. Skinner,^^ a suit

to recover benefits under a credit disability insurance policy that was
purchased by the plaintiff. Skinner, when she refinanced a loan from
General Finance Corporation of Indiana (GFC of Indiana), a subsidiary
of the defendant. General Finance Corporation (GFC). In Skinner, GFC
appealed from the Vigo Superior Court's denial of GFC's motion for
relief from a default judgment. The motion had alleged insufficient
service of process. A summons and complaint against GFC had been
served by registered mail addressed to CT Corporation Systems, which
was the agent of GFC of Indiana but not GFC's resident agent.^° In
other words, the subsidiary which had made the loan was served, but
not the parent corporation which was being sued.

In Skinner, the court of appeals upheld the service on GFC, thus
joining those jurisdictions which recognize that in appropriate cir-
cumstances the separate corporate existence of parent and subsidiary

will be ignored, and service of process on one will be sufficient to

acquire jurisdiction over an out-of-state parent or subsidiary .^^ The
effectiveness of service of process on one corporation in obtaining

«n02 S. Ct. at 2643.

«1nd. Code §§ 23-2-3.1-3 to -5 (1982).
'Ud. at § 23-2-3.1-8.6(a)(3).

«M26 N.E.2d 77 (Ind. Ct. App. 1981).
'"426 N.E.2d at 79.

^'See authorities cited 426 N.E.2d at 84. See also Frazier v. Alabama Motor Club,
Inc., 349 F.2d 456 (5th Cir. 1965); Empire Steel Corp. v. Superior Court, 56 Cal. 2d
823, 366 P.2d 502 (1961); Taca Int'l Airlines S.A. v. Rolls Royce Ltd., 15 N.Y.2d 97,
256 N.Y.S.2d 129, 204 N.E.2d 329 (1965); Comprehensive Sports Planning, Inc. v. Pleasant
Valley Country Club, 73 Misc. 2d 477, 341 N.Y.S.2d 914 (1973). See generally Wellborn,
Subsidiary Corporations in New York: When is Mere Ownership Enough to Establish
Jurisdiction over the Parent, 22 Buffalo L. Rev. 681 (1973).



38 INDIANA LAW REVIEW [Vol. 16:25

jurisdiction over a parent or subsidiary depends on whether the affairs
of the affiliated corporations are so commingled as to make the two
impossible to separate; however, service of process on one will not

suffice to obtain jurisdiction over the other, if their affairs are kept

separate.^^

The mere fact that GFC of Indiana is a wholly owned subsidiary
of GFC does not support jurisdiction over the parent by service on
the subsidiary, because similar names or common ownership of stock
alone will not suffice.^^ However, as the Skinner court noted, the rela-

tionship between GFC and GFC of Indiana went further. The two cor-
porations had common officers, and the corporate counsel for both GFC
and GFC of Indiana was the same person.^'* More important to the
conclusion that the two corporations were actually one was the
evidence set forth by the court, which included: the loans initiated by

GFC of Indiana and by other GFC subsidiaries in twenty-five states
were made from a common checking account in a Chicago bank;
employees of GFC of Indiana and other subsidiaries were paid from
that account by GFC; a computer terminal transmitted transactions
to the GFC home office in Illinois which did all the subsidiary's
accounting; letterheads and telephone listings referred to General

Finance Corporation rather than General Finance Corporation of In-

diana; GFC's advertising emphasized over 400 General Finance and

General Finance Corporation offices from coast to coast where one
could deal with "friendly Bob Adams"; financing statements showed
GFC as the secured party; and forty-five lawsuits brought in Vigo
County to collect defaulted loans were filed in GFC's name.^^

The court was satisfied that although there were "two separate
corporate entities on paper, only one commonly-owned enterprise"
existed.^^ The separate existence of GFC of Indiana could be dis-
regarded because it was so organized and controlled in its affairs that

"^See Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333 (1925). See also Botwinick

V. Credit Exchange, Inc., 419 Pa. 65, 213 A.2d 349 (1965) (activities of subsidiary which

carefully maintained its separate corporate existence, not those out-of-state parent for

purposes of service of process).

''See Botwinick v. Credit Exchange, Inc., 419 Pa. 65, 72, 213 A.2d 349, 353-54 (1965).
^''426 N,E.2d at 79. Normally common officers or directors will not warrant

disregard of corporate existence. See Merriman v. Standard Grocery Co., 143 Ind. App.

654, 242 N.E.2d 128 (1968). However, it is a factor to be considered.

The Skinner court noted that GFC is wholly owned by CNA Financial Corpora-
tion, a financial conglomerate which directly or indirectly controlled sixty or more other

substantial corporations, and that CNA in turn was controlled by Loews Corporation.
426 N.E.2d at 79. The reason for this reference is unclear because the size of the overall

enterprise is completely irrelevant in determining whether a parent and subsidiary

are one and the same.
'^426 N.E.2d at 79-81.

^7d. at 82.



1983] SURVEY-BUSINESS ASSOCIATIONS 39

it was, in effect, a division of GFC.^^ Consequently, service on the

registered agent of GFC of Indiana was service on a lawfully appointed
agent of GFC within the meaning of Indiana Trial Rule 4.6(A)(1);''
therefore, the entry of a default judgment against GFC was appro-
priate. Although default judgments are not favored because they are

rendered without trial, a trial court has considerable discretion in this

area, and a default judgment will be reversed only upon a showing

of a clear abuse of discretion.'^ Certainly, a person is entitled to have

a default judgment set aside if he has not been served with process

and thus had no notice of the proceeding,^"" but GFC did have notice. ^"^

The Skinner result is obviously correct. If the parent and sub-
sidiary are held separate, service on one should not be service on the

other. If, however, a large enterprise structures its operations through

myriad subsidiaries in a "complex and interrelated manner so as to

prevent ascertainment of exactly which corporate entity"^"^ is respon-

sible, the corporation should not be surprised if the corporate fiction

is ignored and service on one "part" of the enterprise is deemed ser-

vice on another part.^"^ A business enterprise that is deliberately set
up in a complex fashion should not expect the public with whom it
deals to wend through a corporate labyrinth at their peril if they
should happen to select the wrong "path."

F. Buy-Sell Agreements and Irrevocable Proxies

Attorneys representing small, closely held corporations should note

^'See Merriman v. Standard Grocery Co., 143 Ind. App. 654, 242 N.E.2d 128 (1968);

Feucht V. Real Silk Hosiery Mills, Inc., 105 Ind. App. 405, 12 N.E.2d 1019 (1938).

'^^Ind. R. Tr. p. 4.6(A)(1). Skinner did not have to serve the Indiana Secretary of State,

as the acting agent for GFC as a foreign corporation not admitted to do business, pur-
suant to Ind. Code § 23-3-31 (1982), because an actual agent of GFC was served. Thus,
the constitutionally imposed requirement that service reasonably inform the parties

of the nature of the proceeding was satisfied, even though the return of the summons
and complaint by GFC of Indiana's registered agent did in fact, as GFC argued, notify
Skinner that an alternative method of service could have been utilized.

''See Erdman v. White, 411 N.E.2d 653 (Ind. Ct. App. 1980); Green v. Karol, 168
Ind. App. 467, 344 N.E.2d 106 (1976).

'''See Keiling v. Mclntire, 408 N.E.2d 565 (Ind. Ct. App. 1980).
""426 N.E.2d at 86. On rehearing, the court emphasized that GFC and GFC of

Indiana constituted only one entity. Since it was never disputed in Skinner that CT.
Corporation was the resident agent of GFC of Indiana, the court on rehearing also
distinguished cases questioning whether the person served was an authorized agent.
431 N.E.2d 526 (Ind. Ct. App. 1982).

'"'Merriman v. Standard Grocery Co., 143 Ind. App. 654, 657, 242 N.E.2d 128, 130
(1968).

'"^Courts are perhaps somewhat more inclined to disregard the corporate fiction
when the issue is service of process than when the issue is imposing liability on, for
example, a parent corporation for the torts or contracts of a subsidiary. See generally

H. Henn, Handbook of the Law of Corporations § 151 (2d ed. 1970).



40 INDIANA LAW REVIEW [Vol. 16:25

Williams v. Williams {Williams 11)}^^ The court of appeals in Williams
II affirmed a Boone Circuit Court order that denied plaintiff Mildred

Williams' motion for preliminary injunction in an action brought

against Howard Williams to compel him to call and to hold an annual
meeting of W & W, Inc. Howard owned fifty percent of the shares
of W & W, and Mildred's husband had owned the balance prior to
his death. ^'^^ The shares were subject to a buy-sell agreement that pro-

vided that W & W would purchase the shares of a deceased
shareholder and that gave "the surviving natural party ... a special

power of attorney to vote such shares until the transfer [of stock to

the corporation had been] completed."^"^ Thus, the buy-sell agreement

expressly stated that the surviving shareholder, rather than the per-

sonal representative of the deceased shareholder, should vote the stock

until the transfer was completed. ^°^

The corporation eventually petitioned for an order directing
Mildred, as executrix, to perform the buy-sell agreement. In that

action. In re Estate of Williams {Williams 7),^°^ Mildred prevailed

because the claim was not filed within the time specified in the In-
diana Probate Code. The court in Williams /, however, expressly
acknowledged that under the probate code the buy-sell agreement
could be enforced against the heirs or the devisees who succeeded
to the decedent's interest in the shares. ^°^ Because the refusal to en-

force the buy-sell agreement in Williams I was procedural and not
on the merits, the Williams II court held that the present action was
not barred under the doctrine of res judicata.""

Because the buy-sell agreement could still be enforced, the court

noted that Mildred would not suffer irreparable harm if a preliminary
injunction ordering a shareholders' meeting was denied. Although
Mildred owned fifty percent of the corporation's stock, the buy-sell
agreement gave Howard a proxy to vote Mildred's shares, so that,
even if Howard called a meeting of W & W shareholders, he could
vote her shares. Therefore, an order compelling Howard to call a
meeting would be a futile gesture. There was no problem with the
duration of the proxy exceeding eleven months because the proxy

'""'427 N.E.2d 727 (Ind. Ct. App. 1981). For further discussion of this case, see
Falender, Trusts and Decedents' Estates, 1982 Survey of Recent Developments in Indiana
Law, 16 Ind. L. Rev. 415, 419 (1983).

•"^427 N.E.2d at 728-29.

'''Id. at 728.

•"Yd.

'°«398 N.E.2d 1368 (Ind. Ct. App. 1980), discussed in Falender, Decedents' Estates
and Trusts, 1980 Survey of Recent Developments in Indiana Law, 14 Ind. L. Rev. 291,
298-301 (1981).

•°M27 N.E.2d at 729 (citing In re Estate of Williams, 398 N.E.2d at 1371).
""427 N.E.2d at 730-31.



1983] SURVEY-BUSINESS ASSOCIATIONS 41

was in writing and complied with the Indiana General Corporation
Act.^" Furthermore, the proxy was irrevocable as a result of the buy-
sell agreement which gave Howard an interest in the shares. ^'^

Of course, it is possible that the dispute has not yet been resolved.

Mildred contended that the buy-sell agreement was merely an option

to sell and that W & W had an obligation to purchase only if she
chose to sell; whereas, W & W and Howard claimed that the buy-sell
agreement provided that Mildred had a duty to sell. The court noted
that the proper construction of the buy-sell agreement was not in issue
before the court."^ Thus, it is possible that we may see Williams III}^^

G. Definitions of a Security

A case involving securities regulation that is worthy of note is
Canfield v. Rapp & Son, Inc.,^^^ in which the Court of Appeals for the
Seventh Circuit affirmed a judgment of the District Court for the

Southern District of Indiana. The district court held that Rapp had
failed to establish any of the material elements for recovery under

either federal or state securities law or common law fraud."® The
essential issue on appeal was whether Rapp's purchase of all shares
of Twigg Corporation from Canfield and two others was a sale of a
''security" within the meaning of the securities laws. Relying on its

earlier decision in Frederiksen v. Poloway,^^'' the appellate court held

that the purchase of the shares ancillary to the acquisition and assump-

tion of control of Twigg was not a transaction involving "securities"
and, therefore, could not give rise to a cause of action under any of

the following statutory laws:"* rule lOb-5"^ promulgated under the

"'IND. Code § 23-l-2-9(e) (1982).
•'^427 N.E.2d at 731. See State ex rel. Breger v. Rusche, 219 Ind. 559, 39 N.E.2d

433 (1942). See also Calumet Indus., Inc. v. MacClure, 464 F. Supp. 19 (N.D. 111. 1978)

(determining the irrevocability of consent agreements by comparing them with proxy

arrangements). See generally 5 W. Fletcher, Cyclopedia of the Law of Private Cor-
porations § 2062 (rev. perm. ed. 1976 & Supp. 1982).

"^427 N.E.2d at 730 n.2.

^"Williams I and Williams II appear to be examples of the all too common family
disputes involving closely held corporations, which are a bane to families but a boon

to attorneys. For an example of this problem, see Galler v. Galler, 45 111. App. 2d 452,

196 N.E.2d 5, aff'd in part, rev'd in part, 32 111. 2d 16, 203 N.E.2d 577 (1964). appeal

dismissed, 69 111. App. 2d 397, 217 N.E.2d 111 (1966), appeal on other pounds, aff'd,
95 111. App. 2d 340, 238 N.E.2d 274 (1968), modified upon denial reh'g, 21 111. App. 3d

811, 316 N.E.2d 114 (1974), aff'd, 61 111. 2d 464, 336 N.E.2d 886 (1975).
"^654 F.2d 459 (7th Cir. 1981).

'''Id. at 460.

"'637 F.2d 1147 (7th Cir.), cert, denied, 451 U.S. 1017 (1981).

"«654 F.2d at 462-63.

"«17 C.F.R. § 240.10b-5 (1982).



42 INDIANA LAW REVIEW [Vol. 16:25

Securities Exchange Act of 1934;^^° section 17(a) of the Securities Act
of 1933;^^^ or the anti-fraud provision of the Indiana Securities Law.^^^

This result was reached notwithstanding the fact that the transaction
was a ''stock sale" within the literal meaning of the term "security"
as defined in the three statutes/^^ The appellate court found that, in
essence, the transaction was a commercial purchase and sale of Twigg
that was effectuated through the purchase of shares, which served
only as an indicia of ownership/^'^

The underlying rationale for Canfield and Frederiksen is the
Seventh Circuit's interpretation of the United States Supreme Court
decision in United Housing Foundation, Inc. v. Forman.^^^ The Seventh

Circuit reads Forman as imposing an economic reality test in deciding
when a particular "instrument" is a security. This test, according to
the Canfield court, consists of three elements: (1) an investment in

a common venture; (2) premised on a reasonable expectation of pro-
fit; (3) to be derived from the entrepreneurial or managerial efforts

of others/^ The court concluded that Rapp's purchase failed to satisfy
the first element because there was no sharing or pooling of funds
with others and also failed the third element because Rapp took over
the management, control, and operation of Twigg.

Rapp attempted to distinguish Frederiksen on the ground that the
economic reality test does not apply if a transaction involves "stock"

with all the attributes of ordinary common stock. Rapp relied upon
Coffin V. Polishing Machines, Inc^^'' in which the economic reality test

was applied only after the court decided that the shares under con-
sideration were not ordinary capital stock. Although there is language

in Forman that the name given to an instrument is not wholly irrele-
vant to its status, the Canfield court rejected Coffin because of the

^^"15 U.S.C. § 78j(b) (1976).

'''Id. § 77q(a)

^^^IND. Code § 23-2-1-12 (1982).
"^The definition of the term "security" in the Securities Act of 1933, 15 U.S.C.

§ 77(b) (1976), the Securities Exchange Act of 1934, 15 U.S.C. § 78c(a)(10), and the In-
diana Securities Act, Ind. Code § 23-2-l-l(k) (1982) are functionally equivalent. See
American Fletcher Mortgage Co. v. U.S. Steel Credit Corp., 635 F.2d 1247 (7th Cir.
1980), cert, denied, 451 U.S. 911 (1981).

'^'654 F.2d at 463.
•25421 U.S. 837 (1975) ("shares of stock" necessary to obtain subsidized low income

housing, which shares could not be pledged or encumbered and did not possess voting
rights, and which in effect represented a tenant's deposit not securities within the
meaning of the federal securities laws).

'2^654 F.2d at 463. This test is derived from SEC v. W.J. Howey Co., 328 U.S.
293 (1946).

^''596 F.2d 1202 (4th Cir.), cert, denied, 444 U.S. 868 (1979). The court also refused
to distinguish Frederiksen because in both Canfield and Frederiksen a business was
purchased and the assets rather than the stock were sold.



1983] SURVEY-BUSINESS ASSOCIATIONS 43

necessity of looking beyond the form of the instrument to decide

whether in reality it is a security.'^*

However, in a 1982 decision, Golden v. Garafalo, a panel of the

Court of Appeals for the Second Circuit expressly rejected the

Frederiksen interpretation of Forman and held that the sale of all the
stock of a corporation, even in connection with a transfer of business

ownership, was a sale of a security. '^^ The panel, like the court in Cof-
fin, reasoned that the economic reality test was appropriate only when
courts were considering "unusual or unique" instruments governed

by the statutory phrase "investment contract." An example of the
"unusual or unique" would be the "stock" in the cooperative housing

project involved in Forman or the unique, one on one, negotiated cer-
tificate of deposit which was held not to be a security in Marine Bank
V. Weaver.'^^^ Thus, although the Canfield-Frederiksen sale of business

doctrine has been relied upon in a growing number of cases, ^'^' the
Golden court was not willing to narrowly define the term "security"

so that, in effect, the federal securities acts are substantially repealed.

One of the problems with the Canfield-Frederiksen approach is that
it really goes beyond Forman. Although the Seventh Circuit's posi-
tion might reflect what appears to be the current hostility of the
Supreme Court to the federal securities laws,^^^ there is a tendency
to forget that the Supreme Court has recognized that the definition
of security that is contained in the federal acts, and, in effect, the

Indiana Securities Act, should be read broadly. ^^^ As the Second Cir-

''«654 F.2d at 464-65.

'^'678 F.2d 1139 (2d Cir. 1982). Judge Lumbard, dissenting in Golden, took the posi-

tion that the two-part approach of Forman was necessitated because there were alter-
native grounds for the Second Circuit's holding that the cooperative apartment "stock"

was a security. Consequently, Judge Lumbard thought that a finding that an instru-
ment possesses the common characteristics of corporate stock does not foreclose an
inquiry into the economic reality of the transaction. Id. at 1147 (Lumbard, J., dissenting).

^°455 U.S. 551 (1982).

'''See, e.g., Reprosystem v. SCM Corp., 522 F. Supp. 1257 (S.D.N.Y. 1981); Oakhill
Cemetery of Hammond, Inc. v. Tri-State Bank, 513 F. Supp. 885 (N.D. 111. 1981); Zilker
V. Klein, 510 F. Supp. 1070 (N.D. 111. 1981); Anchor-Darling Indus., Inc. v. Suozzo, 510

F. Supp. 659 (E.D. Pa. 1981); Barsy v. Verin, 508 F. Supp. 952 (N.D. 111. 1981); Dueker
V. Turner, [1979-1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) 1 97,386 (N.D. Ga. 1979);

Bula V. Mansfield, [1979 Transfer Binder] Fed. Sec. L. Rep. (CCH) 1 96,964 (D. Colo. 1977);

Tech Resources, Inc. v. Estate of Hubbard, 246 Ga. 583, 272 S.E.2d 314 (1980).
'^^See, e.g., Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977); Piper v. Chris-Craft

Indus., Inc. 430 U.S. 1 (1977); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976);
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976); Foremost-McKesson, Inc. v. Provident
Sec. Co., 423 U.S. 232 (1976); Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975); Blue
Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975); Kern County Land Co. v. Oc-
cidental Petroleum Corp., 411 U.S. 582 (1973); Reliance Elec. Co. v. Emerson Elec. Co.,
404 U.S. 418 (1972).

'""See SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). There is even a tendency
to forget that the "instruments" in Howey, which were maintenance agreements



44 INDIANA LAW REVIEW [Vol. 16:25

cuit said in Golden v. Garafalo,^^* there would be little reason for the

statutory drafters "to use words such as 'stock,' 'treasury stock' or

'voting— trust certificate,' unless their intention was to include all such

instruments as commonly defined."^^^ References to specific types of
instruments and common variations would have been inappropriate
if an economic reality test were intended to apply across the board,
because many instruments would be excluded from these categories
by a definition that looked only to economic reality. In fact, if economic

reality were Congress's intent, there would be no reason to mention

specific types of securities, and thus a general catch-all term such as

"investment contracts" would have sufficed. ^^^ However, this issue was
not discussed by the court in either Canfield or Frederiksen; in

addition, the court, in both cases, simply rejected the "literal applica-

tion" argument.^^'

Another problem with the Canfield-Frederiksen doctrine is that,

although many transactions involving corporate shares are not really
securities cases, the doctrine goes too far and insulates transactions

that are truly securities cases from scrutiny under the appropriate

statutes enacted to protect investors. For example, in Oakhill Cemetery

ofHammond, Inc. v. Tri-State Bank,^^^ where a new manager had pur-
chased a controlling block of stock but less than 100% of the outstand-
ing shares, the federal district court used the doctrine to take the

transaction outside the scope of the securities law.^^^ Oakhill is con-

sistent with Canfield-Frederiksen because the purchase was a "com-
mercial" transaction to the manager and the purchaser was going to
manage the enterprise. Therefore, the third element of the economic
reality test could not be satisfied. Of course, this approach ignores

the possibility that a purchaser of a business might regard himself

connected with the purchase of trees in a citrus grove, were found to be securities.

Id. at 295, 299-300.

'^"678 F.2d 1139 (2d Cir. 1982).

'''Id. at 1144.

'""See id.

'^'Canfield v. Rapp & Son, Inc., 654 F.2d 459, 465 (7th Cir. 1981); Frederiksen v.
Poloway, 637 F.2d 1147, 1150-52 (7th Cir.), ceH. denied, 451 U.S. 1017 (1981). See generally

Comment, Acquisition of Business through Purchase of Corporate Stock: An Argument
for Exclusion from Federal Securities Regulation, 8 Fla. St. U.L. Rev. 295 (1980).

'^513 F. Supp. 885 (N.D. 111. 1981). The Oakhill approach is not without its sup-
porters. See generally Seldin, When Stock is not a Security: The "Sale of Business" Doc-
trine Under the Federal Securities Laws, 37 Bus. Law 637 (1982); Thompson, The Shrink-
ing Definition of a Security: Why Purchasing All of a Company's Stock is Not a Federal
Security Transaction, 57 N.Y.U. L. Rev. 225 (1982).

'^513 F. Supp. at 888. Oakhill involved an alleged violation of the federal securities

laws, Indiana common law, and, for some reason, a violation of the section of the In-
diana Securities Act concerning the registration of brokers, investment advisors, and

agents. See Ind. Code § 23-2-1-11 (1982).



1983] SURVEY-BUSINESS ASSOCIATIONS 45

both as an investor hoping to realize an appreciation in the stock, as

well as an entrepreneur receiving compensation for operating the

business.
^^°

The Canfield-Frederiksen approach also presents the potential
anomalous result that "investors" may buy some of the stock of a
business and hence would be entitled to protection under the securities

laws, but if the managers buy the balance they would not be entitled

to recover under the securities laws, although the managers may be
just as defrauded as the former group. If the managers get a "free

ride," that is, the stock is a security because of the presence of the

investors, then the entire concept behind the "sale of business"

doctrine collapses. However, if it is found that the managers did not

purchase "securities," which the logical application of Canfield-

Frederiksen would mandate, a grave injustice will result because they

will be treated differently than their equally defrauded "investor" co-

purchasers. After all, not everyone who purchases a business is in
a position to protect their investment because they may not be knowl-
edgeable about the business they are acquiring.^*^

Of course, the immediate answer is that anyone who has purchased
a business as a result of fraud can always sue for fraud. But then

again, in Canfield, Rapp sued for fraud and was unsuccessful because
he had "failed to prove any of the essential elements of fraud —
misrepresentation, scienter, reliance, causation, and damages."^*^

In Canfield, the Seventh Circuit purported to interpret the

definition of a security in the Indiana Securities Act. The decision,
however, is not binding on Indiana courts. One may hope that, when
faced with the question whether a sale of a business effected through
the sale of stock is subject to the Indiana Securities Act, an Indiana

court would consider the reasoning of the majority opinion in Golden,
and not simply accept the Canfield-Frederiksen sale of business doc-

trine as the proper interpretation of the law. Fraud is fraud, and if
it can be prevented or deterred by the literal language of the Indiana
Securities Act, the literal interpretation should be honored. Courts

that adopt the sale of business doctrine appear to be judicially repeal-

ing the securities laws in the guise of interpreting them. If these

statutes are not to apply to closely held corporations, or to situations

'''See Golden v. Garafalo, 678 F.2d 1139 (2d Cir. 1982).

""The ability of a purchaser of a company to protect his investment is often given

as a reason for narrowly defining a "security." See generally Hannan & Thomas, The
Importance of Economic Reality and Risk in Defining Federal Securities, 25 Hastings

L.J. 219 (1974).
'"^654 F.2d at 466. The only evidence of "fraud" introduced by Rapp related to

future events, and a fraud action requires statements of fact relating to existing or

past events, not future events. See Royal Business Mach., Inc. v. Lorraine Corp., 633

F.2d 34 (7th Cir. 1980).



46 INDIANA LAW REVIEW [Vol. 16:25

where an entire business is purchased because the purchaser should
be able to fend for himself, then it seems more appropriate for the
legislature to decide that the statutes do not apply. ^^^

H. Statutory Developments

The first statutory development that would be of interest to those
involved with business associations law during the survey period was
the enactment of Public Law 142/'^'' which amended section
23-1-2-1 l(h)^'^^ of the Indiana General Corporation Act. This section now
permits the use of conference calls for board of directors' meetings

or for meetings of committees designated by a corporate board, by

providing that participation in a meeting by means of a conference
telephone or similar communication equipment that allows all persons

participating in the meeting to communicate with each other con-

stitutes "presence in person at the meeting."^''^ The power to hold such
telephonic meetings, however, may be restricted or prohibited in a
corporation's articles or bylaws. ^''^ Amended section 23-l-2-ll(h) is
similar to section 43 of the Model Business Corporation Act^*^ and to
the corporations acts of numerous states. ^*^

This is a worthwhile amendment to the Indiana General
Corporation Act. As pointed out in the comment on a proposed amend-
ment to section 43 of the Model Act, "[tjelecommunications equipment
has been so improved that conference calls can be speedily arranged

and amplifying facilities activated wherever there is need."^^° There
is certainly no reason to deny the benefits of modern communication
systems to boards of directors when so much of the ordinary business
of corporations is carried on by such means. Furthermore, because

the Indiana General Corporation Act specifically permits a board or

committee to take action without a meeting, if prior written consent

is given, ^^^ it is senseless not to authorize the use of modern equip-
ment to permit directors who are unable to attend a meeting in per-
son to participate.

"^In some jurisdictions, this has been done. See, e.g.. III. Rev. Stat. ch. 121 V2,
§ 137.4(0) (1979).

''"Act of Feb. 24, 1982, Pub. L. No. 142, 1982 Ind. Acts 1050.
'"'IND. Code § 23-l-2-ll(h) (1982).
'''Id.

'''Id.

''*MoDEL Business Corp. Act § 43 (2d ed. Supp. 1977) [hereinafter cited as Model
Act]. Section 43 was amended in 1974 to authorize conference calls. See Changes in the
Model Business Corporation Act, 29 Bus. Law. 947, 948 (1974).

^'^See Model Act, supra note 148, If 3, at 338-41.
'^"Proposed Change in the Model Business Corporation Art Ayneyiding Section ^.y to

Permit the Holding of Meetings of Directors and Committees by Electronic Comm urn ca-
tion, 28 Bus. Law. 979, 980 (1973).

'^'IND. Code § 23-l-2-ll(i) (1982).



1983] SURVEY-BUSINESS ASSOCIATIONS 47

152Many early cases striking down informal actions by directors
were predicated on the theory that deliberative, collegial decision-

making was the reason why the control and management of the affairs

of a corporation were vested in the board of directors. The physical

absence of the director also explains, to some extent, cases prohibiting

directors from voting by proxy. '^^ If the objective of a board meeting

is to allow the interchange of ideas through group discussion and

deliberation, then it is logical to authorize the use of modern

technology which will, in fact, facilitate such collegial decisionmaking.

Now directors who cannot physically attend meetings can "reach out"
and participate.^^"

Statutory authorization of telephonic meetings was probably

necessary. There is always the possibility that any informal action

which is not done in accordance with statutory provisions may be held
invalid. ^^^ There is some common law authority that a director is not
present at a meeting if he participates in the meeting by means of

a telephone call because meeting means "the coming together of two

or more persons face to face so as to be in each other's presence or

company."'^*^

The General Assembly also amended Indiana insurance law to

permit telephonic meetings of directors of Indiana insurance

companies. ^^^ Interestingly, the General Assembly did not amend sec-

''•-5fr, e.g., Schuckman v. Rubenstein, 164 F.2d 952 (6th Cir. 1947), ceri. doiivd, 333

U.S. 875 (1948); Baldwin v. Canfield, 26 Minn. 43, 1 N.W. 261 (1879); Audenried v. East

Coast Milling Co., 68 N.J. Eq. 450, 59 A. 577 (1904). Of course, the general rule was

often subject to the standard exceptions of estoppel, ratification, or acquiescence. See

generally 1 G. HoRNSTEiN, Corporation Law & Practice ^ 412, at 507-08 (1959).
'''See, e.g., Dowdle v. Central Brick Co., 206 Ind. 242, 189 N.E. 145 (1934). See also

Greenberg v. Harrison, 143 Conn. 519, 124 A.2d 216 (1956) (directors must give

deliberative control and cannot vote by proxy); Lippman v. Kehoe Stenograph Co., 11

Del. Ch. 80, 95 A. 895 (1915) (the personal judgment of the director is important and

he cannot vote by proxy).

'"^This is particularly true in situations where the presence of a director is need-

ed to satisfy quorum or voting requirements, or for a corporation with greater than
normal quorum and voting requirements where the absence of a director may preclude
speedy action, even though all directors are in agreement but the requisite consents

cannot be signed prior to the action.

Of course, the use of electronic communications also will be helpful to large cor

porations with many widespread directors because the cost of equipment or user charges
will be far less than the cost of transporting the directors to one meeting place.

''''See H. Henn, Handbook of the Law of Corporations § 208 (2d ed. 1970).
'''Re Associated Color Laboratories, Ltd., [1970] 12 D.L.R 3d 338, 343 (B.C. Sup.

Ct. chambers).

'"Act of Feb. 18, 1982, Pub. L. No. 161, 1982 Ind. Acts 1219 (amending Ind. Code

§ 27-l-7-10(g) (1982)). This Act also added a new provision authorizing directors of in-
surance companies to act without meetings by means of prior written consents. Id.
at 1221 (codified at Ind. Code § 27-l-7-10(h) (1982)). The language differs from the In-



48 INDIANA LAW REVIEW [Vol. 16:25

tion 23-7-1.1-10 of the Indiana Not-for-Profit Corporation Act^^® to per-

mit telephonic meetings of the directors of Indiana not-for-profit cor-

porations. It is difficult to determine if this omission was deliberate
or an oversight. Arguably, boards of not-for-profit corporations, or at

least small ones such as neighborhood civic leagues, should meet in
person to maintain the closeness of the organization. On the other
hand, there seems to be no reason to deny the right to conduct

telephonic meetings to not-for-profit corporations if the members so
desire. The Not-for-Profit Corporation Act does permit informal ac-
tion without a meeting by the use of consents, ^^^ and nothing would

preclude restricting or prohibiting telephonic meetings in the articles

or by-laws of a not-for-profit corporation.

Another significant enactment in the business area was Public Law
143,^^° which amended section 23-1-2-13 of the Indiana General Cor-
poration Act^^^ by eliminating the prohibition against the same person
performing the duties of the president and secretary of an Indiana

general corporation. As the Act now stands, if the corporation's by-
laws so provide, the same person can hold two or more offices in a
corporation, including the office of president and the office of secretary.

By eliminating the prohibition, the General Assembly brought the
General Corporation Act in line with the three major Indiana profes-

sional corporation acts which have permitted the same person to serve

as both president and a secretary of a professional corporation since
1973.^^2

The prohibition was a particular problem for professional
corporations because the acts prohibit nonprofessionals from serving

as officers, directors, or shareholders. It does not necessarily follow,

however, that permitting the same person to serve as both president
and secretary of a general corporation is desirable. Admittedly, it

appears that unless barred by statute, articles, or by-laws, the com-

mon law permitted a person to hold several corporate offices, including
president and secretary.^^^ Many statutes, however, including the

diana General Corporations Act, Ind. Code § 23-1-2-11(1) (1982), but the effect of the two
provisions will be the same.

>^«IND. Code § 23-7-1.1-10 (1982).
'''Id.

''"Act of Feb. 24, 1982, Pub. L. No. 143, 1982 Ind. Acts 1054.

•«'IND. Code § 23-l-2-13(a) (1982).
'^'General Professional Corporation Act, Ind. Code §§ 23-1-13-1 to -12 (1982); Pro-

fessional Medical Corporation Act, Ind. Code §§ 23-1-14-1 to -22 (1982); and the Profes-
sional Dental Corporation Act, Ind. Code §§ 23-1-15-1 to -22 (1982). See generally Galanti,
Corporations, 1973 Survey of Recent Developments in Indiana Law, 7 Ind. L. Rev. 77,
109-12 (1973).

'^See President & Directors of the Manhattan Co. v. Kaldenberg, 165 N.Y. 1, 58
N.E. 790 (1900) (same person may simultaneously occupy the offices of president and
de facto secretary and in such capacities may execute a document requiring authen-



1983] SURVEY-BUSINESS ASSOCIATIONS 49

Model Act/^'' prohibited this. There is no conceptual difficulty with
one person wearing the proverbial "two hats," but it probably is bet-

ter to have two different individuals sign corporate documents or in-

struments, which have to be acknowledged or verified by two officers

as an analogue to governmental checks and balances.

To some extent that rationale was undercut in 1981 when the
General Assembly amended both Indiana corporation acts to permit
"any current officer" to sign documents instead of requiring two

signatures. ^^^ By reducing the role of the secretary, the General
Assembly essentially eliminated any reason for having two individuals

serve in the two capacities.
This development raises an interesting question — why require a

corporation to have a secretary?^^^ The General Assembly simply could
eliminate the position and provide that any document, such as a resolu-

tion of the board of directors, could be certified by any officer. ^^^ If

the Indiana General Corporation Act has eliminated the need for a

secretary, the issue arises as to how persons in other states dealing
with Indiana corporations will react to documents signed by the same
person acting as both president and secretary, not to mention

documents executed by only one officer. It is not inconceivable that

Indiana attorneys may find themselves explaining Indiana law to
nonresidents. Certainly this author would proceed with caution, if he

were in another state and were presented with a corporate document
that was executed by a person as president and attested to by the
same individual as secretary. A likely concern would be whether the
arrangement, in fact, was permitted under Indiana law.

Although there may be arguments against the trend, even a
traditionalist such as this author must admit that the prolifera-

tication of the president and secretary). See also Collins v. Tracy Grill & Bar Corp.,
144 Pa. Super. 440, 19 A.2d 617 (1941). See generally 6 Z. Cavitch, Business Organiza

TiONS § 128.01 [2] (1982); 1 G. Hornstein, Corporation Law & Practice § 512 (1959); 2
Model Act, supra note 148, § 50, f 3.02.

'^"2 Model Act, supra note 148, § 50. Section 18 of the proposed Statutory Closed
Corporations Supplement to the Model Business Corporation Act does authorize an

individual holding more than one office in a statutory closed corporation to "execute,
acknowledge, or verify in more than one capacity." A Report of the Committee on Cor-
porate Laws, Proposed Statutory Close Corporation Supplement to the Model Business

Corporation Act, 37 Bus. Law. 269, 307 (1981).
'''See IND. Code §§ 23-1-2-5, -4-5. -5-2(f), -5-3(e), -5-8, -7-l.l-42(e) (1982). See generally 1981

Survey, supra note 70, at 62-63.

'''See iND. Code § 23-1-2-13 (1982).
'^^The best proof of corporate authority is the original records of the corporation

or a certificate duly authenticated by a responsible officer. The importance of the
secretary's certification and the presence of a corporate seal cannot be overestimated

because it creates a presumption that the instrument was duly authorized by the board

of directors. In re Drive-in Development Corp., 371 F.2d 215 (7th Cir.), cert, denied sub
nom., 387 U.S. 909 (1966).



50 INDIANA LAW REVIEW [Vol. 16:25

tion of one person corporations probably favors this development. Two
caveats, however, are warranted. The first is that the requirement

of section 23-1-2-13, which provides that two or more offices may be
held by the same person if the by-laws so provide, has not changed,

and, in the absence of such a provision, different individuals must serve

as the three statutorily mandated offices. The second is that, whenever

corporate procedures are simplified, persons involved with closely held

corporations may become careless in complying with the remaining
statutory requirements, and that result increases the possibility that

the corporate veil will be pierced and personal liability imposed.
^^^

In 1981, the General Assembly imposed a requirement that the
annual reports of all corporations contain "a statement of whether the

corporation is the holder of any funds or other property, tangible or

intangible, which may be presumed abandoned pursuant to the
provisions"^^^ of the Indiana Uniform Disposition of Unclaimed Prop-

erty Act.^^° In 1982, those requirements were repealed by Public Law
144,"1 Presumably, Indiana businesses are not unhappy to have a
burdensome reporting requirement eliminated, but Indiana taxpayers,
in a year when the State avoided a deficit only by holding up income
tax refunds, might question the wisdom of vitiating the mechanism
for enforcing the Unclaimed Property Act, which is a source of revenue

for the state common school fund. The amounts collected under this
Act are not insignificant. In 1980, almost two million dollars was col-
lected by the Unclaimed Property Division of the Attorney General's
Office."'

One statutory development of particular interest to attorneys
representing clients whose businesses depend on commercially valuable

but nonpublic information is Public Law 145,"^ which adopted the

'^Tublic Law 143 also simplified the process of dissolving a corporation before
it commences business by amending section 23-l-7-l(a) of the General Corporation Act
to eliminate the requirement that such dissolution be done by a majority of incorporators

and to permit such dissolution pursuant to a petition signed by any current officer

of the corporation and affirmed subject to penalties for perjury. Ind. Code § 23-l-7-l(a)

(1982). The procedures for the voluntary dissolution of a corporation that has begun
business were not changed in substance, but there were some style changes. Id.

'«^IND. Code §§ 23-1-8-1(7), -1-11-7(14), -3-4-l(a) (7), -7-l.l-36(m) (1982).

™Id. at §§ 32-9-1-1 to -45 (1982).

''Act of Feb. 25, 1982, Pub. L. No. 144, 1982 Ind. Acts 1060 (codified at Ind. Code

§ 23-1-8-1 (1982)). Public Law 144 also amended the Uniform Disposition of Unclaimed
Property Act so businesses do not have to file reports with the Unclaimed Property

Division of the Attorney General's Office that they do not hold any property presum-

ed abandoned unless requested in writing by the Attorney General or his represen-

tative. Ind. Code § 32-9-l-15(f) (1982).
'^^1980 Op. Att'y Gen. xlvi-xlvii.

'''Act of Feb. 25, 1982, Pub. L. No. 145, 1982 Ind. Acts 1070. The Act is codified

at Ind. Code U 24-2-3-1 to -8 (1982).



1983] SURVEY-BUSINESS ASSOCIATIONS 51

Uniform Trade Secrets Act/^" The Uniform Trade Secrets Act was
approved and recommended for enactment by the National Conference
of Commissioners on Uniform State Laws in 1979, after a more than
ten-year gestation period.

^^^

A trade secrets act is a very significant development. A valid
patent provides a legal monopoly for seventeen years in exchange for

public disclosure of an invention, but if a patent is subsequently

declared invalid, there is disclosure of the invention without the pro-

tective legal monopoly. Furthermore, many processes or devices will
not qualify for patent protection because they are not an "invention,"

because the process, formula, or device will have a useful life far ex-

ceeding the seventeen-year monopoly provided by the patent statute,

or because other technical reasons exist. ^^^

Consequently, many businesses elect to protect commercially
valuable information through reliance on state trade secret law.

Although the status of trade secret law was uncertain for some time
under the federal preemption doctrine,"^ the Supreme Court definitive-

ly ruled in Kewanee Oil Co. v. Bicron Corp}'^^ that neither the patent
and the copyright clause of the Constitution^^^ nor the federal patent

act^^'' preempts state trade secret law for protection of patentable or

unpatentable devices or information.

The Prefatory Note to the Uniform Trade Secrets Act points out
that trade secret law has not developed satisfactorily notwithstanding

its commercial importance.^^^ The Commissioners point out that there
is a lack of authority in many jurisdictions and, even in those jurisdic-
tions with significant trade secret litigation, there are uncertainties

concerning the extent of trade secret protection and the appropriate

remedies for misappropriation of a trade secret.^®^ Another important

''"Uniform Trade Secrets Act §§ 1-12, 14 U.L.A. 541-51 (1980) [hereinafter cited as
Uniform Act].

''"Id. at 538-40. '

™See, e.g., 35 U.S.C. § 102(b) (1976) (provides that a person is not entitled to a

patent if the invention was in public use or on sale in the United States more than
one year prior to the date of the application for the patent).

'''See Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225 (1964); Compco Corp. v.
Day-Brite Lighting, Inc., 376 U.S. 234 (1964).

''*416 U.S. 470 (1964). Kewanee was recently reaffirmed in Aronson v. Quick Point
Pencil Co., 440 U.S. 257 (1979), where the Court held that federal patent law did not
preclude a contract obligating a party to pay a continuing royalty in exchange for the

disclosure of a trade secret for which no patent was issued. Id. at 265-66. Even though
the contract was upheld in Aronson, it has been established that a provision in a pat-
ent license agreement providing for royalties beyond the expiration date of the pat-

ent is not enforceable. Brulotte v. Thys Co., 379 U.S. 29 (1964).
''«U.S. Const, art. I, § 8, cl. 8.
'^''35 U.S.C. §§ 1-376 (1976).

'^'Uniform Act, supra note 174, at 537.

''Hd.



52 INDIANA LAW REVIEW [Vol. 16:25

reason for a specific trade secret statute is that the provisions in the

First Restatement of Torts, which was the most frequently cited

authority in the development of trade secret law/^^ were deleted in

the second edition of the Restatement published in 1979.^^^

A need for uniformity in trade secret law also prompted the
Uniform Act. Even those states with a well developed body of trade
secret law do not necessarily have uniform laws. This could become

a problem as the importance of trade secret protection increases for

businesses operating in many different states.
For example, Indiana courts have long prohibited former

employees from using trade secrets of employers where there was
an understanding that the trade secrets would not be utilized after

the employment relationship ended,^*^ but the perimeters of the law

were ill-defined. Indiana, like most jurisdictions, has criminal sanctions

for the improper acquisition of trade secrets. ^^^ However, criminal
sanctions may not provide practical or adequate protection to the
owner of a trade secret.

Thus, the adoption of the Uniform Trade Secret Act in Indiana
is an important step in protecting legitimate business interests. It is

impossible to discuss fully the Indiana Uniform Trade Secrets Act in
a survey article, so only the highlights will be noted. The first obser-
vation that can be made about the Indiana Uniform Trade Secrets
Act is that it, in fact, is not uniform. However, this lack of unifor-
mity is in the form rather than in the substance of the Indiana Act.

For some reason, the General Assembly enacted section 9 (short title)^^'
and section 8 (uniformity of application and construction)^*® of the

Uniform Act as sections 1(a) and Kb) of the Indiana statute.^®^ Further-

'^^See Restatement of Torts §§ 757-59 (1939).
^*''The American Law Institute took the position that because trade regulation

law in general had developed into an independent body of law which was no longer

based primarily upon tort principles, it was no longer appropriate to include those
principles in the Restatement. Restatement (Second) of Torts introductory note (Vol.

4 1965). See generally Klitzke, The Uniform Trade Secrets Act, 64 Marq. L. Rev. 277,
282-84 (1980). See also Note, Trade Secrets, Customer Contacts and the Employer-Employee

Relationship, 37 Ind. L.J. 218, 220-28 (1962).

'^^See Westervelt v. National Paper & Supply Co., 154 Ind. 673, 57 N.E. 552 (1900).
See also Koehring Co. v. National Automatic Tool Co., 257 F. Supp. 282 (S.D. Ind. 1966),

aff'd, 385 F.2d 414 (7th Cir. 1967); Donahue v. Permacel Tape Corp., 234 Ind. 398, 127
N.E.2d 235 (1955). See generally Note, Trade Secrets, Customer Contacts and the Employer-

Employee Relationship, 37 Ind. L.J. 218, 220-28 (1962).

'''See Ind. Code §§ 35-42-5-1. -43-4-2, -43-4-3 (1982). 12A R. Milgram. Business
Organizations: Trade Secrets App. B-1 (1981) contains a list of states with similar
criminal sanctions.

^^^Uniform Act, supra note 174, § 9.

'''Id. § 8.

'"l^D. Code § 24-2-3-l(a)-(b) (1982).



1983] SURVEY-BUSINESS ASSOCIATIONS 53

more, although section 7 of the Uniform Act displaces "conflicting tort,

restitutionary, and other law pertaining to civil liability for misap-

propriation of a trade secret" except for "(1) contractual or other civil

liability or relief that is not based upon misappropriation of a trade

secret; or (2) criminal liability for misappropriation of a trade secret,"^**

the comparable Indiana provision displaces all conflicting law pertain-

ing to the misappropriation of trade secrets, except contract law and

criminal law.^*^ Thus, both acts preserve contractually imposed duties

relating to secret information, such as covenants not to compete, but

only the Uniform Act preserves duties imposed by principles of agency

law/^^ Indiana's failure to preserve agency duties is questionable

because it is not inconceivable that a court would rule that the

legislature's decision to omit the language preserving agency principles

demonstrates a legislative intent to repeal such law. Hopefully, no

court would construe section 1(c) as repealing any principle of agency

law and would treat the omission as the elimination of surplusage

because section 7 of the Uniform Act displaces only conflicting law,

and certainly there is no law requiring an agent to act in a disloyal

fashion.

Another possible problem with the Indiana Act is that the Uniform

Act's severability provision^^^ was omitted. If the omission of the
severability clause was a deliberate legislative decision, then it is prob-

able that the General Assembly intended the Indiana Act not to be
severable. Consequently, if any provision of the Indiana Act or its

application to any person or circumstances were held invalid, the in-

validity might also affect the application of other provisions which

could be given effect despite the invalid provision. ^^^ This legislative

decision is inexplicable.

Other than these differences, the Indiana Act generally tracks the

Uniform Act, although the section numbers differ. ^^^ The Indiana Act
applies to a "trade secret," which is broadly defined as information

with actual or potential independent economic value resulting from

its secrecy where there have been reasonable efforts to maintain the

^'"Uniform Act, supra note 174, § 7.

^^•IND. Code § 24-2-3-l(c) (1982).

^^^See Uniform Act, supra note 174, § 7 commissioners' comment, at 550.

"^Uniform Act, supra note 174, § 10.

'^*The absence of a severability clause creates a presumption that the statute is

to be upheld completely or not at all. Indiana Educ. Employment Relations Bd. v. Ben-
ton Community School Corp., 266 Ind. 491, 510, 365 N.E.2d 752, 762 (1977). Of course,
the General Assembly could have been relying on the general severability clause in
the Indiana Code, Ind. Code § 1-1-1-8 (1982), but the omission does raise an issue. See
generally 2 D. Sands, Statutes & Statutory Construction §§ 44.03-.04.il (4th ed. 1972).

''^Because sections 7-9 of the Uniform Act were adopted, in part, in section 1 of
the Indiana Act, the section numbers of the two acts are off by one. Thus, section
1 of the Uniform Act is section 2 of the Indiana Act.



54 INDIANA LAW REVIEW [Vol. 16:25

secrecy.^^ It provides relief for actual or threatened misappropriation

of a trade secret. The Indiana Act defines the term "misappropria-

tion" as the "acquisition of a trade secret by a person who knows
or has reason to know that the trade secret was acquired by improper

means"^^^ or the disclosure or use of a trade secret of another without

consent/^^ One effect of this broad definition of trade secret is that

business information is now clearly treated the same as technical trade

secrets; whereas, there was some uncertainty and confusion under the

common law.^^^
The Indiana Act provides a legal remedy only where there has

been a misappropriation, but it makes no difference whether the misap-
propriation is contractual, tortious, or criminal. This is a decided

improvement over the common law, where the misappropriation of
a trade secret could be treated only as a contractual or a tortious

action.^°° The most important remedy under the Indiana Act is injunc-
tive relief.^^ The statute permits an injunction before there has been
any attempt to use or disclose a trade secret. An example would be
when a terminated employee is attempting to take trade secret
documents. This type of remedy, of course, is very desirable from the

standpoint of the employer. The Indiana Act, however, rejects the
practice of some courts that grant punitive, perpetual injunctions
against someone who has misappropriated a trade secret. Instead, the
Indiana Act provides that an injunction should be no longer than a
trade secret's life, plus any additional time necessary to negate any

"lead time" or commercial advantage obtained through the
misappropriation.^"^ Thus, the injunctive relief lasts as long as, but

no longer than, necessary to protect the trade secret.^"^

Section 24-2-3-4(a) of the new Indiana Act permits recovery of
damages in addition to, or in lieu of, injunctive relief,^"* although it
appears that no double recovery would be permitted for a misappro-
priation.^"^ Recovery for unjust enrichment is also authorized, but only

'''iND. Code § 24-2-3-2(4) (1982).
^^Improper means is defined to include "theft, bribery, misrepresentation, breach

or inducement of a breach of a duty to maintain secrecy, or espionage through elec-

tronic or other means." IND. Code § 24-2-3-2(1) (1982).
^^«lND. Code §§ 24-2-3-2(2)(i)-(ii) (1982).

^^^See generally Klitzke, supra note 184, at 287-88.

^°°The distinction between tortious or contractual misappropriation may have been
significant at common law because of different statutes of limitation. Id. at 296, n.93.

'''See Ind. Code § 24-2-3-3 (1982).

">'Id. § 24-2-3-3(a).

'°^See Uniform Act, supra note 174, § 2 commissioners' comment, at 544.

^""Ind. Code § 24-2-3-4(a) (1982). Double damages may be awarded for a willful and
malicious misappropriation. Id. § 24-2-3-4(b) (1982).

^^See Uniform Act, supra note 174, § 3 commissioners' comment; Klitzke, supra note



1983] SURVEY-BUSINESS ASSOCIATIONS 55

to the extent that unjust enrichment is not taken into account in com-

puting damages for actual loss.^°^
Section 24-2-3-3^"^ departs slightly from its counterpart in the

Uniform Act. The latter provides that, where the court has determined
it would be unreasonable to prohibit future use, an injunction may
condition future use upon the payment of a reasonable royalty for the

period of time that the use could have been prohibited.^"* Under the
Indiana Act, an injunction conditioning future use upon payment of

a reasonable royalty is limited to "exceptional circumstances," where
the court has determined that it would be unreasonable to prohibit

future use.^°^ Both Acts allow a court to award reasonable attorney

fees to a prevailing party in specified circumstances.^^"

Of course, an attempt to protect a trade secret would be futile

if meritorious litigation would result in the disclosure of the trade

secret. Consequently, the Indiana Act authorizes a court, in

appropriate circumstances, to order affirmative acts to protect a trade

secret.^" In addition, the Indiana Act authorizes a court to fashion

safeguards that preserve the confidentiality of a trade secret during

a trial, yet permit a defendant sufficient information to present a

defense and permit the trier of fact sufficient information to resolve

the dispute on the merits.^^^

One of the problems with the common law protection of trade
secrets was whether the contract or tort statute of limitations applied

to a misappropriation of a trade secret.^^^ Furthermore, there is a split

of authority on when the statute begins to run, some courts holding
that each day's use of a trade secret constituted a new and discreet
"continuing wrong," others holding that the date of the first use of

a trade secret started the running of the statute.^*^ The latter line

184, at 304 05. Of course, still to be resolved is whether the Commissioners' Comments
will be taken into account in interpreting the Uniform Act, but presumably they will.

^"^Ind. Code § 24-2-3-4(a) (1982). The practice of some courts is to award damages for
actual loss and for unjust enrichment. See, e.g., Telex Corp. v. International Business

Mach. Corp., 510 F.2d 894 (10th Cir.), cert, dismissed, 423 U.S. 802 (1975). This practice

was rejected by the Commissioners. Uniform Act, supra note 174, § 3, at 547.
'°lND. Code § 24-2-3-3 (1982).
^"^Uniform Act, supra note 174, § 2(b), at 544.

^"^Ind. Code § 24-2-3-3(c) (1982). Reasonable royalties can be required for no longer
than the period during which the use could have been prohibited when neither damages
nor unjust enrichment are provable. Id. § 24-2-3-3(b).

^'°Id. § 24-2-3-5; Uniform Act, supra note 174, § 4. Reasonable attorney fees may
be awarded where a specious claim of misappropriation has been made, or where there
has been a specious effort to terminate an injunction, or where there has been a willful
and malicious misappropriation.

^"IND. Code § 24-2-3-3(d) (1982).
^^^Id. § 24-2-3-6. See generally Uniform Act, supra note 174, § 5 commissioners'

comment, at 548-49.

^'^5ee generally Klitzke, supra note 184, at 306-07.

'''Id. at 307-08.



56 INDIANA LAW REVIEW [Vol. 16:25

of cases obviously shorten the period for which a plaintiff can recover

for a misappropriation.

The Indiana Act^^^ takes a compromise position. It specifically pro-
vides for a three-year statute of limitations and provides that a con-

tinuing misappropriation constitutes a single claim. It further provides

that the statute does not begin to run until an aggrieved person

discovers, or reasonably should have discovered, the existence of the

misappropriation. The statutory solution clarifies the date when the
statute begins to run but avoids the inequitable results that could

occur if the first-use theory is applied mechanically when there is some
time before the owner realizes there has been a misappropriation.^^^

The Uniform Act as adopted in Indiana is a definite advancement
in the protection of innovative business ideas. Both patent and trade

secret law provide a basis for protecting ideas, but unlike patent law,

which is a federal statutory law, trade secret protection was a com-
mon law doctrine with many flaws caused by a lack of uniformity and
piecemeal development.^^^ Thus, the common law development of trade
secret protection has been limited and to some degree ineffective. Now
that it is settled that state trade secret law is not preempted by

federal patent law, the states should develop an effective doctrine.

The Uniform Trade Secret Act provides such a doctrine. Furthermore,
the Indiana Act should be of help to Indiana businesses because it

is possible that possessors of trade secrets may not have known that
the law afforded a remedy for misappropriation. This problem should
no longer exist in Indiana.

"'IND. Code § 24-2-3-7 (1982). This provision is based on section 6 of the Uniform Act.
Uniform Act, supra note 174, § 6.

"*Ind. Code § 24-2-3-8 (1982) provides that the Act does not apply to the part of a
continuing misappropriation otherwise covered by the Act which began before
September 1, 1982, but it does apply to that part which occurs after August 31, 1982,
unless the appropriation was not a misappropriation under displaced Indiana common
law. This provision differs from section 11 of the Uniform Act, Uniform Act, supra
note 174, § 11, which simply states that the Act does not apply to misappropriations
occurring prior to the effective date.

Hopefully not too many trade secret misappropriations are occurring in Indiana
because apportioning the misappropriation under section 24-2-3-8 and the application
of the displaced Indiana common law presents some mindboggling prospects.

"^5ee generally Klitzke, supra note 184, at 309.