Securities Regulation Daily Wrap Up, DIRECTORS AND OFFICERS—Del. Sup. Ct.: Directors not required to negotiate stock repurchase, (Jan 23, 2014)

By Anne Sherry, J.D.

Common law does not impose any duties on directors of closely held corporations to consider buying out minority stockholders, the Delaware Supreme Court has held. The implied covenant of good faith and fair dealing likewise did not create any duty to negotiate a reasonable repurchase price. Susan Blaustein, a shareholder in the Thalheimer-family-owned Lord Baltimore Capital Corporation, tried to sell her stock back to the company but was offered approximately half of the net asset value (Blaustein v. Lord Baltimore Capital Corporation, January 21, 2014, Berger, C.).

The Lord Baltimore shareholders’ agreement conditioned stock repurchases on approval of at least a four-member majority of the board of directors or shareholders holding at least 70 percent of outstanding shares. Nevertheless, Blaustein alleged that she was given verbal assurances when she purchased the stock that she would be able to resell it for full value after a ten-year waiting period. After waiting out the ten-year period, she attempted to resell the shares, but the board refused to offer anything better than a 52 percent discount from the net asset value of the shares.

Blaustein filed a complaint in the Court of Chancery alleging promissory estoppel, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing. The chancery court dismissed the complaint and refused to allow her to amend it to add direct and derivative fiduciary duty claims, and a direct implied covenant claim, against the Lord Baltimore Capital board. On appeal, the Supreme Court noted that the only protection available on the direct claims was the shareholders’ agreement, which gave the stockholder and company discretion as to whether to engage in a transaction and at what price. The derivative claim failed as a matter of law because Blaustein did not make a demand on the board and her futility allegations were conclusory.

The case is No. 272.

Attorneys: Peter J. Walsh, Jr. (Potter Anderson & Corroon LLP) and Nicholas T. Christakos (Sutherland Asbill & Brennan LLP) for Susan M. Blaustein. S. Mark Hurd (Morris, Nichols, Arsht & Tunnell LLP) for Lord Baltimore Capital Corporation. John L. Reed (DLA Piper LLP) for Louis B. Thalheimer.

Companies: Lord Baltimore Capital Corporation

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