Blaustein v. Lord Baltimore Capital Corp.

Supreme Court of Delaware
84 A.3d 954 (2014)

ELI5:

Rule of Law:

Directors of a closely held corporation do not have a general common law fiduciary duty to repurchase a minority stockholder's shares. Furthermore, the implied covenant of good faith and fair dealing cannot be used to impose an obligation to negotiate a repurchase when the shareholders' agreement grants the corporation complete discretion over such matters.

Facts:

Lord Baltimore Capital Corporation is a closely held corporation formed by members of the Thalheimer family in 1998.
In 1999, Susan M. Blaustein became a stockholder under a Shareholders' Agreement.
Paragraph 7(d) of the agreement stated the company 'may repurchase Shares upon terms and conditions agreeable to the Company and the Shareholder,' subject to board or supermajority shareholder approval.
Blaustein alleged that Louis Thalheimer, a controlling family member and director, had orally promised her that she would be able to sell her stock for its full value after a ten-year waiting period.
Thalheimer allegedly stated this promise could not be written into the agreement due to potential negative tax consequences for the corporation.
After the ten-year period expired, Blaustein attempted to sell her stock.
The Lord Baltimore board, led by Thalheimer, refused to offer a price better than a 52% discount from the net asset value of her shares.
Blaustein alleged that the controlling directors refused her proposals due to a conflict of interest, namely to preserve their own personal tax benefits.

Procedural Posture:

Susan M. Blaustein filed a complaint against Louis Thalheimer and Lord Baltimore Capital Corporation in the Delaware Court of Chancery (trial court).
The Court of Chancery dismissed most of Blaustein's initial claims, including promissory estoppel and breach of fiduciary duty, leaving only an implied covenant claim.
The defendants then moved for summary judgment on the remaining implied covenant claim.
In response, Blaustein sought leave from the court to amend her complaint to add new fiduciary duty and implied covenant claims.
The Court of Chancery granted the defendants' motion for summary judgment and denied Blaustein's motion for leave to amend her complaint.
Blaustein (appellant) appealed the Court of Chancery's denial of her motion to amend to the Delaware Supreme Court, with Lord Baltimore and Thalheimer as appellees.

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Issue:

Does the board of a closely held corporation breach a fiduciary duty or the implied covenant of good faith and fair dealing by refusing to repurchase a minority stockholder's shares at her proposed price, when the shareholders' agreement makes such repurchases permissive and subject to the board's discretion?

Opinions:

Majority - Justice Berger

No. The board's refusal to repurchase the shares does not breach a fiduciary duty or the implied covenant of good faith and fair dealing. Under Delaware common law, directors of a closely held corporation have no general fiduciary duty to repurchase a minority stockholder's shares; an investor must rely on contractual protections for liquidity. Because Blaustein had no inherent right to a repurchase, she had no right to demand a non-conflicted board committee to negotiate one. The Shareholders' Agreement provided the only available protection, and its language was permissive, granting both parties discretion and imposing no affirmative duty to negotiate. Similarly, the implied covenant of good faith and fair dealing cannot be used to create new contract terms—such as a duty to negotiate in good faith—that could have been bargained for but were not. Because the agreement explicitly gave the company discretion, there was no contractual gap for the implied covenant to fill.

Analysis:

This decision reinforces the principle that in Delaware corporate law, particularly within closely held corporations, contractual rights are paramount over default fiduciary duties concerning shareholder liquidity. It serves as a strong caution to minority investors that any right to an exit or repurchase of shares must be explicitly and clearly negotiated in a shareholders' agreement. The ruling significantly limits the scope of the implied covenant of good faith and fair dealing, clarifying that it cannot be used to override or add to unambiguous contractual terms that grant a party discretion. This precedent solidifies the idea that courts will not rescue a sophisticated investor from a deal they later regret, especially when they failed to secure specific written protections.

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