Holland was a corporation that
made furnaces. Their CEO, Cheff, met with a guy named Maremont (who owned
a competing furnace manufacturer) about a potential merger. However they
did not come to an agreement.
Maremont wanted to
significantly change Holland's practice of selling furnaces using
Maremont bought 15% of
Holland's stock. He demanded a seat on Holland's board of directors.
Maremont told the directors
that he intended to make a tender offer to buy up the rest of Holland's stock unless Holland bought his
15% at a substantial premium.
Maremont's threat implied
that if he got control of Holland, he would merge it with his company and
fire all of Holland's directors.
That's known as greenmail.
Holland's directors voted to
buy all of Maremont's stock at a premium.
Holland shareholders, led by
Mathes filed a derivative suit for breach
of fiduciary duty.
The shareholders argued that
the directors bought off Maremont in order to save their jobs.
The directors argued that
their actions were covered by the business judgment rule.
Under 8 Del.C. §160 a corporation has the power to buy or sell
shares of its own stock.
The Trial Court found for the
shareholders. The directors appealed.
The Trial Court found that
the purpose behind buying Maremont's stock was just to save their jobs as
The Appellate Court reversed.
The Appellate Court found that
directors are presumed to be protected by the business judgment rule, but where they are faced with a conflict of
interest, such as when they use corporate funds to repurchase shares to
protect their control of the company, they may not be protected.
The Court found that in
order to be protected, the directors have to show a good faith belief
that there is a threat to the corporation's existence (as well as doing
The Court found that the
directors reasonably believed that Maremont was a reasonable threat to
Holland's continued existence.
The Court found that it was
reasonable for the directors to give Maremont a premium over the market
price because they were buying so much at once (aka a control premium).