McMullin v. Beran

Supreme Court of Delaware · 2000 · Corporations

765 A.2d 910 (2000)

Updated August 22, 2026

CorporationsFiduciary dutiesMerger approvalDisclosureControlling shareholder transactionsbusiness judgment ruleduty of careduty of loyalty

Facts

ARCO owned about 80.1% of Chemical and, after receiving Lyondell's unsolicited interest, Chemical's directors authorized ARCO to explore a sale of the entire company. ARCO negotiated with Lyondell, allegedly under pressure from ARCO's immediate cash needs, and Lyondell ultimately offered $57.75 per share in a tender offer followed by a cash-out merger at the same price. Chemical's board met once on June 18, 1998, heard presentations from ARCO, Salomon Smith Barney, and Merrill Lynch, and unanimously approved the transaction. The complaint alleged that ARCO controlled the process, that the board failed to determine Chemical's going-concern value or whether the price exceeded appraisal value, that ARCO-affiliated directors were conflicted, and that the disclosure materials omitted material information relevant to the minority shareholders' choice between tendering and appraisal.

Issue

When a controlling shareholder negotiates and proposes the sale of the entire corporation to a third party, do the target board's fiduciary duties to minority shareholders require an informed and independent determination that the deal maximizes minority value, even though the board cannot realistically pursue alternatives the controller can block? Also, were the complaint's care, loyalty, delegation, and disclosure allegations sufficient to survive a motion to dismiss?

Rule

On a Rule 12(b)(6) motion, the court accepts the complaint's allegations as true and asks whether the plaintiff could rebut the business judgment rule by showing a breach of care, loyalty, or good faith. In a final-stage sale of the entire corporation proposed by a majority shareholder, the board may not have a duty to conduct futile auctions or seek alternatives it cannot effectuate, but it still has an inviolable statutory and fiduciary duty under 8 Del. C. § 251 to act in an informed, deliberate, and independent manner, in good faith, to assess whether the proposed third-party transaction maximizes value for minority shareholders as compared with the corporation's going-concern or appraisal value, and to disclose all material facts necessary for the minority's decision whether to tender or seek appraisal.

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Granite Basin Holdings owns 82% of Mesa BioMaterials, a Delaware corporation headquartered in Phoenix. Granite negotiates a cash tender offer and second-step cash-out merger with Prairie Polymer Group, then Mesa's board meets once, receives a fairness opinion, but never evaluates Mesa's going-concern value before recommending the deal to the minority.

If minority stockholders sue and the defendants move to dismiss, which is the strongest argument for denying the motion?

Explanation. The majority opinion held that when a controlling stockholder proposes and negotiates a third-party sale of the entire company, the board need not pursue futile alternatives the controller can block. But the board's Section 251 and fiduciary duties remain inviolable: it must act independently, deliberately, and on an informed basis to determine whether the deal maximizes value for minority stockholders relative to the company's going-concern or appraisal value. Allegations that the board met once, relied on others, and failed to determine value are sufficient at the pleading stage to rebut the business judgment rule.