Delaware Supreme Court Holds No Duty to Repurchase Shares from a Minority Shareholder

Delaware Supreme Court Holds No Duty to Repurchase Shares from a Minority Shareholder

A recent decision of the Delaware Supreme Court has again confirmed that the board of directors does not owe a fiduciary obligation to a shareholder in the corporation to make a market for shares.  Blaustein v. Lord Baltimore Capital, 2014 WL 240628 (Del. Jan. 21, 2014).

In the oft-cited Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505 (Mass. 1975), that court held that shareholders in a closely-held corporation are subject, amongst themselves, to the same fiduciary obligations that are applicable to partners and, specifically, that where the corporation offers the majority shareholders the right to redeem shares, that right must be similarly offered to the minority shareholders.  While the Donahue decision may not have been the first to do so, it unfortunately gave rise to the notion that a closely-held corporation should be treated as an “incorporated partnership.”  This language has led to no end of confusion as to the how the duties in a closely-held corporation should be assessed and applied.

Fortunately, in the leading jurisdiction of Delaware, the rules of Donahue have been affirmatively rejected.  Specifically, in Nixon v. Blackwell, 626 A.2d 1366, 1380 (Del. 1993), that Court rejected the notice that there existed an obligation to redeem shares when the parties had not contracted for that right.

Most recently, in the Blaustein decision, the Delaware courts were called upon to consider another buyout dispute.  Blaustein had entered into a contract with Lord Baltimore Capital pursuant to which they would negotiate the terms of a share redemption, which redemption would take place if they were able to come to mutual agreement as to the terms.  Those negotiations took place but no agreement could be reached.  Blaustein then went to the Chancery Court, asserting that there was a breach of fiduciary duty by the board’s failure to appoint an independent committee to negotiate with her, that she had been deprived of liquidity and control of her asset portfolio and that there had been a violation of the implied covenant of good faith and fair dealing in not coming to an agreement for redemption.  The Court rejected all of these proposals.  In that Blaustein had no right to compel the corporation to redeem her shares, there could be no right to insist that an independent committee of the board review her proposal.  As to the alleged violation of the implied covenant of good faith and fair dealing, the subject agreement left to the discretion of each party a determination as to whether or not the terms were acceptable.  The agreement did not promise Blaustein a right to redemption at any particular price or that the negotiation would be accomplished by means of a committee of independent, disinterested directors.  Being merely a gap-filler applicable between the terms negotiated by the parties, the implied covenant of good faith and fair dealing would not serve to add those additional requirements.

I have otherwise argued that shareholders in a Kentucky corporation do not stand in a fiduciary relationship with one another.  HERE IS A LINK TO "SHAREHOLDERS ARE NOT FIDUCIARIES"  The Kentucky Supreme Court has recently confirmed that the fiduciary obligations of the board of directors run to the corporate entity and not to the individual members/shareholders thereof.  See Ballard v. 1400 Willow Council of Co-Owners, Inc., No. 2010-SC-000533-DC, 2013 WL 6134150 (Ky. Nov. 21, 2013), a decision which is reviewed HERE IS THE LINK.  The Blaustein decision should be further relied upon in Kentucky to make clear that the rights of a shareholder vis-à-vis a corporation are as set forth in the Business Corporation Act, the Articles of Incorporation, the Bylaws and such contractual arrangements as they may enter into, including a redemption agreement.  However, absent a shareholder contracting for particular protections not provided for by the statute, a shareholder should not be heard to insist they should be entitled to the rights they might therein have gained.