Cheff v. Mathes
199 A.2d 548 (Del. 1964)


Facts:The board of Holland Furnace Co. (D) consisted of seven members. Most board members also held stock in the corporation, and some of the members were also shareholders in Hazelbank United Interest (Hazelbank), an investment group used to finance a portion of Holland's (D) transactions. The Holland (D) board attributed some of its success to its direct employment of a sales force. Although sales had declined recently, the company reorganized in response to the slowdown, and its stock price increased. Holland's (D) CEO, Cheff (D), met with Maremont, president of Maremont Automotive Products (Maremont Automotive) (D), to discuss a merger. Cheff (D) declined to pursue the transaction in view of the companies' differing sales practices. A month later, Maremont informed Holland (D) that he had acquired 55,000 shares of Holland (D) stock. Holland (D) checked into Maremont's background, and found that Maremont had participated in a number of corporate liquidations and was not highly regarded. Maremont's ownership in Holland (D) grew to 100,000 shares, and he demanded to become a member of Holland's (D) board, but his request was denied. Maremont's interest in Holland (D) made Holland's employees uneasy, and twenty-five key employees left. Holland (D) and Cheff (D) both started purchasing Holland stock, causing the shares' price to increase. Maremont offered to sell his shares to Holland (D), but the company delayed and Maremont withdrew his offer. Maremont Automotive (D) offered to purchase Hazelbank. Although the Holland (D) members on Hazelbank's board opposed the offer, the remaining directors seemed to favor it, but the matter was set aside. Holland's (D) legal counsel met with Maremont to arrange a purchase of Maremont Automotive's (D) shares of Holland (D) stock.

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 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 is the burden on the directors to justify such a purchase as one primarily in the corporate interest?

Rule:If a board’s buying out of a dissident stockholder was motivated by a sincere belief that the buyout was necessary to maintain what the board believed to be proper business practices, the board will not be held liable for the decision.

Holding: On appeal, the court held that the lower court erred as a matter of law when it held that appellant corporate director had a duty to formally present the purchase opportunity to appellee's board.

Analysis:The court reversed the judgment in favor of appellee corporation and the imposition of a constructive trust because appellant corporate director did not divert a corporate opportunity that properly belonged to appellee. The court also held that the trial court erred in its application of the corporate opportunity doctrine under the facts of the case, where appellee had no interest or financial ability to acquire the opportunity. The court held that appellant corporate director was not required to consider the contingent and uncertain plans of a third party that sought to acquire appellee in reaching his determination of how to proceed.