Canada S. Oils, Ltd. v. Manabi Exploration Company

Delaware Court of Chancery · 1953 · Corporations

33 Del. Ch. 537 (1953)

Updated August 22, 2026

Corporationscorporate controlstock issuancefiduciary dutymajority voting controlpreliminary injunctionpreemptive rightswaiver

Facts

Plaintiff had acquired slightly more than 50% of defendant's outstanding stock and had earlier voted for a resolution authorizing the board to issue authorized but unissued shares; the court concluded plaintiff was precluded from denying that this waived its preemptive rights. In March 1953, after relations between plaintiff's controlling interests and defendant's president Hagan had deteriorated, five directors aligned with Hagan met on short notice and approved the sale of 226,950 unissued shares to Crockett & Company, which in turn took most of the shares for the Murchison and Ohrstrom interests. Hagan knew plaintiff wanted to retain majority control, did not offer the shares to plaintiff or give it a final opportunity to meet defendant's cash needs, and quickly announced to plaintiff's brokerage contact that plaintiff had lost control. Plaintiff sought to enjoin the issuance, transfer, or voting of the shares on the ground that they were issued primarily to destroy its voting control rather than for a proper corporate purpose.

Issue

Whether defendant's directors improperly caused unissued shares to be sold primarily to deprive plaintiff of majority voting control, thereby justifying preliminary injunctive relief. A subsidiary issue was whether plaintiff could still assert preemptive rights in those shares.

Rule

A stockholder may be precluded, by waiver or estoppel, from asserting preemptive rights where it votes for a resolution authorizing issuance of shares and fails to object after notice that the corporation treated that vote as a waiver. But even where preemptive rights are waived, directors act improperly if the primary purpose of a stock issuance is to deprive an existing stockholder of majority voting control; equity will protect that control right when the plaintiff shows a reasonable probability of success and no adequate remedy at law.

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Red Mesa Minerals, a Delaware corporation based in Denver, has a majority stockholder, Northfield Holdings, with 52% of the outstanding shares. After a falling-out with Northfield, five directors approve on two days' notice the sale of a large block of authorized but unissued shares to investors friendly to the CEO, without offering the shares to Northfield, even though the company does need short-term operating cash.

If Northfield seeks a preliminary injunction against the issuance, what is the strongest basis for relief?

Explanation. The governing rule is that directors may not issue stock primarily to deprive an existing stockholder of majority voting control. A genuine need for funds does not automatically validate the issuance if the surrounding facts reasonably support an inference that control destruction was the primary purpose. The majority opinion treated the funding need as relevant but not dispositive.