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Condec Corp. v. Lunkenheimer Co. - 43 Del. Ch. 353, 230 A.2d 769 (1967)

Rule:

Corporate machinery may not be manipulated so as to injure minority stockholder, and shares may not be issued for an improper purpose such as a take-over of voting control from others.  As a starting point it must be conceded that action by majority stockholders having as its primary purpose the "freezing out" of a minority interest is actionable without regard to the fairness of the price. This does not mean that stock issued to raise money to eliminate a deficit is to be invalidated merely because directors thereby fairly avail themselves of an opportunity to acquire additional shares to fortify their natural desire to remain in control. Where, however, the objective sought in the issuance of stock is not merely the pursual of a business purpose but also to retain control, it has been held to be a mockery to suggest that the "control" effect of an agreement in litigation is merely incidental to its primary business objective.

Facts:

Plaintiff Consolidated Diesel Electric Corporation ("Condec") had acquired sufficient irrevocable proxies to prevent a two-thirds vote in favor of a proposed sale of The Lunkenheimer Company assets to a third party. United States Industries, Inc. then contacted the The Lunkenheimer Company and contracted to purchase the latter’s assets. The contract resulted in United States Industries, Inc. taking over the business of Lunkenheimer, and the issuance of 75,000 shares of stock to the United States Industries, Inc.’s wholly owned subsidiary. Condec brought suit seeking to have the issuance cancelled on the basis that the sale served no legitimate corporate purpose but was designed to prevent plaintiff, the majority stockholder of United States Industries, Inc., from having control of the company.

Issue:

Was the issuance of 75,000 shares of stock of The Lunkenheimer Company to the United States Industries, Inc.’s wholly owned subsidiary valid?

Answer:

No.

Conclusion:

The court entered judgment for plaintiff. The issuance of stock, which would cause a take-over of voting control from plaintiff, was improper and prevented by the statutory and constitutional provisions of the State of Delaware. The Court held that Del. Const. art. XI, § 3 and Del. Code Ann. tit. 8, § 152 prevented the issuance of the stock because such issuance was for the improper purpose of preventing plaintiff from exercising its contractual right to assert voting control of The Lunkenheimer Company’s stock.

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