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Lehrman v. Cohen

Supreme Court of Delaware
222 A.2d 800, 43 Del. Ch. 222, 1966 Del. LEXIS 163 (1966)
ELI5:

Rule of Law:

The creation of a new class of stock with voting rights but minimal economic interests, designed to prevent director deadlocks, does not constitute a voting trust under Delaware law if the original stockholders retain their right to vote their own shares. Such an arrangement is permissible under Delaware General Corporation Law § 151(a), which allows a corporation's certificate of incorporation to define varied voting powers and rights for different classes of stock.


Facts:

  • Giant Food Inc. was initially controlled equally by the Cohen family (holding Class AC stock) and the Lehrman family (holding Class AL stock), with each family electing two of the four directors.
  • Following a dispute within the Lehrman family, an arrangement was made for plaintiff Jacob Lehrman to acquire all the Class AL stock.
  • To prevent potential 2-2 deadlocks on the board, the company's certificate of incorporation was unanimously amended to create a new, fifth directorship.
  • The amendment also created one share of Class AD stock, which was entitled only to elect the fifth director and had no rights to dividends or liquidation assets beyond its $10 par value.
  • This single share of Class AD stock was issued to Joseph B. Danzansky, the company's counsel, who then elected himself as the fifth director.
  • For years, the board operated with two Cohen directors, two Lehrman directors, and Danzansky as the fifth director.
  • A dispute arose when the votes of the Class AC stock and Danzansky's Class AD stock were used to elect Danzansky as company president and approve an executive employment contract for him, over the objections of the Class AL stockholder, Jacob Lehrman.

Procedural Posture:

  • Jacob Lehrman (plaintiff) filed an action in the Delaware Court of Chancery against N. M. Cohen and Joseph B. Danzansky (defendants).
  • The plaintiff's first claim charged that the creation and issuance of the Class AD stock was an illegal arrangement.
  • Both parties filed cross-motions for summary judgment on the first claim.
  • The Court of Chancery granted summary judgment in favor of the defendants and denied the plaintiff's motion.
  • The plaintiff, Jacob Lehrman (appellant), appealed the Court of Chancery's decision to the Supreme Court of Delaware.

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Issue:

Does the creation of a special class of stock with voting rights but negligible proprietary interests, for the purpose of electing a tie-breaking director, constitute an illegal voting trust under the Delaware Voting Trust Statute?


Opinions:

Majority - Herrmann, Justice

No, the creation of the Class AD stock does not constitute an illegal voting trust. The arrangement did not separate the voting rights from the other attributes of ownership of the Class AC and AL stock, which is the first and essential element of a voting trust. The original stockholders retained complete control over voting their own shares, and their voting rights were not transferred to a trustee; rather, their voting power was merely diluted by the creation of a new, valid class of stock as part of the company's capitalization, which is expressly permitted by Delaware statute.



Analysis:

This decision clarifies the distinction between a permissible corporate capital structure and an illegal voting trust. By upholding the creation of a class of stock with voting rights but minimal economic interests, the court affirmed the broad flexibility granted to corporations under Delaware General Corporation Law § 151(a) to create novel governance structures through their certificates of incorporation. The case establishes that as long as shareholders do not formally separate the vote from their shares and transfer it to a trustee (the hallmark of a voting trust), creating new voting stock to solve governance issues like deadlock is a legitimate exercise of corporate power. This ruling provides a roadmap for closely-held corporations to create tie-breaking mechanisms without running afoul of voting trust regulations.

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