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Mendel v. Carroll - 651 A.2d 297 (Del. Ch. 1994)

Rule:

A board's fiduciary obligation to the corporation and its shareholders, in this setting, requires it to be a protective guardian of the rightful interest of the public shareholders. But while that obligation may authorize the board to take extraordinary steps to protect the minority from plain overreaching, it does not authorize the board to deploy corporate power against the majority stockholders, in the absence of a threatened serious breach of fiduciary duty by the controlling stock. 

Facts:

Plaintiff shareholder, Herbert Mendell, individually and on behalf of a class of shareholders (Mendell) filed an application for a mandatory preliminary injunction, specifically, an order directing defendant Board of Directors of Katy Industries, Inc. (Katy) to grant to defendants Pensler Capital Corporation and Pensler Capital Partners I.L.P., an option to purchase up to 20% of Katy's outstanding common stock at $ 27.80 per share. The granting of such an option is a condition of an offer for a B27.80 per share cash merger extended by Pensler to Katy. The proposed merger is said by the Mendell shareholders to be without other material conditions. Katy's board of directors declined to grant the option sought. The Board took this position in the face of a claim by a group of related shareholders, defendant Carroll Family, that granting such an option would deprive them of their legitimate and dominant voice in corporate affairs, and would in the circumstances constitute a breach of fiduciary duty.

Issue:

Did Mendell show a likelihood of success on the merits that they would suffer irreparable harm, thus, preliminary injunction must be granted?

Answer:

No

Conclusion:

The court denied Mendell's motion, holding that the defendants did not have a duty to maximize the minority shares and that the controlling shareholders did not have a duty to sell their shares. The court held that the issuance of a preliminary injunction required, first, that Mendell et al. persuade the court that they had a reasonable likelihood of prevailing on the merits of the complaint, and that they would be threatened with irreparable injury before a final hearing could be had. The court then balanced any harm that would befall defendants against the threat of injury to Mendell.

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