Agranoff v. Miller
1999 WL 14678, 734 A.2d 1066 (1999)
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Rule of Law:
Incumbent directors who are not stockholders or parties to a corporate contract may have standing in a § 225 action to challenge their removal by asserting the corporation's rights under that contract, provided their action is motivated by a genuine desire to protect the corporation and its shareholders, not merely to protect their own incumbency.
Facts:
- EMS Corp. and all of its stockholders were parties to a 1987 Shareholders' Agreement.
- The 1987 Agreement granted EMS a right of first refusal to purchase any shares offered for sale by its stockholders.
- A 1991 amendment stated the agreement would terminate on its tenth anniversary (August 14, 1997) unless a longer period was permitted by applicable law.
- Stuart Agranoff and L. David Callaway were directors of EMS but were not stockholders or individual parties to the 1987 Agreement.
- Edward M. Miller purchased shares and warrants from existing EMS shareholders, who were parties to the 1987 Agreement.
- These purchases gave Miller control over 64% of EMS's shares.
- The selling shareholders allegedly did not offer their shares to EMS first, in potential violation of the 1987 Agreement's right of first refusal.
- Using his newly acquired shares, Miller executed a written consent removing Agranoff and Callaway as directors of EMS.
Procedural Posture:
- EMS Corp., Stuart Agranoff, and L. David Callaway III (plaintiffs) filed an action under 8 Del. C. § 225 in the Delaware Court of Chancery.
- The plaintiffs challenged the validity of a written consent by defendant Edward M. Miller that removed Agranoff and Callaway as directors.
- The defendants, Edward M. Miller and William A. De Lorenzo, filed a motion for judgment on the pleadings.
- The Court of Chancery entered a status quo order governing the company's operations pending a final decision.
- At the motion stage, the plaintiffs conceded that EMS Corp. itself lacked statutory standing to bring a § 225 action.
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Issue:
Do non-shareholder directors, who are not parties to a shareholders' agreement, have standing in a § 225 action to challenge their removal by asserting the corporation's contractual rights under that agreement?
Opinions:
Majority - Strine, Vice Chancellor
Yes, incumbent directors who are not stockholders may have standing in a § 225 action to challenge their removal by asserting the corporation's contractual rights. Unlike in Insituform, where the corporation was not a party to the voting agreement, here EMS is a party to the 1987 Agreement, giving it direct contractual rights. The court found Miller's argument—that by taking control through an alleged breach, he is now the only party who can decide whether to enforce the contract against himself—to be 'somewhat troubling as a matter of public policy.' Such a result would vitiate the corporation's contractual rights. However, this standing is not absolute; it is contingent on whether the directors' action serves a valid corporate or shareholder interest, rather than merely their personal interest in retaining office. The court will ultimately analyze whether there is an objective basis for enforcing the contract, such as protecting a control premium for all shareholders, to ensure the directors are acting consistently with their fiduciary duties.
Analysis:
This decision clarifies and potentially expands director standing in § 225 actions. It establishes that directors, acting as fiduciaries, can assert the corporation's own contractual rights to challenge a change of control, even if they are not stockholders. The court links standing directly to fiduciary duty, creating a merits-based test that examines whether enforcing the contract serves a valid corporate purpose. This prevents a potential wrongdoer from using the control they gained from an alleged breach to shield that very breach from legal challenge, while also preventing directors from entrenching themselves by using corporate rights for personal reasons.
