Document: Blaustein v. Lord Baltimore Capital Corp., C.A. No. 6685-VCN (Del. Ch. Apr. 30, 2013)
The Court considered the extent to which the implied covenant of good faith and fair dealing could be used by a stockholder in a closely-held, Delaware corporation to force the corporation to repurchase her stock at any price in the absence of an express contractual obligation on the part of the corporation to facilitate the stockholder’s exit of her investment in the company.
In this action, a stockholder of Defendant Lord Baltimore Corporation (“Lord Baltimore”) asserted both contract and fiduciary claims against Lord Baltimore in connection with the stockholder’s unsuccessful attempts to liquidate her investment in the company. A stockholders’ agreement prevented plaintiff from transferring her shares in most circumstances. Section 7(d) of the stockholders agreement permitted, but did not require, Lord Baltimore to repurchase plaintiff’s shares:
Notwithstanding any other provision of this Agreement, the Company may repurchase Shares upon terms and conditions agreeable to the Company and the Shareholder who owns the Shares to be repurchased provided that the repurchase is approved either (i) by a majority, being at least four, of all of the Directors of the Company then authorized (regardless of the number attending the meeting of the Board of Directors) at a duly called meeting of the Board of Directors or (ii) in writing by Shareholders who, in the aggregate, own of record or beneficially 70% or more of all Shares then issued and outstanding.
Slip op. at 6. After numerous attempts to negotiate for the repurchase of her stock by Lord Baltimore failed, plaintiff sued Lord Baltimore and alleged that Lord Baltimore’s failure to repurchase her shares at a reasonable price constituted a breach of the implied covenant of good faith and fair dealing and a breach of fiduciary duty. The Court disagreed and held that the implied covenant could not be construed as requiring Lord Baltimore to negotiate with plaintiff—let alone require Lord Baltimore to accept a reasonable repurchase proposal. The Court also held that where, as here, a fiduciary claim arises from a corporation’s exercise (or failure to exercise) a contractual right, the fiduciary claim is precluded. Thus, it was totally irrelevant whether the board’s decision to reject plaintiff’s repurchase proposals were tainted by self-interest—the Lord Baltimore board could reject plaintiff’s repurchase proposal regardless of its reasons.