Stroud v. Grace

Supreme Court of Delaware · 1992 · Corporations

CorporationsShareholder votingDisclosureCorporate governanceBylawsCharter amendmentsbusiness judgment rulefully informed shareholder vote

Facts

Milliken was a privately held Delaware corporation whose controlling family members owned or controlled over 50% of the shares. Its board recommended charter amendments, including Article Eleventh(c), which set director qualification categories, and By-law 3, which established advance procedures for nominating directors and allowed the board to determine whether nominees satisfied the charter qualifications. The board mailed notice of the annual meeting with the proposed amendments, did not solicit proxies, and stated shareholders should attend in person; at the meeting, the board offered confidential financial information to shareholders willing to sign confidentiality agreements. Shareholders holding 78% of the shares entitled to vote approved the amendments, after which the Stroud shareholders challenged the disclosures, the board's fiduciary conduct, and the validity of the amendments and By-law 3.

Issue

Whether the board's recommendation of the amendments and By-law 3 should be reviewed under Unocal or Blasius, whether the shareholder vote was invalid because disclosures were inadequate, whether confidential information could be withheld absent a confidentiality agreement, and whether Article Eleventh(c) and By-law 3 were invalid or unfair.

Rule

In a privately held Delaware corporation that does not solicit proxies, and absent inequitable conduct, the board's pre-meeting disclosure duty in connection with charter amendments does not extend beyond the clear and unambiguous notice required by 8 Del. C. §§ 222(a) and 242(b)(1). A fully informed shareholder vote ratifies otherwise voidable board action in the absence of fraud and shifts the burden to the challenger to prove unfairness. Unocal applies only when directors adopt defensive measures in response to a perceived threat to corporate policy and effectiveness touching on control, and Blasius does not apply where there is no unilateral board action primarily intended to interfere with the shareholder franchise and the amendments were ratified by a fully informed vote. A board may condition disclosure of confidential corporate information on execution of a reasonable confidentiality agreement.

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Blue Heron Tools, Inc., a privately held Delaware corporation based in Toledo, has 40 stockholders and is not publicly traded. Its board mails notice of the annual meeting stating the time, place, and full text of a proposed charter amendment, says the board recommends adoption, and expressly states that no proxies will be solicited. A minority stockholder sues before the meeting, arguing the notice is invalid because it does not explain management’s reasons for proposing the amendment.

How should a Delaware court most likely rule?

Explanation. The majority held that, for a privately held Delaware corporation not soliciting proxies, and absent inequitable conduct, pre-meeting disclosure need not exceed the clear and unambiguous notice required by 8 Del. C. §§ 222(a) and 242(b)(1). The board must state the meeting information and set forth the amendment in full or by brief summary as the directors deem advisable, but need not explain every reason for the proposal.