Opinion ID: 1478250
Heading Depth: 1
Heading Rank: 3

Heading: rationale of the vice chancellor's decision

Text: The theory of this case when it was commenced was based upon allegations relating to the payment of low dividends, the retention of excessive amounts of cash by the Corporation, excessive contribution to its ESOP, and a conspiracy by the Board to depress the value of the Corporation's stock. During the trial, the plaintiffs added new charges that the defendant employees had been paid excessive compensation, that the defendant directors had breached their fiduciary duties by failing to put in place a plan to enable Class B stockholders to sell their stock at a price fixed by an independent appraiser, and that the defendants failed to provide liquidity equivalent to that which was allegedly provided to the defendants through the ESOP and the key man life insurance program of the Corporation. [5] The only issue before this Court is the ruling by the trial court as implemented in its judgment and final order that the defendants breached their fiduciary duties by failing to provide a parity of liquidity. The theory of the trial court on this issue is based upon the fact that, as directors, defendants approved the ESOP and the key man life insurance program, both of which had the effect of benefiting them as employees, with no corresponding benefit to plaintiffs. Thus, the trial court reasoned, defendants are on both sides of the transaction and the business judgment rule does not apply. Therefore, defendants have the burden of showing the entire fairness of their actions on these issues, which burden the Vice Chancellor held they had not carried. The following portions of the opinion of the trial court are crucial to the determination of the issues on appeal: The inquiry does not end, however, with a finding that defendants have not been overcompensated. They have paid low dividends over the years and have attempted to justify high levels of retained earnings in part as a means of promoting the company's growth. If defendants' focus is on appreciation in the value of the company's stock as opposed to the payment of more than minimal dividends, it would be logical to assume that defendants had or were developing a plan that would enable the company's stockholders to realize the increased value of their shares. No such general plan has been adopted, however, and the few steps defendants have taken demonstrate the validity of plaintiffs' claim of unfair treatment. All Barton stockholders face the same liquidity problem. If they are to sell their shares, they must persuade defendants to authorize a repurchase by the company. The stockholders have no bargaining power and must accept whatever terms are dictated by defendants or retain their stock. If the stockholder is pressed for cash to pay estate taxes, for example, as has happened more than once, the stockholder is entirely at defendants' mercy. Defendants recognized their employee stockholders' liquidity needs when they established the ESOP. As noted previously, employees have the option of taking cash in lieu of the shares allocated to their accounts. Moreover, the disparity in bargaining position is eliminated for employee stockholders because the cash payment is determined on the basis of an annual valuation made by an independent party. No similar plan or arrangement has been put into place with respect to the Class B stockholders. There is no point in time at which they can be assured of receiving cash for all or any portion of their holdings at a price determined by an independent appraiser. Defendants have gone one step farther in addressing their own liquidity problems. Their ESOP allocation may be handled in the same manner as other employees. However, defendants are substantial stockholders independent of their ESOP holdings. In order to solve defendants' own liquidity problem, the company has been purchasing key man life insurance since at least 1982. The proceeds will help assure that Barton is in a position to purchase all of defendants' stock at the time of death. In 1989, the premium cost for the key man insurance was slightly higher than the total amount paid in dividends for the year. While the purchase of key man life insurance may be a relatively small corporate expenditure, it is concrete evidence that defendants have favored their own interests as stockholders over plaintiffs'. It also makes one wonder whether the decisions to accumulate large amounts of cash and pay low dividends were not also at least partially motivated by self-interest. The law is settled that fiduciaries may not benefit themselves at the expense of the corporation, Guth v. Loft, Inc., Del.Supr., 5 A.2d 503, 510 (1939), and that, when directors make self-interested decisions, they must establish the entire fairness of those decisions. Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701, 710 (1983). I find it inherently unfair for defendants to be purchasing key man life insurance in order to provide liquidity for themselves while providing no method by which plaintiffs may liquidate their stock at fair value. By this ruling, I am not suggesting that there is some generalized duty to purchase illiquid stock at any particular price. However, the needs of all stockholders must be considered and addressed when decisions are made to provide some form of liquidity. Both the ESOP and the key man insurance provide some measure of liquidity, but only for a select group of stockholders. Accordingly, I find that relief is warranted. Blackwell v. Nixon, Del.Ch., C.A. No. 9041, Berger, V.C. (Sept. 26, 1991) at pp. 10-13, 1991 WL 194725 (footnotes omitted; emphasis supplied).