Theodora Holding Corporation v. Henderson
257 A.2d 398, 1969 Del. Ch. LEXIS 81 (1969)
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Rule of Law:
Under Delaware law, corporate charitable donations are permissible if they are reasonable in amount and made to a legitimate charitable organization, with the federal tax code's deductibility limits serving as a helpful guide for determining reasonableness.
Facts:
- Girard B. Henderson was the majority stockholder and exercised effective control over Alexander Dawson, Inc., a personal holding company.
- Theodora Holding Corp., created by Henderson's ex-wife, was a minority stockholder in Alexander Dawson, Inc.
- In December 1967, Henderson caused Alexander Dawson, Inc. to donate stock with a value of approximately $528,000 to the Alexander Dawson Foundation, a charitable trust controlled by Henderson.
- The stated purpose of the donation was to help finance a western camp for underprivileged boys.
- In the year of the donation, Alexander Dawson, Inc. had a total income of over $19 million, making the donation amount well within the 5% federal tax deductibility limit for corporations.
- In a separate transaction in 1958, Henderson used $120,000 of corporate funds from Alexander Dawson, Inc. to purchase a seat on the New York Stock Exchange in his own name.
- Henderson later sold the stock exchange seat for a personal profit of approximately $330,000.
Procedural Posture:
- Theodora Holding Corp. filed a derivative and direct lawsuit in the Delaware Court of Chancery against Girard B. Henderson and Alexander Dawson, Inc.
- The plaintiff sought an accounting for alleged improper transactions and asked the court to appoint a liquidating receiver for Alexander Dawson, Inc.
- After the filings, the case proceeded to a full trial before the Court of Chancery.
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Issue:
Under Delaware law, is a corporate charitable donation to a foundation controlled by the majority stockholder valid when the donation is reasonable in amount and serves a legitimate public purpose?
Opinions:
Majority - Marvel, Vice Chancellor
Yes, the corporate charitable donation is valid. Under 8 Del. C. § 122(9), corporations have broad power to make donations for the public welfare or for charitable purposes. The test for the validity of such a gift is one of reasonableness. The court finds the provisions of the Internal Revenue Code, which limit deductible corporate charitable gifts to 5% of gross income, to be a helpful guide in assessing reasonableness. In this case, the gift of $528,000 was well within this 5% limit given the corporation's income of over $19 million. Furthermore, the court noted the minimal net cost to shareholders after tax benefits and the overall long-term benefit to the corporation and its shareholders from supporting philanthropic causes that bolster the free enterprise system. However, regarding the New York Stock Exchange seat, the court found Henderson breached his fiduciary duty of loyalty. He used corporate funds for his own personal enrichment and is not protected by the business judgment rule in a clear case of self-dealing. Therefore, Henderson must account to the corporation for all profits derived from the sale of the seat.
Analysis:
This case is significant for establishing the modern 'reasonableness' standard for corporate charitable giving in Delaware. By linking the legal standard to the federal tax code's 5% deductibility limit, the court created a clear and practical safe harbor for corporate boards, encouraging corporate philanthropy. The decision validates the idea that corporations can make donations that serve broad public welfare goals rather than only those that provide a direct and quantifiable corporate benefit. The ruling also strongly reaffirms the duty of loyalty, making clear that fiduciaries cannot use corporate funds for personal gain, even if the corporation itself could not have pursued the specific opportunity.
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