Schnell v. Chris-Craft Industries, Inc.

Supreme Court of Delaware
285 A.2d 437 (1971)

ELI5:

Rule of Law:

Corporate directors may not utilize the corporate machinery and the law for an inequitable purpose, such as perpetuating themselves in office. An action that is legally possible is not permissible if its primary purpose is inequitable.

Facts:

The by-laws of a corporation set the annual stockholders' meeting for January 11, 1972.
A group of dissident stockholders planned to wage a proxy contest to challenge the incumbent management at the upcoming annual meeting.
Management had previously resisted the dissidents' efforts, including by refusing to produce a list of stockholders.
On October 16, 1971, the dissident stockholders committee filed its intention to wage a proxy fight with the Securities and Exchange Commission (S.E.C.).
Two days later, on October 18, 1971, the corporation's management-controlled board of directors amended the by-laws.
The amendment advanced the date of the annual stockholders' meeting from January 11, 1972, to December 8, 1971.
This change significantly reduced the time available for the dissident stockholders to prepare and wage their proxy contest.

Procedural Posture:

Dissident stockholders (plaintiffs) petitioned the Delaware Court of Chancery (trial court) for an injunction.
The injunction sought to prevent management (defendants) from advancing the date of the annual stockholders' meeting.
The Court of Chancery denied the stockholders' petition for injunctive relief.
The dissident stockholders (appellants) appealed the denial to the Supreme Court of Delaware, the state's highest court.

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Issue:

Did the board of directors act inequitably and in violation of their duties when they amended corporate by-laws to advance the date of a scheduled annual stockholders' meeting for the primary purpose of obstructing a proxy contest by dissident shareholders?

Opinions:

Majority - Herrmann, Justice

Yes, the board of directors acted inequitably by advancing the date of a stockholders' meeting for the purpose of obstructing a proxy contest. The court found that management attempted to utilize the corporate machinery and Delaware Law for the inequitable purposes of perpetuating itself in office and obstructing the legitimate efforts of dissident stockholders. Such actions are contrary to established principles of corporate democracy. The court famously stated that 'inequitable action does not become permissible simply because it is legally possible.' The court distinguished this case from American Hardware Corp. v. Savage Arms Corp., where there was no finding of inequitable conduct by management. It also rejected the lower court's finding that the stockholders' claim was tardy, noting that they filed suit promptly after learning of the change and could not be expected to anticipate such inequitable action by management.

Dissenting - Wolcott, Chief Justice

No, the board's action should stand. The dissent would have affirmed the lower court's decision. The dissenting justice agreed with the Vice Chancellor that the dissident stockholders' application for injunctive relief came too late, considering the long history of their attempts to gain control of the corporation. Therefore, the dissent would not have granted the relief requested.

Analysis:

This case is a foundational decision in Delaware corporate law, establishing that director actions, even if technically legal under a statute, are subject to judicial review for equitable fairness. It introduces a powerful check on board authority, preventing directors from using their power to entrench themselves or disenfranchise shareholders. The principle that 'inequitable action does not become permissible simply because it is legally possible' has become a cornerstone of corporate fiduciary duty jurisprudence, influencing subsequent cases involving defensive measures against takeovers and interference with shareholder voting rights.

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