Jedwab v. MGM Grand Hotels, Inc.
509 A.2d 584, 1986 Del. Ch. LEXIS 509 (1986)
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Rule of Law:
While preferential rights of preferred stock are contractual in nature, directors and controlling shareholders owe a fiduciary duty of fairness to preferred stockholders regarding rights they share with common stock, such as the right to a fair allocation of merger consideration.
Facts:
- In 1980, MGM Grand Hotels, Inc. suffered a catastrophic fire at its Las Vegas hotel, leading to massive litigation claims and a decline in its stock value.
- In 1982, MGM Grand created a new Series A Redeemable Preferred Stock and offered to exchange it for common stock on a one-for-one basis. This preferred stock had a $20 per share liquidation preference and redemption right.
- Kerkorian was the controlling shareholder of MGM Grand, owning approximately 69% of the common stock and 74% of the preferred stock.
- In 1985, Bally Manufacturing Corporation offered to acquire all of MGM Grand's equity for a total price of $440 million in cash.
- Kerkorian, on behalf of MGM Grand, negotiated the allocation of the merger consideration with Bally.
- The resulting merger agreement provided that public common stockholders would receive $18 per share, while all preferred stockholders would receive $14 per share.
- To fit the transaction within Bally's $440 million offer, Kerkorian agreed to accept less consideration for his own common shares: $12.24 in cash plus certain non-cash assets, including contingent litigation rights and the rights to the MGM Grand name.
Procedural Posture:
- Jedwab, a preferred stockholder, filed a class action lawsuit in the Delaware Court of Chancery on behalf of all preferred stockholders.
- The defendants were MGM Grand Hotels, Inc., its directors, and its controlling shareholder, Kerkorian.
- Plaintiff sought a preliminary and permanent injunction to block a proposed merger between MGM Grand and a subsidiary of Bally Manufacturing Corporation.
- The case is before the Court of Chancery on the plaintiff's motion for a preliminary injunction.
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Issue:
Does a controlling shareholder and board of directors breach a fiduciary duty to preferred stockholders by approving a merger that allocates a lower per-share consideration to them than to public common stockholders?
Opinions:
Majority - Chancellor Allen
No. A board and controlling shareholder do not breach a fiduciary duty to preferred stockholders by allocating different per-share consideration in a merger, provided that the overall allocation between the classes of stock is fair. While the preferential rights of preferred stock are governed by contract, fiduciary duties apply to rights shared equally with common stock, including the right to a fair apportionment of merger proceeds. Here, although the transaction is subject to the entire fairness standard because the controlling shareholder received a different form of consideration, the allocation is likely to be found fair. The court reasoned that the pertinent comparison is not between the preferred stock's price and the public common's price, but between the consideration received by the two classes of stock as a whole. The premium paid to the public common stockholders was funded entirely by the controlling shareholder, Kerkorian, who accepted less value for his own shares. The law does not require a fiduciary to sacrifice his interests, nor does it dictate how he must distribute any value he voluntarily forgoes.
Analysis:
This case clarifies the dual nature of duties owed to preferred stockholders in Delaware, distinguishing between their purely contractual preferential rights and the equitable fiduciary duties they share with common stockholders. It establishes that a different allocation of merger consideration between classes is not a per se breach of duty; the allocation must be analyzed for its overall fairness based on the distinct legal and economic rights of each class. The ruling also affirms that a controlling shareholder may subsidize a premium for public shareholders from their own proceeds without creating a valid claim of unfairness from another class of stock, thereby protecting a fiduciary's right to sacrifice their own interests without being legally compelled to share that sacrifice pro-rata.
