Abraham v. Emerson Radio Corp., download file. In this Chancery Court case, the complaint attempted to establish a claim against the majority shareholder for selling its majority stake for a premium to a purchaser that, upon acquiring control, set out to “transfer valuable assets to the use and benefit of the purchaser’shareholders to the detriment of Sport Supply’s (seller’s entity) shareholders.” In effect, the complaint sought an order to “equitably redistribute the premium the majority shareholder received from the buyer to the other minority shareholders of the seller”. This case was decided on a Motion to Dismiss which was granted.
The essence of the argument about why the complaint failed to state a claim, according to the court “is simple: under Delaware law, Emerson [the majority shareholder and seller] was free, as a general matter, to sell its majority bloc in Sports Supply for a premium that was not shared with the other Sport Supply stockholders.” The complaint failed to allege adequate circumstances to support the suggestion that Emerson knew, suspected or should have suspected that the buyer was either a looter or was dishonest, and had improper plans for Sports Supply. The court was dubious that the common law of corporations would recognize a duty of care-based claim against the controlling stockholder for failing to (in the judgment of the court) examine the bona fides of a buyer, at least when the corporate charter contains an exculpatory provision authorized expressly by DGCL Section 102(b)(7) [of Section 8 of the Delaware Code.]
Thus, the court reasoned, when the board itself is exempt from liability for violations of the duty of care, pursuant to the DGCL, by what logic would the judiciary extend liability to a controlling shareholder exercising its ordinarily unfettered right to sell its shares? The court concluded its reasoning in dismissing the claims by observing that, when opposing the basic right of every stockholder to sell its shares: “a plaintiff seeking to support the claim must plead facts that indicate that the controller knew there was a risk that the buyer was a looter or otherwise intended to extract illegal rents from the subsidiary, at the expense of the subsidiary’s remaining stockholders.”