Harris v. Carter
Delaware Court of Chancery
582 A.2d 222 (1990)
The Carter group (defendants), holding 52% of Atlas Energy's stock, agreed to exchange their Atlas shares for shares Mascolo (defendant) held in his own company, Insuranshares of America (ISA), and to resign as Atlas directors in favor of Mascolo and his designees; Mascolo represented that ISA owned two life-insurance subsidiaries, which was allegedly false, and during negotiations Atlas's own chief financial officer flagged accuracy concerns about ISA's financial statements that the Carter group never followed up on. After Mascolo took control, the new board renamed Atlas, slashed its capitalization, used Atlas stock to buy up ISA shares, and began selling off Atlas's oil properties. Minority shareholder Harris (plaintiff) sued the Carter group, Mascolo, and his designees, alleging the Carter group breached a duty to investigate Mascolo's legitimacy before selling him control, and the defendants moved to dismiss.
Whether a controlling shareholder selling a controlling stake in a corporation has a duty to make a reasonable inquiry into the buyer's honesty when the surrounding circumstances would alert a reasonably prudent person to a risk of fraud.