In Benihana of Tokyo, Inc. v. Benihana, Inc., download file, the plaintiff sought rescission of an agreement to issue $20 million of Benihana preferred stock based on the claim that the transaction violated the Certificate of Incorporation and Section 151 of the DGCL by virtue of its issuance of new shares with preemptive rights and also based on claims that the directors breached their fiduciary duties of loyalty and care in approving the transaction with an alleged primary improper purpose to dilute the interest of other shareholders and to entrench certain directors. Another claim was that the transaction should be reviewed under the entire fairness standard and that the transaction failed under such review standard. The court found after an expedited trial that the board did have authority under the Certificate of Incorporation and the applicable provisions of the DGCL to issue preferred stock with preemptive rights; that a majority of the informed, disinterested and independent directors approved the transactions; that the directors did not have an improper purpose of entrenchment; that the directors did not breach their fiduciary duties of loyalty and care; and that the transaction for the issuance of preferred shares was a valid exercise of the board members’ business judgment. Accordingly, the claims were dismissed.
The decision also includes an application of the Business Judgment Rule presumption, as well as an analysis of whether the board was informed, disinterested and independent so as to warrant the application of Section 144 of the DGCL which would entitle the deferential application of the Business Judgment Rule to an interested transaction which was approved by a majority of disinterested and informed board members when otherwise, an interested transaction would be subject to the entire fairness standard. The court found that Section 144 did apply and thus the burden shifted to the plaintiff to challenge the transaction, but that burden was not carried.