626 A.2d 1366
The directors of a closely-held corporation (D) appealed from the decision of the Delaware Chancery Court which held that defendants breached their fiduciary duties to plaintiffs by maintaining a discriminatory policy which unfairly favored the employee stockholders over plaintiffs.
-E.C. Barton & Co. (Defendant) was a closely-held Delaware corporation.
-Upon founder E.C. Barton’s death, all of the Class A voting stock passed to employees, and only Class B non-voting stock passed to Barton’s family.
-The Corporation offered to repurchase Class B stock through a series of self-tender offers.
-The Corporation also set up an Employee Stock Ownership Plan (ESOP) that allowed employees to cash out on termination or retirement.
-The Corporation could repurchase Class A stock on an employee’s death or retirement.
-The Board resolved to use employee life insurance benefits to repurchase Class B shares from employee estates. Fourteen Class B stockholders sued the Corporation and the directors (defendants) in the Court of Chancery alleging that the defendants (1) tried to force minority stakeholders to sell by paying only minimal dividends, (2) breached fiduciary duties by approving undue compensation, and (3) breached fiduciary duties by discriminating against non-employee stockholders.
HOLDING: The Court held that defendants had treated plaintiffs unfairly by establishing employee stock ownership plan (ESOP) that favored employee, Class A stockholders, over the plaintiffs, who were non-employee Class B stockholders.
-The court applied the entire fairness standard.
-The court held that the Vice Chancellor erred as a matter of law in concluding that substantially equal treatment was required as to plaintiffs.
-The court stated that it was well-established that stockholders do not need to always be treated equally for all purposes.
-There was support in the record for the fact that ESOP was a corporate benefit and was established to benefit the corporation.
-Defendants had met their burden of establishing the entire fairness of dealings with plaintiffs, because the record was sufficient to conclude that plaintiffs' claim that defendant directors had maintained a discriminatory policy of favoring Class A employee stockholders over Class B non-employee stockholders was without merit.
The court's judgement was reversed.
The matter remanded for proceedings consistent with the opinion on the grounds that defendants had met their burden of establishing the entire fairness of their dealings with plaintiff non-employee Class B stockholders.
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