Opinion ID: 2269158
Heading Depth: 1
Heading Rank: 2

Heading: Was the power to purchase the Mathieson stock inequitably exercised?

Text: Plaintiffs make two arguments directed to this question. First, it is said that the sole purpose of the purchase of the Mathieson shares was to eliminate a block of stock and prevent its being offered in the open market or otherwise disposed of, and that the statute may not lawfully be used in furtherance of such a purpose. Two cases are cited in support of this argument, Starring v. American Hair & Felt Co., 21 Del.Ch. 380, 191 A. 887 (affirmed per cur. 21 Del.Ch. 431, 2 A.2d 249), and Greene v. E. H. Rollins & Sons, Inc., 22 Del.Ch. 394, 2 A.2d 249. In the Starring case Chancellor Wolcott had before him a charter provision purporting to authorize the redemption of common stock. Invoking this provision, the corporation sought to compel certain stockholders to surrender their stock, and one of them objected. In holding the provision contrary to law the Chancellor observed that what was attempted in that case was in effect a reduction of capital by retiring the shares held by some stockholders while allowing the remaining stockholders to keep their shares; whereas the provisions of Section 28 required such a reduction to be made by drawing the necessary number of shares by lot for retirement. The soundness of the decision is not questioned, but it is of no aid to plaintiffs. The Starring case dealt with a compulsory retirement of shares; the instant case concerns a purchase from a stockholder willing to sell. These two methods of reducing capital are distinct, and the statutory provisions governing them are different. The Starring decision is inapplicable. Greene v. Rollins, supra, in which the Chancellor reaffirmed the observation in the Starring case, above mentioned also involved a charter provision for the compulsory sale of stock to the corporation. The principal question was whether such a provision was an unreasonable restraint on alienation. This decision is likewise not in point here. We see no sound reason why it should be held as a matter of law that the method of reducing capital by purchasing shares at private sale for retirement may not be invoked simply because the purpose or motive of the reduction is to eliminate a substantial number of shares held by a stockholder at odds with management policy, provided of course that the transaction is clear of any fraud or unfairness. This was substantially the situation which was presented in the British and American case, supra, and which was found by the House of Lords to be no deterrent to approval of the purchase. Our conclusion is that the purchase in the instant case was not, as a matter of law, illegal because of its purpose. The second contention of plaintiffs directed to the issue of unfairness is founded upon a charge that at least two of the directors voting for the purchase, whose votes were necessary for a quorum, did so for selfish reasons, that is, to protect their positions and salaries; and that their action was not in the best interest of the corporation, since no benefit has accrued to it from the purchase. This contention is in effect an attack on the good faith of the directors' action and thus raises an issue of fact. Plaintiffs filed no affidavits in support of this contention, and the present record lacks any substantial evidence to support it. But we cannot resolve it here. On remand, plaintiffs will be at liberty to proceed to final hearing and adduce evidence directed to this issue, which must be determined by the Vice Chancellor in the light of the principles of law herein set forth. The order of the court below of July 10, 1952, is affirmed, and the cause is remanded to the Court of Chancery of New Castle County for further proceedings in conformity with this opinion.