Where a corporation possesses a sufficient capital surplus from which to declare a dividend, a stockholder seeking to compel payment must allege facts which, if true, would overcome the business judgment rule so that the transaction might be tested against the intrinsic fairness test which shifts the burden of persuasion to the stockholder.
Shortly before minority shareholders were cashed out of their equity interest in the subsidiary corporation by a merger, the subsidiary corporation failed to declare its regular quarterly dividend. The complaining stockholder brought an action asking the court to compel the board of directors to declare the dividend, claiming that the board breached the fiduciary duty by the parent company to the subsidiary corporation in arranging the merger. The complaint did not request an injunction against the consummation of the merger, nor did it attack the adequacy of the price offered. The corporations pointed out this pleading omission in their motion to dismiss.
Was a stockholder's complaint to compel a corporation to declare a dividend inadequate because it did not allege self-dealing or plead with particularity any fraudulent conduct in the decision not to declare the dividend?
The court dismissed the complaint as inadequate because it did not allege self-dealing or plead with particularity any fraudulent conduct in the decision not to declare a dividend. For a cause of action to be stated, the stockholder must allege that the impending merger and the consideration being offered did not account for the value of the dividend that would have been forthcoming if the merger had not taken place. Because the stockholder did not challenge the merger, the complaint did not state a claim upon which relief could be granted. However, the court granted the stockholder leave to amend the complaint.