Susan Blaustein was a minority stockholder in Lord Baltimore Capital Corporation, a closely held Delaware corporation formed by members of the Thalheimer family. A shareholders’ agreement governed her investment. Its repurchase provision, Paragraph 7(d), stated that the company “may” repurchase shares on terms agreeable to both the company and the selling stockholder, subject to approval by either a majority of the board or holders of at least 70% of the outstanding shares.
Blaustein alleged that Louis Thalheimer had orally assured her that, after ten years, she could sell her shares at full value. When that period expired, however, Lord Baltimore would offer to repurchase her shares only at a 52% discount from their net asset value. Blaustein made several counterproposals, which Louis presented to the board. The board did not depart from the discounted price. Blaustein alleged that the four Thalheimer-affiliated directors were conflicted because a fair-price repurchase could disrupt their personal tax-planning interests.
Blaustein sued Lord Baltimore and Louis, asserting promissory estoppel, fiduciary-duty, and implied-covenant claims. The Court of Chancery dismissed all claims except an implied-covenant claim. It later granted summary judgment on that remaining claim and denied Blaustein leave to amend her complaint to add new fiduciary-duty and implied-covenant theories. Blaustein appealed only the rejection of those proposed new claims.
Issue #1
Whether directors of a closely held corporation owe a minority stockholder a direct fiduciary duty to consider and negotiate, through non-conflicted decisionmakers, a repurchase of the minority stockholder’s shares.
Holding
No. Delaware common law creates no general fiduciary duty to repurchase a minority stockholder’s shares, and the shareholders’ agreement did not create such a duty.
Reasoning
Under Delaware law, directors of a closely held corporation have no general obligation to buy out a minority stockholder. A stockholder concerned about liquidity must obtain contractual protection. Because Blaustein had no inherent right to sell her shares to Lord Baltimore at full value, or at any other price, she likewise had no right to demand that an independent committee negotiate a repurchase with her.
Paragraph 7(d) supplied the relevant contractual protection, but its language was permissive rather than mandatory. It provided that the company “may” repurchase shares on mutually agreeable terms, subject to specified approval. It imposed no affirmative obligation on the company or its directors to consider, negotiate, or accept a repurchase proposal.
Blaustein’s allegations of director self-interest could not trigger entire-fairness review in the absence of a duty or right that the directors had allegedly violated. Her proposed direct claim therefore would not survive a motion to dismiss, making amendment futile.
Issue #2
Whether Blaustein could pursue a derivative fiduciary-duty claim based on the directors’ alleged failure to consider her repurchase proposal in Lord Baltimore’s best interests.
Holding
No. Blaustein neither made a pre-suit demand nor pleaded particularized facts establishing that demand would have been futile.
Reasoning
To the extent the proposed complaint alleged that the board rejected a beneficial corporate opportunity in order to protect the Thalheimer directors’ personal tax interests, the asserted injury was to Lord Baltimore and all stockholders derivatively. That theory therefore had to satisfy Delaware’s derivative-suit demand requirements.
A derivative plaintiff must either demand that the board act or plead with particularity why a demand would be futile. The existence of a stockholder control group, standing alone, does not excuse demand; the complaint must show that a majority of the board lacked independence or otherwise could not exercise valid business judgment.
Blaustein’s allegations at most created doubt about the independence of three of Lord Baltimore’s seven directors: Louis, Elizabeth, and Coleman. Her allegations against Kilpatrick—that the Thalheimer stockholders appointed him and that he had previously voted with them—were insufficient without more to show that he lacked independence. Because a majority of the board remained independent, demand was not excused, and the proposed derivative claim was futile.
Issue #3
Whether the implied covenant of good faith and fair dealing required Lord Baltimore to negotiate Blaustein’s proposed stock redemption in good faith or at a reasonable price.
Holding
No. The implied covenant could not add a duty to negotiate or a right to a full-value repurchase where the shareholders’ agreement deliberately left both the decision to repurchase and the price to the parties’ discretion.
Reasoning
Paragraph 7(d) stated that Lord Baltimore may repurchase shares on terms and conditions agreeable to both the company and the selling stockholder. The provision thus gave each side complete discretion whether to enter a redemption transaction and, if so, at what price.
The provision’s approval requirement protected Lord Baltimore and its non-selling stockholders from repurchases not in their interests. It did not promise Blaustein a fair-price buyout, an independent negotiating body, or a mandatory process for considering her proposal.
The implied covenant is a limited gap-filling doctrine. It supplies terms the parties would have agreed upon had they considered an unanticipated issue at the time of contracting; it does not rewrite a contract merely because one party later regards the bargain as unfavorable. Here, the parties expressly addressed minority-share repurchases but did not include the protections Blaustein sought. The proposed implied-covenant claim therefore would have been futile even under the more plaintiff-friendly standard governing amendment of pleadings.
Issue #4
Whether the Supreme Court could grant relief on a fraud-in-the-inducement theory based on Louis Thalheimer’s alleged oral promise of liquidity after ten years.
Holding
No. Although Blaustein’s allegations suggested a possible fraud-in-the-inducement claim, she did not present that theory to the Court of Chancery or on appeal.
Reasoning
Blaustein alleged that Louis orally promised she could withdraw after ten years at full value, and that he said the promise could not be written into the shareholders’ agreement because of potential tax consequences. If she purchased stock in reliance on that representation, those facts could suggest fraud in the inducement.
But Blaustein did not characterize or litigate her claim as fraud in the trial court or before the Supreme Court. The Court therefore declined to decide whether that unasserted theory could provide relief.