Guth v. Loft Inc.

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Guth v Loft Inc
Pepsi Cola logo 1940.svg
Court Delaware Court of Chancery
Citation(s) 5 A2d 503 (Del Ch 1939)
Keywords
Directors' duties, conflicts of interest

Guth v Loft Inc, 5 A2d 503 (Del Ch 1939) is a Delaware corporation law case, important for United States corporate law, on corporate opportunities and the duty of loyalty. It deviated from the year 1726 rule laid down in Keech v Sandford[1] that a fiduciary should leave open no possibility of conflict of interest between his private dealings and the job he is entrusted to do.

Facts[edit]

Mr. Guth was the president of Loft, Inc. which manufactured a cola drink. Loft's soda fountains purchased cola syrup from Coca-Cola Ltd., but then Mr. Guth decided it would be cheaper to buy from Pepsi after Coke declined to give him a larger jobber discount. Pepsi went bankrupt before Mr. Guth could inquire about obtaining syrup from Pepsi. Mr. Guth bought the company and its syrup recipe (which he then had Loft chemists reformulate) and then purported to sell the syrup on to Loft. He was alleged to have breached his fiduciary duty of loyalty to the company by failing to offer that opportunity to Loft, instead appropriating it for himself.

Judgment[edit]

Daniel J. Layton, the concurrent chief justice, gave the lead judgment for the Delaware Supreme Court. He started off by paying service to the general principle against conflicts of interest.

But then he stated the main principle as this,

So where a corporation cannot take an opportunity because (1) it lacks finances (2) it is not in the same line of business (3) it has not "interest or reasonable expectancy" then a director will be found to have legitimately taken an opportunity for itself. Layton felt that there was no real standard for loyalty and it depends on the facts of the case. The court may enquire and will decide upon the fairness of any transaction.

Significance[edit]

This has been followed in the Delaware General Corporation Law §144.

See also[edit]

Notes[edit]

  1. ^ Keech v Sandford (1726) Sel Cas Ch61

References[edit]

  • David Kershaw, ‘Does it matter how the Law Thinks About Corporate Opportunities?’ (2005) 25:4 Legal Studies 533
  • John Lowry and Rod Edmunds, ‘The No Conflict-No Profit Rules and the Corporate Fiduciary-Challenging the Orthodoxy of Absolutism’ [2000] Journal of Business Law 122-142
  • V. Brudney and R. C. Clark, “A New Look at Corporate Opportunities” (1981) 94 Harvard Law Review 997