Caseflicks

Supreme Court of Delaware • 1966

Lehrman v. Cohen

222 A.2d 800 | 43 Del. Ch. 222 | 1966 Del. LEXIS 163

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Takeaway

In short, a charter-created voting share may break board deadlocks without becoming a voting trust: diluting existing votes is not the same as transferring them.

Background

The Cohen and Lehrman families held equal voting power in Giant Food, Inc., with each family’s stock entitled to elect two directors. To reduce the risk of a deadlocked board, all stockholders approved a 1949 charter amendment creating one share of Class AD stock. That share could elect a fifth director but carried no dividend rights and no liquidation rights beyond repayment of its $10 par value. It was issued to the company’s longtime counsel, Joseph Danzansky.

In 1964, votes opposed by the Lehrman directors made Danzansky president and approved a substantial employment arrangement for him. Jacob Lehrman sued, challenging both those events and the legality of the Class AD arrangement. On cross-motions concerning the share’s validity, the Court of Chancery granted summary judgment to the defendants. Lehrman appealed that ruling.

Issues

Issue #1

Whether the Class AD share was an unlawful voting trust or otherwise invalid because it had voting power but almost no economic rights.

Holding

No. Creating the Class AD share did not establish a voting trust, and Delaware law permitted its stated combination of voting and economic rights.

Reasoning

Under Abercrombie, a voting trust requires separation of voting rights from the other attributes of existing stock ownership, along with an irrevocable grant for a definite period whose principal purpose is voting control. Because separation is the threshold requirement, the Court did not need to decide whether the remaining requirements were met.

The Class AC and AL holders retained the right to vote their own shares and to elect two directors per class. The new share reduced their relative voting power, but no votes were taken from their shares and entrusted to someone else. Dilution through the creation of voting stock is not, by itself, a voting trust subject to § 218’s ten-year limit.

Section 151(a) allows a corporation to specify a class’s voting powers and participating rights in its charter. It therefore permitted this share to carry a vote despite its limited economic rights. The policy behind the voting-trust statute concerns separating votes from shares through a trust, not requiring every voting share to carry substantial economic participation.

Issue #2

Whether giving the Class AD share the power to elect a fifth, deadlock-breaking director unlawfully delegated the other directors’ management duties.

Holding

No. The charter-based arrangement did not constitute an unlawful delegation by the directors.

Reasoning

A board generally cannot hand its management duties to someone else. But § 141(a) permits a corporation’s certificate of incorporation to provide how its business will be managed.

Here, the stockholders unanimously amended the charter to create the fifth directorship. Any authority the fifth director held came from that charter provision, not from the other directors surrendering their duties to an arbitrator. A lawful plan to prevent board deadlock was not invalid merely because the fifth director could cast a deciding vote.