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Law School Case Brief

Stroud v. Grace - 606 A.2d 75 (Del. 1992)

Rule:

Where one challenges the validity of a shareholder vote by claiming inadequate disclosure of confidential financial information in connection with that vote, the initial burden of proving complete disclosure of material facts relevant to the vote remains with the board of directors. If the board withheld information in these special circumstances, it would still bear the burden of proving that: (1) the withheld information was confidential; and (2) the board only withheld the material confidential information from shareholders, who having been given notice and opportunity, failed to execute a reasonable confidentiality agreement. To ensure maximum flexibility, it is inadvisable to adopt a bright-line test of reasonableness in this context. Certainly confidential information must not otherwise be publicly available. Finally, assuming the defendants meet their burden, the plaintiffs would be required, depending on the applicable standard, to prove that the board is not entitled to the protections of the business judgment rule, or that the challenged transaction was unfair.

Facts:

Milliken Enterprises, Inc. (Milliken) was a privately-held Delaware corporation. A series of disputes arose between the corporation and certain of its shareholders, mostly members of the Stroud branch of the Milliken family (Strouds). Plaintiff Strouds brought individual and derivative claims against Milliken and its board of directors (Defendants), alleging that the board breached its fiduciary duties by recommending certain charter amendments to its shareholders (Amendments). The Strouds also contested the adequacy and accuracy of the disclosures the board made to the shareholders in the notice of meeting at which the proposed amendments were to be considered, and also challenged the validity of the amendments and a by-law (By-law 3), which established the procedure for nominating candidates to Milliken's board of directors. The Court of Chancery sua sponte granted summary judgment for the Defendants on all of Strouds' claims but upheld Strouds' attack on By-law 3. Plaintiffs appealed.

Issue:

Did certain shareholders adequately prove that the amendments to the bylaws were invalidly adopted?

Answer:

No

Conclusion:

Because the board found no threat to its control and because defendant's shareholders had approved the amendments, the Court found that plaintiffs failed to prove either that the amendments were not properly adopted or that their adoption was the product of fraud, manipulation, or other inequitable conduct. Additionally, without a showing of abuse, the validity of the corporate action in nominating directors under Bylaw 3 had to await actual use. Hence, the Court affirmed the judgment granting defendant’s motion for summary judgment.

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