Case Briefs on Corporate Law

Yin Huang
September 25, 2010

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Contents
1 The Duty of Care 5
1.1 Joy v. North . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Dodge v. Ford Motor Co. . . . . . . . . . . . . . . . . . . . . . 5
1.3 A.P. Smith Manufacturing Co. v. Barlow . . . . . . . . . . . . 5
1.4 Katz v. Oak Industries, Inc. . . . . . . . . . . . . . . . . . . . 6
1.5 Credit Lyonnais Bank Nederland, N.V. v. Pathe Communica-
tions Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.6 Francis v. United Jersey Bank . . . . . . . . . . . . . . . . . . 7
1.7 In re Emerging Communications, Inc. Shareholders Litigation 8
1.8 Kamin v. American Express Co. . . . . . . . . . . . . . . . . . 8
1.9 Smith v. Van Gorkom . . . . . . . . . . . . . . . . . . . . . . 9
1.10 In re Caremark International Inc. Derivative Litigation . . . . 12
1.11 Malpiede v. Townson . . . . . . . . . . . . . . . . . . . . . . . 13
1.12 Gantler v. Stephens . . . . . . . . . . . . . . . . . . . . . . . . 14
1.13 Lyondell Chemical Co. v. Ryan . . . . . . . . . . . . . . . . . 16

2 The Duty of Loyalty: Self-Dealing and Corporate Opportu-

nities 16
2.1 Lewis v. S.L. & E., Inc. . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Cookies Food Products v. Lakes Warehouse . . . . . . . . . . 17
2.3 Hawaiian International Finances, Inc. v. Pablo . . . . . . . . . 19
2.4 Forkin v. Cole . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.5 Northeast Harbor Golf Club, Inc. v. Harris . . . . . . . . . . . 20
2.6 Broz v. Cellular Information Systems, Inc. . . . . . . . . . . . 21
2.7 In re eBay, Inc. Shareholders Litigation . . . . . . . . . . . . . 23
2.8 Tyson Foods, Inc. (Tyson II) . . . . . . . . . . . . . . . . . . . 23

3 Duty of Loyalty: Controlling Shareholders 24

3.1 Zahn v. Transamerica Corp. . . . . . . . . . . . . . . . . . . . 24
3.2 Sinclair Oil Corp. v. Levien . . . . . . . . . . . . . . . . . . . 25
3.3 David J. Greene & Co. v. Dunhill International, Inc. . . . . . 27
3.4 Kahn v. Lynch Communications Systems, Inc. . . . . . . . . . 27
3.5 Levco Alternative Fund v. The Reader’s Digest Association,
Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.6 In re Trados Inc. Shareholder Litigation . . . . . . . . . . . . 29

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4 The Voting System: Allocation of Legal Powers and Proxy
Rules 31
4.1 Charlestown Boot & Shoe Co. v. Dunsmore . . . . . . . . . . 31
4.2 People ex rel. Manice v. Powell . . . . . . . . . . . . . . . . . 32
4.3 Schnell v. Chris-Craft Industries, Inc. . . . . . . . . . . . . . . 32
4.4 Blasius Industries Inc. v. Atlas Corp. . . . . . . . . . . . . . . 33
4.5 Condec Corp. v. Lunkenheimer Co. . . . . . . . . . . . . . . . 34
4.6 J.I. Case Co. v. Borak . . . . . . . . . . . . . . . . . . . . . . 34
4.7 Wyandotte v. United States . . . . . . . . . . . . . . . . . . . 35
4.8 Cort v. Ash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.9 Mills v. Electric Auto-Lite Co. . . . . . . . . . . . . . . . . . . 35
4.10 TSC Industries v. Northway, Inc. . . . . . . . . . . . . . . . . 36
4.11 Virginia Bankshares, Inc. v. Sandberg . . . . . . . . . . . . . . 37
4.12 Rosenfeld v. Fairchild Engine & Airplane Corp. . . . . . . . . 38

5 Transactions in Control 39
5.1 Zetlin v. Hanson Holdings, Inc. . . . . . . . . . . . . . . . . . 39
5.2 Gerdes v. Reynolds . . . . . . . . . . . . . . . . . . . . . . . . 40
5.3 Perlman v. Feldmann . . . . . . . . . . . . . . . . . . . . . . . 41
5.4 Brecher v. Gregg . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.5 Essex Universal Corp. v. Yates . . . . . . . . . . . . . . . . . . 43

6 Mergers and Acquisitions: The Legal and Business Struc-

ture 45
6.1 Hollinger, Inc. v. Hollinger International, Inc. . . . . . . . . . 45
6.2 Hariton v. Arco Electronics, Inc. . . . . . . . . . . . . . . . . . 46
6.3 Heilbrunn v. Sun Chemical Corp. . . . . . . . . . . . . . . . . 47
6.4 Farris v. Glen Alden Corp. . . . . . . . . . . . . . . . . . . . . 47
6.5 Rath v. Rath Packing Co. . . . . . . . . . . . . . . . . . . . . 48
6.6 Terry v. Penn Central Corp. . . . . . . . . . . . . . . . . . . . 48

7 Mergers and Acquisitions: Freeze-outs and the Appraisal

Right 49
7.1 Leader v. Hycor, Inc. . . . . . . . . . . . . . . . . . . . . . . . 49
7.2 MT Properties, Inc. v. CMC Real Estate Corp. . . . . . . . . 50
7.3 Weinberger v. UOP, Inc. . . . . . . . . . . . . . . . . . . . . . 50
7.4 Glassman v. Unocal Exploration Corp. . . . . . . . . . . . . . 50
7.5 Solomon v. Pathe . . . . . . . . . . . . . . . . . . . . . . . . . 51

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 7.6 Coggins v. New England Patriots Football Club, Inc. . . . . . 52
7.7 Alpert v. 28 Williams Street Corp. . . . . . . . . . . . . . . . 52

8 Public Contests for Corporate Control: Part 1 52

8.1 Unocal Corp. v. Mesa Petroleum Co. . . . . . . . . . . . . . . 52
8.2 Moran v. Household International, Inc. . . . . . . . . . . . . . 54
8.3 Carmody v. Toll Brothers . . . . . . . . . . . . . . . . . . . . 55
8.4 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. . . . . . 55
8.5 Barkan v. Amsted . . . . . . . . . . . . . . . . . . . . . . . . . 56

9 Public Contests for Corporate Control: Part 2 56

9.1 Paramount Communications, Inc. v. QVC Network . . . . . . 56

10 Miscellaneous Cases 57
10.1 Emerald Partners v. Berlin . . . . . . . . . . . . . . . . . . . . 57
10.2 Pure Resources, Inc. Shareholders Litigation . . . . . . . . . . 57

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1 The Duty of Care
1.1 Joy v. North
692 F.2d 880 (2d Cir. 1982)

Squib The Second Circuit held that directors’ decisions as to the risk of
corporate investments should be reviewed under the business judgment rule.
The court found that the business judgment rule would prevent directors
from being unduly punished for taking risks.

1.2 Dodge v. Ford Motor Co.

204 Mich. 459 (1919)

Squib Ford Motor Company was making enormous profits on cars. After
distributing considerable dividends for several years, Henry Ford decided
that the company should reduce dividends and use the money to expand its
business and lower the price of its cars. The Michigan Supreme Court held
that the company’s directors had no power to place humanitarian concerns
over the maximization of immediate profits.

1.3 A.P. Smith Manufacturing Co. v. Barlow

13 N.J. 145 (1953)

1.3.1 Overview
The New Jersey Supreme Court held that a corporation may make donations
to the public good.

1.3.2 Facts
A.P. Smith Manufacturing Company made a donation to Princeton Univer-
sity. According to the president of the company, the donation was “good”
business” because it helped to produce an educated citizenry from which the
company could hire. The president further stated that such donations were
a “reasonable and justified public expectation.” The company’s shareholders
sued on the ground that the company’s charter allowed no such donations.

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1.3.3 Issue
May a corporation make donations for the public good?

1.3.4 Holding
A corporation may make donations for the public good.

1.3.5 Reasoning
Jacobs, J. The realities of the twentieth century have driven courts to
construe corporate powers more and more broadly. The original restrictions
on corporate powers developed in the nineteenth century, when wealth was
concentrated in private hands rather than corporations. As corporations
became more powerful, new legislation allowed them to donate within broad
limits. Since nothing suggests that the donation was made to a pet charity,
the donation is valid.

1.4 Katz v. Oak Industries, Inc.

508 A.2d 873 (Del.Ch. 1986)

Squib The Chancery Court of Delaware held that corporate directors must
prioritize the interests of shareholders even if that prioritization comes at the
expense of bondholders.

1.5 Credit Lyonnais Bank Nederland, N.V. v. Pathe

Communications Corp.
1991 WL 277613 (Del.Ch. 1991)

Squib The Delaware Court of Chancery observed that some special cir-
cumstances may cause a corporate board to owe a fiduciary duty not just to
shareholders but to the corporate enterprise as a whole. The court provided
an example illustrating how directors should act when their corporation is
“operating in the vicinity of insolvency.”

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1.6 Francis v. United Jersey Bank
87 N.J. 15 (1981)

1.6.1 Overview
The New Jersey Supreme Court held that corporate directors owe a duty
of care to their corporation and its shareholders. The court outlined the
responsibilities that arise from the duty of care.

1.6.2 Facts
Pritchard & Baird Intermediaries Corporation was a reinsurance broker. The
company acted as a “middle man” between insurance companies seeking to
indemnify each other for insurance claims. The company had begun as a part-
nership co-founded by Charles Prichard, Sr. (“Charles Sr.”) but eventually
became a corporation whose whose board included Lillian Pritchard (“Lil-
lian”), William Pritchard (“William”), and Charles Pritchard, Jr. (“Charles
Jr.”). Following the death of Charles Sr., Charles Jr. and William began
to abuse the company’s finances by withdrawing increasing sums of money
from its accounts under the guise of “shareholder loans.” Although the with-
drawals created enormous capital deficits that eventually forced the company
into bankruptcy, Lillian did nothing to rein in the abuse.

1.6.3 Issue
(1) Did Lillian Pritchard breach a duty of care to the corporation and its
shareholders? (2) If so, was the breach a proximate cause of the bankruptcy?

1.6.4 Holding
(1) Lillian Pritchard breached a duty of care to the corporation and its share-
holders. (2) The breach was a proximate cause of the bankruptcy.

1.6.5 Reasoning
Pollock, J. Corporate directors owe a duty of care to the corporation and
its shareholders. While the specific responsibilities vary according to the
nature of the corporation, the duty of care requires directors to have at least

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a rudimentary understanding of the corporation’s business as well as up-to-
date knowledge of the corporation’s activities. Although a director need not
personally audit the corporation’s accounts, directors should review financial
statements to keep abreast of its financial situation. Therefore, a director
may not excuse his failure to discharge this duty by claiming ignorance of
the corporation’s state.
Despite being a director of Pritchard & Baird, Lillian was entirely de-
tached from the company’s affairs. Had she reviewed its financial statements,
she would immediately have realized that Charles Jr. and William were mak-
ing improper withdrawals from the company’s accounts. The obviousness of
the withdrawals means that Lillian also had an obligation to attempt reining
in the abuse. Her failure to intervene was therefore a proximate cause of the
bankruptcy.

1.7 In re Emerging Communications, Inc. Sharehold-

ers Litigation
2004 WL 1305745 (2004)

Squib The court found that a director violated his duty of care by agreeing
to a merger in which his corporation would be purchased for an excessively
low price. According to the court, the director’s financial expertise should
have alerted him to the fact that the proposed price was unfairly low. The
court held that this knowledge obligated him to object to the merger.

1.8 Kamin v. American Express Co.

383 N.Y.S.2d 807 (1976)

1.8.1 Overview
The New York State Supreme Court held that the business-judgment rule
insulates corporate directors from liability for a decision as long as they made
the decision on an informed basis and with good faith.

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1.8.2 Facts
American Express Company had purchased a significant amount of stock in
another corporation. Although the purchase price of the stock was $29.9 mil-
lion, the stock eventually depreciated to a value of only $4 million. American
Express then faced a choice as to the disposition of the stock. The first choice
was to sell the stock on the open market, in which case the company would
be entitled to a tax break of $8 million. The second choice was to forgo the
tax break and distribute the stock as dividends to American Express’s own
shareholders. The directors considered both choices and ultimately decided
on the second course of action. Shareholders then sued on the ground that
the directors had wasted the company’s assets by failing to take advantage
of the tax break.

1.8.3 Issue
Should the directors be liable for committing waste?

1.8.4 Holding
The directors should not be liable for committing waste.

1.8.5 Reasoning
Edward J. Greenfield, Justice. Because the complaint does not claim
that the directors engaged in self-dealing or any other form of bad faith, the
decision must be reviewed under the business-judgment rule. The business-
judgment rule states that directors are not liable for the results of a decision
as long as they made that decision on an informed basis and in good faith.
Since the directors considered both courses of action at some length, they
cannot be held liable simply because the decision turned out badly.

1.9 Smith v. Van Gorkom

488 A.2d 588 (Del. 1985)

1.9.1 Overview
The Delaware Supreme Court declined to apply the business-judgment rule
in reviewing a merger approved by insufficiently informed directors. The

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court found that the directors had breached their duty of care by approving
the merger.

1.9.2 Facts
Trans Union Corporation (“Trans Union”) was a diversified holding company.
Although the company generated considerable revenue, it consistently faced
difficulties in making enough money to fulfill its tax obligations. Jerome
Van Gorkom, a director of the corporation, proposed solving the problem by
allowing another corporation to acquire Trans Union in a leveraged buyout
(LBO). The board considered the possibility only briefly. Donald Romans,
the Chief Financial Officer, and Bruce Chelberg, the Chief Operating Officer,
performed a cursory analysis of the feasibility of an LBO and concluded that
$50 per share would be an “easy” price for such a transaction while $60
per share would be “very difficult.” Based on this analysis, Van Gorkom
expressed his willingness to sell his 75,000 shares of the company for $55 per
share.
Rather than further discussing Trans Union’s options with the board,
Van Gorkom approached Jay Pritzker, a takeover specialist and social ac-
quaintance, with the possibility of acquiring Trans Union through a merger.
Van Gorkom did not disclose to the board his contact with Pritzker, ask-
ing only Carl Peterson, the Controller, to analyze the feasibility of an LBO
at $55 per share. Pritzker eventually agreed to a cash-out merger in which
Pritzker’s New T Company would acquire Trans Union at $55 per share. To
address Van Gorkom’s concerns as to the fairness of the price, the Merger
Agreement allowed Trans Union to perform a ninety-day “market test” to
determine whether a higher price could be obtained. Since Pritzker was tak-
ing the risk of losing Trans Union to a higher bidder, the Agreement also
gave Pritzker an option to buy 1 million shares of Trans Union at $38—75
cents above the most recent closing price. In the rush to finalize the transac-
tion, the Agreement was drafted “sometimes with discussion and sometimes
not.” Van Gorkom conspicuously retained James Brennan, an independent
attorney, to represent Trans Union and never consulted Trans Union’s legal
department.
Van Gorkom announced the merger to the other directors at a subsequent
board meeting, but the subject of the meeting was not disclosed beforehand.
Only Romans and Chelberg had any prior knowledge of the merger. During
the meeting, Van Gorkom described the terms of the merger orally, sup-

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ported only by statements from Romans, Chelberg, and Brennan. Copies
of the Agreement were not available until after the meeting. Despite initial
opposition to the merger, the board ultimately approved the transaction.
The public announcement of the merger, however, set off a wave of protest
from Trans Union’s managers. Faced with the possibility of en masse resig-
nation in the management ranks, Van Gorkom convinced Pritzker to modify
the Agreement. Although news of the modifications temporarily appeased
the managers, the revised Agreement actually worked against Trans Union’s
interests by placing additional constraints on Trans Union’s ability to with-
draw from the merger upon receiving a better offer than Pritzker’s. Even
so, the board again approved the merger without reviewing a copy of the
Agreement.

1.9.3 Issue
Did Trans Union’s directors make an informed business judgment in approv-
ing the merger?

1.9.4 Holding
Trans Union’s directors did not make an informed business judgment in ap-
proving the merger.

1.9.5 Reasoning
Horsey, Justice (for the majority): The directors should not have relied
solely on Van Gorkom’s oral presentation of the merger in approving the
transaction. Van Gorkom did not supply copies of the Merger Agreement for
review during either meeting, nor did he explain how he concluded that $55
per share would be a fair price. Although directors are entitled to rely upon
“reports made by officers” in making business decisions, the oral statements
of Van Gorkom, Romans, and Chelberg were too uninformed to qualify as
“reports.”
Although the price of $55 per share represented a substantial premium
over Trans Union’s market price of $38 per share, the existence of such a
premium alone does not establish the fairness of the transaction. Because
the market price may undervalue the company, the directors should have
undertaken a detailed valuation.

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 Likewise, the market test failed to establish fairness because the Agree-
ment severely limited Trans Union’s ability to accept offers better than
Pritzker’s. The original Agreement prohibited Trans Union from soliciting
offers, and the revised version hampered Trans Union’s ability to withdraw
from the merger even if a better offer were forthcoming. Given these restric-
tions, the directors should have realized that no realistic market test was
attainable.

McNeilly, Justice, dissenting . . . The majority ignores that Trans

Union’s directors had been discussing the tax problem long before the merger
arose. Since the directors discussed the problem at length, their decision with
regard to the merger should be considered an informed business judgment.

1.10 In re Caremark International Inc. Derivative Lit-

igation
698 A.2d 959 (Del.Ch. 1996)

1.10.1 Overview
The Chancery Court of Delaware declined to impose liability on the directors
of a corporation whose employees had engaged in conduct that resulted in a
criminal investigation of the company.

1.10.2 Facts
Caremark International provided healthcare services. Because Caremark rou-
tinely contracted the services of independent physicians, the company faced
the possibility of violating the Anti-Referral Payments Law (“ARPL”). The
ARPL prohibited healthcare providers from paying “kickbacks” to physicians
who referred Medicare of Medicaid patients to their services.
Although Caremark published a “Guide to Contractual Relationships”
instructing employees on compliance with the ARPL, the company was in-
dicted for allegedly paying kickbacks to a Minneapolis physician. During the
investigation, Caremark updated its Guide and implemented procedures for
the approval of contracts with independent physicians.

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 After Caremark settled the criminal case, shareholders sued on the ground
that the company’s directors had breached their duty of care by failing to
detect and thwart the conduct that led to the criminal investigation.

1.10.3 Issue
Did Caremark’s directors breach their duty of care by failing to detect and
thwart the conduct that led to the criminal investigation?

1.10.4 Holding
Caremark’s directors did not breach their duty of care by failing to detect
and thwart the conduct that led to the criminal investigation.

1.10.5 Reasoning
Allen, Chancellor. Corporate directors must make a good-faith effort to
implement effective methods of monitoring the company’s employees and de-
tecting wrongdoing, but the precise nature of the monitoring system should
be left to the directors’ judgment. As long as directors ensure that such
good-faith monitoring exists, they should not face liability simply for assum-
ing the integrity of the company’s employees. Since Caremark implemented
procedures to prevent the violation of the ARPL, the directors should not
be liable for the cost of the settlement.

1.11 Malpiede v. Townson

780 A.2d 1075 (Del. 2001)

1.11.1 Overview
The Delaware Supreme Court held that § 102(b)(7) of the Delaware General
Corporation Law insulated directors from personal liability for breaching the
duty of care.

1.11.2 Facts
Frederick’s of Hollywood was negotiating a merger with Knightsbridge Capi-
tal Corporation. The terms of the merger restricted Frederick’s from negoti-
ating with competing bidders. Despite that Frederick’s subsequently received

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higher bids from two other prospective buyers, the directors of Frederick’s
completed the merger with Knightsbridge. Shareholders of Frederick’s then
sued on the ground that the directors had breached the duty of care by failing
to consider the higher bids..

1.11.3 Issue
Can the directors be personally liable for breaching the duty of care?

1.11.4 Holding
The directors cannot be personally liable for breaching the duty of care.

1.11.5 Reasoning
Veasey, Chief Justice: Section 102(b)(7) of the Delaware General Corpo-
ration Law insulates directors from personal liability for breaching the duty
of care. Since the shareholders have not alleged that the directors engaged
in conduct falling within any of the exceptions to § 102(b)(7), the directors
cannot be held personally liable.

1.12 Gantler v. Stephens

965 A.2d 695 (Del. 2009)

1.12.1 Overview
The Supreme Court of Delaware held that the directors of a corporation may
breach their fiduciary duty by frustrating its sale.

1.12.2 Facts
First Niles Financial, Inc. (“First Niles”) was a holding company whose sole
business was to own and operate Home Federal Savings and Loan Associ-
ation of Niles (“Home Federal”). Several directors of First Nile, including
Gantler, did business with the company through their own businesses. When
a depressed local economy dimmed the company’s prospects, the board con-
sidered selling the company. Although three prospective buyers approached
First Niles with bids the directors deemed acceptable, negotiations with all

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three parties ultimately failed. Gantler dragged his feet in providing due-
diligence materials to the first two buyers. The directors rejected the offer of
the third buyer.
The directors ultimately decided to concentrate voting power in their own
hands by reclassifying First Niles’s stock. Although the reclassification was
approved by a shareholder vote, the directors did not disclose the extent to
which their own businesses did business with First Niles. Shareholders then
sued the directors for breaching their fiduciary duty.

1.12.3 Issue
Does the conduct of First Niles’s directors support a claim that the directors
breached their fiduciary duty?

1.12.4 Holding
The conduct of First Niles’s directors supports a claim that the directors
breached their fiduciary duty.

1.12.5 Reasoning
Jacobs, Justice. The decisions of a corporate board are reviewed under
the business-judgment rule unless the plaintiff demonstrates that the direc-
tors failed to make an informed and impartial decision. The plaintiff cannot
overcome the business-judgment rule simply by pointing to the directors’ de-
sire to entrench themselves. Because all directors face the possibility of being
dismissed upon the sale of their corporation, the plaintiff must identify some
element of self-interest beyond the mere continuation of service as a board
member.
Since the directors had business ties to First Niles through their own
businesses, the circumstances support the claim that the directors breached
their fiduciary duty in refusing to sell First Niles. Although shareholder
approval of a self-interested decision may reinstate the business-judgment
rule, reinstatement does not apply here because the directors failed to disclose
their personal ties to First Niles in the proxy statement accompanying the
vote.

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1.13 Lyondell Chemical Co. v. Ryan
979 A.2d 235 (Del. 2009)

1.13.1 Overview
1.13.2 Facts
1.13.3 Issue
1.13.4 Holding
1.13.5 Reasoning

2 The Duty of Loyalty: Self-Dealing and Cor-

porate Opportunities
2.1 Lewis v. S.L. & E., Inc.
629 F.2d 764 (2d Cir. 1980)

2.1.1 Overview
The Second Circuit declined to apply the business-judgment rule in review-
ing a transaction in which the directors of a corporation had engaged in
self-dealing. The court held instead that the defendants had the burden of
establishing that the transaction was fair and reasonable.

2.1.2 Facts
The Lewis family operated a business consisting of two corporations: S.L. &
E., Inc. (“SLE”) and Lewis General Tires, Inc. (“LGT”). The organization
of the business was such that SLE owned the land on which LGT carried
out its operations. SLE leased the land to LGT at an annual rent of $14,400
between 1966 and 1971, though the formal terms of the lease were never given
much attention despite significant fluctuations in the real-estate market. The
family members seemed to believe that the precise terms of the lease were
immaterial since SLE existed purely to serve the needs of LGT. They also
apparently ignored that there existed some shareholders of SLE who were
not simultaneously shareholders of LGT.

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 Eventually, the affairs of the business became such that Donald Lewis
(“Donald”) owned only shares of SLE. At that time, several of his siblings—
Richard Lewis, Alan Lewis, and Leon Lewis, Jr.—owned enough shares of
SLE and LGT to serve as directors for both corporations. In short, there
existed a situation in which the directors of SLE constituted a subset of the
directors of LGT. When the siblings attempted to exercise an option to buy
Donald’s shares of SLE, Donald charged that they had wasted SLE’s assets
by “grossly undercharging” LGT for the use of SLE’s land.

2.1.3 Issue
(1) Which party bears the burden of proof as to whether SLE’s directors had
committed waste? (2) Did that party discharge the burden?

2.1.4 Holding
(1) The defendants bear the burden of proving that they committed no waste.
(2) The defendants failed to discharge the burden.

2.1.5 Reasoning
Although an informed decision by the directors of a corporation is normally
reviewed using the business-judgment rule, the rule does not apply when
the directors face a conflict of interest. In such cases, the directors have
the burden of proving that their decision was fair and reasonable to the
corporation.
The defendants have plainly failed to discharge the burden. Expert testi-
mony established that the market rent during the relevant period was more
than $39,000 per year and that such a rent was well within the means of LGT.
The defendants’ claims of LGT’s financial infirmity belie their incentive to
give themselves higher salaries.

2.2 Cookies Food Products v. Lakes Warehouse

430 N.W.2d 447 (Iowa 1988)

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2.2.1 Overview
The Supreme Court of Iowa declined to hold the director of a corporation
liable for breaching the fiduciary duty even though he had engaged in trans-
actions with the potential to create a conflict of interest. The court found
that the director discharged the burden of proving that the transactions were
fair.

2.2.2 Facts
L. D. Cook founded Cookies Food Products, Inc. to produce and distribute a
barbecue sauce that he had created. The shares of the corporation belonged
to Cook, Duane Herrig (the defendant), and thirty-some other shareholders.
In addition to being a minority shareholder of Cookies, Herrig owned and
operated two other corporations: Lakes Warehouse Distributing, Inc., and
Speed’s Automotive Co., Inc.
When Cookies found itself in dire financial straits after its first year in
business, its directors approached Herrig with the proposition that he use
the resources of his two other corporations to distribute Cookies’s barbecue
sauce. Herrig entered into an exclusive distribution with Cookies, and his
assistance led to a phenomenal growth in sales.
Herrig became a majority shareholder of Cookies upon Cook’s retirement.
Upon assuming control of the corporation, he replaced several directors with
his own appointees. Herrig also took on additional responsibilities within
the business, most notably by developing a taco sauce for which he received
royalties from Cookies. The directors also authorized the corporation to pay
Herrig $1,000 per month for the time he spent managing the business.
Because Cookies distributed no dividends during this period of growth,
the minority shareholders became dissatisfied with their inability to profit
from the corporation. They sued on the ground that Herrig had improperly
profited from self-dealing arrangements with Cookies.

2.2.3 Issue
Did Herrig prove that he acted in good faith, honesty, and fairness despite
the self-dealing nature of his arrangements with Cookies?

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2.2.4 Holding
Herrig proved that he acted in good faith, honesty, and fairness.

2.2.5 Reasoning
Neuman, Justice. Nothing suggests that Herrig failed to disclose the prof-
its he made from his relationship with Cookies. The evidence shows that
Herrig was instrumental in the success of Cookies. Trial testimony suggests
that he may actually have been underpaid for the amount of work he did.

Schultz, Justice, dissenting. The majority has absolved Herrig of liabil-

ity without properly analyzing whether his arrangements with Cookies were
actually fair. The evidence suggests that the corporation could have saved
money by hiring other individuals to perform Herrig’s work. That Herrig
contributed to the success of the business has no bearing on whether his
dealings with the business were fair.

2.3 Hawaiian International Finances, Inc. v. Pablo

53 Haw. 149 (1971)

2.3.1 Overview
The Supreme Court of Hawaii found that the director of a corporation
breached his fiduciary duty when he accepted undisclosed commissions from
the sale of real estate to the corporation.

2.3.2 Facts
Pastor Pablo (“Pablo”) and Rufina Pablo were the directors of Pastor Pablo
Realty, Inc. At the same time, Pablo served as the president of Hawaiian
International. Pablo advised Hawaiian International as to the availability for
purchase of two parcels of land in California. Acting on Hawaiian Interna-
tional’s behalf, Pablo agreed to purchase the land. Unbeknownst to Hawaiian
International, however, Pastor also arranged to take a portion of the com-
missions to be received by the seller’s brokers. Pablo did not disclose the
commissions to the directors of Hawaiian International until several months
after the transaction had closed.

19
2.3.3 Issue
Did Pablo breach his fiduciary duty to Hawaiian International?

2.3.4 Holding
Pablo breached his fiduciary duty.

2.3.5 Reasoning
Kobayashi, Justice. The acceptance of undisclosed benefits arising from
a transaction involving a corporation may amount to a breach of the fiduciary
duty owed to that corporation even if the benefits do not result in any harm
to the corporation. Pablo cannot circumvent the settled law by claiming
that Hawaiian International would have been prohibited from receiving any
commissions from the sale by virtue of not being a licensed real-estate broker.
A corporate officer cannot invoke ultra vires in order to obtain a share of the
profits from a transaction. Pablo should have disclosed the commission to
Hawaiian International so as to allow the corporation to make an informed
decision as to the purchase price.

2.4 Forkin v. Cole

548 N.E.2d 795 (Ill.App. 1989)

Squib Cole, who controlled HPDI Corporation, mortgaged the corpora-

tion’s property as security for a personal loan. Although Cole argued that
the corporation suffered no material loss, the court found that he had en-
cumbered the HPDI asset.

2.5 Northeast Harbor Golf Club, Inc. v. Harris

661 A.2d 1146 (Maine 1995)

2.5.1 Overview
The Supreme Court of Maine articulated the steps that a corporate director
must take in order to avoid liability for the improper taking of a corporate
opportunity.

20
2.5.2 Facts
While serving as a director of Northeast Harbor Golf Club, Harris purchased
several parcels of land adjacent to the Golf Club’s property. Harris disclosed
each transaction to the Golf Club’s board of directors, and she stated in each
instance that she had no particular plans to develop the land. The directors
declined to take any formal action in response to the purchases. When Har-
ris expressed the desire to develop the land as residential subdivisions, the
directors argued that she had breached her fiduciary duty to the Golf Club
by failing to notify the directors of the opportunity to purchase the land.

2.5.3 Issue
What must a director do to avoid liability for the improper taking of a
corporate opportunity?

2.5.4 Holding
A director must at least notify the corporation of an opportunity from which
the director might profit personally at the corporation’s expense.

2.5.5 Reasoning
Roberts, Justice. Although different courts have adopted different tests
for what constitutes a “corporate opportunity,” the basic purpose of each test
is to ensure that a director does not pursue personal gain at the corporation’s
expense. As set forth in the American Law Institute’s Principles of Corporate
Governance, a director should disclose to the corporation any opportunity
that might set the director’s personal interests at odds with the interests of
the corporation. In order to avoid liability for breaching her fiduciary duty,
Harris must convince the court that she afforded the Golf Club a meaningful
opportunity to consider and reject purchasing the parcels of land at issue.

2.6 Broz v. Cellular Information Systems, Inc.

673 A.2d 148 (Del. 1996)

21
2.6.1 Overview
The Delaware Supreme Court held that the director of a corporation generally
has no obligation to disclose potential conflicts of interest to potential buyers
of the corporation.

2.6.2 Facts
Broz simultaneously served as a director for two corporations. First, he
was the sole stockholder of RFB Cellular, Inc. (“RFBC”), which provided
cell-phone service in the Midwest. Second, he was a director of Cellular
Information Systems, Inc. (“CIS”), which was a competitor of RFBC. CIS
knew of Broz’s relationship to RFBC at all times.
In April 1994, Mackinac Cellular Corporation approached Broz to discuss
the possibility of selling to RFBC a license that would allow RFBC to expand
its coverage. Broz promptly disclosed the offer to several directors of CIS,
each of whom expressed that CIS had neither the resources nor the plans
to purchase such a license. After CIS made clear its lack of interest, Broz
acquired the license for RFBC in November 1994.
Between April 1994 and November 1994, PriCellular, Inc. acquired CIS.
PriCellular subsequently sued Broz on the ground that he had breached his
fiduciary duty to CIS by failing to consider that a potential purchaser of CIS
might be interested in the license.

2.6.3 Issue
Is the director of a corporation required to disclose a potential conflict of
interest not only to the corporation but also to parties that might have a
future interest in the corporation?

2.6.4 Holding
The director of a corporation need only disclose potential conflicts of interest
to the corporation itself.

2.6.5 Reasoning
The acquisition of CIS by PriCellular was still purely speculative when Broz
disclosed the availability of the license to CIS. Broz obtained confirmation

22
that CIS had no interest in purchasing the license. Trial testimony estab-
lished that the entire board of CIS believed that the corporation was finan-
cially incapable of making such a purchase. Having ascertained CIS’s inten-
tions, Broz had no obligation to anticipate eventualities such as PriCellular’s
acquisition of CIS.

2.7 In re eBay, Inc. Shareholders Litigation

2004 WL 253521 (Del. Ch. 2004)

Squib The Delaware Court of Chancery held that accepting shares that
would otherwise be issued in an initial public offering (IPO) may amount to
a breach of the fiduciary duty. During a secondary offering of eBay, Goldman
Sachs issued shares of the company to the defendants. Because the price of
eBay stock skyrocketed, the defendants made immense profits on the shares
within days or hours of receiving them. Although the court doubted that ac-
cepting such shares interfered with any corporate opportunity, it nonetheless
found that the defendants’ conduct amounted to a breach of their fiduciary
duty. The court held that the defendants had an obligation to provide an
accounting of personal profits derived from transactions involving the corpo-
ration.

2.8 Tyson Foods, Inc. (Tyson II)

2007 WL 2351071 (Del. Ch. 2007)

2.8.1 Overview
The Delaware Court of Chancery found that the granting of “spring-loaded”
stock options may amount to a breach of the fiduciary duty. The court held
that failure to disclose the nature of such options with sufficient particular-
ity precludes the application of the business-judgment rule in reviewing the
issuance of the options.

2.8.2 Facts
The directors of Tyson Foods received from the corporation “spring-loaded”
stock options—options whose strike prices were so contrived as to have a

23
high probability of being “in the money” immediately after issuance. Despite
significant doubt as to whether the options complied with the terms of the
Tyson Stock Incentive Plan, the directors assured shareholders in vague terms
that the options were indeed permitted under the Plan.

2.8.3 Issue
Did the directors breach their fiduciary duty by failing to disclose the nature
of the options with sufficient particularity?

2.8.4 Holding
The directors breached their fiduciary duty by failing to disclose the nature
of their options with sufficient particularity.

2.8.5 Reasoning
Chandler, J. Directors owe to their corporation a duty of unremitting
loyalty. The directors of Tyson Foods cannot fulfill this obligation by em-
ploying “bare formalism concealed by a poverty of communication.” Since
the directors breached their fiduciary duty, their conduct cannot be reviewed
under the business-judgment rule.

3 Duty of Loyalty: Controlling Shareholders

3.1 Zahn v. Transamerica Corp.
162 F.2d 36 (3d Cir. 1947)

3.1.1 Overview
The Third Circuit held that a controlling shareholder owes to minority share-
holders the same fiduciary duty as that which a director would owe.

3.1.2 Facts
The Axton-Fisher Tobacco Company had issued three classes of stock: pre-
ferred stock, Class A common stock, and Class B common stock. Impor-
tantly, the Class A shares were callable by Axton-Fisher at $60 per share.

24
Zahn owned Class A stock. Transamerica held enough Class B stock to con-
trol Axton-Fisher by appointing a majority of its directors and managing
Axton-Fisher’s business affairs.
Transamerica knew that Axton-Fisher owned a significant quantity of
tobacco whose value had recently risen from approximately $6 million to
more than $20 million. To appropriate the value of the tobacco for itself,
Transamerica caused Axton-Fisher’s board to call the Class A stock and
liquidate the company. Zahn sued on the ground that the call option im-
properly deprived holders of Class A stock from receiving their fair share of
the proceeds from the liquidation.

3.1.3 Issue
(1) Did Transamerica owe a fiduciary duty to Axton-Fisher’s minority share-
holders? (2) If so, did Transamerica breach that duty by depriving share-
holders of the ability to participate fully in the liquidation?

3.1.4 Holding
(1) Transamerica owed a fiduciary duty to the minority shareholders. (2)
Transamerica breached that duty by calling Class A stock.

3.1.5 Reasoning
Biggs, Circuit Judge. While minority shareholders may vote solely for
their own interests, directors owe a fiduciary duty to all shareholders. Be-
cause Transamerica appointed a majority of Axton-Fisher’s directors, Axton-
Fisher’s board was not acting disinterestedly when it chose to liquidate
the company. Rather, a “puppet-puppeteer” relationship existed between
Transamerica and Axton-Fisher. This relationship obligated Transamerica
to act not only in its own interests but also in the interests of Axton-Fisher’s
shareholders.

3.2 Sinclair Oil Corp. v. Levien

280 A.2d 717 (Del. 1971)

25
3.2.1 Overview
The Supreme Court of Delaware held that the intrinsic-fairness rule should
be used to review a parent corporation’s self-dealing transactions with a sub-
sidiary. By contrast, the court held that the business-judgment rule applies
to all other parent-subsidiary dealings.

3.2.2 Facts
Sinclair Oil Corporation (“Sinclair”) wholly owned and operated Sinclair
Venezuelan Oil Company (“Sinven”). Between 1960 and 1966, Sinclair caused
Sinven to distribute dividends. During that period, Sinclair also breached a
contract with Sinven. Levien sued on the ground that Sinclair had breached
its fiduciary duty to Sinven’s shareholders by distributing the dividends and
breaching the contracts.

3.2.3 Issue
(1) What standard should be applied in reviewing potentially self-interested
dealings between a parent corporation and a subsidiary? (2) Did Sinclair
breach its fiduciary duty to Sinven’s shareholders?

3.2.4 Holding
(1) A parent corporation’s potentially self-interested dealings with a sub-
sidiary should be reviewed under the intrinsic-fairness standard. All other
parent-subsidiary dealings should be reviewed under the business-judgment
rule. (2) Sinclair did not breach any fiduciary duty in distributing the divi-
dends, but it did breach a fiduciary duty by failing to make payments pur-
suant to its contract with Sinven.

3.2.5 Reasoning
Wolcott, Chief Justice. The intrinsic-fairness rule applies to dealings
in which a parent corporation may benefit itself at the expense of the sub-
sidiary’s shareholders. By contrast, the business-judgment rule applies to
any parent-subsidiary dealing where such a conflict of interest cannot arise.
Levien has failed to demonstrate that the distribution of dividends by
Sinven benefited Sinclair at the expense of Sinven’s shareholders. While dis-

26
tributing the dividends may have been imprudent in light of Sinven’s financial
situation, the only relevant consideration is that the dividends proportion-
ally benefited Sinven’s shareholders. Because the dividends did not benefit
Sinclair at the expense of Sinven’s shareholders, no conflict of interest existed.
Levien has also failed to demonstrate that the distribution of dividends
deprived Sinven of a corporate opportunity. Although he has alleged that
distributing the dividends slowed Sinven’s growth, he could not point to any
particular opportunity that Sinven lost through this course of action.
Because Levien has not shown that any conflict of interest existed between
Sinclair and Sinven, Sinclair’s conduct must be evaluated under the business-
judgment rule. Since the distribution of the dividends cannot be considered
irrational, Levien cannot recover for their distribution.
By contrast, the breach-of-contract claim must be evaluated under the
intrinsic-fairness standard because Sinclair’s failure to make contractual pay-
ments to Sinven had the potential to benefit Sinclair at the expense of Sin-
ven’s shareholders. Because Sinclair has failed to show that the delayed
payments were intrinsically fair to Sinven’s shareholders, Sinclair may be
liable to Levien.

3.3 David J. Greene & Co. v. Dunhill International,

Inc.
Squib Dunhill International owned Spalding, a manufacturer of sporting
goods and toys. After Dunhill acquired Child Guidance Toys, Greene sued
on the ground that the acquisition was a corporate opportunity belonging to
Spalding. The Chancery Court of Delaware ruled for Greene upon finding
that Spalding had a realistic prospect of acquiring Child Guidance Toys.

3.4 Kahn v. Lynch Communications Systems, Inc.

3.4.1 Overview
The Supreme Court of Delaware applied the entire-fairness rule in reviewing
a transaction involving self-dealing. The court declined to shift the burden of
proving fairness to the plaintiff after finding that the approval of ostensibly
disinterested directors was defective.

27
3.4.2 Facts
Alcatel U.S.A. Corporation (“Alcatel”) owned 43.3 percent of Lynch Commu-
nication Systems, Inc. (“Lynch”). Alcatel itself was owned by the Compagnie
Générale d’Electricité (“CGE”). Although Alcatel was a minority shareholder
of Lynch, Alcatel nonetheless exercised considerable control over Lynch by
designating five of its eleven directors and several other important officers.
After determining that Lynch should acquire Telco Systems, Inc. (“Telco”)
to safeguard its competitiveness, the directors of Lynch recommended the
acquisition to Alcatel. Alcatel, however, rejected the recommendation and
suggested instead that Lynch should acquire Celwave Systems, Inc. (“Cel-
wave”), an indirect subsidiary of CGE. Despite that several of Lynch’s di-
rectors favored the originally proposed acquisition of Telco, Alcatel insisted
that Lynch pursue Celwave.
Lynch formed an Independent Committee to consider the acquisition of
Celwave. The Committee ultimately found the acquisition to be unfavorable
and unanimously rejected the transaction. Alcatel responded by abandoning
the Celwave proposal and making an offer to purchase enough Lynch stock
to become the majority shareholder of Lynch. Despite that negotiations
suggested that Lynch desired at least $17 per share, Alcatel made a final
offer of $15.50 per share. Lynch’s board approved the transaction. Kahn
sued on the ground that the price was unfairly low because Lynch’s directors
could neither act independently of Alcatel nor negotiate at arm’s length with
Alcatel.

3.4.3 Issue
Did Alcatel’s control of Lynch restrain the directors of Lynch from acting
independently and negotiating at arm’s length?

3.4.4 Holding
Alcatel’s control of Lynch restrained the directors of Lynch from acting in-
dependently and negotiating at arm’s length.

3.4.5 Reasoning
Holland, Justice. Although Alcatel was a minority shareholder of Lynch,
it was nonetheless a controlling shareholder because it exercised substantial

28
control over Lynch. Alcatel therefore faced a conflict of interest in purchasing
Lynch stock, so the transaction must be reviewed under the entire-fairness
standard.
Although the approval of a self-interested transaction by independent di-
rectors may shift the burden of proof to the plaintiff, the burden of proving
fairness in the current case must rest with Alcatel. While it is true that
Lynch’s Independent Committee formally approved the transaction, that
approval was defective because the Committee members were not acting in-
dependently in making the decision. In addition to generally dominating
Lynch’s operations, Alcatel threatened to initiate a hostile takeover in the
event that Lynch turned down its offered price. Because Alcatel interfered
with Lynch’s ability to decline the transaction, it has the burden of proving
that the transaction was fair.

3.5 Levco Alternative Fund v. The Reader’s Digest As-

sociation, Inc.
803 A.2d 428 (Del. 2002)

Squib The Delaware Supreme Court disapproved a recapitalization of the

Reader’s Digest Association that would have benefited the controlling share-
holder at the expense of the minority shareholders.

3.6 In re Trados Inc. Shareholder Litigation

2009 WL 2225958 (Del.Ch. 2009)

3.6.1 Overview
The Chancery Court of Delaware held that corporate directors must prioritize
the interests of common stockholders whenever their interests conflict with
those of preferred stockholders.

3.6.2 Facts
Trados developed language-translation software. Four of its seven directors—
David Scanlan, Lisa Stone, Sameer Gandhi, and Joseph Prang—were board

29
designees of investment firms whose combined holdings included 51% of Tra-
dos’s outstanding preferred stock. The company’s poor performance caused
the directors to contemplate merging Trados with another company. To this
end, the directors hired a new CEO, Joseph Campbell, whose task was to
“grow the company profitably or sell it.”
Under Campbell’s leadership, Trados’s performance improved to the point
where a merger was no longer urgently needed. Despite the company’s im-
proved prospects, the directors nonetheless approved a merger in which the
common stockholders received nothing for their shares.

3.6.3 Issue
Does the directors’ decision to sell Trados support a claim for breach of the
fiduciary duty?

3.6.4 Holding
The directors’ decision to sell Trados supports a claim for breach of the
fiduciary duty.

3.6.5 Reasoning
Chandler, Chancellor Where the interests of common stockholders con-
flict with those of preferred stockholders, corporate directors must prioritize
the interests of common stockholders. The business-judgment rule does not
apply when the directors of a corporation have sufficiently material interests
that may conflict with those of shareholders. Scanlan, Stone, Gandhi, and
Prang all faced conflicts of interest because each worked for an investment
firm that sought to maximize the value of the preferred shares. Because these
directors were employed by their respective firms, it is reasonable to infer that
they could not weigh impartially the interests of the preferred stockholders
against those of the common stockholders.

30
4 The Voting System: Allocation of Legal
Powers and Proxy Rules
4.1 Charlestown Boot & Shoe Co. v. Dunsmore
60 N.H. 85 (1880)

4.1.1 Overview
The New Hampshire Supreme Court held that shareholders may not inter-
fere with the directors’ management of a corporation except to the extent
permitted by corporate bylaws.

4.1.2 Facts
The shareholders of the Charlestown Boot & Shoe Company voted to close
down the corporation and appointed Osgood, who was not affiliated with
the corporation, to oversee the conclusion of its operations. The directors
of Charlestown, however, refused to follow the shareholders’ recommended
course of action and declined to sell the corporation’s assets. After an unin-
sured warehouse burned down, the shareholders for damages allegedly in-
curred by the directors’ unwillingness to follow their recommendations.

4.1.3 Issue
Did the directors have an obligation to act in accordance with the sharehold-
ers’ recommendations?

4.1.4 Holding
The directors had no obligation to act in accordance with the shareholders’
recommendations.

4.1.5 Reasoning
Smith, J. The affairs of a corporation are to be managed solely by its
directors. Shareholders may not interfere with the directors’ decisions except
to the extent permitted by the corporate bylaws. Shareholders may not
appoint an external individual, such as Osgood, to act with the directors.

31
4.2 People ex rel. Manice v. Powell
94 N.E. 634 (N.Y. 1911)

Squib The New York Court of Appeals held that corporate directors are
entitled act according to their best judgment in managing the affairs of the
corporation. The court emphasized that “stockholders cannot act in relation
to the ordinary business of the corporation.”

4.3 Schnell v. Chris-Craft Industries, Inc.

285 A.2d 437 (Del. 1971)

4.3.1 Overview
The Supreme Court of Delaware held that the directors of a corporation may
not change the date of a shareholder vote for the purposes of entrenching
themselves on the board.

4.3.2 Facts
After the shareholders of Chris-Craft Industries express their intent to replace
the directors because of the corporation’s poor performance, the directors
voted to advance the date of the annual shareholder meeting by a month.
The shareholders sued on the ground that the directors changed the date of
the meeting for the purpose of frustrating a shareholder vote on the issue of
replacing the directors.

4.3.3 Issue
Did the directors improperly change the date of the shareholder meeting?

4.3.4 Holding
The directors improperly changed the date of the shareholder meeting.

32
4.3.5 Reasoning
Herrmann, Justice (for the majority of the court): The directors
changed the date of the shareholder meeting in order to frustrate the share-
holders’ efforts to organize a proxy battle. Directors may not use the cor-
porate machinery in such a way as to frustrate dissident shareholders’ legit-
imate attempts to exercise their voting rights. Even though the directors’
actions technically fall within the boundaries of the Delaware Corporation
Law, mere compliance with the letter of the law does not validate an other-
wise inequitable action.

4.4 Blasius Industries Inc. v. Atlas Corp.

564 A.2d 651 (Del.Ch. 1988)

4.4.1 Overview
The Delaware Court of Chancery held that the directors of a corporation
may not interfere with the power of shareholders to appoint a majority of
the board. The court found that this limitation applies even if the directors
are acting in good faith and not merely to entrench themselves.

4.4.2 Facts
After acquiring 9.1% of the outstanding shares of Blasius Industries, Atlas
announced its intention to explore the possibility of acquiring control of the
company and implementing a restructuring. Acting through a subsidiary,
Atlas submitted to Blasius a “precatory resolution” indicating its intention
to expand the board from seven to fifteen members and to appoint enough
directors to control a majority of the new board. The directors of Blasius
responded by adding two members to the board, thereby preventing Atlas
from installing a majority in the proposed fifteen-member board. Atlas chal-
lenged the decision on the ground that it was an improper exercise of the
directors’ power.

4.4.3 Issue
Are the directors of a corporation prohibited from interfering with the share-
holders’ ability to install a majority of the board even if they are sincerely

33
acting in the corporation’s interest?

4.4.4 Holding
The directors of a corporation are prohibited from interfering with the share-
holders’ ability to install a majority of the board even if they are sincerely
acting in the corporation’s interest.

4.4.5 Reasoning
Allen, Chancellor. Because the appointment of directors lies at the foun-
dation of the agency relationship between shareholders and the board, the
directors of a corporation should not have the power to take any action whose
intended effect is to entrench the incumbent directors’ control of the board.
Even if the directors believe in good faith that entrenchment will serve the
corporation’s interests, they must nonetheless refrain from tampering with
the allocation of power between the board and shareholders. This restriction
protects shareholders, who can respond to unsatisfactory management only
by exercising their votes or selling their shares.

4.5 Condec Corp. v. Lunkenheimer Co.

43 Del.Ch. 353 (1967)

Squib The Delaware Court of Chancery held that a corporation may not
resist a takeover attempt by diluting the acquiring party’s holdings by issuing
new shares.

4.6 J.I. Case Co. v. Borak

377 U.S. 426 (1964)

Squib The Supreme Court held that private parties may bring claims to
enforce the SEC’s Proxy Rules. The Court found that private enforcement
supplemented the SEC’s efforts to ensure compliance with the Rules.

34
4.7 Wyandotte v. United States
389 U.S. 191 (1967)

Squib The Supreme Court reaffirmed its holding in J.I. Case Co. v. Borak,
377 U.S. 426 (1964), that private parties could bring claims to enforce the
Proxy Rules.

4.8 Cort v. Ash

422 U.S. 66 (1975)

Squib The Supreme Court established a four-factor test for determining

the appropriateness of bringing a private action to enforce the Proxy Rules.
The Court stated that courts deciding whether to allow a private action
should consider (1) whether the plaintiff belongs to the class for whose espe-
cial benefit the statute was enacted; (2) whether the statute creates a federal
right in favor of the plaintiff; (3) whether a private action would be consistent
with the legislative scheme; and (4) whether the plaintiff’s cause of action
would traditionally fall under state law or federal law.

4.9 Mills v. Electric Auto-Lite Co.

396 U.S. 375 (1970)

4.9.1 Overview
The Supreme Court held that a materially misleading proxy statement nec-
essarily constitutes a cause of the subsequent shareholder action. The Court
found that such a statement allows private enforcement of § 14(a) of the
Securities Exchange Act of 1934.

4.9.2 Facts
Mergenthaler Linotype Company was a majority shareholder of Electric Auto-
Lite Company. Mergenthaler appointed eleven of Electric Auto-Lite’s direc-
tors. When Mergenthaler sought to merge with Electric Auto-Lite, it issued
a proxy statement that failed to mention that Mergenthaler had appointed

35
the eleven directors. Mills sued on the ground that the omission of this in-
formation constituted a violation of § 14(a) of the Securities Exchange Act
of 1934.

4.9.3 Issue
(1) Is Mills required to show that the misleading proxy statement was a but-
for cause of the merger? (2) May the fairness of a merger allow that merger
to be upheld despite inadequate disclosure?

4.9.4 Holding
(1) Mills need not show that the misleading proxy statement was a but-for
cause of the merger. The misleading nature of the statement itself gives rise
to a inference that the statement influenced the shareholders’ votes. (2) The
fairness of a merger does not form a defense against claims of inadequate
disclosure.

4.9.5 Reasoning
Mr. Justice Harlan delivered the opinion of the Court. The very fact
that the proxy statement was misleading gives rise to the inference that the
statement affected shareholders’ votes. When a shareholder has shown that
the disclosures contained in a proxy statement are materially defective, the
shareholder need not show additionally that any of the defects had a decisive
effect on the vote. This rule avoids the intractable difficulty of determining
just how many votes were affected by the defective proxy statement.
The fairness of a merger does not form a defense against claims of inade-
quate disclosure. Congress intended to promote the exercise of shareholders’
votes in passing the Act of 1934; allowing a merger to be sustained solely by
a fair outcome would defeat this purpose.

4.10 TSC Industries v. Northway, Inc.

426 U.S. 438 (1976)

Squib The Supreme Court defined what it meant for information to be

“material” for the purposes of a proxy statement. The Court stated that “an

36
omitted fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote.” The Court
further stated that a material fact is one which would alter the “total mix”
of information available to a reasonable investor.

4.11 Virginia Bankshares, Inc. v. Sandberg

501 U.S. 1083 (1991)

4.11.1 Overview
4.11.2 Facts
First American Bankshares, Inc. (“FABI”) wholly owned Virginia Bankshares,
Inc. (“VBI”). FABI pursued a transaction in which First American Bank of
Virginia (“Bank”) would merge with VBI. FABI issued a proxy solicitation
indicating that $42 per share was a “fair” price for the Bank even though
circumstances suggested that the Bank was worth at least $60 per share.
Sandberg sued on the ground that FABI’s conclusory regarding the Bank’s
value violated § 14(a) of the Securities Exchange Act of 1934.

4.11.3 Issue
(1) Can conclusory or qualitative statements be materially misleading for the
purposes of § 14(a)? (2) Can undisclosed beliefs of directors support liability
under § 14(a)?

4.11.4 Holding
(1) Conclusory or qualitative statements can be materially misleading for
the purposes of § 14(a). (2) Undisclosed beliefs of directors cannot support
liabiliy under § 14(a).

4.11.5 Reasoning
Justice Souter delivered the opinion of the Court. Because directors
typically know much more about a corporation than shareholders, directors’
statements evaluations of potential transactions can be material to the extent
that shareholders rely on their expertise. Furthermore,

37
4.12 Rosenfeld v. Fairchild Engine & Airplane Corp.
309 N.Y. 168 (1955)

4.12.1 Overview
The New York Court of Appeals held that a corporation may reimburse
current and former directors for the expense of a proxy contest as long as
the contest was not waged for the purpose of securing a personal interest in
controlling the corporation.

4.12.2 Facts
After control of Fairchild Engine and Airplane changed hands following a
proxy contest, the new directors voted to provide $28,000 to the former
directors for expenses incurred in defending against the contest. Shareholders
voted to provide $127,000 to the new directors for their expenses in bringing
the contest. As a shareholder, Rosenfeld sued the corporation on the theory
that such compensation was improper.

4.12.3 Issue
May a corporation compensate the parties to a proxy contest for the expenses
they incurred during the contest?

4.12.4 Holding
A corporation may compensate the parties to a proxy contest for the expenses
they incurred during the contest.

4.12.5 Reasoning
Frossel, Judge. Directors must have the means to resist those who at-
tempt to seize control of their corporation. Otherwise, the directors would
be at the mercy of any party with sufficient funds to initiate a takeover of
the company. As long as the parties wage the contest over genuine issues of
policy as opposed to the desire for personal power, the corporation should
be allowed to compensate both parties for the expenses they incur.

38
Desmond, Judge (concurring). The court should consider the specific
nature of the expenses incurred by each party to the proxy contest. The court
should exclude from reimbursement those expenses relating to “proceedings
by one faction in its contest with another for the control of the corporation.”

Van Voorhis, Judge (dissenting). The former directors expended funds

for purposes

5 Transactions in Control
5.1 Zetlin v. Hanson Holdings, Inc.
48 N.Y.2d 684 (1979)

5.1.1 Overview
The New York Court of Appeals held that a controlling shareholder may
generally sell its shares at a premium.

5.1.2 Facts
The controlling shareholders of Gable Industries, Inc. sold their 44.4% stake
in the company at $15 per share when the market price of Gable Industries
stock was only $7.38 per share. Zetlin sued on the ground that the sellers
should not have charged a premium for their controlling stake.

5.1.3 Issue
May the controlling shareholders of a corporation sell their shares at a pre-
mium?

5.1.4 Holding
The controlling shareholders of a corporation may sell their shares at a pre-
mium.

39
5.1.5 Reasoning
Since the controlling shareholders have invested the resources necessary to
obtain control of the corporation, they should have the ability to charge a
premium for the controlling stake. Absent corporate looting or other acts
of bad faith, minority shareholders are not entitled to protection against the
interests of the majority.

5.2 Gerdes v. Reynolds

28 N.Y.2d 622 (1941)

5.2.1 Overview
The New York Court of Appeals held that controlling shareholders may not
sell their controlling stake to a corporate looter for the purpose of realizing
personal gains.

5.2.2 Facts
The controlling shareholders of Reynolds Investment Company, Inc. sold their
shares of the corporation at an immense premium. Although valuations of
the company ranged from 5 cents per share to 50 cents per share, the control-
ling shareholders received $2 per share. As part of the sale, the controlling
shareholders appointed to the board individuals designated by the buyer.
The company’s assets consisted substantially of holdings in other companies,
and the buyer began “converting [the] securities to its own use” immediately
upon completion of the sale. The minority shareholders sued on the ground
that the controlling shareholders had breached their fiduciary duty by selling
their stake to a corporate looter.

5.2.3 Issue
(1) Did the controlling shareholders have an obligation to investigate the
buyer? (2) Did the sale price reflect payment for the appointment of the
buyer’s designees to the board?

40
5.2.4 Holding
(1) The controlling shareholders had an obligation to investigate the buyer.
(2) The sale price reflected payment for the appointment of the buyer’s de-
signees to the board.

5.2.5 Reasoning
Walter, Justice . . . . Corporate directors may not relinquish control of
their corporation under conditions that would leave the corporation’s assets
without proper care or protection. Although the controlling shareholders of
Reynolds Investment Company had no knowledge that the buyer planned to
loot the corporation, the circumstances of the sale should have alerted them
to this possibility. The price paid for the company grossly exceeded its market
value. The company’s particular combination of holdings was unremarkable
and easily duplicable. A reasonable investor could do just as well, if not
better, by buying similar securities directly from the market. Furthermore,
the transaction left the buyer in a position to pay for the company by selling
the company’s assets. These circumstances raise a strong inference that the
buyer was in fact a corporate looter. The facts compel the conclusion that
the sale price included not only the value of the shares but also payment for
appointment of the buyer’s designees to the board.

5.3 Perlman v. Feldmann

219 F.2d 173 (2d Cir. 1955)

5.3.1 Overview
The Second Circuit held that the controlling shareholders of a corporation
misappropriated a corporate opportunity by selling their stake to the corpo-
ration’s customers.

5.3.2 Facts
C. Russell Feldmann and members of his family were the controlling share-
holders of Newport Steel Corporation. Owing to steel shortages caused by
the Korean War, the company had sufficient bargaining power to implement
the “Feldmann Plan.” Under the Plan, purchasers of steel gave interest-free

41
advances to Newport in return for claims to Newport’s steel output. Rather
than continuing to do business under the Plan, the controlling shareholders
decided to sell their stake to steel consumers. The sellers were paid $20 per
share, which represented a significant premium over a market price that had
not exceeded $12. The minority shareholders then sued on the ground that
Feldmann and his family had improperly deprived Newport of the opportu-
nity to continue operating under the Feldmann Plan.

5.3.3 Issue
Did the controlling shareholders of Newport improperly appropriate for them-
selves benefits that might have accrued to the corporation?

5.3.4 Holding
The controlling shareholders of Newport improperly appropriated for them-
selves benefits that might have accrued to the corporation.

5.3.5 Reasoning
Clark, Chief Judge. Controlling shareholders breach the fiduciary duty
when they “siphon[ ] off for personal gain corporate advantages to be derived
from a favorable market situation.” By selling control of the company to
steel consumers, Feldmann and his family members deprived Newport of the
opportunity to continue reaping benefits under the Feldmann Plan. Any
premium that steel consumers would have paid to Newport for the scarce
steel were instead directed to the controlling shareholders in the form of a
control premium.

5.4 Brecher v. Gregg

392 N.Y.S.2d 776 (1975)

5.4.1 Overview
The New York Supreme Court found that some blocks of shares are too small
to be considered controlling blocks.

42
5.4.2 Facts
Gregg owned 82,000 shares of Lin Broadcasting Corporation (“LIN”). His
holdings amounted to 4% of LIN’s outstanding stock. When Gregg sold the
shares to the Saturday Evening Post Company (“SEPCO”), he received a
price of $3.5 million, which represented a premium of $1.26 million over the
market price. As part of the sale, Gregg resigned from his post as president of
LIN and agreed to ensure that SEPCO’s designees would occupy a majority
of the board. LIN’s shareholders sued on the ground that Gregg improperly
sold his control of the company.

5.4.3 Issue
Did Gregg improperly sell control of the company?

5.4.4 Holding
Gregg improperly sold control of the company.

5.4.5 Reasoning
Norman L. Harvey, J. As a matter of law, a 4% stake in a corporation
cannot be considered holdings sufficient to warrant a control premium.

5.5 Essex Universal Corp. v. Yates

305 F.2d 572 (2d Cir. 1972)

5.5.1 Overview
The Second Circuit held that the seller of a 28.3% stake in a corporation
may agree to replace existing directors with the buyer’s designees.

5.5.2 Facts
Yates, the president and chairman of Republic Pictures Corporation, agreed
to sell 28.3% of the company’s outstanding shares to Essex Universal Cor-
poration. The terms of the sale specified that Yates would grant Essex the
option to replace a majority of Republic’s board with its own designees. This
provision overrode bylaws providing that only a third of the directors could

43
be replaced at each annual meeting. When Yates terminated the transaction
after finding Essex’s method of payment to be inadequate, Essex sued for
damages. In response, Yates argued that the transaction was void because
the option amounted to an unlawful sale of control.

5.5.3 Issue
Did Essex’s option to appoint immediately a majority of the board create an
unlawful sale of control?

5.5.4 Holding
Essex’s option to appoint immediately a majority of the board did not create
an unlawful sale of control.

5.5.5 Reasoning
Lumbard, Chief Judge. For all practical purposes, the 28.3% stake that
Yates sold to Essex is sufficiently large to represent a controlling stake in
the corporation. Since Yates sold a controlling stake in Republic, Essex was
entitled to ask for the power to appoint a majority of the board immediately
upon completion of the sale. The contrary rule would tend to frustrate the
transfer of corporate control from seller to buyer. If Yates continues to pursue
this argument, he must carry the burden of showing that the option would
have frustrated the efforts of some contingent of shareholders to appoint their
own directors.

Friendly, Circuit Judge (concurring). Provisions that allow a buyer to

circumvent the normal constraints on appointments of directors tend to inter-
fere with shareholders’ ability to appoint directors through their own votes.
For this reason, provisions such as Essex’s option should be enforced only
if the buyer has purchased more than half of the corporation’s outstanding
stock, so that the election of directors would be a mere formality.

44
6 Mergers and Acquisitions: The Legal and
Business Structure
6.1 Hollinger, Inc. v. Hollinger International, Inc.
858 A.2d 342 (Del.Ch. 2004)

6.1.1 Overview
The Delaware Court of Chancery applied the Gimble test to determine whether
a corporation was selling “substantially all” of its assets.

6.1.2 Facts
Hollinger International (“International”) owned Telegraph Group Ltd. (“Tele-
graph”) through a series of subsidiaries that included Hollinger (“Inc.”).
When International directed Inc. to sell Telegraph to Press Holdings Interna-
tional, Inc. sued to enjoin the sale on the ground that International had failed
to obtain shareholder approval for a transaction disposing of “substantially
all” of International’s assets.

6.1.3 Issue
Does the sale amount to a disposition of “substantially all” of International’s
assets?

6.1.4 Holding
The does not amount to a disposition of “substantially all” of International’s
assets.

6.1.5 Reasoning
Strine, Vice Chancellor . . . . Delaware law requires a corporation to
obtain shareholder approval for any sale disposing of “substantially all” of the
corporation’s assets. Under the Gimble test, a corporation disposes of “sub-
stantially all” of its assets when it engages in a sale “of assets quantitatively
vital to the operation of the corporation and [which] is out of the ordinary
and substantially affects the existence and purpose of the corporation.”

45
 International is not disposing of “substantially all” of its assets by selling
Telegraph. Although Telegraph accounts for 56–57% of International’s asset
value, International also owns the Chicago Group, which accounts for 43-44%
of its value. The sale of Telegraph would leave International with an appre-
ciable fraction of its current assets. The sale also would not “substantially
affect[ ] the existence and purpose of the corporation” since International
would continue to own and operate newspapers.
While International’s chain of subsidiaries would ordinarily insulate it
from liability, International’s willingness to contract directly with Press Hold-
ings suggests that courts should have the power to hold International respon-
sible for a transaction in which its subsidiaries are simply acting at its behest.

6.2 Hariton v. Arco Electronics, Inc.

41 Del.Ch. 74 (1963)

6.2.1 Overview
The Delaware Court of Chancery approved a de facto merger accomplished
through a sale of assets.

6.2.2 Facts
Arco Electronics and Loral combined with each other in a de facto merger. In
the transaction, Arco sold its assets to Loral in exchange for Loral stock. Al-
though a majority of Arco’s shareholders approved the transaction, dissenting
shareholders sued on the ground that Arco had improperly circumvented the
merger statute and thereby deprived shareholders of the right to appraisal of
the assets.

6.2.3 Issue
Did Arco improperly circumvent the merger statute and thereby deprive its
shareholders of the right to an appraisal of its assets?

6.2.4 Holding
Arco did not improperly circumvent the merger statute and thereby deprive
its shareholders of the right to an appraisal of its assets.

46
6.2.5 Reasoning
Southerland, Chief Justice: Sections 271 and 275 of the Delaware Gen-
eral Corporation Law may be applied simultaneously to bring about a de
facto merger.

6.3 Heilbrunn v. Sun Chemical Corp.

150 A.2d 755 (Del.Ch. 1959)

Squib The Delaware Court of Chancery approved the use of a stock-for-

assets merger in which the minority shareholders of the acquired corporation
could not vote against the merger.

6.4 Farris v. Glen Alden Corp.

393 Pa. 427 (1958)

6.4.1 Overview
The Supreme Court of Pennsylvania disapproved a de facto merger.

6.4.2 Facts
After operating at a loss for several years, Glen Alden Corporation sold itself
to List Industries Corporations. In order to take advantage of Glen Alden’s
loss carryovers for taxes and carry out the sale under Pennsylvania law, the
transaction was structured as an “upside-down” acquisition in which Glen
Alden acted as the nominal buyer. Although a majority of Glen Alden’s
shareholders approved the sale, dissenting shareholders sued on the ground
that Glen Alden had improperly deprived them of the right to an appraisal
of their shares.

6.4.3 Issue
Did Glen Alden improperly deprive its minority shareholders of the right to
an appraisal of their shares?

47
6.4.4 Holding
Glen Alden improperly deprived its minority shareholders of the right to an
appraisal of their shares.

6.4.5 Reasoning
Cohen, Justice. As efforts to circumvent legal constraints have generated
increasingly complex corporate transactions, the substance—rather than the
form—of a transaction should dictate which rules apply. The “reorganiza-
tion” has fundamentally altered Glen Alden. The de facto merger has con-
verted Glen Alden from a mining company into a diversified holding company.
The merger has also significantly changed Glen Alden’s capital structure, so
that former shareholders of Glen Alden now own shares of a corporation
that is leveraged to a much greater extent than Glen Alden. The merger
has forced Glen Alden’s shareholders to exchange their shares for unwanted
shares in a new corporation.

6.5 Rath v. Rath Packing Co.

136 N.W.2d 410 (Iowa 1965)

Squib The Iowa Supreme Court disapproved an attempt to circumvent

shareholders’ voting rights by implementing a de facto merger instead of a
statutory merger. Rath Packing Company arranged to acquire Needham
Packing by issuing stock in exchange for Needham’s assets. Although 60%
of Rath’s shareholders approved the transaction, the approval fell below the
two-thirds supermajority required under Iowa law. Emphasizing the sub-
stance of the transaction, the court found that allowing the transaction would
“amount[ ] to judicial repeal of the merger [statute].”

6.6 Terry v. Penn Central Corp.

668 F.2d 188 (3d Cir. 1981)

6.6.1 Overview
The Third Circuit approved a triangular merger.

48
6.6.2 Facts
Penn Central sought to acquire Colt Industries, Inc. (“Colt”) through a tri-
angular merger in which Colt would be purchased by a subsidiary of Penn
Central. Former shareholders of Colt sued on the ground that the merger
improperly deprived them of their ability to vote on the transaction and their
appraisal rights. Penn Central subsequently abandoned the purchase of Colt,
but it continued to pursue similar mergers with other companies.

6.6.3 Issue
Would the triangular merger with Colt have improperly deprived Colt’s
shareholders of their voting rights and appraisal rights?

6.6.4 Holding
The triangular merger with Colt would not have improperly deprived Colt’s
shareholders of their voting rights and appraisal rights.

6.6.5 Reasoning
Adams, Circuit Judge. Under section 311 of the Pennsylvania Business
Corporation Law (“PBCL”), Colt’s shareholders would have voting and ap-
praisal rights only if they would have acquired enough shares of Penn Central
to elect a majority of Penn Central’s board. Section 908 of the PBCL states
that voting and appraisal rights exist only if the transaction would create a
single corporation. Since Penn Central’s acquisition of Colt would not have
fallen within the scope of either section, Colt’s shareholders could not have
invoked voting or appraisal rights.

7 Mergers and Acquisitions: Freeze-outs and

the Appraisal Right
7.1 Leader v. Hycor, Inc.
395 Mass. 215 (1985)

49
Squib The Massachusetts Supreme Court approved the “block method” of
stock valuation.

7.2 MT Properties, Inc. v. CMC Real Estate Corp.

481 N.W.2d 383 (Minn.App. 1992)

Squib The Minnesota Court of Appeals disapproved the use of “minority

discounts” in appraising shares held by minority shareholders.

7.3 Weinberger v. UOP, Inc.

457 A.2d 701 (Del. 1983)

7.3.1 Overview
7.3.2 Facts
7.3.3 Issue
7.3.4 Holding
7.3.5 Reasoning

7.4 Glassman v. Unocal Exploration Corp.

777 A.2d 242 (Del. 2001)

7.4.1 Overview
The Delaware Supreme Court held that appraisal is the only remedy for
minority shareholders who object to a short-form merger.

7.4.2 Facts
Unocal Corporation owned a 96% stake in Unocal Exploration Corporation
(“UXC”). After several years of low revenues and earnings, Unocal decided
that acquiring the remaining 4% of UXC stock would allow Unocal to save
money. When Unocal initiated a short-form merger with UXC, minority
shareholders of UXC sued on the ground that Unocal and its directors had

50
breached their fiduciary duty by failing to show that the transaction was
entirely fair.

7.4.3 Issue
May Unocal proceed in a short-form merger with UXC without showing that
the transaction is entirely fair?

7.4.4 Holding
Unocal may proceed in a short-form merger with UXC without showing that
the transaction is entirely fair.

7.4.5 Reasoning
Berger, Justice. Since the entire point of a short-form merger is to spare
corporations from the process of establishing entire fairness, minority share-
holders who object to a short-form merger can request only request appraisal
of their shares.

7.5 Solomon v. Pathe

672 A.2d 35 (Del. 1996)

7.5.1 Overview
The Delaware Supreme Court held that a purchasing corporation in a short-
form merger owes no fiduciary duty to the minority shareholders of the cor-
poration being acquired.

7.5.2 Facts
Credit Lyonnais Banque Nederland N.V. (“CBLN”) owned 98% of Pathe
Communications Corporation. When CBLN made a public tender offer to
purchase the remaining 2% of Pathe at $1.50 per share, minority shareholders
of Pathe sued on the ground that CBLN had breached its fiduciary duty to
Pathe’s shareholders by making a “coercive” offer for Pathe.

51
7.5.3 Issue
Did CBLN breach a fiduciary duty to Pathe’s shareholders?

7.5.4 Holding
CBLN did not breach a fiduciary duty to Pathe’s shareholders.

7.5.5 Reasoning
Harnett, Justice. Absent coercion or incomplete disclosure of the terms
of the transaction, the purchasing corporation owes no fiduciary duty to the
minority shareholders of the acquired corporation.

7.6 Coggins v. New England Patriots Football Club,

Inc.
397 Mass. 525 (1986)

Squib The Massachusetts Supreme Court held that a purchasing corpo-

ration in a short-form merger must justify the transaction using a business
purpose. According to the court, the lack of a business purpose may signify
that the controlling shareholder is ousting the minority for selfish purposes.

7.7 Alpert v. 28 Williams Street Corp.

63 N.Y.2d 557 (1984)

Squib The New York Court of Appeals held that a corporation may not ef-
fect a short-form merger unless the merger would result in the “advancement
of a general corporate interest.”

8 Public Contests for Corporate Control: Part

1
8.1 Unocal Corp. v. Mesa Petroleum Co.
493 A.2d 946 (Del. 1985)

52
8.1.1 Overview
The Delaware Supreme Court approved selective self-tendering as a defensive
measure against hostile takeovers.

8.1.2 Facts
Mesa Petroleum Company, which owned 13% stake in Unocal Corporation,
decided to acquire an additional 37% of Unocal’s stock and thereby gain
control of Unocal. To this end, Mesa initiated a two-tiered tender offer. The
“front-loaded” first tier gave Unocal’s shareholders the choice to tender their
stock at $54 per share even though the market value of the stock was more
than $60 per share. At the second tier, any shareholders who declined to
tender at the first tier would be forced to exchange their holdings for junk
bonds worth no more than $45 per share.
To counteract Mesa’s pressure to tender, Unocal’s directors announced
that Unocal would immediately commit to purchasing 29% of its non-Mesa-
owned shares at $72 per share. By artificially raising the price of the 29%
stake, Unocal effectively lowered the value of the shares that Mesa intended
to purchase. Mesa sued on the ground that Unocal’s directors had misused
their power in making the self-tender.

8.1.3 Issue
May a corporation use selective self-tendering as a defense against hostile
takeovers?

8.1.4 Holding
A corporation may use selective self-tendering as a defense against hostile
takeovers.

8.1.5 Reasoning
Moore, Justice. Corporate directors have broad discretion in protecting
the interests of their corporation. Their discretion extends to defending the
corporation against hostile takeovers. Although self-tendering raises the pos-
sibility of unfair self-dealing, directors may avail themselves of the business-

53
judgment rule as long as they are making a reasonable response to a genuine
threat.
Since a majority of Unocal’s independent directors approved the self-
tender, the self-tender was a product of “good faith and reasonable inves-
tigation.” The self-tender was also reasonable in light of the threat since
Mesa was attempting to force Unocal’s shareholders to sell their shares for
significantly less than their value.

8.2 Moran v. Household International, Inc.

500 A.2d 1346 (Del. 1985)

8.2.1 Overview
The Delaware Supreme Court applied the business-judgment rule in review-
ing the use of a “poison pill.”

8.2.2 Facts
The directors of Household International adopted the Rights Plan, a “flip-
over poison pill” designed to discourage hostile takeovers. Under the Plan,
Household’s shareholders automatically acquired the option to buy at a 50%
discount shares of any corporation that successfully gained control of House-
hold in a hostile takeover. Moran challenged the directors’ authority to adopt
the Plan.

8.2.3 Issue
Should the adoption of the Plan be reviewed under the business-judgment
rule?

8.2.4 Holding
The adoption of the Plan should be reviewed under the business-judgment
rule.

54
8.2.5 Reasoning
McNeilly, Justice. Since the Plan is designed to facilitate the exercise
of business judgment by forestalling situations in which a hostile takeover
may force the directors to make a hasty decision, the adoption of the Plan
should be reviewed under the business-judgment rule. The Delaware General
Corporation Law contains no restrictions on the creation of poison pills. Fur-
thermore, poison pills tend to incur fewer costs than other means of warding
off hostile takeovers. The Plan does not preclude Household’s sharehold-
ers from accepting a hostile tender offer, as certain maneuvers can allow a
determined purchaser can overcome the Plan. Finally, fiduciary duties con-
strain the use of the Plan, as Household’s directors may not use the Plan to
frustrate a transaction that would benefit shareholders.

8.3 Carmody v. Toll Brothers

8.4 Revlon, Inc. v. MacAndrews & Forbes Holdings,
Inc.
506 A.2d 173 (Del. 1985)

8.4.1 Overview
The Delaware Supreme Court held that corporate directors breached their
duty of loyalty by placing the interests of noteholders before those of share-
holders and frustrating an auction when the sale of the company was in-
evitable.

8.4.2 Facts
Revlon was facing the possibility of a hostile takeover by Pantry Pride. After
Revlon rejected Pantry Pride’s initial offer of $40–50 per share, Pantry Pride
prepared to make a hostile tender offer at $45 per share. Revlon defended
itself by adopting a Note Purchase Rights Plan, which allowed Revlon’s share-
holders to exchange their shares for notes with a face value of $65. In effect,
the Plan was a poison pill that diluted Revlon’s stock. When Pantry Pride
subsequently raised its bid to $47.50 per share, Revlon again allowed share-
holders to exchange their shares for notes. The notes issued in the second
exchange, however, contained “poison debt” provisions that would prevent

55
Revlon from taking on additional debt. The purpose of the poison debt was
to make it difficult for Pantry Pride to finance the takeover by borrowing
money in Revlon’s name. In response, Pantry Pride raised its bid to $53 per
share.
While Pantry Pride’s bidding unfolded, Revlon explored the possibility
of selling itself to Forstmann. Revlon eventually agreed to a merger with
Forstmann at $56 per share, with Revlon waiving the “poison debt” provi-
sions of its notes. The waiver, however, caused the value of the notes to drop,
prompting Revlon’s directors to worry about the possibility of being sued for
the drop.
To protect the value of the notes, Revlon convinced Forstmann to sup-
port the value of the notes through a note exchange. In return, Forstmann
obtained a lock-up option to purchase two of Revlon’s divisions and Revlon’s
agreement to a no-shop provision. Although Pantry Pride raised its bid to
$56.25

8.4.3 Issue
8.4.4 Holding
8.4.5 Reasoning

8.5 Barkan v. Amsted

9 Public Contests for Corporate Control: Part

2
9.1 Paramount Communications, Inc. v. QVC Net-
work
637 A.2d 34 (Del. 1994)

9.1.1 Overview
The Delaware Supreme Court held that the Revlon duties are triggered when
a merger causes the dispersed holdings of the acquired corporation to be
transferred to a controlling shareholder.

56
9.1.2 Facts
9.1.3 Issue
9.1.4 Holding
9.1.5 Reasoning

10 Miscellaneous Cases
10.1 Emerald Partners v. Berlin
726 A.2d 1215 (Del. 1999)

Squib The Delaware Supreme Court held that the party invoking the pro-
tection of § 102(b)(7) of the Delaware General Corporation Law bears the
burden of proving that it acted in good faith.

10.2 Pure Resources, Inc. Shareholders Litigation

808 A.2d 421 (Del.Ch. 2002)

Squib The Delaware Court of Chancery disapproved an attempt to acquire

a corporation through a coercive tender offer. Unocal already owned 65%
of Pure Resources and made a tender offer for the remaining 35%. The
tender offer was contingent upon the tendering of a majority of the non-
Unocal-owned shares of Pure Resources. The court found the condition to
be coercive because the minority shareholders of Pure Resources included
directors and officers of Unocal as well as managers of Pure Resources, who
stood to benefit from severance packages upon the completion of a merger
with Unocal.

57