Benihana of Tokyo, Inc. v. Benihana, Inc.
906 A.2d 114 (2006)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under Delaware law, an interested director transaction is protected by the business judgment rule if it is approved by a majority of informed, disinterested directors, and the primary purpose of the transaction is to advance a legitimate corporate interest, even if it has a secondary effect of diluting a controlling shareholder's voting power.
Facts:
- Benihana of Tokyo, Inc. (BOT), controlled by the Aoki family trust, held a 50.9% voting majority in Benihana, Inc.
- Following a family dispute, Benihana's CEO, Joel Schwartz, became concerned about the Aoki family's control over the company.
- Benihana's restaurants were outdated, and the company needed at least $56 million for a comprehensive 'Construction and Renovation Plan' to remain competitive.
- After determining that a bank line of credit was insufficient, Benihana's financial advisor, Morgan Joseph, recommended issuing convertible preferred stock to raise the necessary capital.
- John Abdo, a director of Benihana, was also a director, vice-chairman, and major shareholder of BFC Financial Corporation (BFC).
- Abdo, on behalf of BFC, contacted Morgan Joseph to express interest in purchasing the new stock and proceeded to negotiate the terms of the transaction with Morgan Joseph.
- The Benihana board, knowing of Abdo's role as a principal in BFC, approved the issuance of $20 million in convertible preferred stock to BFC.
- The transaction, upon conversion, would dilute BOT's voting control below 50%.
Procedural Posture:
- Benihana of Tokyo, Inc. (BOT) filed a lawsuit against Benihana, Inc.'s directors and BFC Financial Corporation in the Delaware Court of Chancery (trial court).
- BOT alleged that the directors breached their fiduciary duties and that BFC aided and abetted these breaches.
- Following a trial, the Court of Chancery entered judgment for the defendants, finding that the stock issuance was authorized and that the board's approval was a valid exercise of business judgment.
- BOT, as appellant, appealed the trial court's decision to the Delaware Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a board of directors breach its fiduciary duties by approving an interested transaction to issue convertible preferred stock, which dilutes the voting power of the controlling shareholder, when the disinterested directors are aware of the conflict and the transaction's primary purpose is to secure needed corporate financing?
Opinions:
Majority - Berger, Justice
No. The board of directors did not breach its fiduciary duties because the interested transaction was cleansed by the approval of informed, disinterested directors and was motivated by a legitimate business purpose. First, the court held that Benihana's certificate of incorporation, which contained a 'blank check' provision for preferred stock, authorized the board to issue stock with contractual preemptive rights, despite another provision generally denying such rights. Second, the court found the transaction satisfied the safe harbor of Delaware General Corporation Law § 144(a)(1). The disinterested directors possessed all material information regarding Abdo's interest, as they knew he was a principal of BFC, even if they were not explicitly told he personally negotiated the deal. This approval by a majority of disinterested directors meant the transaction was subject to the deferential business judgment rule. Finally, the court deferred to the trial court's factual finding that the board's primary purpose was to secure financing for the crucial renovation plan, not to entrench themselves by diluting BOT's voting power. Therefore, the board's action was a valid exercise of its business judgment.
Analysis:
This decision reinforces the significant protection afforded to boards by the business judgment rule, particularly when an interested transaction is 'cleansed' under the § 144(a)(1) safe harbor. It clarifies that disclosure of a conflict does not require a formalistic recitation of every detail, so long as the disinterested directors have sufficient information to comprehend the nature and extent of the interest. The case also underscores the critical importance of the board's 'primary purpose' in actions that affect corporate control; if the primary motivation is a legitimate business need, a collateral effect of diluting a shareholder's stake will not, by itself, invalidate the board's decision. This provides directors with substantial latitude to pursue financing strategies they believe are in the corporation's best interest.
Unlock the full brief for Benihana of Tokyo, Inc. v. Benihana, Inc.