Repurchase of shares under Delaware corporate law
Under Delaware corporate law a shareholder agreement that gave a shareholder the opportunity to ask the closely held corporation to repurchase her shares was of little help as the agreement did not stipulate the repurchase price.
In its judgment of January 21 2014 in the case of Blaustein, et al. v. Lord Baltimore Capital Corp., et al., the Supreme Court of the State of Delaware affirmed an earlier judgment of the Court of Chancery of the State of Delaware of April 30 2013 that Susan M. Blaustein did not have the right to be bought out as a shareholder of Lord Baltimore Capital Corporation under conditions agreeable to her. Susan M. Blaustein, both individually and as a trustee of a number of trusts, had become a shareholder of Lord Baltimore Capital Corporation in 1999, a corporation established in 1998 by members of the Thalheimer family. A shareholder agreement stipulated that the corporation ‘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 of the shares would be approved by either a majority of the board of directors of the corporation or by 70% of the corporation’s shareholders. Having been a shareholder for more than ten years, Blaustein asked the corporation to repurchase the shares she held. The board of directors of the corporation, by a majority of four out of seven members, was willing to do so, but at a price that was in the opinion of Blaustein unreasonably low (the offer was a 52% discount of the net asset value of the shares). Whereas the board majority argued that it acted in the best interests of the corporation, because repurchasing Blaustein’s shares at the value she proposed would jeopardize the corporation financially in terms of ‘negative tax implications’, Blaustein disagreed and advanced several arguments. First, Blaustein was of the opinion that the board majority was not ‘free of conflict’ and that ‘an independent board committee’ should decide on the issue rather than the existing board majority. The Supreme Court decided that ‘Blaustein has no inherent right to sell her stock to the company at “full value,” or any other price. It follows that she has no right to insist on the formation of an independent board committee to negotiate with her’. Second, Blaustein argued that the board’s majority decision was detrimental to both the corporation and all of its shareholders (making her claim a derivative claim on behalf of both the corporation and all its shareholders). In response to this, the Supreme Court considered that ‘a plaintiff must allege with particularity that a majority of the board lacks independence or is otherwise incapable of validly exercising its business judgment’. This was not the case, because of the seven directors of the corporation only three were members of the Thalheimer family. Third, Blaustein relied on the terms of the shareholder agreement. In this respect, the Supreme Court decided that the agreement ‘does not contain any promise of a “full value” price or independent negotiators’.