will estop the corporation ....' " 67 Neb. 644, 93 N.W. at 1033. The Home Fire decision rested on three interrelated and largely overlapping equitable principles: (1) the "tainted shares" doctrine, which precludes a shareholder from complaining of acts of corporate mismanagement if his transferor participated or acquiesced in the wrongdoing; (2) the contemporaneous ownership rule, which requires that the plaintiff have been a shareholder at the time of the alleged wrongful acts (any person who would be prevented from maintaining an action by virtue of the tainted shares doctrine would also be precluded under the contemporaneous ownership rule, though the converse would not be true in all cases); and (3) the inequity of permitting shareholders who had acquired a large part of their interest through the very acts of management complained of and who had paid a fair market value to recover back their purchase price, i. e., to prevent the new shareholders from reaping a windfall by in effect obtaining a corporation for nothing.
Because the applicability of these principles to the Electrolux purchase of NUE and their effect on the viability of this lawsuit are at issue here, we set them forth in some detail.
The Tainted Shares Rule
The tainted shares rule precludes a purchaser of stock from complaining of acts of corporate mismanagement if he acquired his shares from a vendor who participated or acquiesced in the wrongdoing. The rationale for the rule is that, because shares are not negotiable paper, a seller cannot transfer any better litigious rights than he himself possesses. If the seller is estopped from maintaining a suit, so too is his buyer.
The Contemporaneous Ownership Rule
The contemporaneous ownership requirement for shareholder derivative actions was first announced in Hawes v. Oakland, 104 U.S. 450, 26 L. Ed. 827 (1882), and later was adopted as Equity Rule 97. At present it is codified in Fed.R.Civ.P. 23.1(1) which provides that the complaint shall allege "that the plaintiff was a shareholder at the time of the transaction of which he complains or that his share ... devolved on him by operation of law." The original purpose of the contemporaneous ownership requirement was to prevent transfers of shares to a nonresident in order to confer federal diversity jurisdiction. More recently the rule has been deemed designed to prevent champertous or speculative litigation, particularly as manifested in strike suits. See generally 7A Wright and Miller, Federal Practice and Procedure § 1826 and 3B Moores Federal Practice P 23.1.15. In Home Fire, Dean Pound gave the contemporaneous ownership rule life independent of its federal roots, positing that, "so long as (the new shareholder) is not injured in what he got when he purchased, and holds exactly what he got and in the condition in which he got it, there is no ground of complaint." 67 Neb. 644, 93 N.W. at 1029. The focus of Dean Pound's discussion of the contemporaneous ownership rule is on the lack of injury to the new shareholder, who paid fair market value for his stock. Since the breach of fiduciary duty was to his vendor, the new shareholder has no cause to complain. Underlying Dean Pound's discussion of the contemporaneous ownership rule is the assumption that the vendor has chosen not to complain of the acts of mismanagement. "The right to complain of (corporate mismanagement) is one which the stockholders injured may or may not exercise as they choose. Where such transactions are not absolutely void, they may, if they so elect, acquiesce and treat them as binding. The discretion whether to sue to set them aside or to acquiesce in and agree to them is incapable of transfer ... (The new shareholder) can take no advantage of the power which was in his vendor and the latter did not care to exercise." Id. at 1030.
Thus it is clear that while Dean Pound was concerned about the lack of injury to the present shareholders, this concern was accompanied by the assumption that the former shareholders had not complained about the injury inflicted upon them, presumably acquiescing in it to the extent that they accepted a price that reflected the acts of mismanagement. The injustice of the enrichment lay in the new shareholders asserting a cause of action that had never been asserted by the old shareholders.
The third equitable principle relied upon in Home Fire essentially consists of further ruminations on the subject of unjust enrichment. As discussed in Home Fire, that principle is related to the notion of speculation that underlies the contemporaneous ownership rule. "(To permit the new shareholders to recover) would be to give them moneys to which they have no just title or claim whatever, and enable them to speculate upon wrongs done to others with which they have no concern. It would enable them to recover back a large part of the purchase money they paid and agreed to pay for the stock, notwithstanding the stock was worth all that they paid for it, and notwithstanding they obtained and now retain all that they bargained for." Id. at 1031. The emphasis throughout Dean Pound's discussion in this section of Home Fire is on the inequity of permitting the present shareholders to recoup their purchase price and recover from the defendant moneys that in equity belonged to him, as major shareholder, when he wrongfully appropriated them, i. e., to permit recovery for wrongs the defendant had done not to plaintiffs but to himself.
The factual postures of Home Fire and of Bangor Punta are remarkably similar.
Both involved attempts by new shareholders to recover damages from the former owners in the name of the corporations they now controlled, in effect to rescind contracts knowingly and voluntarily entered into while nevertheless retaining the benefits of their bargains. Justice Powell found the considerations supporting what he termed "the Home Fire principle" to be "especially pertinent" in Bangor Punta since Amoskeag, the principal beneficiary of any recovery, had acquired its shares long after the wrongs occurred and did not assert that it had sustained any injury at all on account of defendant's acts of mismanagement.
Rejecting the notion relied on by the court of appeals that any recovery would inure to the benefit of the public through the improvement of the corporation's economic position and the quality of its services, the Bangor Punta Court determined that the assumption that any recovery would necessarily benefit the public was unwarranted, since BAR could divert recovery to its shareholders rather than reinvest it in the railroad. Throughout Bangor Punta, the Court emphasizes the fact that recovery in these circumstances would constitute a "windfall." As for the deterrent value of such suits and the effective immunity from punishment that the wrongdoers would enjoy, Justice Powell commented somewhat ascerbically that "if deterrence were the only objective, then in logic any plaintiff willing to file a complaint would suffice." 417 U.S. at 717, 94 S. Ct. at 2586. Refusing to "indiscriminately extend causes of action to every citizen," he concluded that the action could not be maintained.
The four dissenters quarrelled with the majority's reading of the precedents relied upon-particularly Home Fire -positing that the Home Fire principles were applicable only where none of the corporation's shareholders held stock at the time of the alleged wrongdoing.
Where, as in Bangor Punta, there were minority shareholders who held stock at the time the wrongs occurred, recovery by the corporation either in its own name or through a derivative action brought by the minority shareholders would, in their view, be perfectly appropriate even if the wrongdoers continued to hold stock and would thereby benefit from the recovery. The dissenters further argued that even if Home Fire could be read to preclude recovery where there were minority shareholders, the equitable principle it announced should not be permitted to bar recovery given the public's interest in the vitality of its railroads, the interests of BAR's creditors, and the important policies expressed in the antitrust laws, policies whose furtherance is dependent in large measure on private damage actions. The dissent thus viewed the result as inconsistent with prior opinions of the Court that limited the application of equitable defenses where they would impede the vindication of those policies through the vehicle of private treble damage litigation.
B. Bangor Punta Construed-Its Scope and Applicability
The critical question here is whether the equitable principles relied upon in Home Fire and Bangor Punta have application beyond the peculiar factual pattern that characterized both those cases-and indeed all of Bangor Punta's reported progeny, for this is the first case in which Bangor Punta has been invoked by defendants who are not either former owners of the corporation in whose name recovery is sought or someone acting in concert with those former owners.
We have reflected at length in an attempt to extract the essence of Bangor Punta. Our conclusion is that Bangor Punta stands mainly for the proposition that in analyzing the standing of an antitrust plaintiff the court may disregard the corporate fiction when equitable considerations so require, i. e., when the corporate form "is used to defeat an overriding public policy." 417 U.S. at 713, 94 S. Ct. at 2584. The question we must therefore grapple with is whether the equities in this case require us to disregard NUE's corporate identity and look to the identity of its current shareholder, Electrolux, which will in some measure be enriched by any recovery that might be had in the corporate name.
Bangor Punta instructs us that "where equity would preclude the shareholders from maintaining an action in their own right, the corporation would also be precluded." Id. We must thus determine whether equity would prohibit this action by NUE's shareholders.
At the outset we note that there is no allegation-and, indeed, there could be none-that when this lawsuit was originally filed in 1970, it was not properly maintainable by NUE itself, for the cause of action was a corporate cause of action; the injuries said to have occurred at the hands of the defendants were injuries to the business and property of NUE, and NUE was the statutorily designated plaintiff. Presumably, had NUE failed or refused upon proper demand to bring the action, one or more of its shareholders could have instituted a derivative suit complaining of the injury suffered by the corporation because of defendants' anticompetitive acts.
Since the lawsuit was never styled as a derivative action, however, we must ascertain whether the transfer of shares to a new owner brings into play the equitable difficulties identified in Bangor Punta and thus extinguishes what was a properly framed and instituted lawsuit.
It is useful for purposes of analysis to assume for the moment that the present action was instituted by NUE following rather than prior to the tender offer by which Electrolux came to control the corporation. Under these circumstances, would the equitable principles relied upon in Bangor Punta preclude the new shareholders from maintaining the action and thus also preclude NUE from pursuing it? We approach the problem by considering the applicability of the three conceptual underpinnings of the Home Fire/Bangor Punta doctrine.
First, it is clear that the "tainted shares" doctrine is inapposite here since unlike the shareholders in Home Fire, Bangor Punta, and the REA cases, Electrolux did not acquire its holdings from wongdoers or those who acquiesced in wrongdoing. More difficult questions are whether the contemporaneous ownership requirement and/or the "windfall" analysis advanced in Home Fire would preclude such a lawsuit.
The contemporaneous ownership requirement is now embodied in Fed.R.Civ.P. 23.1(1). As a matter of procedure, had Electrolux attempted to institute the present suit as a derivative action complaining of wrongs that occurred prior to its acquisition, it would have been prevented from doing so by Rule 23.1. Indeed, a derivative action properly brought by NUE's previous shareholders would have abated upon the transfer of the shares. 3B Moore's Federal Practice P 23.1.17; 7A Wright & Miller, Modern Federal Practice and Procedure § 1826. But, this said, it does not follow that this procedural requirement can be used to pierce the corporate veil when the action is instituted by the corporation, i. e., unless the rule has a substantive equitable basis, it cannot be the ground upon which corporate standing can be denied.
It has been suggested by Professor Moore and Professors Wright and Miller in their treatises that Rule 23.1(1) should not be read to bar a direct suit by the corporation itself when none of its present shareholders held stock during the time of the alleged injury and are therefore themselves ineligible to sue derivatively. "Inasmuch as the language of Rule 23.1(1) applies only to derivative actions, extending its application to prevent an action by the corporation is not justified either textually or as a matter of policy underlying the provision." 7A Wright and Miller, supra § 1828 at 353. This position is adopted in Aeronca, Inc. v. Style-Crafters, Inc., 499 F.2d 1367, 1374 (4th Cir. 1974), where Rule 23.1 was held inapplicable to a credit transaction between two corporations, one of whose ownership had changed following the acts that formed the basis of its defense and counterclaim. The court declined to apply a "strained construction of rules designed to govern suits between stockholders and corporate officers or directors, or stockholders and the corporation in which they may hold stock." See also Central Railroad Signal Co. v. Longden, 194 F.2d 310, 321 (7th Cir. 1952) (construing the predecessor provision to Rule 23.1). "We think the doctrine of contemporaneous ownership ... does not apply to a suit by a corporation ... It is clear that the rule has to do with a secondary action by shareholders and not with primary actions by incorporated or unincorporated associations; it has no application where the corporation brings the action itself to enforce its own right, as here."
It is important to note that the district court in Bangor Punta did conclude that since Amoskeag would be barred from maintaining a derivative action by Rule 23.1(1), so too would BAR. The Supreme Court, while describing this analysis in its statement of the case, did not rely upon it, specifically noting that the issue whether the requirement is one of procedure only or one of substantive law has never been resolved.
417 U.S. at 708, n. 4, 94 S. Ct. at 2582 n. 4. Professor Moore states that the "better" view of Bangor Punta is that it is based on equitable estoppel and that Rule 23.1(1) is simply not applicable to a suit by the corporation itself. The evils that the contemporaneous shareholder rule is designed to prevent-manufactured jurisdiction and strike suits by minority shareholders-are not present when the corporation sues, and thus the rationale for the rule would not be furthered should we apply it in this case, and we decline to do so, recognizing its relevance only insofar as it incorporates, as Dean Pound appears to suggest in Home Fire, 67 Neb. 644, 93 N.W. at 1031, notions of "windfall" or unjust enrichment,
to a discussion of which we now turn.
Initially, we must note some conceptual difficulties that stem from the rather broad language employed by the Court in Bangor Punta, particularly its unfortunate use of and emphasis upon the notion of "windfall," a lay term that apparently is meant to be synonymous with "unjust enrichment." "Windfall" is defined by Webster as "an unexpected or sudden gain or advantage." That definition is plainly too general to be useful as a legal precept, particularly since it does not express the pejorative connotations apparently placed upon it in Bangor Punta. And the notion of unjust enrichment would seem at least as supportive of plaintiff's position as of defendants', since were we to dismiss this suit on Bangor Punta grounds, defendants would be able to keep the profits they made at NUE's expense.
Defendants view Bangor Punta as stating that a court must never permit a "windfall" to occur (for under their model a "windfall" will always amount to unjust enrichment), and that a "windfall" will occur whenever a buyer purchases shares of a damaged corporation at a price reflecting the damage and then recovers, in the corporate name, on account of that damage. In defendants' view, the identity of the damager-be it former owner or third party-is irrelevant, as is the question whether the lawsuit preexisted the sale. NUE reads Bangor Punta more narrowly to state that the inequity of recovery there lay in the fact that defendant would have to pay twice for its wrongdoing, once when it sold its shares at a price reflecting its own mismanagement
and a second time in damages. In NUE's view Bangor Punta has no applicability when the defendant is a stranger to the corporation.
We think that although there is some comfort in Bangor Punta for each position, the thrust of the opinion is somewhat different from the characterization placed upon it by either party here. While we agree with defendants that in Bangor Punta the focus of the Court is on the inequity of the plaintiff's recovery, rather than on the defendants' conduct or loss (" "A plaintiff must recover on the strength of his own case, not on the weakness of the defendant's case. It is his right, not the defendant's wrong-doing, that is the basis of recovery,' " 417 U.S. at 717 n. 14, 94 S. Ct. at 2586 n. 14, quoting Home Fire, 67 Neb. at 673, 93 N.W. at 1035), we do not agree that it therefore follows that the principles espoused in Bangor Punta are readily transferable beyond the factual circumstances in which they were employed and that recovery must be denied whenever a corporation seeks to recover for injury suffered before new owners acquired its shares.
First, we are struck with the apparent care taken by Mr. Justice Powell, speaking for the Court, to relate the ratio decidendi to the facts of the case, framing the issue as whether recovery can be had in "these circumstances." 417 U.S. at 705, 94 S. Ct. at 2580.
The resolution of this issue depends upon the applicability of the settled principle of equity that a shareholder may not complain of acts of corporate mismanagement if he acquired his shares from those who participated or acquiesced in the alleged wrongful transactions.
This principle has been invoked with special force where a shareholder purchases all or substantially all the shares of a corporation from a vendor at a fair price, and then seeks to recover against that vendor for prior corporate mismanagement.
417 U.S. at 711, 94 S. Ct. at 2583.
The equitable considerations precluding recovery in such cases were explicated long ago (in Home Fire, where Dean Pound) observed that the shareholders of the plaintiff corporation in that case had sustained no injury since they had acquired their shares from the alleged wrongdoers after the disputed transactions occurred and had received full value for their purchase price.