Buckley Family Trust v. Charles Patrick McCleary
2020 WL 1522549 (Del. Ch. Mar. 31, 2020) (2020)
Rule of Law:
A court will only compel the payment of dividends if the withholding of them is explicable only on the theory of an oppressive or fraudulent abuse of discretion. Furthermore, to excuse a pre-suit demand in a derivative action based on the duty of care, a plaintiff must plead particularized facts showing that the directors acted with gross negligence, creating a substantial likelihood of personal liability.
Facts:
- The Buckley Family Trust (Plaintiff) holds approximately 16.4% of the non-voting common stock in McCleary, Inc., a snack food company, while the McCleary family (Defendants) owns the remaining majority interest and controls the Board.
- A 1993 Stock Purchase and Restriction Agreement prevents shareholders from selling stock without first offering it to the Company or other shareholders at a price including a mandatory 30% discount for lack of marketability.
- Between 2015 and 2017, the Board authorized several business initiatives that failed or lost money, including a facility renovation for a competitor (Shearer's) that fell through and a new warehouse project that was abandoned after the city demanded costly road maintenance.
- In 2016, the Board decided to transition the Company's largest customer account from Aldi to a new customer, Truco; the relationship with Truco soured, forcing the Company to return to Aldi at lower prices, resulting in approximately $10 million in lost sales.
- The Company retained a surplus of approximately $18.2 million as of 2018, largely in illiquid assets like machinery and inventory, rather than cash.
- The Board refused to declare meaningful dividends beyond those necessary for tax obligations, which the Plaintiff claimed was an attempt to coerce them into selling their shares at the contractual discount.
Procedural Posture:
- Plaintiff made a demand for books and records under 8 Del. C. § 220.
- Plaintiff filed a Verified Amended Complaint in the Court of Chancery of Delaware asserting claims for oppressive abuse of discretion and breach of fiduciary duties.
- Defendants moved to dismiss Count I and Count II under Rule 12(b)(6) for failure to state a claim.
- Defendants moved to dismiss the derivative aspects of Count II under Rule 23.1 for failure to make a pre-suit demand.
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Issue:
Does a board of directors' refusal to declare dividends constitute an oppressive abuse of discretion warranting judicial intervention, and does a plaintiff establish demand futility by alleging that directors made poor business decisions that resulted in financial losses?
Opinions:
Majority - Chancellor Bouchard
No, the Court held that the refusal to pay dividends was protected by the business judgment rule, and the Plaintiff failed to plead demand futility regarding the duty of care claims. Regarding the dividend claim, the Court reaffirmed that the declaration of dividends is a discretionary act of the Board. Judicial interference is only warranted if the withholding is 'oppressive or fraudulent.' Unlike previous cases (e.g., Litle v. Waters) where directors withheld dividends to force a squeeze-out while enriching themselves, the directors here owned common stock and suffered the same lack of dividends as the Plaintiff. The 30% discount on share sales was a contractual term the Trust accepted, not a coercive tool invented by the Board. Regarding the derivative duty of care claims, the Plaintiff failed to make a demand on the Board. To excuse demand, the Plaintiff had to show the directors faced a 'substantial likelihood of liability.' Although the company lacked a Section 102(b)(7) exculpation clause, the standard for liability is gross negligence. The Court reviewed the challenged business decisions (Aldi, warehouse, Shearer's) and found the Board acted on reports, consultants, and strategic logic. Bad outcomes do not equal gross negligence. Therefore, demand was not excused.
Analysis:
This decision reinforces the high deference Delaware courts give to corporate boards regarding dividend policies. It clarifies that a 'large surplus' on a balance sheet does not automatically entitle shareholders to dividends, especially when that surplus is tied up in illiquid assets. The case is also notable because the corporation lacked a Section 102(b)(7) provision, which typically exculpates directors from duty of care breaches. This allowed the court to perform a rare substantative analysis of the 'gross negligence' standard at the pleading stage. The ruling demonstrates that even without exculpation, pleading gross negligence is a 'difficult burden'; simply pointing to failed business strategies and lost profits is insufficient to overcome the presumption that directors acted on an informed basis.
