Law School Case Brief
Abraham v. Emerson Radio Corp. - 901 A.2d 751 (Del. Ch. 2006)
In examining a Del. Ch. Ct. R. 12(b)(6) motion, the trial court must accept the well-pled factual allegations in the complaint as true and draw reasonable inferences from them in the plaintiff's favor. But neither inferences nor conclusions of law or fact are accepted as true without specific allegations of fact which support the conclusion
This is a claim against Sport Supply Group, Inc.’s controlling stockholder that sold its control bloc for a premium to a strategic buyer that also operated in that same market space. According to the allegations of the complaint, the buyer somehow misused its control of the acquired subsidiary to usurp its assets for the buyer's benefit and to the unfair detriment of the subsidiary's other stockholders. The plaintiff alleges that the controller should have suspected that the buyer had improper designs for the subsidiary simply because the buyer announced its intention to capitalize on the synergies between the buyer's operating assets and those of the subsidiary. In fact, the plaintiff refuses to stop short of advocating that a selling controller should be deemed, as a matter of law, to be on notice that any buyer who is also a competitor likely has improper motives.
The former controller and its major stockholder and CEO have moved to dismiss the claims against them.
Was the claim against the controlling stockholder who sold its control bloc for a premium to a strategic buyer that also operated in that same market space viable in this case?
The Delaware chancery court held that even if the claim was a derivative claim, demand was excused under the first prong of the Aronson test for demand excusal. However, even assuming that a controlling stockholder could be held liable for negligently selling control to a buyer with improper motives, the complaint did not state a claim. The complaint did not state facts supporting an inference that the CEO should have suspected that the buyer planned to extract illegal rents from the subsidiary. At most, the complaint pled facts suggesting that the CEO knew that it was selling to a strategic buyer who would attempt to capitalize on possible synergies between itself and its new non-wholly owned subsidiary. That did not provide a rational basis for a seller to conclude that the buyer intended to illegally usurp the subsidiary's assets for its own unfair benefit. Even assuming a negligence-based theory of liability existed, the claim was not viable. In Delaware, a controlling stockholder could sell its stock for a premium not shared with the other stockholders except in very narrow circumstances, which were not pled.
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