Barkan v. Armsted Industries, Inc.

Supreme Court of Delaware · 1989 · Corporations

567 A.2d 1279 (Del. 1989)

Updated August 22, 2026

Corporationsclass action settlementCourt of Chanceryabuse of discretionbusiness judgmentRevlon dutieschange of controlmanagement buyout

Facts

After Charles Hurwitz accumulated a significant stake in Amsted, the board adopted a poison pill and later considered a management-sponsored leveraged buyout involving an ESOP. A Special Committee composed of non-management, non-ESOP directors evaluated the proposal, received a fairness opinion from Salomon Brothers, negotiated an increase from $45 to $46.25 per share, and the offer was later increased again to $47 per share in cash, preferred stock, and subordinated debentures. Four shareholder suits filed before the final offer were settled after plaintiffs agreed to dismiss their claims in exchange for the increased cash component, subject to confirmatory discovery, and the transaction later closed before formal court approval of the settlement. Barkan later sued and objected to the settlement, claiming breaches of fiduciary duty, disclosure violations, and lack of present consideration.

Issue

Did the Court of Chancery abuse its discretion by approving the settlement of the shareholder class actions? More specifically, did the Chancellor err in concluding that the fiduciary-duty and disclosure claims had little likelihood of success and that the settlement was supported by sufficient consideration despite being finalized after the transaction closed?

Rule

When reviewing a class action settlement, the Court of Chancery must consider the nature of the claims, possible defenses, and the legal and factual circumstances, then apply its own business judgment to determine whether the settlement is reasonable; on appeal, the Supreme Court reviews only for abuse of discretion and will affirm if the findings are supported by the record and are not the product of legal error. In change-of-control cases, directors must act consistently with their duties of care and loyalty, but there is no single required blueprint; a market canvass is required when the board lacks reliable grounds to judge adequacy, while a board may approve a transaction without an active market survey if it possesses a body of reliable evidence supporting fairness. Disclosure materiality is governed by Rosenblatt: an omitted or misstated fact is material only if there is a substantial likelihood that a reasonable shareholder would view it as significantly altering the total mix of information available.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Shareholders of Lakefront Components, Inc., a Delaware corporation based in Milwaukee, filed a class action challenging a cash-out merger. After limited motion practice, the parties proposed a settlement that added $0.60 per share and broadened disclosures. The Court of Chancery reviewed the pleadings, affidavits, likely defenses, and transaction record, then approved the settlement as reasonable without conducting a full trial on the fiduciary-duty claims.

If an objecting shareholder appeals, what is the most likely standard the Delaware Supreme Court will apply to the approval order?

Explanation. The majority states that the Court of Chancery must consider the nature of the claims, defenses, and legal and factual circumstances, then use its own business judgment to decide whether the settlement is reasonable. On appeal, the Supreme Court does not exercise its own business judgment to reassess fairness; it reviews for abuse of discretion and affirms if the findings are supported by the record and are the product of an orderly and logical deductive process, absent legal error. (Derived from Barkan v. Armsted Industries, Inc. (1989).)