In this post-trial decision, the Court of Chancery held that a controlling stockholder’s exercise of redemption and call rights that eliminated a minority holder’s interests was not entirely fair. The plaintiff owned a minority stake in a company that controlled an investment business that raised funds from foreign nationals seeking U.S. residency. The plaintiff also held a minority interest in a related partnership that held 90% ownership of the business. The controlling stockholder of the company exercised a right to redeem the partnership’s interest in the business at book value, and then acted by written stockholder consent to adopt a bylaw authorizing a call right that permitted the controller to repurchase the plaintiff’s minority stockholder interest in the company. The exercise of these rights appeared motivated by the controller’s desire to avoid liability for having taken large sums of money from the business to fund his lavish personal lifestyle. The plaintiff’s shares in the company were repurchased at $100 per share, which the controller asserted was their fair market value.
First, the Court found that the call right could not apply to the plaintiff’s shares without his assent, which the controller did not have, rendering his exercise of the call right invalid. The Court reasoned that section 202(b) of the DGCL does not allow a bylaw to impose a call right on already-issued shares without the stockholder’s assent. The Court explained that the requirement to obtain a stockholder’s assent to a post-stock issuance restriction was not limited to when a stockholder seeks to transfer the shares.
Further, the Court ruled that the exercise of the call right was a self-interested transaction by the controller that he failed to prove was entirely fair under entire fairness review. The controller owed fiduciary duties in connection with his stockholder consent to amend the company’s bylaws. The call right in the amended bylaw provided the controller with the power to acquire a minority stockholder’s shares at any time, and at a price that he determined to be “fair market value.” This novel and expansive power implicated the entire fairness standard of review. The Court explained that because the controller had adopted the bylaw unilaterally without applying any of the hallmarks of procedural fairness, and because the controller in fact determined the “fair market value” arbitrarily, his exercise of the call right of the minority stockholder was not entirely fair.
Finally, the Court ruled that exercising the redemption right of the partnership’s interest in the business at book value constituted a discretionary decision by the controller that conferred a non-ratable benefit of providing him with greater control. It was therefore also a self-interested transaction subject to entire fairness review. The Court found nothing in the record supported the fairness of the redemption, and the price again was purely arbitrary.
After considering opinions from the parties’ respective valuation experts, the Court awarded the plaintiff $6,898,612.00 in damages.
