Cheff v. Mathes
41 Del.Ch. 494, 199 A.2d 588 (Del.Supr. 1964)

  • Holland was a corporation that made furnaces. Their CEO, Cheff, met with a guy named Maremont (who owned a competing furnace manufacturer) about a potential merger. However they did not come to an agreement.
    • Maremont wanted to significantly change Holland’s practice of selling furnaces using door-to-door salesmen.
  • Maremont bought 15% of Holland’s stock. He demanded a seat on Holland’s board of directors. Holland refused.
  • Maremont told the directors that he intended to make a tender offer to buy up the rest of Holland’s stock unless Holland bought his 15% at a substantial premium.
    • Maremont’s threat implied that if he got control of Holland, he would merge it with his company and fire all of Holland’s directors.
    • That’s known as greenmail.
  • Holland’s directors voted to buy all of Maremont’s stock at a premium.
  • Holland shareholders, led by Mathes filed a derivative suit for breach of fiduciary duty.
    • The shareholders argued that the directors bought off Maremont in order to save their jobs.
    • The directors argued that their actions were covered by the business judgment rule.
      • Under 8 Del.C. §160 a corporation has the power to buy or sell shares of its own stock.
  • The Trial Court found for the shareholders. The directors appealed.
    • The Trial Court found that the purpose behind buying Maremont’s stock was just to save their jobs as directors.
  • The Appellate Court reversed.
    • The Appellate Court found that directors are presumed to be protected by the business judgment rule, but where they are faced with a conflict of interest, such as when they use corporate funds to repurchase shares to protect their control of the company, they may not be protected.
      • The Court found that in order to be protected, the directors have to show a good faith belief that there is a threat to the corporation’s existence (as well as doing reasonable investigation).
    • The Court found that the directors reasonably believed that Maremont was a reasonable threat to Holland’s continued existence.
    • The Court found that it was reasonable for the directors to give Maremont a premium over the market price because they were buying so much at once (aka a control premium).