Law School Case Brief
Cheff v. Mathes - 199 A.2d 548 (Del. 1964)
While courts have sustained, in an analogous field, the use of proxy funds to inform stockholders of management's views upon policy questions inherent in an election to a board of directors, they have not sanctioned the use of corporate funds to advance the selfish desires of directors to perpetuate themselves in office. Similarly, if the actions of the board are motivated by a sincere belief that the buying out of a dissident stockholder is necessary to maintain what the board believes to be proper business practices, the board will not be held liable for such decision, even though hindsight indicates the decision not to have been the wisest course. On the other hand, if the board members act solely or primarily because of the desire to perpetuate themselves in office, the use of corporate funds for such purpose is improper.
Plaintiff shareholders filed a derivative suit against defendant corporate directors, alleging that purchases of company stock with corporate funds were made for the purpose of ensuring the perpetuation of control by the incumbent directors. The trial court agreed with plaintiffs' allegations and found that the directors acted with the improper desire to maintain control, concluding that that defendants were liable for losses allegedly resulting from the improper use of corporate funds to purchase shares of the company. Defendant corporate directors appealed the judgment from the trial court (Delaware) in favor of plaintiff shareholders in a derivative suit.
Did the defendants act in good faith in the use of corporate funds?
In reversing the lower court, the court noted that the evidence indicated that the directors' decisions were based upon direct investigation, receipt of professional advice, and personal observations of the company attempting a takeover. Based upon their information, the board of directors believed, with justification, that there was a reasonable threat to the corporation's continued existence. The question was thus one of business judgment and furnished no justification for holding the directors personally liable for losses even though, in hindsight, their decisions might not have been the best for the business.
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