In this memorandum opinion, the Court of Chancery granted defendants’ summary judgment motion dismissing claims based on the implied covenant of good faith and fair dealing under a shareholders’ agreement and further denied plaintiffs’ motion for leave to supplement the complaint to add fiduciary duty claims based on new facts. In denying the motion for leave to supplement the complaint, the Court concluded that directors of a closely-held corporation (but not a statutory close corporation) and its controlling stockholders do not owe a special fiduciary duty to, or any general duty to, buy out minority stockholders under Delaware law.
In 1999, Plaintiff Susan M. Blaustein (“Susan” and together with various trusts directed by her, “Plaintiffs”) became a minority investor in and board member of Defendant Lord Baltimore Capital Corp. (the “Company”). In connection with the investment, Susan and other Company shareholders negotiated and entered into a shareholders’ agreement (the “Shareholders’ Agreement”). Two years later, Susan raised the issue of a buyout from the Company with Louis Thalheimer (“Louis” and together with the Company, “Defendants”), a fellow board member who Susan alleged to represent part of the Company’s control group. Negotiations dragged on over the course of several years, but the parties never reached an agreement.
After the Court had granted in part and denied in part their motion to dismiss, Defendants moved for summary judgment on Susan’s remaining claims. The Court granted summary judgment for Defendants on Susan’s implied covenant claim that Louis had precluded Susan access to the Board to consider her repurchase proposals. Though the Board did not hold a formal vote on any of Susan’s proposals until well after the litigation had commenced, the Court found the record indicated that Louis had discussed the ongoing negotiations between Susan and Lord Baltimore with the Board and noted that Susan’s representatives on the Board could have requested a vote at any time. The Court also granted summary judgment for Defendants on Susan’s implied covenant claim for failure to negotiate in good faith upon finding that the Shareholders’ Agreement imposed no obligation upon the parties to negotiate at all. Instead, the agreement left the parties with bilateral discretion in determining whether to buy or sell their shares.
The Court then considered Susan’s motion for leave to supplement the complaint. The proposed supplemental complaint alleged that Defendants breached their fiduciary duties when they rejected both Susan’s repurchase proposals and Susan’s proposal to form an independent committee to consider the repurchase proposals. With respect to the latter claim, the Court found that it ran counter to the Shareholder’s Agreement, which provided “an explicit process by which the parties intended for share repurchases to occur.” Section 7(d) provided that the Company “may repurchase shares when approval is obtained from either (1) a majority of the directors or (2) 70 percent or more of all shareholders. Because a contractual provision governed the specific duty to be enforced, the Court found the fiduciary duty claim to be precluded.
As for the Defendants’ rejection of Susan’s repurchase proposals, the issue ultimately turned on whether Defendants owed a fiduciary duty to Susan, as a minority shareholder, to accept a reasonable repurchase proposal. After providing an overview of the relevant jurisprudence, the Court concluded that while other jurisdictions have recognized special fiduciary duties among stockholders in closely-held corporations, Delaware has not. Under Delaware common law, the protections afforded to minority stockholders in closely-held (but not statutory close) corporations are the same as those in publicly-held corporations. Defendants, therefore, did not owe Susan a common law, special fiduciary duty to buy back her shares.
Nor, in the Court’s estimation, did the Shareholders’ Agreement provide a means by which Susan could assert such a fiduciary duty claim. To the contrary, it afforded the Company discretion in deciding whether to repurchase shares. While sympathetic to Susan’s seemingly difficult position as a minority shareholder, the Court found that to allow her claim would be to grant her an additional right by fiduciary duty principles that she had not obtained through arms-length contractual negotiation. Accordingly, the Court denied the motion for leave to supplement the complaint.
The full opinion is available here.