In Blaustein v. Lord Baltimore Capital Corp., No. 272, 2013, 2014 Del. LEXIS 30 (Del. Jan. 21, 2014), the Delaware Supreme Court held that a closely-held corporation’s directors owe no fiduciary duty to decide, free from conflicts of interest, whether a corporation will repurchase a minority stockholder’s shares in the corporation. Additionally, the Supreme Court held that the implied covenant of good faith and fair dealing contained in a shareholders agreement did not give a minority stockholder the right to a good faith, conflict-free negotiation over the repurchase of her stock. If a minority stockholder wishes to have the right to put his or her stock to the corporation at a fair price to be set through negotiations with independent and disinterested decision makers at the corporation, the stockholder must contract for that right expressly in advance.
Plaintiff was a minority shareholder of the defendant, Lord Baltimore Capital Corporation (“Lord Baltimore”), a closely held Delaware corporation. Plaintiff wished to sell her shares back to Lord Baltimore. Lord Baltimore’s Shareholders’ Agreement stated that the company “may” repurchase a minority shareholder’s stock provided that the repurchase is either approved (i) by a majority of all the directors of the company or (ii) in writing by shareholders who own 70% or more of all shares issued and outstanding.
Lord Baltimore’s directors offered to repurchase plaintiff’s shares at a 52% discount from the net asset value of her shares. In response, plaintiff made several offers to sell her shares at a smaller discount. After considering these offers, the board rejected them and reoffered to purchase her shares at the 52% discount. Plaintiff believed her offers were rejected because a majority of the board had a conflict of interest. Specifically, she believed a majority of the seven directors refused to repurchase her shares at a higher price because it would jeopardize their personal tax benefits.
Plaintiff sued Lord Baltimore in the Delaware Court of Chancery. Plaintiff later filed a motion to amend her complaint to add two new claims: one for breach of fiduciary duty and one for breach of the implied covenant of good faith and fair dealing. In plaintiff’s new fiduciary duty claim, she alleged that the directors breached their fiduciary duty to consider and negotiate repurchasing her shares without any conflicts of interest. In plaintiff’s new implied covenant claim, she alleged that the directors violated her implied right in the Shareholders’ Agreement to a good-faith negotiation of her repurchase proposals. The Chancery Court denied plaintiff’s request to amend her complaint because it found the claims were futile. Blaustein v. Lord Baltimore Capital Corp., No. 6685-VCN, 2013 Del. Ch. LEXIS 108 (Del. Ch. Apr. 30, 2013).
On appeal, the Supreme Court first addressed whether, under common law, Lord Baltimore’s directors owed a fiduciary duty to consider and negotiate, free of any conflicts, a repurchase of plaintiff’s shares. The Court explained that under common law the directors of a closely held corporation have no general fiduciary duty to repurchase the stock of a minority stockholder. If minority stockholders want that right, they must contract for it. The Court then reasoned that if the board had no duty to repurchase plaintiff’s shares at all, then plaintiff had no right to a non-conflicted board decision on whether to repurchase her shares. Thus, the Supreme Court held, plaintiff’s motion to amend was properly denied because the fiduciary duty claim would have been futile under common law.
The Court also addressed whether the Shareholders’ Agreement created a fiduciary duty to consider and negotiate, free from conflicts of interest, a repurchase of plaintiff’s shares. The Shareholders’ Agreement gave Lord Baltimore the option to repurchase a minority stockholder’s stock and the ability to designate the price. The Shareholders’ Agreement did not require that Lord Baltimore negotiate the repurchase of a stockholder’s shares. It followed that because the directors had no duty to repurchase plaintiff’s shares, the directors also had no affirmative duty to negotiate, free from conflicts, plaintiff’s repurchase price. Therefore, the Supreme Court held, plaintiff’s request to add a breach of fiduciary duty claim was properly denied.
Next, the Supreme Court addressed whether the Court of Chancery erred when it rejected plaintiff’s new claim for breach of the implied covenant of good faith and fair dealing. Plaintiff argued that the Shareholders’ Agreement contained an implied contractual right to a good faith negotiation of her redemption proposals. The Court disagreed. The Supreme Court held that the implied covenant of good faith and fair dealing should be used to enforce “what the parties would have agreed to themselves had they considered the issue originally.” The covenant should not be used, the Court held, effectively to renegotiate the contract. Here, the parties decided that Lord Baltimore would repurchase minority stockholders’ shares at its own discretion. Also, the Shareholders’ Agreement said nothing about a minority stockholder’s right to a conflict-free negotiation. Therefore, adding an implied right to a good faith negotiation would be tantamount to rewriting the Shareholders’ Agreement. For this reason, the Court held plaintiff’s request to add a claim for breach of the implied covenant of good faith and fair dealing was properly denied.
Blaustein clarifies that a minority stockholder in a closely held corporation should address any concerns relating to the liquidity of his or her shares expressly through contract.