David J. Greene & Company v. Dunhill International, Inc.

Delaware Court of Chancery · 1968 · Corporations

249 A.2d 427 (1968)

Updated August 22, 2026

CorporationsParent-subsidiary mergerEntire fairnessCorporate opportunityPreliminary injunctionintrinsic fairnesscontrolling stockholderburden of proof

Facts

Dunhill owned 80.3% of Spalding and proposed a merger in which Dunhill would survive and minority Spalding stockholders would receive one Dunhill $2 preferred share convertible into 1.6 shares of Dunhill common for each Spalding share. The exchange ratio was recommended by Duff, Anderson & Clark and approved by both boards and by a majority of the minority shares voting. Plaintiffs alleged the ratio was grossly unfair, challenged the valuation methodology used to justify it, and contended Dunhill had diverted to itself the Child Guidance Toys acquisition, an opportunity related to Spalding's toy business. The record also showed substantial dilution in Spalding's per-share earnings and book value under the proposed exchange.

Issue

When a controlling parent corporation proposes to merge with its controlled subsidiary, has the controller shown on the preliminary injunction record that the merger terms are fair to the minority stockholders? More specifically, did Dunhill meet its burden to prove fairness despite valuation doubts, alleged diversion of a corporate opportunity, and substantial dilution?

Rule

If the same controlling party stands on both sides of a merger between a parent and its subsidiary, the usual presumption of good-faith business judgment does not apply. Instead, the controller bears the burden of proving the transaction's fairness after careful scrutiny, and the court may examine all relevant value figures and all terms of the merger, including going concern value, book value, net asset value, market value, and other valuation components. Approval by disinterested stockholders does not shift that burden, and 8 Del. C. § 141(e) does not create a presumption of fairness in this context. The Guth corporate-opportunity principle also applies to a majority stockholder that, through control of corporate functions, appropriates an opportunity belonging to the corporation.

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

Redwood Leisure Holdings owns 82% of Cascade Fitness Gear, a Delaware corporation based in Portland. Redwood proposes to merge Cascade into itself, and the same Redwood executives who control Cascade negotiated the exchange ratio on both sides of the deal.

If Cascade's minority stockholders seek to enjoin the merger as unfair, which statement is most accurate under Delaware law as described in the majority opinion?

Explanation. When a controlling stockholder stands on both sides of a parent-subsidiary merger, the usual presumption of good-faith business judgment does not apply. Instead, the controller bears the burden of showing the transaction is fair, and the court subjects it to careful scrutiny. The majority opinion rejected a fraud-only test for this kind of self-dealing merger.