Nixon v. Blackwell

Supreme Court of Delaware · 1993 · Corporations

Corporationsfiduciary dutiesentire fairnessclosely-held corporationsentire fairnessfair dealingself-dealingESOP

Facts

Plaintiffs were minority holders of non-voting Class B stock in a non-public, closely-held Delaware corporation, while the directors were present or former employees who held substantial Class A voting stock. The corporation created an ESOP for employees and maintained key man life insurance arrangements that could provide liquidity connected to employee-held stock, but plaintiffs had no comparable guaranteed liquidity. The corporation had also made several self-tender offers over the years to repurchase Class B stock from plaintiffs or their family members. The trial court found this unequal liquidity treatment inherently unfair and ruled for plaintiffs on that basis alone.

Issue

When directors of a closely-held Delaware corporation are self-interested because they benefit from an ESOP and key man insurance program, does the entire fairness standard require the corporation to provide substantially equal liquidity to non-employee minority stockholders? Also, may Delaware courts create special minority-protective rules for a closely-held corporation that is not a statutory close corporation?

Rule

Where directors stand on both sides of a transaction, the entire fairness standard applies and the directors bear the burden of proving fairness. But entire fairness, correctly applied, does not require equal treatment in all respects, and Delaware law does not impose a judicially created rule requiring equal liquidity opportunities for non-employee minority stockholders of a closely-held corporation that is not a statutory close corporation. In applying entire fairness, a court must use reasonable, articulable, and articulated standards and a principled, disciplined analysis rather than subjective suspicion.

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

Granite River Supply, a non-public Delaware corporation based in Tulsa, has two stock classes. Its board, composed entirely of current managers, approves a retirement stock program under which manager-shareholders may require the company to buy back shares at an appraised price, while outside passive shareholders get no comparable right. The managers personally qualify for the program.

If outside shareholders sue for breach of fiduciary duty, what standard of review should a Delaware court apply to the board's decision to adopt the program?

Explanation. When directors benefit from a transaction they approve, they are on both sides of it, so entire fairness applies and the directors bear the burden of proving fairness. The majority opinion rejected business judgment review in that circumstance even though the corporation was closely held and the challenged devices were common corporate practices.