No Fiduciary Duty to Repurchase Minority Stockholder Shares
In contrast to many jurisdictions that have recognized special fiduciary duties owed by majority stockholders to protect minority stockholders in closely held corporations, Delaware courts have not adopted a special fiduciary duty of a controlling or majority stockholder to minority stockholders in closely held corporations, or a fiduciary duty to buy back a minority stockholder's shares. Thus, declining to follow the approach of many other jurisdictions, Delaware law does not afford minority stockholders in a closely held corporation any greater protection than the fiduciary duties a controlling stockholder owes to a minority stockholder in a public corporation.
In enunciating the above principles for closely held corporations, the Delaware Supreme Court emphasized in the seminal case Nixon v. Blackwell, 626 A.2d 1366, 1380 (Del. 1993), that "it would do violence to normal corporate practice and our corporation law to fashion an ad hoc ruling which would result in a court-imposed stockholder buyout for which the parties had not contracted."
In a recent decision, the Delaware Supreme Court affirmed that the above principles—that controlling stockholders do not owe special fiduciary duties to minority stockholders—also apply to directors in closely held corporations. In Blaustein v. Lord Baltimore Capital, C.A. No. 6685-VCN (Del. Jan. 21, 2014), the Supreme Court affirmed the Delaware Court of Chancery's decision, denying the plaintiff leave to amend to assert a fiduciary duty claim against the directors of a closely held corporation and a claim for breach of the implied covenant of good faith and fair dealing. The court held that "under common law, the directors of a closely held corporation have no general fiduciary duty to repurchase the stock of a minority stockholder." The court reasoned that minority stockholders must "rely on contractual protections if liquidity [of their shares] is a matter of concern."
The plaintiff, Susan M. Blaustein, a minority stockholder, sought leave to amend her complaint to add a claim for breach of fiduciary duties against the directors of a closely held Delaware corporation. In her proposed amended pleading, Blaustein alleged that the directors breached their fiduciary duties to her by failing to consider and negotiate, free of conflicting interests, the repurchase of her shares in the closely held company. As a result of the breach of their fiduciary duties, Blaustein asserted that she was deprived of liquidity and control over her asset portfolio. Blaustein also sought leave to add a new claim for breach of the implied covenant of good faith and fair dealing under a shareholder agreement. This agreement provided that the "company may repurchase shares upon terms and conditions agreeable to the company and the shareholder who owns the shares to be repurchased."
This provision was permissive, not mandatory. The agreement required that any repurchase be approved by a majority of the directors and 70 percent of the stockholders. The approval requirement protected the company and nonselling stockholders from a stock repurchase that was not in their best interests. Blaustein alleged that the agreement contained an implied contractual right to good-faith negotiation of her stockholder repurchase proposals.
The Supreme Court affirmed the Chancery Court's denial of leave to amend to Blaustein on the grounds of futility of her proposed amended pleading. In rejecting Blaustein's claim to entire fairness review based on a purported right to an independent, disinterested corporate decision on whether her shares should be repurchased, the court held directors of a closely held corporation have no fiduciary duties to repurchase the shares of a minority stockholder under common law. Relying on its decision in Nixon, the court emphasized that if a minority stockholder desires liquidity, or to have its shares bought back by a company, such an investor must rely on contractual protections. Therefore, the court explained that Blaustein had no inherent right to sell her stock to the company at "full value" or any other price and, thus, no right to demand formation of an independent, disinterested board committee to consider her stockholder repurchase proposals.
In sum, the court found that the shareholder agreement was the only available source of protection to Blaustein.
But the court reasoned that the agreement did not impose an affirmative duty on either the company or the plaintiff to consider or negotiate the repurchase of a stockholder's shares, but rather gave both the stockholder and the company discretion as to whether to engage in any repurchase proposal, and discretion as to the repurchase price. Therefore, the court concluded that the agreement did not impose any contractual duty on the directors to repurchase the shares of the plaintiff minority stockholder. Accordingly, because Blaustein's proposed fiduciary duty claim was subject to dismissal, the court found that the Chancery Court had correctly denied leave to amend as to this claim.
The court next swiftly rejected Blaustein's new proposed claim for breach of the implied covenant of good faith and fair dealing under the shareholder agreement. The court reasoned that in contrast to the situation where an implied covenant is used to accomplish what the parties would have agreed to themselves had they considered the issue at the time of contracting, here, the parties had considered the issue in the shareholder agreement, i.e., whether, and on what terms, minority stockholders would be able to have their shares repurchased. The court pointed out that the agreement did not, however, contain any promise of a full-value price or require consideration or negotiations of shareholder repurchase proposals by independent, disinterested directors. Accordingly, because the implied covenant does not give parties the right to renegotiate or rewrite the terms of issues already addressed in an agreement, the court found that the Chancery Court had also correctly denied Blaustein's leave to amend to add her proposed claim for breach of the implied covenant of good faith and fair dealing.
The decision confirms that if an investor in a closely held corporation desires liquidity or to have its shares repurchased, the investor must bargain for these provisions in the certificate of incorporation, bylaws or shareholder agreement. These tools are designed to give the minority stockholder the opportunity to bargain for protection before making the business decision to invest in a minority position in the corporation. But, absent such contractual protections, Delaware courts will not impose any common-law fiduciary duty on controlling stockholders or directors to compel a buyout of a minority stockholder's shares in a closely held corporation.