Gabelli & Co., Inc. Profit Sharing Plan v. Liggett Group, Inc.
444 A.2d 261, 1982 Del. Ch. LEXIS 394 (1982)
Rule of Law:
A minority shareholder cannot compel the payment of a dividend by a majority shareholder-controlled subsidiary on grounds of breach of fiduciary duty and self-dealing where the non-declaration of the dividend is intertwined with a cash-out merger, unless the plaintiff also alleges and challenges the unfairness of the merger price.
Facts:
- Gabelli & Co., Inc. Profit Sharing Plan ("Gabelli") owned 800 shares of Liggett Group, Inc. ("Liggett") common stock.
- GM Sub Corporation ("GM Sub"), an indirect wholly-owned subsidiary of Grand Metropolitan Limited ("Grand Met"), made a tender offer to purchase shares of Liggett.
- GM Sub initially offered $50 per share but later increased its offer to $69 per share to counter a competing offer from Standard Brands, Inc.
- Liggett’s board approved the $69 per share offer, and approximately 85% of Liggett’s shareholders accepted the tender offer, making Grand Met the majority shareholder.
- Grand Met, through its newly acquired majority position, proposed a plan of merger in which Liggett would be merged into Grand Met or a wholly-owned subsidiary, with minority shareholders being cashed out at $69 per share.
- For sixteen years, Liggett had customarily declared a regular quarterly dividend of $.625 per share in late July, with an early August record date and late August/early September payment.
- In July 1980, immediately preceding the scheduled early August merger, Liggett’s Board of Directors did not declare the customary dividend.
Procedural Posture:
- Gabelli & Co., Inc. Profit Sharing Plan filed an action in the Delaware Court of Chancery on July 16, 1980, seeking to compel Liggett's Board of Directors to declare the traditional dividend and seeking class action status on behalf of all Liggett minority shareholders.
- Defendants Liggett Group, Inc. and GM Sub Corporation moved to dismiss Gabelli's complaint for failure to state a claim upon which relief may be granted.
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Issue:
Does a complaint, alleging that a majority stockholder caused a subsidiary to eliminate its regular dividend immediately prior to a cash-out merger for the majority stockholder's pecuniary gain, state a claim for breach of fiduciary duty by the parent corporation, without also challenging the fairness of the merger price?
Opinions:
Majority - Harnett, Vice Chancellor
No, a complaint alleging that a majority stockholder caused a subsidiary to eliminate its regular dividend immediately prior to a cash-out merger for the majority stockholder's pecuniary gain does not state a claim for breach of fiduciary duty by the parent corporation if it fails to also challenge the fairness of the merger price. The court reasoned that the decision to declare a dividend is ordinarily a matter of Board discretion, protected by the business judgment rule, which courts will not disturb absent a showing of oppressive or fraudulent abuse of discretion. While a majority shareholder owes a fiduciary duty to minority shareholders, this duty alone does not automatically invoke the "intrinsic fairness" test unless there is a showing of self-dealing or the parent usurped something of value to the exclusion and detriment of minority shareholders, as established in Sinclair Oil Corp. v. Levien. A mere failure to declare a dividend, by itself, does not constitute self-dealing to the exclusion of minority shareholders because dividends affect all shareholders proportionally. To overcome this, the plaintiff must view the non-declaration of the dividend and the cash-out merger as one transaction and allege that the merger price was unfair and did not account for the value of the foregone dividend. Without an allegation that the merger itself was unfair or that the merger price was inadequate, the complaint fails to establish the necessary detriment to the minority shareholders to support a claim of oppression, bad faith, or self-dealing that would trigger the intrinsic fairness test. The court cannot assume the merger terms were unfair when the complaint does not challenge them. Consequently, the complaint, as currently pleaded, does not state a cause of action, though the plaintiff is granted leave to amend to challenge the merger.
Analysis:
This case clarifies the high evidentiary bar for minority shareholders challenging dividend decisions by a controlling parent corporation, especially when such decisions are made in contemplation of a cash-out merger. It reinforces that the business judgment rule protects a board's dividend decisions unless actual self-dealing to the exclusion of minority shareholders is explicitly demonstrated. The key takeaway is that when a dividend policy change is part of a larger, integrated transaction like a merger, the fairness of the entire transaction, particularly the merger price, becomes paramount. Future litigants must directly challenge the merger's fairness to succeed on such claims, emphasizing the necessity of proving actual, non-proportional detriment to the minority beyond a mere alteration of dividend expectations.
