Lacos Land Co. v. Arden Group, Inc.
1986 Del. Ch. LEXIS 444, 517 A.2d 271 (1986)
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Rule of Law:
A shareholder vote is voidable if it was procured through either (1) improper coercion by a corporate fiduciary who threatens to breach their duty of loyalty by blocking beneficial corporate transactions unless they receive a personal benefit, or (2) a proxy statement that contains material misrepresentations or omissions that would have significantly altered the total mix of information available to a reasonable shareholder.
Facts:
- Bernard Briskin was the Chief Executive Officer, a director, and a 21.1% shareholder of Arden Group, Inc.
- Briskin proposed a recapitalization plan to create a new Class B Common Stock with ten votes per share, designed to be attractive primarily to himself and transfer corporate control to him.
- Briskin informed Arden's board that he would not support future corporate transactions, such as mergers or financings that could be in the best interests of all shareholders, if they diluted his voting power, unless the recapitalization plan was approved.
- A special committee of non-officer directors, without retaining independent legal or financial advisors, reviewed and recommended the plan.
- Arden's board of directors approved the plan and recommended it to shareholders in a proxy statement.
- The proxy statement disclosed Briskin's threat to withhold support for future transactions if the plan was not approved.
- The proxy statement also incorrectly implied that after the transaction, Briskin would be a "Restricted Person" under the company's charter, which would have subjected certain future transactions with him to a supermajority shareholder vote.
- At the annual meeting, shareholders voted to approve the charter amendments required for the recapitalization.
Procedural Posture:
- A plaintiff shareholder owning approximately 4.5% of Arden Group, Inc.'s Class A stock filed an action in the Delaware Court of Chancery against the company's board of directors.
- Another shareholder owning 4.6% of the stock moved to intervene as a plaintiff.
- The plaintiff moved for a preliminary injunction to prevent the company from issuing the new Class B Common Stock authorized by the shareholder vote.
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Issue:
Does a shareholder vote approving a recapitalization plan that transfers control to a corporate fiduciary become voidable when the fiduciary threatens to block future beneficial corporate transactions if the plan is not approved, and when the proxy statement contains material misrepresentations about the plan's effects?
Opinions:
Majority - Chancellor Allen
Yes. A shareholder vote is fatally flawed and the resulting charter amendments are voidable when the vote is procured through improper coercion by a corporate fiduciary or based on a materially misleading proxy statement. The court found two independent reasons to grant the preliminary injunction. First, the shareholder vote was improperly coerced. Briskin, acting in his capacity as a director and officer, threatened to breach his fiduciary duty by withholding support for future transactions beneficial to the corporation unless he received the personal benefit of absolute control. This placed shareholders in the improper position of having to choose between acceding to his demands and having their fiduciary act against the company's best interests. Second, the proxy statement was materially misleading. It falsely implied that Briskin would be a 'Restricted Person' under Article Twelfth of the charter, which would have acted as a check on his power. In reality, the board's approval of the transaction exempted him from this status. The court found a substantial likelihood that a reasonable shareholder would have considered the truth about Briskin's 'Restricted Person' status important in deciding how to vote, as it significantly altered the 'total mix' of information about the extent of the power being transferred.
Analysis:
This decision reinforces the high standards of the fiduciary duties of loyalty and candor under Delaware law. It clarifies that a fiduciary cannot leverage their corporate position to coerce shareholders into granting them a personal benefit, even if the fiduciary's motives might be benevolent. The ruling establishes that linking a threat to breach one's duty of loyalty to a shareholder vote renders that vote voidable. Furthermore, the case underscores the stringency of the duty of candor, demonstrating that misrepresentations by implication regarding the legal effects of a proposal can be deemed material, especially when they relate to checks on the power of the fiduciary benefiting from the transaction.
