Law School Case Brief
David J. Greene & Co. v. Dunhill Int'l, Inc. - 249 A.2d 427 (Del. Ch. 1968)
The settled rule of law is that as majority stockholder and directors as its nominees occupy, in relation to the minority, a fiduciary position in dealing with the company's property. Since they stand on both sides of the transaction, they bear the burden of establishing its entire fairness, and it must pass the test of careful scrutiny by the courts.
Plaintiffs David Green and Co. et al, collectively owned shares of defendant Dunhill International, Inc. Plaintiffs sought an injunction prohibiting the consummation of a proposed merger between defendant corporation and another corporation. Plaintiffs argued that the terms of the merger were grossly unfair and inequitable to defendant's minority stockholders. Plaintiffs pointed out that the majority of defendant's directors were officers and directors of the company with whom defendant would merge; that through them the other corporation dominated and controlled defendant; and that in exercising such control, the other corporation breached fiduciary duties which it owed to defendant and the minority stockholders.
Is there sufficient evidence for the court to question the fairness, to defendant's minority shareholders of the merger.
Preliminary injunction granted because plaintiffs produced sufficient evidence for the court to question the fairness, to defendant's minority shareholders of the merger. Equating one share of Spalding stock to 1.6 shares of Dunhill common and computing "pro forma" net earnings on that basis, it appears that Spalding earnings on a per share basis would be sharply reduced after merger: from $2.69 to $1.74 for 1967 and from $2.12 to $1.07 for the first half of 1968. On a similar basis, book value of a Spalding share would be reduced from $34.08 to $17.49. It is obvious that Duff, Anderson regards such factors as a call on a common stock with an active New York Stock Exchange listing, an equity position in a larger industrial based company, and other factors discussed in its report as more than offsetting the "near term paper dilution" which it tacitly concedes will be the lot of the Spalding minority. And so they may. But, cumulatively, the uncertainty as to the appropriate multiplier, the record facts as to the Child Guidance opportunity and the substantial dilution in earnings and book value which will admittedly occur, persuade me that plaintiffs have made out the probability of success sufficient for their motion. In other words, on the present record Dunhill has not met its burden of proof to show that the transaction is fair after careful scrutiny by the Court. Sterling v. Mayflower Hotel Corp., supra. I hasten to add that this is not a finding that the merger is unfair. It simply means that plaintiffs have established their right to go to trial and so the motion for a preliminary injunction will be granted. At trial each side will have full opportunity to develop the contentions made in the present record. In view of the fact that consummation of the merger will be enjoined, Dunhill is entitled to and on request will get a prompt trial on the merits.
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