Document: Blaustein v. Lord Baltimore Capital Corp., No. 272, 2013 (Del. January 21, 2014)
A minority shareholder bought into a corporation upon the alleged oral promise of a director that she could sell her shares back to the corporation for full value after a 10-year period. When the corporation would only offer to buy the shares at a 52 percent discount, the shareholder filed suit. The Delaware Court of Chancery dismissed the suit and refused leave to amend. The Delaware Supreme Court affirmed, stating that the minority shareholder’s direct claim failed because, under the common law, the directors of a closely held corporation have no general fiduciary duty to repurchase the stock of a minority shareholder. The Court noted that “An investor must rely on contractual protections if liquidity is a matter of concern.”
The Court found that the shareholder’s derivative claim also failed because the shareholder had not made a demand on the board. Although the shareholder alleged demand futility, her allegations were conclusory, the Court said: “At best, the allegations create a reasonable doubt as to the independence of three of the seven Lord Baltimore directors . . . Because a majority of the directors are independent, demand is not excused.”
In addition, the shareholder asserted a breach of the covenant of good faith and fair dealing in connection with the buyout provision of the shareholders’ agreement. The Court, however, stated that the buyout provision was permissive only, and in no way obligated the corporation to repurchase the shares of minority shareholders. “The implied covenant of good faith and fair dealing cannot be employed to impose new contract terms that could have been bargained for but were not,” the Court said.
Finally, the Court noted that the allegations that the minority shareholder invested in the corporation based on oral assurances from one of the directors could constitute a claim of fraud in the inducement, but because the she had not brought such a claim before the Court, the Court could not consider whether relief was available under that theory.