Solomon v. Armstrong

Delaware Court of Chancery · Corporations

Corporationsfiduciary dutiesbusiness judgment ruleshareholder ratificationdisclosuretracking stocktracking stockClass E stock

Facts

GM effected a split-off of its wholly owned subsidiary EDS by converting each GM Class E share into one share of EDS stock, coupled with new service agreements between GM and EDS and a $500 million cash transfer from EDS to GM. GM used separate negotiating teams for GM and EDS interests, supervised by a Capital Stock Committee, and conditioned the transaction on approval by separate class votes, including Class E holders. GM's certificate of incorporation gave Class E holders class voting rights on adverse changes and an Exchange Rate protection in certain dispositions of EDS, but the split-off amended the certificate to remove Class E provisions. GM disseminated a consent solicitation describing the process, assumptions, risks, and effects of the transaction, and shareholders approved it.

Issue

Did the complaint allege facts sufficient to rebut the business judgment rule by showing disloyal process, coercion, inadequate disclosure, or a transaction equivalent to a controlling-shareholder freeze-out? Did the split-off also breach GM's certificate of incorporation by depriving Class E holders of the Exchange Rate right?

Rule

The business judgment rule presumes directors acted on an informed basis, in good faith, and in the corporation's best interests; a challenger must plead facts showing lack of due care or loyalty to rebut that presumption. Where there is no controlling shareholder or dominating force able to compel the result, a fully informed and uncoerced shareholder vote independently supports business judgment protection. Disclosure is adequate if omitted or misstated facts would not have assumed actual significance to a reasonable stockholder's vote, and directors need not supply immaterial hypotheticals or exhaustive detail. A certificate-based contractual right is not breached when shareholders, after sufficient disclosure, validly approve an amendment eliminating that right as part of the transaction.

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Pine Harbor Holdings, a Delaware corporation based in Chicago, has two classes of common stock tied to different business lines. Its board approves a transaction reallocating assets between the divisions, and most directors own substantially more Blue shares than Silver shares, but the complaint does not allege those holdings are material to any director personally.

If Silver shareholders sue for breach of loyalty and seek entire fairness review, what is the most likely result at the pleading stage?

Explanation. The majority opinion holds that directors often must resolve conflicts among classes of stock, and ownership of more shares of one class than another does not itself imply disloyalty. To plead debilitating pecuniary self-interest, plaintiffs must allege the interest was material to the directors. Without that, the business judgment presumption remains intact. (Derived from Solomon v. Armstrong (n.d.).)