Court Opinion

ID: 9629980
Source: CourtListenerOpinion
Date Created: 2023-08-22 09:56:07.39049+00
Date Added: 2024-06-11T18:07:28.774474
License: Public Domain

HARTNETT, Justice, and HORSEY, Justice (Retired),
dissenting:
We respectfully dissent. The question is what is the appropriate standard of review to be employed by the Court of Chancery in reviewing the Milacron Recapitalization Plan that was approved by a vote of the shareholders pursuant to 8 Del.C. § 242, the effect j; of which will inevitably entrench the majority; stockholders, to the ultimate detriment of the minority stockholders who did not approve the Plan. The members of the Geier Family Group, the intended and acknowledged beneficiaries of the Plan, “own or control in excess of 50% of the total voting power of the Company’s stock and in excess of two-thirds of the Preferred Stock Outstanding.” (Proxy *1386Statement set forth in footnote 6 of the Majority’s Opinion.) Under these circumstances, neither the business judgment rule nor the shareholder vote shift the burden of persuasion in the required judicial inquiry into the reasonableness of the Recapitalization Plan or its fairness to the minority shareholders.
Furthermore, the existence of controverted facts precluded the Court of Chancery from finding that the Plan was reasonable under the standard articulated in Unocal or that the standard articulated in Blasius was not applicable.
I.
We believe the action of the Milacron Board in instituting and recommending adoption of the Recapitalization Plan implicates the duty of loyalty and, therefore, must be subject to full judicial scrutiny, not to judicial deference because of the business judgment rule. The Board’s stated reason for the Plan is not dispositive, given the Plan’s conceded effect: to confer substantial benefits on the majority shareholders, the Geier Family Group, without conferring similar benefits upon the minority shareholders having equally legitimate, but differing, investment objectives.
The shareholders were informed by the Proxy that shareholder approval of the Plan was “virtually assured.” (Footnote 6, majority opinion.) We, therefore, do not believe that the Board’s submission of the Recapitalization Plan to the shareholders, pursuant to 8 Del.C. § 242, and the approval of it by the same majority shareholders who are the beneficiaries of the Plan lessens judicial scrutiny into the reasonableness of the Plan and its fairness to the minority shareholders.
Even if the shareholder vote was voluntary (which it was not), it would have merely accorded the Plan a presumption of fairness. The Court of Chancery still had a duty to determine whether the power exercised by the Board was oppressive to the minority. See Davis v. Louisville Gas & Electric Co., Del.Ch., 142 A. 654 (1928); Bailey v. Tubize Rayon Corp., D.Del., 56 F.Supp. 418 (1944).
II.
The majority’s reliance on Stroud v. Grace, Del.Supr., 606 A.2d 75 (1992), to preclude or lessen judicial review of the Plan is misplaced. In the present case, the Geier Family Group are the controlling shareholders of a public corporation. The proposed Plan significantly alters shareholder voting rights to the detriment of those minority shareholders who have no interest in preserving the family ownership, or whose investment objectives may have a different time frame from the Family Group. Stroud involved a private, closely held corporation that sought to have adopted a “right of first refusal” charter amendment commonly used by such corporations to preclude the transfer of shares to outsiders. Milacron’s status as a public corporation does not permit the Court of Chancery to merely defer to the text of the Recapitalization Plan which has the ultimate effect of turning a public corporation into a defacto close corporation.
In Stroud this Court relied upon a shareholder vote to cure otherwise suspect board actions involving charter amendments commonly adopted by close corporations. The court found that “[i]n the absence of fraud, a fully informed stockholder vote in favor of even a ‘voidable’ transaction ratifies board action and places the burden of proof on the challenger.” Stroud, 606 A.2d at 83.
In the present case, however, the charter amendments worked fundamental changes in the governance of Milacron, as the Proxy concedes. The Recapitalization Plan’s ultimate effect will be to confer upon the Geier Family shareholders control not only over the future composition of the Board, but over the strategic long-term planning of the company. A coerced shareholder vote which received the approval of less than 50 percent of the votes of all the unaffiliated [non-Geier Family] shares outstanding cannot be deemed to be a shareholder approval that lessens judicial scrutiny as to the fundamental fairness of the Plan. In our opinion, for there to be a vote that cures a defect, two factors are implicated. First, there must be a full disclosure of the pertinent facts. Stroud, 606 A.2d at 84; Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 703 (1993). *1387Second, the vote must be free from coercion, that is, the shareholder action must be meaningful and voluntary. Rakestraw v. Rodrigues, Supr., 8 Cal.3d 67, 104 Cal.Rptr. 57, 60, 500 P.2d 1401,1404 (1972). See Eisenberg v. Chicago Milwaukee Corp., Del.Ch., 587 A.2d 1051,1061 (1987); Ivanhoe Partners v. Newmont Mining Corp., Del.Ch., 533 A.2d 585, 605, aff'd, Del.Supr., 535 A.2d 1334 (1987); AC Acquisitions Corp. v. Anderson Clayton & Co., Del.Ch., 519 A.2d 103, 113-14 (1986); Locos Land Co. v. Arden Group, Inc., Del. Ch., 517 A.2d 271, 278-79 (1986). The legal imprimatur of a shareholder ratification cannot arise out of a staged and essentially meaningless vote.37
Here the minority stockholders were faced with two significant disclosures in the Proxy: (1) the adoption of the Recapitalization Plan was “virtually assured” of approval because of the votes of the Geier Family (the proposers of, and the prime beneficiaries of the Plan), and (2) the adoption of the proposed Charter Amendment could result in a de-listing of Milacron stock from the New York Stock Exchange unless it was ratified by an affirmative vote of % of all the shares. The minority stockholders, therefore, had no real choice. Nor did a majority of the minority apparently vote for the Plan.38 (Footnote 12, majority opinion.) Notwithstanding that the shareholder vote was legally sufficient to meet the requirements of 8 Del.C. § 242, the burden of persuasion to show the unfairness of the Plan was not shifted to the minority shareholders. See Schnell v. Chris-Craft Indus., Inc., Del.Supr., 285 A.2d 437, 439 (1971).
III.
In our opinion, the Board’s decision proposing and recommending the adoption of the Recapitalization Plan should be subject to a heightened level of judicial scrutiny, under the rationale of Unocal, 493 A.2d 946, or Blasius, 564 A.2d 651, or both. When the voting rights of minority stockholders are changed without their consent, there is the omnipresent specter of inherent conflict between a board’s duty to all the stockholders and the desires of the block of stockholders holding a majority of the shares. This conflict is similar to the conflict that existed in Unocal,39
Although an action diminishing a shareholder’s vote is not invalid, per se, the right of an individual stockholder to exercise the voting rights of its shares is a fundamental corporate right. Tanzer v. Int’l Gen. Indus., Inc., Del.Supr., 379 A.2d 1121, 1123 (1977); Wylain, Inc. v. TRE Corp., Del.Ch., 412 A.2d 338, 344 (1980); Aprahamian v. HBO & Co., Del.Ch., 531 A.2d 1204 (1987); Blasius, 564 A.2d at 659 n. 2 (1988). The right of franchise must not be diluted except where reasonably necessary to accomplish an appropriate corporate business policy. Id.
If the Milacron Board’s purpose was to reduce the voting power of the minority shareholders or to increase the voting strength of the Geier Family Group shares, then the Board’s action must pass the “compelling justification” standard of scrutiny articulated in Blasius. Stroud, 606 A.2d at 92 n. 3 (1992). As the majority concedes, the Board’s duties were not fulfilled merely by blind compliance with the technical mandates of 8 Del.C. § 242. See Schnell, 285 A.2d at 439.
The Court of Chancery’s determination that the “compelling justification” standard of Blasius was not implicated was apparently based on its conclusory finding that “the recapitalization plan does not interfere with voting rights so as to preclude effective stockholder action.” This, however, is contradicted by the Court of Chancery’s finding that the Plan has an entrenchment effect. *1388The Court of Chancery’s finding of the inevitability of the entrenchment of the Geier Family shareholders in the control of Mila-cron’s future is an indisputable fact fully supported by the record through the Proxy Statement, and acknowledged in the Majority’s Opinion at op. 1373-1374 and footnote 10. Hence, the Majority’s conclusion to the contrary, at op. 1377-1378, is not supported by the record. Because the primary issue is shareholder entrenchment, the directors’ motivation and good faith are not dispositive. Cf. Kahn v. Lynch Communication Systems, Inc., Del.Supr., 638 A.2d 1110,1112-20 (1994) (recognizing that the appointment of a special committee by a controlling stockholder does not necessarily shift the burden of proving entire fairness from the controlling shareholder).
From a review of the entire record, we are convinced that, notwithstanding the self-serving denials of the proponents of the Plan, its effect on shareholders’ voting rights was clearly substantial rather than incidental. The Court of Chancery, in our view, should have held an evidentiary hearing to determine if the Recapitalization Plan has a negative effect on the minority shares and to determine whether the primary purpose of the Plan was to assure the continual control of the corporation by the Geier Family members while permitting them to sell some of their shares.
If the Court of Chancery found these factors existed, it should have reviewed the Plan under the Blasius compelling justification standard.
IV.
In Stroud, this Court described the relationship between the tests articulated in Bla-sius and Unocal and stated that these tests are not mutually exclusive. Stroud, 606 A.2d at 92, n. 3. Although the Court of Chancery improperly, in our view, rejected the “compelling justification” standard of Blasius, unlike the majority, we believe that it correctly found that the action of the Board in adopting the Recapitalization Plan was subject to the heightened judicial scrutiny mandated by Unocal. A court must apply the enhanced scrutiny test set forth in Unocal whenever the board “adopts any defensive measure taken in response to some threat to corporate policy and effectiveness which touches upon issues of control.” Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131, 1144 (1990).
If the purpose of the Recapitalization Plan was defensive, so as to eliminate challenges to control from hostile acquisition offers or proxy contests, as the Proxy suggests, the Unocal standard is triggered, as the Court of Chancery properly found. In conducting its Unocal analysis, however, the Court of Chancery failed to recognize that genuine issues of material fact existed that precluded its finding that the Recapitalization was a reasonable response to a perceived corporate threat.
From a review of the entire record, we are convinced that there are several disputed issues of fact that must be resolved before the Unocal heightened judicial scrutiny as to the proportionality and reasonableness of the Recapitalization Plan can be completed.40 Among them are: 1) whether the primary purpose of the Recapitalization Plan was to disenfranchise the non-Geier Family shares; 2) whether the Plan’s purpose was to substantially reduce the value and marketability of those shares; and 3) whether the primary purpose of the Plan was to enable the Geier Family members to dispose of a substantial portion of their shares and still retain control of the corporation.
Lastly, we find nothing in the text of 8 Del.C. § 242(b)(1) that precludes the Court of Chancery from exercising judicial oversight over a Recapitalization Plan with such a disproportionate effect on the minority shares.
V.
The standard for granting summary judgment is high. Summary judgment should *1389not be granted if the record indicates that a material fact is in dispute or if it seems desirable to inquire more thoroughly into the facts in order to clarify the application of law to the circumstances. Ebersole v. Lowengrub, Del.Supr., 180 A.2d 467 (1962). “In discharging this function, the [trial] court must view all the evidence in the light most favorable to the non-moving party.” Merrill v. Crothall-American, Inc., Del.Supr., 606 A.2d 96, 99 (1992) (citation omitted).
It is clear from the record that the Recapitalization Plan will increase the relative voting power of the long-term holders of the common stock — who are likely to be Geier Family members. This fact mandates a factual inquiry into the purpose of the Board in adopting and recommending the Recapitalization Plan. If the change in shareholder voting power was an unintended byproduct of a defensive strategy, the heightened scrutiny standard in Unocal should be applied. If, however, the facts show that the Board’s primary purpose was to dilute the franchise of the non-Geier Family shares, then, under Blasius, Defendants “[bear] the heavy burden of demonstrating a compelling justification for such action.” Blasius, 564 A.2d at 661.
If the facts show that the purpose of the Recapitalization Plan was simply to favor the Geier Family at the expense of the other stockholders, then a breach of the duty of loyalty likely occurred. See Unitrin, 651 A.2d at 1375 (a director may be found to be acting independently only when his “decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences” (quoting Aronson v. Lewis, Del.Supr., 473 A.2d 805, 816 (1984)); Frantz Mfg. v. EAC Indus., Del.Supr., 501 A.2d 401, 408 (1985); Giuricich v. Emtrol Corp., Del.Supr., 449 A.2d 232, 239 (1982); Schnell, 285 A.2d at 439.
Although we recognize the frustration of the Court of Chancery in attempting to dispose of this suit, which was filed in 1986, the granting of summary judgment must be cautiously invoked so that the parties may always be afforded an evidentiary hearing where there is a bona fide dispute as to the facts. H & S Mfg. Co. v. Benjamin F. Rich Co., Del.Ch., 164 A.2d 447 (1961). A trial court must not weigh the evidence in passing on the motion. Continental Oil Co. v. Pauley Petroleum, Inc., Del.Supr., 251 A.2d 824 (1969).
We believe, therefore, that the case should be remanded to the Court of Chancery for a limited evidentiary hearing to resolve the remaining issues of material fact and for a meaningful review of the Recapitalization Plan in which the proponents of the Plan bear the burden of showing its fairness and reasonableness to the minority shareholders. After resolving the disputed factual issues, the Court of Chancery would be in a position to decide whether the review should be conducted under the enhanced standard of review of Unocal or Blasius.

. As the majority opinion notes at footnote 12, apparently 6,406,367 shares were not voted for the Plan.

. If the Charter Amendment had been put to a separate vote of the minority shareholders they would have had an operative choice and, presumably, an affirmative vote would have relieved the Board of its burden of defending the Plan. See Citron v. E.I. DuPont de Nemours & Co., Del.Ch., 584 A.2d 490, 500 (1990).

.For a discussion of the desirability of broadened, enhanced judicial scrutiny, see Martin Lipton and Theodore N. Mirvis, Enhanced Scrutiny and Corporate Performance: The New Frontier for Corporate Directors, 20 Del.J.Corp.L. 123 (1995).

. An example of how the Recapitalization Plan was structured to favor the Geier Family shareholders is the Plan's provision that a transfer of shares will cause a reversion of the voting rights from 10 votes per share to a single vote per share for 36 consecutive months after a transfer. This provision will not apply, however, to shares of stock given by members of the Geier family to other family members.