Sterling v. Mayflower Hotel Corporation

Delaware Court of Chancery · 1952 · Corporations

33 Del. Ch. 20 (1952)

Updated August 22, 2026

CorporationsMergersInterested directorsControlling shareholder fiduciary dutiesEntire fairnessmergerquorumcharter provision

Facts

Hilton owned about 83% of Mayflower's stock and caused Mayflower's board to approve a merger under which each Mayflower share would be exchanged for one Hilton share; Mayflower's stockholders then approved the merger by a large margin because of Hilton's voting control. Mayflower's certificate contained Article Thirteenth, which allowed interested directors to be counted for quorum purposes in approving contracts or transactions involving interested directors. Hilton had also been offering to buy Mayflower shares for $19.10 and agreed that for thirty days after the merger it would buy from former Mayflower stockholders the Hilton shares they received at that same price. Plaintiffs claimed no lawful quorum existed because interested directors were counted and that the exchange ratio was unfair when compared to Mayflower's asserted value.

Issue

Was the merger invalid because Mayflower's board counted interested directors toward a quorum under Article Thirteenth, and if not, had defendants shown at the preliminary injunction stage that the merger was not fraudulent and was fair to Mayflower's minority stockholders? More specifically, could the court consider value factors beyond the market price of Hilton stock in assessing fairness?

Rule

A Delaware charter provision is not invalid under Section 5, Paragraph 8 merely because it alters a common law rule, so long as the altered rule is not of such a character that stockholders may not contract around it; at least where board action is only a prerequisite to submission of a transaction for stockholder approval, interested directors may be counted for quorum purposes if the certificate so provides. In a merger involving a controlling stockholder, defendants bear the burden of showing good faith and entire fairness to minority stockholders. In determining fairness, the court may consider all relevant value factors of both corporations, including going concern value, book value, net asset value, earnings, dividends, and market value; market value alone is not conclusive.

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

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

Harbor Crest Lodging, a Delaware corporation based in Miami, owns a single resort in Florida. Its certificate states that directors with a financial interest in a transaction may be counted for quorum purposes when the board approves a merger proposal that must also be submitted to stockholders; the corporation's 78% stockholder causes the board to approve such a merger, and the interested directors are necessary for a quorum.

If minority stockholders challenge the merger on the ground that the board lacked a lawful quorum because interested directors were counted, what is the strongest response under the governing rule?

Explanation. The majority held that a certificate provision may validly alter the common law rule against counting interested directors for quorum purposes, at least when the board action merely authorizes submission of the matter to stockholders for approval. The provision is not invalid simply because it changes common law, so long as the rule altered is not so fundamental that stockholders may not contract around it.