In this opinion, the Supreme Court of the State of Delaware affirmed the Court of Chancery’s denial of plaintiffs’ motion for leave to amend and supplement their complaint to allege a new fiduciary duty claim and a new implied covenant claim.
In 1999, Susan M. Blaustein (together with certain trusts for which she served as trustee, “Plaintiffs”) became a minority stockholder in Defendant Lord Baltimore Capital Corp. (the “Company”), an S Corporation. In connection with this investment, Blaustein and other Company shareholders entered into a shareholders’ agreement (the “Shareholders’ Agreement”). Among other things, the Shareholders’ Agreement contained several stock transfer restrictions. The Shareholders’ Agreement restricted the transfer of stock in a manner that would jeopardize the Company’s S Corporation status and contained a penalty provision in the event shareholders transferred stock in violation of those restrictions. Additionally, the Shareholders’ Agreement provided that the Company may repurchase shares upon terms and conditions agreeable to the Company and the selling shareholder, provided that the repurchase was approved by either (i) a majority of the Company’s directors or (ii) the owners of 70% or more of all Company shares then issued and outstanding. Plaintiffs, however, alleged that defendant Louis Thalheimer (“Louis”), a fellow board member alleged to represent part of the Company’s control group, had orally promised her that, after ten years, all shareholders would be permitted to withdraw from the Company on fair and reasonable business terms reflecting their share of the net asset value of the Company at the time of withdrawal with no discount or penalty. Plaintiffs claimed that the parties had not reduced this promise to writing because Louis had claimed doing so would jeopardize the Company’s S Corporation status. Despite the alleged promise, when Plaintiffs later attempted to negotiate to have their stock repurchased, Louis, on behalf of the Company refused to consider a repurchase , except at a steep discount.
Plaintiffs filed a complaint in the Court of Chancery. In a memorandum opinion dated May 31, 2012, the Court of Chancery dismissed the complaint except as to a portion of its implied covenant claim that alleged Louis had impeded the board’s consideration of Plaintiffs’ repurchase proposals. In July 2012, the board convened a meeting to consider Plaintiffs’ proposals, which were rejected. According to Plaintiffs, a majority of the board, those with ties to the Thalheimer family, was conflicted and rejected the proposals to preserve personal estate tax planning benefits. Plaintiffs then sought leave to amend their complaint to allege a new fiduciary duty claim and a new implied covenant claim. Plaintiffs’ proposed supplemental complaint alleged that the Company’s directors breached their fiduciary duties by failing to consider and negotiate, free of conflict, a repurchase of Plaintiffs’ shares. By failing to accept the repurchase proposals, the directors allegedly harmed Plaintiffs directly by depriving them of liquidity and control over their assets. In a second memorandum opinion, dated April 30, 2013, the Court of Chancery granted defendants’ motion for summary judgment dismissing the original implied covenant claim and denied Plaintiffs’ motion to amend and supplement the complaint.
On appeal, the Supreme Court found that, under common law, the directors had no fiduciary duty to repurchase the stock of minority stockholders. Likewise, the Court found that the Shareholders’ Agreement imposed no affirmative duty on any party to consider or negotiate any repurchase proposal. The Supreme Court also considered whether Plaintiffs could assert a derivative claim that the Company’s director’s harmed “Lord Baltimore and its shareholders as a whole” by failing to act in good faith. The Court found Blaustein had failed to show that a majority of the board lacked independence, however, and, as a result, could not show demand futility. Thus, it affirmed the trial court’s denial of Plaintiffs’ motion to amend the complaint to add a new fiduciary duty claim.
The Supreme Court next considered Plaintiffs’ new claim for breach of the implied covenant of good faith and fair dealing, which alleged that the Shareholders’ Agreement contained an implied contractual right to good-faith negotiation of stockholder redemption proposals. The Court found that the relevant language plainly gave “both parties complete discretion in deciding whether, and at what price, to execute a redemption transaction.” The parties had considered the terms on which minority stockholders would be able to have their stock repurchased and made no provision for a “full value” price or independent negotiators. Because the implied covenant does not permit parties to impose new contract terms that were not previously bargained for, the Supreme Court affirmed the trial court’s denial of this proposed claim as well.
The full opinion is available here.