10/9/22, 3:38 PM Guth v. Loft (Del.

1939) [Pepsi]

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Annotated Case
Guth v. Loft (Del. 1939) [Pepsi]
by Holger Spamann
Information
ANNOTATION DISPLAY
Last Updated:
December 19,
2016
Guth is the mother of all Delaware duty of loyalty cases. The decision introduces
Original Item:
"Guth v. Loft"
the basic idea that it is incumbent on the fiduciary to prove that the fiduciary acted
“in the utmost good faith” (or, in modern parlance, with “entire fairness”) to the Lineage of: Guth v. Loft (Del.
corporation in spite of the fiduciary’s conflict of interest. As mentioned above, 1939) [Pepsi]
approval by a majority of fully informed, disinterested directors or shareholders Current Annotated Case

can absolve the fiduciary or at least shift the burden of proof. In Guth, however, 08/18/2013 at 19:42 by
the Court of Chancery had found that Guth had not obtained such approval from Holger Spamann

12/07/2017 at 17:21 by
his board.
Holger Spamann

The decision deals with two separate aspects of Guth’s behavior. The corporate 11/02/2016 at 17:06 by
resources that Guth used for his business, such as Loft’s funds and personnel, Samantha Bates

clearly belonged to Loft, and there was little question that Guth had to compensate 12/16/2014 at 14:32 by
Brett
Loft for their use. The contentious part of the decision, however, deals with a Johnson

difficult line-drawing problem: which transactions come within the purview of the
Author Stats
duty of loyalty in the first place? Surely fiduciaries must retain the right to self-
interested behavior in some corner of their life. Where is the line? In particular, Name:
Holger Spamann
which business opportunities are “corporate opportunities” belonging to the
corporation, and which are open to the fiduciaries to pursue for their own benefit?
Cf. DGCL 122(17). And why does it matter here, seeing that some of Guth's
actions clearly were actionable self-dealing? Hint: Which remedy is available for
which action?

1 5 A.2d 503

2
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 GUTH et al.

v.

LOFT, Inc.
3  Supreme Court of Delaware.

 April 11, 1939.

4 [...]
910 For convenience, Loft Incorporated, will be referred to as Loft; the
8
7
6
5
1
Grace Company, Inc., of Delaware, as Grace; and Pepsi-Cola
Company, a corporation of Delaware, as Pepsi.

12 Loft filed a bill in the Court of Chancery against Charles G. Guth, Grace
and Pepsi seeking to impress a trust in favor of the complainant upon all
shares of the capital stock of Pepsi registered in the name of Guth and in
the name of Grace (approximately 91% of the capital stock), to secure a
transfer of those shares to the complainant, and for an accounting.

13 The cause was heard at great length by the Chancellor who, on

September 17, 1938, rendered a decision in favor of the complainant in
accordance with the prayers of the bill. Loft, Inc., v. Guth, Del.Ch., 2
A.2d 225. An interlocutory decree, and an interlocutory order fixing
terms of stay and amounts of supersedeas bonds, were entered on
October 4, 1938; and, thereafter, an appeal was duly prosecuted to
this Court.

14 The essential facts, admitted or found by the Chancellor, briefly stated,

are these: Loft was, and is, a corporation engaged in the manufacturing
and selling of candies, syrups, beverages and foodstuffs, having its
executive offices and main plant at Long Island City, New York. In 1931
Loft operated 115 stores largely located in the congested centers of
population along the Middle Atlantic seaboard. While its operations
chiefly were of a retail nature, its wholesale activities were not
unimportant, amounting in 1931 to over $800,000. It had the
equipment and the personnel to carry on syrup making operations, and
was engaged in manufacturing fountain syrups to supply its own
extensive needs. It had assets exceeding $9,000,000 in value,
excluding goodwill; and from 1931 to 1935, it had sufficient working
capital for its own cash requirements.

15
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Guth, a man of long experience in the candy, chocolate and soft drink
business, became Vice President of Loft in August, 1929, and its
president in March 1930.

16 Grace was owned by Guth and his family. It owned a plant in

Baltimore, Maryland, where it was engaged in the manufacture of
syrups for soft drinks, and it had been supplying Loft with "Lady Grace
Chocolate Syrup".

17 In 1931, Coca-Cola was dispensed at all of the Loft Stores, and of the
Coca-Cola syrup Loft made large purchases, averaging over 30,000
gallons annually. The cost of the syrup was $1.48 per gallon. Guth
requested the Coca-Cola Company to give Loft a jobber's discount in
view of its large requirements of syrups which exceeded greatly the
purchases of some other users of the syrup to whom such discount had
been granted. After many conferences, the Coca-Cola Company
refused to give the discount. Guth became incensed, and contemplated
the replacement of the Coca-Cola beverage with some other cola drink.
On May 19, 1931, he addressed a memorandum to V. O. Robertson,
Loft's vice-president, asking "Why are we paying a full price for Coca-
Cola? Can you handle this, or would you suggest our buying Pebsaco
(Pepsi-Cola) at about $1.00 per gallon?" To this Robertson replied that
Loft was not paying quite full price for Coca-Cola, it paying $1.48 per
gallon instead of $1.60, but that it was too much, and that he was
investigating as to Pepsi-Cola.

18 Pepsi-Cola was a syrup compounded and marketed by National Pepsi-

Cola Company, controlled by one Megargel. The Pepsi-Cola beverage
had been on the market for upwards of twenty five years, but chiefly in
southern territory. It was possessed of a secret formula and trademark.
This company, as it happened, was adjudicated a bankrupt on May 26,
1931, upon a petition filed on May 18, the day before the date of
Guth's memorandum to Robertson suggesting a trial of Pepsi-Cola syrup
by Loft.

19 [5 A.2d 506] Megargel was not unknown to Guth. In 1928, when Guth
had no connection with Loft, Megargel had tried unsuccessfully to
interest Guth and.one Hoodless, vice-president and general manager of
a sugar company, in National Pepsi-Cola Company. Upon the
bankruptcy of this company Hoodless, who apparently had had some
communication with Megargel, informed Guth that Megargel would
communicate with him, and Megargel did inform Guth of his company's
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bankruptcy and that he was in a position to acquire from the trustee in

bankruptcy, the secret formula and trademark for the manufacture and
sale of Pepsi-Cola.

20 In July, 1931, Megargel and Guth entered into an agreement whereby

Megargel would acquire the Pepsi-Cola formula and trademark; would
form a new corporation, with an authorized capital of 300,000 shares
of the par value of $5, to which corporation Megargel would transfer
the formula and trademark; would keep 100,000 shares for himself,
transfer a like number to Guth, and turn back 100,000 shares to the
company as treasury stock, all or a part thereof to be sold to provide
working capital. By the agreement between the two Megargel was to
receive $25,000 annually for the first six years, and, thereafter, a
royalty of 2 1/2 cents on each gallon of syrup.

21 Megargel had no money. The price of the formula and trademark was
$10,000. Guth loaned Megargel $12,000 upon his agreement to
repay him out of the first $25,000 coming to him under the agreement
between the two, and Megargel made a formal assignment to Guth to
that effect. The $12,000 was paid to Megargel in this way: $5000
directly to Megargel by Guth, and $7,000 by Loft's certified check,
Guth delivering to Loft simultaneously his two checks aggregating
$7000. Guth also advanced $426.40 to defray the cost of
incorporating the company. This amount and the sum of $12,000 were
afterwards repaid to Guth.

22 Pepsi-Cola Company was organized under the laws of Delaware in

August, 1931. The formula and trademark were acquired from the trustee
in bankruptcy of National Pepsi-Cola Company, and its capital stock
was distributed as agreed, except that 100,000 shares were placed in
the name of Grace.

23 At this time Megargel could give no financial assistance to the venture

directly or indirectly. Grace, upon a comparison of its assets with its
liabilities, was insolvent. Only $13,000 of Pepsi's treasury stock was
ever sold. Guth was heavily indebted to Loft, and, generally, he was in
most serious financial straits, and was entirely unable to finance the
enterprise. On the other hand, Loft was well able to finance it.

24 Guth, during the years 1931 to 1935 dominated Loft through his control
of the Board of Directors. He has completely controlled Pepsi. Without
the knowledge or consent of Loft's Board of Directors he drew upon Loft

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without limit to further the Pepsi enterprise having at one time almost the
entire working capital of Loft engaged therein. He used Loft's plant
facilities, materials, credit, executives and employees as he willed.
Pepsi's payroll sheets were a part of Loft's and a single Loft check was
drawn for both.

25 An attempt was made to keep an account of the time spent by Loft's

workmen on Pepsi's enterprises, and in 1935, when Pepsi had available
profits, the account was paid; but no charge was made by Loft as
against Pepsi for the services rendered by Loft's executives, higher
ranking office employees or chemist, nor for the use of its plant and
facilities.

26 [...]
30 Guth claimed that he offered Loft the opportunity to take over the Pepsi-
29
28
27
Cola enterprise, frankly stating to the directors that if Loft did not, he
would; but that the Board declined because Pepsi-Cola had proved a
failure, and that for Loft to sponsor a company to compete with Coca-
Cola would cause trouble; that the proposition was not in line with Loft's
business; that it was not equipped to carry on such business on an
extensive scale; and that it would involve too great a financial risk. Yet,
he claimed that, in August, 1933, the Loft directors consented, without a
vote, that Loft should extend to Guth its facilities and resources without
limit upon Guth's guarantee of all advances, and upon Guth's contract
to furnish Loft a continuous supply of syrup at a favorable price. The
guaranty was not in writing if one was made, and the contract was not
produced.

31 [...]
32 The Chancellor found that Guth had never offered the Pepsi opportunity

to Loft; [...] that Guth's use of Loft's money, credit, facilities and
personnel in the furtherance of the Pepsi venture was without the
knowledge or authorization of Loft's directors; that Guth's alleged
personal guaranty to Loft against loss resulting from the venture was not
in writing, and otherwise was worthless; that no contract existed
between Pepsi and Loft whereby the former was to furnish the latter with
a constant supply of syrup for a definite time and at a definite price; that
as against Loft's contribution to the Pepsi-Cola venture, the appellants
had contributed practically nothing; that after the repayment of the sum

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of $12,000 which had been loaned by Guth to Megargel, Guth had

not a dollar invested in Pepsi stock; that Guth was a full time president of
Loft at an attractive salary, and could not claim to have invested [5
A.2d 508]his services in the enterprise; that in 1933, Pepsi was
insolvent; that Loft, until July, 1934, bore practically the entire financial
burdens of Pepsi, but for which it must have failed disastrously to the
great loss of Loft.

33 [...]
34 By the decree entered the Chancellor found, inter alia, that Guth was
estopped to deny that opportunity of acquiring the Pepsi-Cola
trademark and formula was received by him on behalf of Loft, and that
the opportunity was wrongfully appropriated by Guth to himself; that the
value inhering in and represented by the 97,500 shares of Pepsi stock
standing in the name of Guth and the 140,000 shares standing in the
name of Grace, were, in equity, the property of Loft; that the dividends
declared and paid on the shares of stock were, and had been, the
property of Loft; and that for all practical purposes Guth and Grace
were one.

35 The Chancellor ordered Guth and Grace to transfer the shares of stock

to Loft; [...]
37
36 LAYTON, Chief Justice, delivering the opinion
of the Court:
38 In the Court below the appellants took the position that, on the facts, the
complainant was entitled to no equitable relief whatever. In this Court,
they seek only a modification of the Chancellor's decree, not a reversal
of it. They now contend that the question is one of equitable adjustment
based upon the extent and value of the respective contributions of the
appellants and the appellee. This change of position is brought about,
as it is said, because of certain basic fact findings of the Chancellor
which are admittedly unassailable in this Court. The appellants accept
the findings of fact; but they contend that the Chancellor's inferences
from them were unwarrantable in material instances [...]
39
46
45
44
43
42
41
40
48 Corporate officers and directors are not permitted to use their position of
47
trust and confidence to further their private interests. While technically

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not trustees, they stand in a fiduciary relation to the corporation and its
stockholders. A public policy, existing through the years, and derived
from a profound knowledge of human characteristics and motives, has
established a rule that demands of a corporate officer or director,
peremptorily and inexorably, the most scrupulous observance of his
duty, not only affirmatively to protect the interests of the corporation
committed to his charge, but also to refrain from doing anything that
would work injury to the corporation, or to deprive it of profit or
advantage which his skill and ability might properly bring to it, or to
enable it to make in the reasonable and lawful exercise of its powers.
The rule that requires an undivided and unselfish loyalty to the
corporation demands that there shall be no conflict between duty and
self-interest. The occasions for the determination of honesty, good faith
and loyal conduct are many and varied, and no hard and fast rule can
be formulated. The standard of loyalty is measured by no fixed scale.

49 If an officer or director of a corporation, in violation of his duty as such,

acquires gain or advantage for himself, the law charges the interest so
acquired with a trust for the benefit of the corporation, at its election,
while it denies to the betrayer all benefit and profit. The rule, inveterate
and uncompromising in its rigidity, does not rest upon the narrow
ground of injury or damage to the corporation resulting from a betrayal
of confidence, but upon a broader foundation of a wise public policy
that, for the purpose of removing all temptation, extinguishes all
possibility of profit flowing from a breach of the confidence imposed by
the fiduciary relation. Given the relation between the parties, a certain
result follows; and a constructive trust is the remedial device through
which precedence of self is compelled to give way to the stern demands
of loyalty. [...]
50 The rule, referred to briefly as the rule of corporate opportunity, is
merely one of the manifestations of the general rule that demands of an
officer or director the utmost good faith in his relation to the corporation
which he represents.

51 It is true that when a business opportunity comes to a corporate officer

or director in his individual capacity rather than in his official capacity,
and the opportunity is one which, because of the nature of the
enterprise, is not essential to his corporation, and is one in which it has
no interest or expectancy, the officer or director is entitled to treat the
opportunity as his own, and the corporation has no interest in it, if, of

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course, the officer or director has not wrongfully embarked the [5 A.2d
511] corporation's resources therein. Colorado & Utah Coal Co. v.
Harris et al., 97 Colo. 309, 49 P.2d 429; Lagarde v. Anniston Lime &
Stone Co., 126 Ala. 496, 28 So. 199; Pioneer Oil & Gas Co. v.
Anderson, 168 Miss. 334, 151 So. 161; Sandy River R. Co. v. Stubbs,
77 Me. 594, 2 A. 9; Lancaster Loose Leaf Tobacco Co. v. Robinson,
199 Ky. 313, 250 S.W. 997. But, in all of these cases, except, perhaps,
in one, there was no infidelity on the part of the corporate officer sought
to be charged. In the first case, it was found that the corporation had no
practical use for the property acquired by Harris. In the Pioneer Oil &
Gas Co. case, Anderson used no funds or assets of the corporation, did
not know that the corporation was negotiating for the oil lands and,
further, the corporation could not, in any event have acquired them,
because their proprietors objected to the corporation's having an
interest in them, and because the corporation was in no financial
position to pay for them. In the Stubbs case, the railroad company,
desiring to purchase from Porter such part of his land as was necessary
for its right of way, station, water-tank, and woodshed, declined to
accede to his price. Stubbs, a director, made every effort to buy the
necessary land for the company and failed. He then bought the entire
tract, and offered to sell to the company what it needed. The company
repudiated expressly all participation in the purchase. Later the
company located its tracks and buildings on a part of the land, but
could not agree with Stubbs as to damages or terms of the conveyance.
Three and one-half years thereafter, Stubbs was informed for the first
time that the company claimed that he held the land in trust for it. In the
Lancaster Loose Leaf Tobacco Co. case, the company had never
engaged in the particular line of business, and its established policy had
been not to engage in it. The only interest which the company had in the
burley tobacco bought by Robinson was its commissions in selling it on
its floors, and these commissions it received. In the Lagarde case, it was
said that the proprietorship of the property acquired by the Legardes
may have been important to the corporation, but was not shown to have
been necessary to the continuance of its business, or that its purchase by
the Legardes had in any way impaired the value of the corporation's
property. This decision is, perhaps, the strongest cited on behalf of the
appellants. With deference to the Court that rendered it, a different view
of the correctness of the conclusion reached may be entertained.

52 On the other hand, it is equally true that, if there is presented to a

corporate officer or director a business opportunity which the
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corporation is financially able to undertake, is, from its nature, in the line
of the corporation's business and is of practical advantage to it, is one in
which the corporation has an interest or a reasonable expectancy, and,
by embracing the opportunity, the self-interest of the officer or director
will be brought into conflict with that of his corporation, the law will not
permit him to seize the opportunity for himself. And, if, in such
circumstances, the interests of the corporation are betrayed, the
corporation may elect to claim all of the benefits of the transaction for
itself, and the law will impress a trust in favor of the corporation upon the
property, interests and profits so acquired. [...]
53 But, there is little profit in a discussion of the particular cases cited. In
none of them are the facts and circumstances comparable to those of the
case under consideration. The question is not one to be decided on
narrow or technical grounds, but upon broad considerations of
corporate duty and loyalty.

54 [...]
55 Duty and loyalty are inseparably connected. Duty is that which is
required by one's station or occupation; is that which one is bound by
legal or moral obligation to do or refrain from doing; and it is with [5
A.2d 512] this conception of duty as the underlying basis of the principle
applicable to the situation disclosed, that the conduct and acts of Guth
with respect to his acquisition of the Pepsi-Cola enterprise will be
scrutinized. Guth was not merely a director and the president of Loft. He
was its master. It is admitted that Guth manifested some of the qualities
of a dictator. The directors were selected by him. Some of them held
salaried positions in the company. All of them held their positions at his
favor. Whether they were supine merely, or for sufficient reasons entirely
subservient to Guth, it is not profitable to inquire. It is sufficient to say that
they either wilfully or negligently allowed Guth absolute freedom of
action in the management of Loft's activities, and theirs is an unenviable
position whether testifying for or against the appellants.

56 Prior to May, 1931, Guth became convinced that Loft was being unfairly
discriminated against by the Coca-Cola Company of whose syrup it
was a large purchaser, in that Loft had been refused a jobber's discount
on the syrup, although others, whose purchases were of far less
importance, had been given such discount. He determined to replace
Coca-Cola as a beverage at the Loft stores with some other cola drink,

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if that could be accomplished. So, on May 19, 1931, he suggested an

inquiry with respect to desirability of discontinuing the use of Coca-
Cola, and replacing it with Pepsi-Cola at a greatly reduced price. Pepsi-
Cola was the syrup produced by National Pepsi-Cola Company. As a
beverage it had been on the market for over twenty-five years, and
while it was not known to consumers in the area of the Loft stores, its
formula and trademark were well established. Guth's purpose was to
deliver Loft from the thraldom of the Coca-Cola Company, which
practically dominated the field of cola beverages, and, at the same
time, to gain for Loft a greater margin of profit on its sales of cola
beverages. Certainly, the choice of an acceptable substitute for Coca-
Cola was not a wide one, and, doubtless, his experience in the field of
bottled beverages convinced him that it was necessary for him to obtain
a cola syrup whose formula and trademark were secure against attack.
Although the difficulties and dangers were great, he concluded to make
the change. Almost simultaneously, National Pepsi-Cola Company, in
which Megargel was predominant and whom Guth knew, went into
bankruptcy; and Guth was informed that the long established Pepsi-
Cola formula and trademark could be had at a small price. Guth, of
course, was Loft; and Loft's determination to replace Coca-Cola with
some other cola beverage in its many stores was practically co-
incidental with the opportunity to acquire the Pepsi-Cola formula and
trademark. This was the condition of affairs when Megargel
approached Guth. Guth contended that his negotiation with Megargel
in 1931 was but a continuation of a negotiation begun in 1928, when
he had no connection with Loft; but the Chancellor found to the
contrary, and his finding is accepted.

57 It is urged by the appellants that Megargel offered the Pepsi-Cola

opportunity to Guth personally, and not to him as president of Loft. The
Chancellor said that there was no way of knowing the fact, as
Megargel was dead, and the benefit of his testimony could not be had;
but that it was not important, for the matter of consequence was how
Guth received the proposition.

58 It was incumbent upon Guth to show that his every act in dealing with
the opportunity presented was in the exercise of the utmost good faith to
Loft; and the burden was cast upon him satisfactorily to prove that the
offer was made to him individually. Reasonable inferences, drawn from
acknowledged facts and circumstances, are powerful factors in arriving
at the truth of a disputed matter, and such inferences are not to be

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ignored in considering the acts and conduct of Megargel. He had been

for years engaged in the manufacture and sale of a cola syrup in
competition with Coca-Cola. He knew of the difficulties of competition
with such a powerful opponent in general, and in particular in the
securing of a necessary foothold in a new territory where Coca-Cola
was supreme. He could not hope to establish the popularity and use of
his syrup in a strange field, and in competition with the assured position
of Coca-Cola, by the usual advertising means, for he, himself, had no
money or resources, and it is entirely unbelievable that he expected
Guth to have command of the vast amount of money necessary to
popularize Pepsi-Cola by the ordinary methods. He knew of the
difficulty, not to say impossibility, of inducing proprietors of soft drink
establishments to use a cola drink utterly unknown [5 A.2d 513] to their
patrons. It would seem clear, from any reasonable point of view, that
Megargel sought to interest someone who controlled an existing
opportunity to popularize his product by an actual presentation of it to
the consuming public. Such person was Guth, the president of Loft. It is
entirely reasonable to infer that Megargel approached Guth as
president of Loft, operating, as it did, many soft drink fountains in a most
necessary and desirable territory where Pepsi-Cola was little known, he
well knowing that if the drink could be established in New York and
circumjacent territory, its success would be assured. Every reasonable
inference points to this conclusion. What was finally agreed upon
between Megargel and Guth, and what outward appearance their
agreement assumed, is of small importance. It was a matter of
indifference to Megargel whether his co-adventurer was Guth
personally, or Loft, so long as his terms were met and his object
attained.

59 Leaving aside the manner of the offer of the opportunity, certain other
matters are to be considered in determining whether the opportunity, in
the circumstances, belonged to Loft; and in this we agree that Guth's
right to appropriate the Pepsi-Cola opportunity to himself depends upon
the circumstances existing at the time it presented itself to him without
regard to subsequent events, and that due weight should be given to
character of the opportunity which Megargel envisioned and brought to
Guth's door.

60 The real issue is whether the opportunity to secure a very substantial

stock interest in a corporation to be formed for the purpose of exploiting
a cola beverage on a wholesale scale was so closely associated with

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the existing business activities of Loft, and so essential thereto, as to

bring the transaction within that class of cases where the acquisition of
the property would throw the corporate officer purchasing it into
competition with his company. This is a factual question to be decided
by reasonable inferences from objective facts.

61 [...]
62 The appellants suggest a doubt whether Loft would have been able to
finance the project along the lines contemplated by Megargel, viewing
the situation as of 1931. The answer to this suggestion is two-fold. The
Chancellor found that Loft's net asset position at that time was amply
sufficient to finance the enterprise, and that its plant, equipment,
executives, personnel and facilities, supplemented by such expansion
for the necessary development of the business as it was well able to
provide, were in all respects adequate. The second answer is that Loft's
resources were found to be sufficient, for Guth made use of no other to
any important extent.

63 Next it is contended that the Pepsi-Cola opportunity was not in the line
of Loft's activities which essentially were of a retail nature. It is pointed
out that, in 1931, the retail stores operated by Loft were largely located
in the congested areas along the Middle Atlantic Seaboard, that its
manufacturing [5 A.2d 514] operations were centered in its New York
factory, and that it was a definitely localized business, and not operated
on a national scale; whereas, the Megargel proposition envisaged
annual sales of syrup at least a million gallons, which could be
accomplished only by a wholesale distribution. Loft, however, had
many wholesale activities. Its wholesale business in 1931 amounted to
over $800,000. It was a large company by any standard. It had an
enormous plant. It paid enormous rentals. Guth, himself, said that Loft's
success depended upon the fullest utilization of its large plant facilities.
Moreover, it was a manufacturer of syrups and, with the exception of
cola syrup, it supplied its own extensive needs. The appellants admit that
wholsesale distribution of bottled beverages can best be accomplished
by license agreements with bottlers. Guth, president of Loft, was an able
and experienced man in that field. Loft, then, through its own personnel,
possessed the technical knowledge, the practical business experience,
and the resources necessary for the development of the Pepsi-Cola
enterprise.

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64 [...]
66 It is urged that Loft had no interest or expectancy in the Pepsi-Cola
65
opportunity. That it had no existing property right therein is manifest; but
we cannot agree that it had no concern or expectancy in the
opportunity within the protection of remedial equity. Loft had a practical
and essential concern with respect to some cola syrup with an
established formula and trademark. A cola beverage has come to be a
business necessity for soft drink establishments; and it was essential to
the success of Loft to serve at its soda fountains an acceptible five cent
cola drink in order to attract into its stores the great multitude of people
who have formed the habit of drinking cola beverages. When Guth
determined to discontinue the sale of Coca-Cola in the Loft stores, it
became, by his own act, a matter of urgent necessity for Loft to acquire
a constant supply of some satisfactory cola syrup, secure against
probable attack, as a replacement; and when the Pepsi-Cola
opportunity presented itself, Guth having already considered the
availability of the syrup, it became impressed with a Loft interest and
expectancy arising out of the circumstances and the urgent and practical
need created by him as the directing head of Loft.

67 As a general proposition it may be said that a corporate officer or

director is entirely free to engage in an independent, competitive
business, so long as he violates no legal or moral duty with respect to
the fiduciary relation that exists between the corporation and himself.
The appellants contend that no conflict of interest between Guth and Loft
resulted from his acquirement and exploitation of the Pepsi-Cola
opportunity. They maintain that the acquisition did not place Guth in
competition with Loft any more than a manufacturer can be said to
compete with a retail merchant whom the manufacturer supplies with
goods to be sold. However true the statement, applied generally, may
be, we emphatically dissent from the application of the analogy to the
situation of the parties here. There is no unity between the ordinary
manufacturer and the retailer of his goods. Generally, the retailer, if he
[5 A.2d 515] becomes dissatisfied with one supplier of merchandise,
can turn to another. He is under no compulsion and no restraint. In the
instant case Guth was Loft, and Guth was Pepsi. He absolutely
controlled Loft. His authority over Pepsi was supreme. As Pepsi, he
created and controlled the supply of Pepsi-Cola syrup, and he
determined the price and the terms. What he offered, as Pepsi, he had
the power, as Loft, to accept. Upon any consideration of human
https://h2o.law.harvard.edu/collages/4308 13/14
10/9/22, 3:38 PM Guth v. Loft (Del. 1939) [Pepsi]

characteristics and motives, he created a conflict between self-interest

and duty. He made himself the judge in his own cause. This was the
inevitable result of the dual personality which Guth assumed, and his
position was one which, upon the least austere view of corporate duty,
he had no right to assume. Moreover, a reasonable probability of injury
to Loft resulted from the situation forced upon it. Guth was in the same
position to impose his terms upon Loft as had been the Coca-Cola
Company. If Loft had been in servitude to that company with respect to
its need for a cola syrup, its condition did not change when its supply
came to depend upon Pepsi, for, it was found by the Chancellor,
against Guth's contention, that he had not given Loft the protection of a
contract which secured to it a constant supply of Pepsi-Cola syrup at
any definite price or for any definite time.

68 It is useless to pursue the argument. The facts and circumstances

demonstrate that Guth's appropriation of the Pepsi-Cola opportunity to
himself placed him in a competitive position with Loft with respect to a
commodity essential to it, thereby rendering his personal interests
incompatible with the superior interests of his corporation; and this
situation was accomplished, not openly and with his own resources, but
secretly and with the money and facilities of the corporation which was
committed to his protection.

69 [...]
70 Upon a consideration of all the facts and circumstances as disclosed we
are convinced that the opportunity to acquire the Pepsi-Cola trademark
and formula, goodwill and business belonged to the complainant, and
that Guth, as its President, had no right to appropriate the opportunity to
himself.

71 [...]
72

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https://h2o.law.harvard.edu/collages/4308 14/14