Arizona Court of Appeals Division One Holds That Directors and Officers Generally Do Not Owe a Duty to Disclose Inside Information When Purchasing Shareholder’s Stock, but That There Is a Limited Duty If Special Facts (i.e., Material Facts) Exist.

This appeal concerns the purchase of shares in a closely held family business.  Plaintiffs sold their shares in the business to their cousin Clinton Underhill, an officer of the business.  Plaintiffs later sued Clinton and James Underhill, alleging that they fraudulently misrepresented the value of the shares in order to purchase the shares at substantially less than value.  Plaintiffs asserted claims for breach of fiduciary, common law fraud, and securities fraud as well as derivative torts.    

The superior court granted summary judgment in defendants’ favor.  The court held that an officer may purchase stock from a shareholder as from a stranger, so long as the officer does not actively mislead the seller.  The court further held that an officer has no duty to disclose inside information, unless the information materially affects the value of the stock.  And, although officers have a limited fiduciary duty to disclose material information to a shareholder, the court held that under the particular circumstances of the case there were no material misrepresentations. 

The superior court also entered summary judgment against plaintiffs on their derivative tort claims and awarded attorneys’ fees to the defendants.  Plaintiffs appealed. 

The Court of Appeals affirmed.  The Court discussed the duty of directors and officers to disclose inside information to shareholders when purchasing the shareholder’s stock—an issue the Arizona courts last addressed in Steinfeld v. Nielsen, 15 Ariz. 424, 139 P. 879 (1913).  The Court reiterated that directors and officers generally do not owe a duty to disclose inside information when purchasing shareholder’s stock, but that there is a limited fiduciary duty if “special facts” exist.  Addressing the special facts doctrine, the Court refused to limit the doctrine based on accessibility of information to a shareholder-seller.  The Court held that “special facts” equate merely to material facts, determined by the materiality standard in securities cases—“a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder” or “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” 

Looking at the facts asserted by plaintiffs, the Court agreed with the trial court that the alleged omitted facts and alleged misrepresentations were either not supported by the evidence or were not material misrepresentations.  The Court also affirmed the award of attorney fees, finding that the tort claims arose out of the contract for the purchase of the shares. 

Judge Thompson authored the opinion; Judges Portley and Gemmill concurred.