Cheff v. Mathes

[chrisrs]

CHEFF V. MATHES
199 A.2d 548 (1964)

PROCEDURAL POSTURE: Defendant corporate directors appealed a judgment from the trial court (Delaware) in favor of plaintiff shareholders in a derivative suit. The trial court held that defendants were liable for losses allegedly resulting from the improper use of corporate funds to purchase shares of the company.

FACTS: Meremont approached Holland Furnace Company (Holland) about the possibility of a merger. The directors (D) of Holland decided against the merger. Meremont responded by buying a large block of Holland and demanding a place on the board of directors of Holland. The directors at Holland refused to consider this request. The Holland board voted to investigate Meremont and found that they had been involved in takeovers and lootings of corporations in the past. There was evidence that present employees of Holland were worried about the potential acquisition of Holland by Meremont and that there was substantial unrest. Then a Meremont employee, claimed that the retail business of Holland was obsolete and in serious turmoil from the desire of Meremont to purchase Holland. Many of Holland's sales people were thinking of leaving. At this time Holland was furnished with a Dun and Bradstreet report, which indicated the practice of Maremont was to achieve quick profits by sales or liquidations of companies acquired by him. Ds also got an income statement of Motor Products, Inc., showing a loss of $336,121.00 for the period in 1957. Upon this news, the directors of Holland authorized a repurchase of their own shares at a higher man market price. Ds authorized the purchase of all of Meremont's holdings of Holland stock at a market premium. The stated reason for this repurchase was that it was to be used in a stock option plan. Ps claim that the repurchase was a mechanism to prevent a takeover by Meremont. The plaintiff claims that Ds breached their fiduciary duty of loyalty to shareholders by not considering the merger and issued the stock repurchase in order to protect their own positions on the board. The trial court found that Ds acted with the improper desire to maintain control. Ds appealed.

ISSUE: May directors issue a stock repurchase plan if their motivation is for a proper business purpose? Are corporate directors presumed to act in good faith, and the burden of jproof to show otherwise falls upon the plaintiff? If the issue is the purchase of shares with corporate funds to remove a threat to corporate policy is the burden on the directors to justify such a purchase as one primarily in the corporate interest?

RULE OF LAW: Directors may issue a stock repurchase plan if their motivation is for a proper business purpose. Corporate directors are presumed to act in good faith, and the jburden of proof to show otherwise falls upon the plaintiff If the issue is the purchase of shares with corporate funds to remove a threat to corporate policy the burden is on the directors to justify such a purchase as one primarily in the corporate interest.

ANALYSIS:Plaintiff shareholders filed a derivative suit against defendant corporate directors, alleging that purchases of company stock with corporate funds were made for the purpose of ensuring the perpetuation of control by the incumbent directors. The trial court agreed with plaintiffs' allegations and found that the directors acted with the improper desire to maintain control. Defendants appealed. In reversing the lower court, the court noted that the evidence indicated that the directors' decisions were based upon direct investigation, receipt of professional advice, and personal observations of the company attempting a takeover. Based upon their information, the board of directors believed, with justification, that there was a reasonable threat to the corporation's continued existence. The question was thus one of business judgment and furnished no justification for holding the directors personally liable for losses even though, in hindsight, their decisions might not have been the best for the business.