Bennett v. Breuil Petroleum Corporation

Delaware Court of Chancery · 1953 · Corporations

34 Del. Ch. 6 (1953)

Updated August 22, 2026

Corporationsfreeze-outminority stockholdercontrolling stockholderstock issuanceconstructive fraudinadequate considerationsummary judgment

Facts

Breuil Petroleum had 1,000,000 outstanding shares, with plaintiff Bennett holding 423,500 shares and James F. Breuil, Sr. holding a majority stake; Bennett alleged Breuil dominated the corporation. In 1953, after the corporation acknowledged a critical financial condition, the stockholders amended the charter to reduce par value from $1 to 40 cents, increase authorized shares by 1,000,000, eliminate preemptive rights except as granted by majority holders, and authorize nontransferable fifteen-day rights to existing stockholders to buy the new shares pro rata at 40 cents per share. Bennett alleged the plan was adopted to impair his interest and force him out, and further alleged that 40 cents per share was grossly inadequate because the stock was worth about $2.50 to $3 per share. Defendants denied improper motive and inadequacy and argued the issuance was a legitimate financing decision and that Bennett was not injured because he was offered his pro rata share.

Issue

Did the complaint state actionable claims sufficient to survive dismissal and summary judgment where a minority stockholder alleged that a controlling stockholder caused a rights offering primarily to freeze him out and that the corporation issued stock for cash at a grossly inadequate price? Also, could plaintiff pursue both the improper-purpose claim and the inadequate-consideration cancellation claim in the same action?

Rule

A stockholder states an actionable claim by alleging facts showing that a majority stockholder used corporate action primarily to freeze out a minority interest, or that stock was issued for cash at a grossly inadequate price amounting to constructive fraud. On such claims, defendants begin with a presumption of good faith, and the plaintiff bears the burden of proving bad faith, improper motive, or constructive fraud. Statutes making directors' valuation conclusive as to property received for stock or as to the value of rights do not govern the adequacy of the cash price of the shares themselves.

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Red Mesa Minerals, a closely held Delaware corporation based in Tulsa, faces cash shortages. Its controlling stockholder, Nolan Pierce, causes the corporation to issue new shares for cash through a rights offering to all stockholders, but minority stockholder Elena Cruz alleges Pierce pushed the plan primarily to force her to either contribute capital she does not have or lose influence in the company. Pierce argues the court must defer because financing decisions are matters of business judgment.

If Elena sues to cancel the issuance on the ground that the primary purpose was to freeze her out, which is the best answer?

Explanation. A majority stockholder may not use otherwise lawful corporate action primarily to freeze out a minority interest. The majority opinion recognized such a claim as actionable without regard to price fairness. Although financing is generally a business matter, allegations of an improper freeze-out purpose create a judicially cognizable claim requiring factual resolution.