Stroud v. Grace

606 A.2d 75 (1992)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

Milliken was a privately held Delaware corporation. It was one of the largest and most successful textile businesses in the world. Most of the its 200 shareholders were direct descendants of its founder Seth Milliken. The board consisted of ten members. Four of the ten were members of the family or employees, and the remaining six were otherwise unaffiliated with the company. The current problems arose upon the death of W.B. Dixon Stroud and the release from under trust control or Roger, Gerrish, and Minot Milliken of shares to the Strouds, who now owned or controlled 17% of Milliken shares. Soon after the death of W.B., Roger proposed that the Milliken shareholders enter into a General Option Agreement that gave the Milliken family the first right of refusal to purchase shares offered to unrelated persons. Almost 75% of the Milliken shareholders executed this agreement. Only the Strouds and a few others did not execute the agreement. Subsequently, the Milliken board proposed a new amendment that established a new method of qualifying directors for membership on the board; shareholders were required to submit a notice of their candidates to the board well in advance of the annual meeting, and the board was empowered to disqualify a nominee at any time even at the annual meeting. The next annual meeting was scheduled, and notice of the current bylaws and the board resolution for the new amendment were sent out. The new amendment was approved by 78% of the shares entitled to vote, and 97.85 of share entitled to vote were present. Strouds (P) then filed derivative action suits against Ds contesting notice, the Amendments and By Law 3. The Court of Chancery sua sponte granted summary judgment for Ds on all of P's claims but upheld P's attack on By-law 3. The board's actions would not be reviewed under the standards set forth in Unocal Corp. v. Mesa Petroleum Co., and found that the notice of the annual meeting was not inadequate or misleading. The trial court held that the board was under a duty to disclose more information in its notice than the requirements of 8 Del. C. §§ 222(a) & 242(b)(1). The Court of Chancery ruled that Milliken did not have to disclose any confidential information to shareholders who had not first executed a reasonable confidentiality agreement. Finally, the trial court assessed P's challenge to the validity of the Amendments and By-law 3 under the 'compelling justification' standard of Blasius Industries, Inc. The Vice Chancellor found that the Amendments were fair, but that By-law 3 was unreasonable on its face because it potentially prevented the shareholders from nominating their candidates for the board of directors.