Delaware Business Litigation Report

Court Rejects Stockholder's Challenge to Issuance of Preferred Stock

Benihana of Tokyo, Inc. v. Benihana, Inc., C.A. No. 550-N, 2005 WL 3753046 (Del. Ch. Dec. 8, 2005). Stockholder sought rescission of an agreement to issue $20 million of preferred stock to a third-party holding company. Plaintiff alleged that the transaction violated 8 Del. C. - 151 and corporation's certificate of incorporation by granting the holding company shares with preemptive rights and was therefore void as ultra vires. Plaintiff also alleged that a majority of the corporation's directors breached their fiduciary duties in approving the transaction and that the transaction had an improper primary purpose to dilute Plaintiff's interest in the corporation and entrench certain director defendants. Plaintiff further alleged that the acquirer aided and abetted the director defendants in their actions.

After expedited discovery and trial, the court found that the board had authority under the corporation's certificate of incorporation and the applicable provisions of the Delaware General Corporation Law to issue the preferred stock involved in the transaction. The court also found that the transaction was approved by a majority of informed, disinterested and independent directors, that the directors did not have an improper purpose of entrenchment, and that the directors otherwise acted in conformity with their fiduciary duties. Accordingly, the court found the transaction to be a valid exercise of the board's business judgment and entered judgment in Defendants' favor. The Court of Chancery's ruling was subsequently affirmed on appeal in Benihana of Tokyo, Inc. v. Benihana, Inc., No. 36, 2006, 2006 WL 2465412 (Del. Aug. 24, 2006).

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