Court of Chancery Defers to Board of Director’s Business Judgment in Response to Stockholder’s Dividend Demand

By: James S. Bruce and Marissa Leon

In Buckley Family Trust v. Charles Patrick McCleary, et al. (C.A. No. 2018-0903-AGB), the Delaware Court of Chancery (the “Court”) granted defendants’ motion to dismiss a stockholder’s claims to compel the company to pay a dividend and also dismissed the stockholder’s claim alleging breach of fiduciary duty of care regarding decisions made by the board of directors of the company.

The Buckley Family Trust (“Plaintiff”) is one of seven stockholders of McCleary, Inc., a privately held snack food company (the “Company”), and only one of two stockholders that are not family members of the Company’s founder.  Plaintiff holds shares in the Company pursuant to a Purchase and Restriction Agreement (the “Agreement”).  Under the Agreement, the stockholders are restricted from selling or transferring any of their shares without offering to sell the shares at a thirty percent discount first to the Company and then to the other stockholders if the Company does not exercise its right of first refusal.  

In response to not having received a sufficient return on its shares, Plaintiff filed a complaint against the Company and the five family member stockholders of the Company, who also serve on the Company’s board of directors (the “Board” and collectively, “Defendants”).  In its first count, Plaintiff asserts that the Board committed an oppressive abuse of discretion by failing to declare a dividend for seven years.  Plaintiff argued that the Company had a surplus from which it could pay dividends and that the Company had retained unnecessarily high amounts of surplus income, thus coercing Plaintiff to sell its shares to Defendants at a discount.  The Court found that the Agreement’s restrictions on the sale or transfer of stock were permissible under Delaware law. In addition, the Court noted that (i) Plaintiff and the members of the Board each held common stock and would share equally on a pro rata basis in any dividend paid by the Company, and (ii) the Company had paid dividends to all stockholders to satisfy tax obligations and had in the past declared a special dividend to all common stockholders.  The Court concluded that the lack of additional dividends was not an abuse of discretion and that there was no evidence of self-interest.  Plaintiff’s first claim was dismissed by the Court.

Plaintiff also claimed that the Board breached its fiduciary duties when it approved certain actions and failed to act on other occasions.  In particular, the Plaintiff challenged the Company’s decisions to transition away from a key customer, to authorize building a new warehouse and to improve the Company’s packaging capabilities to accommodate a customer. Plaintiff also challenged the Company’s failure to improve the Company’s food production facilities, to manage the Company’s tax obligations and to observe corporate formalities.  Since Plaintiff did not make a demand on the Board before filing the derivative action on behalf of the Company, the Court analyzed whether it would have been futile for the Plaintiff to make a demand.  In its examination of the Board’s actions and alleged inactions, the Court reviewed various documents presented by the parties and minutes of the Board’s meetings.  The Court concluded that the Board did not act with reckless indifference or without the bounds of reason such that the directors would face a substantial risk of personal liability.  Therefore, Plaintiff failed to demonstrate that making a demand on the Board before filing the lawsuit would have been futile, and the Court dismissed the Plaintiff’s claim under Court of Chancery Rule 23.1.

Buckley Family Trust v. Charles Patrick McCleary, et al. (C.A. No. 2018-0903-AGB)

Copyright © 2024, K&L Gates LLP. All Rights Reserved.