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Speiser v. Baker

Court of Chancery of Delaware
1987 Del. Ch. LEXIS 398, 525 A.2d 1001 (1987)
ELI5:

Rule of Law:

Under DGCL § 160(c), a parent corporation's shares held by a subsidiary "belong to" the parent and are prohibited from voting if the parent possesses the unconditional right to obtain a voting majority, regardless of its present voting power. Separately, the right to compel a shareholder meeting under DGCL § 211(c) is virtually absolute and is not defeated by allegations of a shareholder's improper motive or past acquiescence.


Facts:

  • Marvin Speiser and Leon Baker each owned 50% of the common stock and were the sole directors of Health Med Corporation.
  • Health Med's only significant asset was a 42% block of stock in Health Chem ('Chem'), a publicly traded company.
  • Chem, through its wholly-owned subsidiary Medallion Corp., owned preferred stock representing 95% of the equity in Health Med.
  • This preferred stock, in its unconverted state, carried only 9% of Health Med's voting power.
  • Chem possessed the unconditional and immediate right to convert its preferred stock into Health Med common stock, which would grant it 95% of the voting power.
  • This circular ownership structure was intentionally created by Speiser and Baker to allow them to control Chem by directing how Health Med voted its 42% stake.
  • Speiser and Baker had a falling out, leading to a deadlock.
  • No annual meeting of Health Med had been held for several years, as Baker was able to prevent a quorum by not attending.

Procedural Posture:

  • Marvin Speiser sued Leon Baker and Health Med Corporation in the Delaware Court of Chancery to compel an annual shareholder meeting pursuant to DGCL § 211(c).
  • Baker filed an Answer with affirmative defenses and a counterclaim seeking a declaratory judgment that Health Med was prohibited from voting its Chem stock under DGCL § 160(c).
  • Speiser, the plaintiff, filed a motion for judgment on the pleadings on his § 211 claim.
  • Speiser also filed a motion to dismiss Baker's § 160(c) counterclaim.

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Issue:

Does DGCL § 160(c) prohibit a subsidiary from voting a parent corporation's stock when the parent owns 95% of the subsidiary's equity and possesses an unconditional, but unexercised, right to convert its holdings into a 95% voting majority, even though its present holdings only represent 9% of the vote?


Opinions:

Majority - Chancellor Allen

Yes, DGCL § 160(c) prohibits the subsidiary from voting the parent's stock under these circumstances. While a literal reading of the statute's 'majority of the shares entitled to vote' clause might suggest otherwise, the court must interpret the statute's primary prohibition on voting shares 'belonging to the corporation' in light of its historical purpose: to prevent management entrenchment. The court reasoned that 'belonging to' is not a technical term and should be interpreted to 'suppress the mischief' of management using corporate assets to perpetuate their control. Given Chem's 95% economic ownership of Health Med and its unconditional, immediate power to assume 95% voting control, the Chem shares held by Health Med effectively 'belong to' Chem and are therefore disabled from voting. As an independent ground, the court found that the failure to convert the preferred stock likely constituted a breach of the fiduciary duty of loyalty owed to Chem's public shareholders, as its only purpose was to entrench the controllers at the expense of the true equity owners.



Analysis:

This decision is significant for its purposive interpretation of DGCL § 160(c), preventing corporations from using technical, formalistic structures to evade the statute's anti-entrenchment purpose. The court established that economic reality and the potential for control, not just present formal voting power, are determinative in analyzing circular ownership schemes. By looking beyond the literal statutory language to its underlying policy, the case solidifies the principle that Delaware courts will use equity to strike down arrangements that disenfranchise public shareholders, reinforcing the strength of fiduciary duty analysis in corporate law.

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