Frantz Manufacturing Company v. EAC Industries

Supreme Court of Delaware · 1985 · Corporations

501 A.2d 401 (1985)

Updated August 22, 2026

Corporationsfiduciary dutiesbylawsshareholder consentESOPtakeover defenses8 Del. C. § 228bylaw amendments

Facts

EAC acquired approximately 51% of Frantz's outstanding shares and used written consents under 8 Del. C. § 228 to amend Frantz's bylaws and place EAC's president, Fritzsche, on the board. The consent amendments required all directors to be present for a quorum and unanimous board approval for action. After learning of EAC's actions, Frantz management caused 125,000 treasury shares to be issued to an ESOP, which diluted EAC's majority position, and then the Frantz board purported to ratify that funding without Fritzsche's consent. Frantz also argued that director Thomas Rosenow breached fiduciary duties by resigning and selling his shares to EAC at the same time.

Issue

Were EAC's bylaw amendments adopted by shareholder consent valid and effective during the change in control, was Frantz's post-takeover funding of the ESOP valid, and did Rosenow breach fiduciary duties by resigning and selling his shares to EAC? More specifically, could the incumbent board use treasury-share funding of an ESOP after control had already passed in order to dilute the new majority owner's voting power?

Rule

Bylaws adopted by proper shareholder consent are presumed valid and should be given effect unless they are inconsistent with statute or common law or are unreasonable in application. When directors act for the sole or primary purpose of perpetuating their own control, that improper motive defeats business judgment rule protection; and corporate action seeking to undo an accomplished takeover after control has already passed is not protected by the business judgment rule. A director may sell his shares and resign in good faith, and generally has no duty to disclose his stock dealings to the corporation or offer the shares to the corporation first.

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

Redstone Components, Inc., a Delaware corporation based in Cleveland, has seven directors. After Harbor Peak Holdings acquires 53% of Redstone's voting shares, it delivers written consents removing staggered board terms, seating its president Lena Torres on the board, and amending the bylaws to require every director's presence for a quorum and unanimous board approval for any action. The incumbent directors argue the amendments are invalid because they make board action difficult during a control contest.

If Harbor Peak complied with the mechanics of shareholder consent, how should a court most likely rule on the validity of the bylaw amendments?

Explanation. Bylaws adopted through proper shareholder consent are presumed valid and should be given effect unless they conflict with statute or common law or are unreasonable in application. The majority opinion upheld even unusually restrictive bylaws when their purpose was to prevent the new majority from being disenfranchised after control had already passed, rather than to entrench incumbents.