Alta Health Strategies, Inc. v. Kennedy

This matter is before the court on the motions of Plaintiff and Counterclaim Defendant Alta Health Strategies, Inc. (“Alta”) for Partial Summary Judgment and to Compel Discovery. The court heard oral argument on February 28, 1992, and took the matters under advisement. Jill N. Parrish of Kimball, Parr, Waddoups, Brown & Gee, Salt Lake City, Utah, appeared for Alta. David R. Money, Salt Lake City, Utah, appeared on behalf of Counterclaim Defendants Nofsinger and Moorhead. Stanford B. Owen of Fabian & Clendenin, Salt Lake City, Utah, represented the Defendants and Counterclaim Plaintiffs Carole Kennedy and Peter O’Donnell. The court, having reviewed the record and the relevant law, is now prepared to rule.

I. BACKGROUND

Alta is a managed health care company with its headquarters in Salt Lake City, Utah, and was formed in the fall of 1986 as the result of the leveraged buyout of the James Benefit Division. After its formation, Alta sought to hire a senior executive to aid in its transition from a third party administrator to a managed health care company, a transition which would position the company for a public stock offering. Alta originally anticipated an initial public offering of its stock in the fall of 1988, but poor financial performance and the condition of the stock market prevented an actual public offering until January 1991. In the spring of 1987, Alta approached Kennedy, who had nineteen years experience in managed health care, to offer employment as a senior vice president. At about the same time, Alta offered employment to O’Donnell, a health benefits consultant who also had managed health care experience. Both Kennedy and O’Donnell accepted employment with Alta and began work in May and June of 1987 respectively. Kennedy and O’Donnell contend that they accepted a reduced salary from Alta in reliance on Alta’s promise of significant future stock bonuses and on Alta’s representations regarding the value of its stock. Dep. of Carole Kennedy at 41-42, 50, & 67-69; Dep. of Peter O’Donnell at 34-35, 45, & 52. Neither Kennedy nor O’Donnell signed written employment contracts, but Alta sent both letters setting forth the terms of their respective employments, and both signed stock purchase agreements with Alta. 1

Kennedy and O’Donnell assert that during their two years with Alta, they worked effectively and were instrumental in transforming Alta into a profitable managed health care company, but that two events led to their dissatisfaction and consequent termination of service. First, Kennedy and O'Donnell allege that the lure of a sizeable equity position in Alta convinced them to accept salaries which fell short of what they could obtain elsewhere in the industry. 2 Dep. of Carole Kennedy at 41-42; Dep. of Peter O’Donnell at 34-35. Kennedy and O’Donnell received a bonus of only 600 shares each after their first year of employment. 3 These bonuses were a source of dissatisfaction, because they fell far short of what Kennedy and O’Donnell *1089 expected. Their dissatisfaction was compounded in June 1988 when they learned, at the time of Alta’s attempted public offering, that some of the original senior investors in Alta had a substantially greater equity stake in Alta than either Kennedy or O’Donnell, and that some of the senior managers’ salaries, unlike those of Kennedy and O’Donnell, were not disproportionately low when compared with the then prevailing industry standard for executives in the health care industry.

Second, Kennedy and O’Donnell allege that Alta officials made repeated representations regarding the value of the stock both before and after they commenced their employment with Alta, and that these representations significantly overstated the value of the stock. Dep. of Carole Kennedy at 67; Dep. of Peter O’Donnell at 52. Kennedy and O’Donnell did not become aware that the representations overstated the value of the stock until Alta, at the time of its attempted public offering, filed its public offering statements. 4 Kennedy and O’Donnell terminated their employment with Alta in April and June of 1989, after which Alta sought to exercise its repurchase option as set forth in the stock purchase agreement. They allege that the price Alta offered for their stock was significantly below the value that had been represented to them and substantially below the value of the stock as internally appraised. Kennedy and O’Donnell refused the checks that Alta tendered to them.

In May 1990, Alta brought the present action seeking a declaration regarding the rights of the parties with respect to the stock purchase agreement. Kennedy and O’Donnell answered and counterclaimed alleging the following causes of action: (1) breach of employment agreement and promissory estoppel; (2) breach of the stock purchase agreement; (3) fraud; (4) negligent misrepresentation; (5) violation of the Utah Uniform Securities Act; (6) violation of federal securities laws; and (7) breach of fiduciary duty. 5 Kennedy and O’Donnell joined as counterclaim defendants Alta’s chief executive officer, Terry Nofsinger, and one of its directors, Rod-man W. Moorhead, III.

After initial discovery, Kennedy and O’Donnell moved for summary judgment on Alta’s claim. After a hearing, on January 15, 1992, the court denied the motion. Thereafter, Alta, with Nofsinger and Moor-head, brought the present motion seeking summary judgment on the following causes of action: (1) federal securities law; (2) state securities law; (3) fraud; (4) negligent misrepresentation; (5) breach of employment contract; and (6) breach of fiduciary duty. The claim for breach of the stock purchase agreement is not part of this motion. The court, having considered the matter, now grants the motion for summary judgment on the claims for violation of federal and state securities law and for breach of fiduciary duty and denies the motion on the claims for fraud, negligent misrepresentation, and breach of employment contract.

II. SUMMARY JUDGMENT

Before setting forth the basis of its decision on each claim, the court notes its role in deciding a motion for summary judgment. “Rule 56 Fed.R.Civ.P. permits the entry of summary judgment on a claim when there is no genuine issue of material fact outstanding.” City Consumer Serv. Inc. v. Horne, 578 F.Supp. 283, 288 (D.Utah 1984) (citing Adickes v. S.H. Kress Co., 398 U.S. 144, 157-59, 90 S.Ct. 1598, 1608-09, 26 L.Ed.2d 142 (1970)). “As a matter of law, the movant must show entitlement to summary disposition beyond all reasonable doubt.” Id. (citing Norton *1090 v. Liddel, 620 F.2d 1375, 1381 (10th Cir.1980)). The trial judge, however, “must construe all pleadings, affidavits, and depositions liberally in favor of the party against whom the motion is made.” Id. (citation omitted). “Where different inferences can be drawn from conflicting affidavits, depositions and pleadings, summary judgment should not be granted.” Id. (citing United States v. Diebold, Inc., 369 U.S. 654, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962)). Accordingly, if doubt arises regarding any factual issue, the court must resolve the doubt in favor of the non-movant, in this case Kennedy and O’Donnell, and deny the motion. Finally, “Rule 56, F.R.Civ.P., permits the entry of a partial summary judgment on a claim when there is no genuine question of material fact outstanding and the subject matter of the issue is wholly distinct and separate from other legal theories underlying the complaint.” Abbott v. Shaffer, 564 F.Supp. 1200, 1205 (D.Utah 1983). 6

A. Violation of Federal Securities Law

Kennedy and O’Donnell claim that they are entitled to damages because Alta violated section 10(b) of the Securities Exchange Act of 1934 7 and Rule 10b-5 8 promulgated thereunder. Kennedy and O’Donnell allege that they purchased Alta stock in reliance on representations by Alta officials that the stock was worth $100 per share, and that they would receive a substantial amount of stock as part of their compensation. 9 Kennedy and O'Donnell *1091 further allege that Alta intentionally and materially misrepresented the price of the stock resulting in damages in an amount equal to the difference between the price Kennedy and O’Donnell paid for the stock and the stock’s fair market value on the date of the transaction, plus the value of uncompensated services performed by Kennedy and O’Donnell on behalf of Alta. Kennedy and O’Donnell acknowledge that the fair market value of the stock on the date of transaction equalled what they paid for it. Therefore, their claimed damage consists of the value of their uncompensated services.

The court has previously set forth the elements of a Rule 10b-5 claim.

The essential elements of a Section 10(b) or Rule 10b-5 claim for damages are: (1) damage to the plaintiff, (2) caused by reliance on defendant’s misrepresentations or omissions of material facts, or on a scheme by defendant to defraud, (3) made with an intent to deceive, manipulate or defraud, (4) in connection with the purchase or sale of securities and (5) furthered by defendant’s use of the mails or facilities of interstate commerce.

Lochhead v. Alacano, 697 F.Supp. 406, 414 n. 4 (D.Utah 1988) (citation omitted).

The court turns first to the damage element. The general rule of Rule 10b-5 damages, the out of pocket rule, measures damage by the difference between the price paid for the stock and the stock’s fair market value on the date of the transaction. Hickman v. Groesbeck, 389 F.Supp. 769, 779 (D.Utah 1974). This rule has its source in 15 U.S.C. § 78bb(a) (1991), which requires actual damages for recovery under 10b-5. 10 Nonetheless, the court may fashion “a remedy to suit the particular case.” Hackbart v. Holmes, 675 F.2d 1114, 1121 (10th Cir.1982). The particularized remedy, known as the benefit of the bargain rule, arises either as a consequential damage measure, Grubb v. FDIC, 868 F.2d 1151, 1165 (10th Cir.1989), or as a restitutionary measure. Hackbart, 675 F.2d at 1122. “The failure to show actual damages is a fatal defect in a Rule 10b-5 cause of action.” Feldman v. Pioneer Petroleum, Inc., 813 F.2d 296, 302 (10th Cir.) (citation omitted), cert. denied, 484 U.S. 954, 108 S.Ct. 346, 98 L.Ed.2d 372 (1987). Therefore, Alta’s motion for summary judgment on this claim must be granted unless, as Kennedy and O’Donnell argue, the value of future services is a component of Rule 10b-5 damages.

The court, having found no case in which a claimant sought or received the value of future services as a component of damages under Rule 10b-5, declines to apply the benefit of the bargain rule to Kennedy and O’Donnell’s Rule 10b-5 claim. Kennedy and O’Donnell cite Hackbart in support of their claim. Hackbart, however, does not control this issue. In Hackbart, the Tenth Circuit awarded the benefit of the bargain as a restitutionary measure to a business partner who held a non-equity position in a partnership. Hackbart, 675 F.2d at 1122. Under the partnership agreement, the non-equity partner would receive forty-nine percent of the business, but only *1092 after his non-participating stock was converted to participating equity stock. Id. at 1116. The stock conversion would not occur until the non-equity partner had proven his business ability to the satisfaction of the board of directors. Id. After nearly six years in the partnership and before the stock conversion, the non-equity partner severed his relationship with the partnership. Id. at 1117. The court awarded the non-equity partner his equity interest in the partnership, reasoning that the plaintiff lacked the business knowledge requisite to understand the agreement, and that his six years of service substantially contributed to the increased value of the partnership.

For several reasons, however, Hackbart is distinguishable from the present matter. First, the agreement and the participants to the agreement differ significantly from those involved in Hackbart. The Hackbart non-equity partner, unlike Kennedy and O’Donnell, lacked the business knowledge necessary to understand the partnership agreement. Id. at 1121 n. 9. Additionally, in Hackbart, the written partnership agreement detailed how the non-equity ownership would achieve equity status and what his percentage of equity would be. Id. at 1116-17. The stock purchase agreement in this matter, however, offers none of this certainty. There was no agreement as to the maximum or minimum number of shares that Kennedy and O’Donnell could expect. The stock was offered on the basis of merit, and the parties did not have the option of taking cash in lieu of stock. Further, the two organizations differ. Hack-bart involved a two-person partnership involved in the tire business. Id. at 1116. In such a venture, the link between the non-equity partner’s six years of service and the growth in value of the partnership is easily and directly drawn. Id. at 1122. Such is not the case with Alta. Alta, at the time, was a complex organization with many employees. No doubt Kennedy and O’Donnell contributed to the transformation of Alta to a managed health care company, but the link between Kennedy and O’Donnell’s work and the success of Alta is too attenuated to apply a restitutionary measure of damages as in Hackbart.

Having established no basis for damages, summary judgment on the federal securities claim is proper. The court is convinced that the record, when viewed in the light most favorable to Kennedy and O’Donnell, contains no issue of material fact with respect to damages, and that as a matter of law the claim for violation of federal securities law must be dismissed.

B. Violation of State Securities Law

Kennedy and O’Donnell claim damages resulting from Alta’s violation of the Utah Uniform Securities Act. Alta, however, argues that the claim is barred by Utah Code Ann. § 61-1-22(5) (1989). Section 22(5) provides:

No person may sue under this section: (a) if the buyer or seller received a written offer, before suit and at a time when he owned the security, to refund the consideration paid together with interest at 12% per year from the date of payment, less the amount of any income received on the security, and he failed to accept the offer within 30 days of its receipt.

Alta argues that its repurchase offer complied with the statutory requirements; therefore, Kennedy and O’Donnell have no cause of action under this provision. Kennedy and O’Donnell argue, however, that Alta’s repurchase offer fell short of the twelve percent requirement, because it did not include the value of the services they provided Alta. 11 Accordingly, the court must decide whether consideration, as used in the statute, includes the value of future services.

The Uniform Securities Act does not define consideration. Therefore, because Utah courts have not addressed the issue, the court must look elsewhere in the Utah Code for guidance. The Utah Business Corporation Act, Utah Code Ann. § 16 — 10— *1093 18 (1991), enumerates the types of permissible stock consideration, and expressly indicates that future services are not proper consideration for the purchase of stock. 12 In reading section 16-10-18 with section 61-1-22(5), the court concludes that consideration under the Uniform Securities Act does not include the value of future services. Therefore, summary judgment on this claim must be granted, if Alta offered the money Kennedy and O’Donnell paid for their stock plus twelve percent per year.

Kennedy and O’Donnell each paid $50,-030 for their original purchase of stock in 1987. After their respective terminations, two years later, Alta offered $78,406 to Kennedy and $70,679.25 to O’Donnell. Simple mathematics clarifies that Alta offered better than twelve per cent per year. Therefore, Alta’s repurchase offer complied with the statute, and the claim for a violation of state securities statutes must be dismissed as a matter of law.

C. Fraud

Alta seeks summary judgment on Kennedy and O’Donnell’s claim for fraud. Kennedy and O’Donnell claim that they reasonably relied on material misrepresentations regarding the following: (1) that they could purchase stock on the same basis as the original senior managers; (2) that Alta would annually provide a substantial stock bonus to them; (3) that the fair market value of the stock on the date of their employment was $100 per share; (4) that their compensation would be commensurate with the senior managers of Alta; (5) that Nofsinger had the same restrictions on his stock as Kennedy; (6) that neither Nof-singer nor the other senior managers had written employment agreements; (7) that all the senior managers held the same amount of stock and had taken salary reductions; and (8) that they would be able to liquidate their stock within two years. Alta argues that Kennedy and O’Donnell’s claim fails as to each element of fraud.

“[Allegations of fraud do not lend themselves readily to resolution by way of summary judgment.” Teledyne Ind., Inc. v. Eon Corp., 373 F.Supp. 191, 195 (S.D.N.Y.1974) (citation omitted). Even so, “[s]um-mary judgment is appropriate when conclusory allegations of fraud stand alone, unsupported by specific evidence pertinent to a claim of common law fraud.” Edelmann v. National Patent Dev. Corp., 656 F.Supp. 1073, 1077 (S.D.N.Y.1987) (citations omitted). Having undertaken a review of the record and of the applicable law, the court is persuaded that Kennedy and O’Donnell have presented evidence sufficient to resist summary judgment as to the fraud claim.

The Utah Supreme Court has set forth the elements of fraud as follows:

(1) That a representation was made;

(2) concerning a presently existing material fact;

(3) which was false;

(4) which the representor either (a) knew to be false, or (b) made recklessly, knowing that he [or she] had insufficient knowledge upon which to base such representation;

(5) for the purpose of inducing the other party to act upon it;

(6) that the other party, acting reasonably and in ignorance of its falsity;

(7) did in fact rely upon it;

(8) and was thereby induced to act;

(9) to his [or her] injury and damage.

Crookston v. Fire Ins. Exch., 817 P.2d 789, 800 (Utah 1991) (quoting Pace v. Parrish, 122 Utah 141, 247 P.2d 273, 274-75 (1952)). 13

*1094 An essential element of fraud is intent. To satisfy this element, the plaintiff must show that the representations were known to be false or were made when the representor knew he had insufficient information. Id. However, in cases where a confidential relationship exists between the parties, “[t]he breach of duty by the dominant party ... may be regarded as constructive fraud.” Blodgett v. Martsch, 590 P.2d 298, 302 (Utah 1978). In such a case, “[i]t is unnecessary for the plaintiff to show an intent to defraud.” 14 Id. “There are a few relationships (such as parent-child, attorney-client, trustee-cestui) which the law presumes to be confidential.” Id. As set forth in the court’s discussion of the claim for breach of fiduciary duty, infra, under Delaware law, “a director is a trustee for an individual stockholder.” 15 3 William M. Fletcher, Cyclopedia on the Law of Private Corporations § 848, at 217 (perm. ed. rev. vol. 1986); see also Hynson v. Drummond Coal Co., 601 A.2d 570, 575 (Del.Ch.1991) (“As with trust beneficiaries, so with corporate shareholders, the law that creates the relationship affords them a right to hold fiduciaries accountable.”). Therefore, the directors of Alta had a confidential relationship with Kennedy and O’Donnell which relieves Kennedy and O’Donnell of the requirement of showing intent to defraud.

Alta next attacks the fraud claim on the ground that the alleged representations were not material. In support of its claim, Alta argues that its alleged representations to Kennedy and O’Donnell that their compensation would be commensurate with other senior managers were too vague and abstract to constitute material representations. Alta further asserts that the representations do not involve matters on which Kennedy and O’Donnell reasonably could have relied.

The Utah Court of Appeals recently set forth the standard for assessing the materiality of a misrepresentation: “Materiality seems to require that the victim to some extent must believe the pretense to be true, but the greater focus is the objective issue of whether the misrepresentation was instrumental” in the decision. Utah v. LeFevre, 825 P.2d 681, 687 (Utah Ct.App.1992). 16 Phrased differently, the representation is material “if the victim believed the misrepresentation to be true, and included it as a factor in the decision-making process.” Id. Kennedy and O’Donnell allegedly accepted below market salaries with Alta on the basis of alleged representations regarding the value of stock and their opportunity to increase their equity position with the firm. Under the standard for materiality, the alleged misrepresentations are neither vague nor abstract, but rather formed the basis of the bargain between the parties. Consequently, they are material.

Alta further argues that the alleged representations regarding the value of the stock were statements of opinion, rather than statements of presently existing fact. “[I]t is settled that a misrepresentation of present promissory intention is a misrepresentation of presently existing fact.” Galloway v. Afco Dev. Corp., 777 P.2d 506, 508 (Utah Ct.App.1989). Representations regarding the value of the stock at the time Kennedy and O’Donnell accepted employment with Alta “relate to [the stock] as it existed at the time of the representations, rather than to any promise” of future performance. Id. Alta cannot prevail on this point.

*1095 Finally, Alta contends that Kennedy and O’Donnell had no right to rely on the alleged representations, because they failed to make an independent investigation of the representations. “Reasonable reliance must be considered with reference to the facts of each case, and is usually a question for the jury to determine.” Conder v. A.L. Williams & Assoc., 739 P.2d 634, 638 (Utah Ct.App.1987) (citation omitted). “[A] plaintiff may justifiably rely on positive assertions of fact without independent investigation.” Id. (citations omitted).

It is only where, under the circumstances, the facts should make it apparent to one of his knowledge and intelligence, or he has discovered something which should serve as a warning that he is being deceived, that a plaintiff is required to make his own investigation.

Id. (citation omitted).

The record contains nothing that would have placed Kennedy and O’Donnell on notice of a problem sufficient to require independent investigation before relying on the alleged misrepresentations. Moreover, the court is troubled by the assertion that a party has no right to rely on the representations of another. Such an argument casts a dim light on the representor.

It can hardly be maintained that the general moral level of business and other financial relationships would be enhanced by a rule of law which would allow a person to defend against a willful, deliberate fraud by stating, “You should not have trusted or believed me” or “Had you not been so gullible you would not have been [so] deceived.”

Berkeley Bank for Coops, v. Meibos, 607 P.2d 798, 806 (Utah 1980) (quoting Johnson v. Allen, 108 Utah 148, 158 P.2d 134, 137 (1945). Accordingly, the motion for summary judgment on the fraud claim is denied.

D. Negligent Misrepresentation

Kennedy and O’Donnell base their negligent misrepresentation claim on the same alleged representations discussed in the previous section, and Alta sets forth the same arguments in support of its motion on this claim. Because “[negligent misrepresentation is a form of fraud,” the court will not discuss each element of the claim at length. Atkinson v. IHC Hosp., Inc., 798 P.2d 733, 737 (Utah 1990) (citation omitted), cert. denied, — U.S. —, 111 S.Ct. 970, 112 L.Ed.2d 1056 (1991). The court’s previous discussion with respect to justifiable reliance and materiality applies equally to this claim.

To prevail on this claim, Kennedy and O’Donnell must establish that

[o]ne who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by the justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

Id.

The critical distinction between fraud and negligent misrepresentation is the element of intent.

The negligent representer [sic] need not be shown to have any intent to deceive the victim, and he generally does not demonstrably know that what he says is false. The law imposes on him the duty to reasonably assure the accuracy of what he represents, because of his superior position to obtain the needed knowledge and his pecuniary interest in the transaction.

Galloway v. Afco Dev. Corp., 777 P.2d 506, 509 (Utah Ct.App.1989) (footnote omitted). Accordingly, Kennedy and O’Donnell must show that Alta and its representatives had a duty to assure the accuracy of their representations and that they breached this duty. The Utah Supreme Court has described this duty:

If ... the information is given in the capacity of one in the business of supplying such information, that care and diligence should be exercised which is compatible with the particular business or profession involved. Those who deal

*1096 with such persons do so because of the advantages which they expect to derive from this special competence. The law, therefore, may well predicate on such a relationship, the duty of care to insure the accuracy and validity of the information.

Christenson v. Commonwealth Land Title Ins. Co., 666 P.2d 302, 305 (Utah 1983) (citation omitted).

Alta, Nofsinger, and Moorhead possessed both a superior position to obtain information regarding the representations made to Kennedy and O’Donnell and also a pecuniary interest in Alta. Therefore, they had a duty to insure the accuracy of their statements. The facts when fully developed may indicate that the representations were negligent rather than intentional or reckless, or that they were neither negligent nor intentional. These questions cannot be resolved in this motion. Accordingly, Alta’s motion for summary judgment on the negligent misrepresentation claim is denied.

E. Breach of Fiduciary Duty

Kennedy and O’Donnell allege that the directors of Alta breached a fiduciary duty to them by not offering to repurchase their stock at fair market value. Alta, in moving for summary judgment on this claim, first argues that, although its directors, in valuing the stock at the time of the repurchase attempt, owed a duty to its shareholders collectively, the directors did not owe a duty to Kennedy and O’Donnell individually. Alta argues alternatively that even if it owed a fiduciary duty to Kennedy and O’Donnell, the duty was not breached, because it valued the stock in good faith reliance on an independent appraisal of the stock. To prevail on this claim, Kennedy and O’Donnell must show that the directors owed them a fiduciary duty, that the duty was breached, and that the breach of this duty resulted in damage. St. Louis Union Trust Co. v. Merrill, Lynch, Pierce, Fenner & Smith Inc., 562 F.2d 1040, 1055 (8th Cir.1977) (applying Delaware law), cert. denied, 435 U.S. 925, 98 S.Ct. 1490, 55 L.Ed.2d 519 (1978). 17

“Although directors generally do not occupy a fiduciary position with respect to stockholders in face to face dealings, Delaware law does create such a duty in special circumstances where advantage is taken of inside information by a corporate insider who deliberately misleads an ignorant stockholder.” Id. at 1055 (citing Kors v. Carey, 158 A.2d 136, 143 (Del.Ch.1960); Lank v. Steiner, 224 A.2d 242, 245 (Del.Ch.1966)). 18 Therefore, under Delaware law, directors who possess inside information regarding the value of stock owe a fiduciary duty when reacquiring outstanding corporate stock not only to the corporation and to the shareholders collectively, 19 but also to the minority shareholders from *1097 whom the stock is being reacquired. 20 Id.; see also, Harry G. Henn & John R. Alexander, Law of Corporations § 173, at 436, § 240, at 652 (3d ed. 1983). Accordingly, as a matter of law, the directors of Alta owed a fiduciary duty to Kennedy and O’Donnell.

Alta next contends that even if the directors owed a fiduciary duty to Kennedy and O’Donnell, the duty was not breached, because, in valuing the stock, the directors relied in good faith on a valuation report prepared by an independent valuation firm. The court agrees that good faith is the proper standard to judge whether a director’s conduct breached a fiduciary duty. 21 Further, because the duty involved valuing stock under the terms of the stock purchase agreement, the director’s reliance on the independent valuation should be judged by its compliance with the stock purchase agreement.

Section 5.11 of the stock purchase agreement provides that the corporation shall maintain a valuation committee to determine the fair market value of the shares when the stock is not publicly traded. Stock Purchase Agreement § 5.11, at 24; § 4.1(h), at 16. The agreement provides that the valuation committee shall determine’the value “if no public market exists for a Share the value thereof as of a recent date.” Id. § 4.1(h), at 16 (emphasis added). Accordingly, the directors had a good faith duty to ensure that Kennedy and O’Donnell were offered the fair market value based on a recent valuation.

Alta argues that the valuation committee arrived at the repurchase valuation based on an independent appraisal, which valued the stock in December 1988 at $3.00 per share. The directors accepted this valuation, despite other more recent valuations, valuing the stock at a higher price. Given the speculative nature of the stock and the growth of Alta during this period of time, a valuation made seven months prior to the repurchase attempt may not comport with the fiduciary duty of the directors, especially considering the more recent valuations. The court does not judge which of the available valuations is accurate, but, merely, finds that a factual question exists regarding the fair market value of the stock on the date of the attempted repurchase.

An essential element of breach of fiduciary duty is causation. “[T]he stockholder must rely on the misleading representation or omission in order to establish a cause of action for breach of fiduciary duty.” St. Louis Union Trust, 562 F.2d at 1055. In St. Louis Union Trust, the estate of a former shareholder, which was required to sell his shares to the corporation under terms of a stock agreement, brought Rule 10b-5, fraud, and breach of fiduciary duty claims against the corporate directors on the grounds that the corporation exercised its repurchase option in furtherance of a scheme to enhance the price of the stock for public offering. Id. at 1044. The court reversed the trial court and dismissed all claims reasoning that what the shareholder did or did not know about the public offering was irrelevant to the shareholders decision to sell the stock, because he was contractually bound to sell *1098 if the corporation exercised its option.