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Reis v. Hazelett Strip-Casting Corp.

Court of Chancery of Delaware

October 25, 2010, Submitted; January 21, 2011, Decided

C.A. No. 3552-VCL

Opinion

 [*449]  LASTER, Vice Chancellor.

The controller of Hazelett Strip-Casting Corporation cashed out the minority shares held by the estate of his deceased brother via a reverse stock split. The plaintiff sued on behalf of the beneficiaries of the estate who would have received shares but for the reverse split. I hold that the reverse split was not entirely fair and award damages of $1,268,850, plus pre- and post-judgment interest, less an offset for amounts already paid.

I. FACTUAL BACKGROUND

These are the facts as found after a two-day trial.

A. Hazelett Strip-Casting Corporation

In 1929, C.W. Hazelett designed and operated the first commercial continuous casting and processing line in the world. In 1949, he invented the twin-belt caster. In 1956, his sons William Hazelett ("Bill") and S. Richard Hazelett ("***") formed Hazelett Strip-Casting to capitalize on  [*450]  their father's inventions. 1

Located in Colchester, Vermont, Hazelett Strip-Casting manufactures casting machines for the production of aluminum, zinc, lead, and copper strip and related products. A strip-casting machine is a major capital investment costing up to $16 million. Once in service, a strip-casting machine has a useful life of twenty to thirty years. Hazelett Strip-Casting sells between zero and four machines per year. The bulk of the company's stable and recurring revenues come from servicing existing machines and selling spare parts.

Hazelett Strip-Casting has always been a family business. From 1956 until December 27, 1994, Bill and *** were Hazelett Strip-Casting's only stockholders. Bill owned 800 shares, giving him 69.57% of the equity. *** owned 350 shares, giving him 30.43%. The brothers did not have a voting agreement, and the corporation's governing documents lacked any supermajority requirements or other provisions that would limit Bill's control as majority stockholder. *** wrote in his Last Will and Testament dated December 5, 2001, that

I permitted Bill to acquire a majority ownership  [**3] interest . . . without understanding that minority stockholders have in practice almost no legal rights against a majority unless the Corporation were sold. The so-called fiduciary obligation of the majority is inherently too vague to be effective except in around one percent of actual cases. I was late in learning that corporation law, unlike partnership law, is designed to favor unitary control. Nevertheless, the outcome is not entirely unreasonable. Given my brother's temperament, he needed leeway, freedom, and he still needs it. I credit Bill for guiding our corporation to success and for finally allowing me to share in that success to a limited extent.

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28 A.3d 442 *; 2011 Del. Ch. LEXIS 11 **; 2011 WL 303207

GINETTE REIS, Plaintiff, v. HAZELETT STRIP-CASTING CORPORATION, STAVE ISLAND LIMITED PARTNERSHIP, R. WILLIAM HAZELETT, DAVID N. HAZELETT, RAYMOND J. CLAVELLE, JR., CRAIG SNYDER and RICHARD T. HAYDEN, Defendants.

Subsequent History: Corrected: February 1, 2011

CORE TERMS

Strip-Casting, fair value, shares, earnings, valuation, appraisal, merger, split, stockholders, fair price, capitalized, per share, fiduciary, fractional interest, adjusting, stock, book value, cash flow, employees, enhanced, Probate, damages, shareholders, normalizing, purposes, minority stockholder, transactions, projections, calculated, freeze-out

Business & Corporate Compliance, Business & Corporate Law, Closely Held Corporations, Formation, Business & Corporate Law, Corporations, Corporate Formation, General Overview, Shareholder Actions, Appraisal Actions & Dissent Rights, Fair Market Value, Articles of Incorporation & Bylaws, Amendments to Articles of Incorporation, Corporate Finance, Initial Capitalization & Stock Subscriptions, Classes of Stock, Consideration, Civil Procedure, Defenses, Demurrers & Objections, Motions to Strike, Evidence, Burdens of Proof, Allocation, Preponderance of Evidence, Discovery & Disclosure, Discovery, Relevance of Discoverable Information, Testimony, Credibility of Witnesses, Management Duties & Liabilities, Causes of Action, Fiduciary Duties, Business Judgment Rule, Inferences & Presumptions, Presumptions, Effects, Defenses, Mergers & Acquisitions Law, Takeovers & Tender Offers, Duties & Liabilities of Directors & Officers, Directors & Officers, Terms in Office, Elections, Self-Dealing, Burden Shifting, Mergers, Rights of Dissenting Shareholders, Remedies, Shareholder Duties & Liabilities, Controlling Shareholders, Duties & Liabilities of Shareholders, Duty of Loyalty, Justiciability, Standing, Personal Stake, Corporate Governance, Shareholders