Orban v. Field - Civil Action No. 12820, 1997 Del. Ch. LEXIS 48 (Ch. Apr. 1, 1997)

Rule:

A board may deploy corporate power against its own shareholders in some circumstances -- the greater good justifying the action -- but when it does, it should be required to demonstrate that it acted both in good faith and reasonably. The burden is upon the party advocating the propriety of the board's conduct to show that the conduct was taken in good faith pursuit of valid ends and was reasonable in the circumstances.

Facts:

Plaintiff, common stockholders of Office Mart Holdings Corp. ("Office Mart"), sued defendants, board members and the chief executive (board), William Field et al., claiming a breach of loyalty by reason of their having assisted the preferred stockholders' efforts to bring about a corporate merger. Plaintiffs also claimed that waste was committed by reason of board approval of certain payments to the chief executive. Plaintiffs disapproved of certain decisions made by the board that resulted in a stock-for-stock merger of the corporation with another entity in which the common stockholders, unlike the preferred stockholders, received no consideration. The board facilitated the preferred stockholders' exercise of certain warrants that resulted in the dilution of the common stockholders' position and prevented them from thwarting the merger. The board, defendants, sought summary judgment. The court granted summary judgment. 

Issue:

Did the court err in granting the defendant’s summary of judgment?

Answer:

No. The court granted summary judgment to the board on the common stockholders' claims of breaches of fiduciary duty, including loyalty, and waste.

Conclusion:

The court held: (1) that the board did not breach its fiduciary duty to the common stockholders because the transaction was taken in good faith and was reasonable; (2) that no duty of loyalty was breached because the preferred stockholders, unlike the common stockholders, had an existing legal preference entitling them to part of the merger proceeds and the merger reasonably appeared to be the best available transaction; and (3) that certain payments to the chief executive did not constitute waste, as they were approved by disinterested directors, they otherwise would have been paid to the preferred stockholders, they were protected by the business judgment rule, and they were called for under the executive's contract.