Kahn v. Roberts

Supreme Court of Delaware · 1996 · Corporations

679 A.2d 460 (Del. 1996)

Updated August 22, 2026

Corporationsfiduciary dutiesbusiness judgment ruledisclosurestock repurchaseUnocal enhanced scrutinyUnocalenhanced scrutiny

Facts

DeKalb repurchased the Roberts family's voting Class A shares for $40 per share after the Roberts family, dissatisfied with company direction and their relationship with management, sought to reduce or sever its ties with the company and had proposed alternatives including a sale of the company. The board rejected selling the company, consulted Merrill Lynch and legal counsel, formed a special committee of outside directors, and after several meetings approved the repurchase. In a July 15, 1991 shareholder letter, the chairman announced the repurchase, stated it would be financed with bank borrowing, and described it as a positive transaction that allowed certain Roberts family members to diversify and gain liquidity. Kahn sued, alleging the repurchase should be reviewed under Unocal and that the letter omitted material facts.

Issue

Whether DeKalb's board decision to repurchase the Roberts family's shares was subject to Unocal enhanced scrutiny as a defensive response to a threat to corporate control, or instead protected by the business judgment rule. Also, whether the shareholder letter contained actionable disclosure omissions or misstatements.

Rule

Unocal enhanced scrutiny applies when directors initiate defensive action in response to a threat to corporate policy related to a potential change in control of the corporation. Absent an actual threat to corporate control or action substantially taken for the purpose of entrenchment, board action is reviewed under the business judgment rule, which protects lawful actions taken in good faith, after reasonable deliberation, and without conflicts of interest. If a disclosure duty is assumed, it extends only to material factual omissions or misstatements; a fact is material only if there is a substantial likelihood a reasonable investor would view it as significantly altering the total mix of available information.

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

Summit BioFeeds, a Delaware corporation based in Des Moines, repurchased a 28% block of voting shares from Owen Mercer, a long-time stockholder who had become frustrated with management and wanted liquidity. Before approving the deal, the board formed a committee of outside directors, consulted outside counsel and an investment bank, and there was no bidder, tender offer, or ongoing sale process for the company.

If a minority stockholder later challenges the repurchase as a fiduciary breach, which standard of review should a Delaware court most likely apply?

Explanation. The governing rule is that enhanced scrutiny applies only when directors take defensive action in response to a threat to corporate policy related to a potential change in control, or when the action is substantially taken for entrenchment. A repurchase of a disgruntled stockholder's block, without a hostile bidder, a company 'in play,' or a real probability of a control contest, is reviewed under the business judgment rule. The board's use of outside directors and advisors reinforces ordinary business-judgment protection rather than triggering Unocal.