A recent Delaware Court of Chancery decision is a treasure trove of fundamental principles applicable to corporate litigation. In Ban v. Manheim, C.A. No.2022-0768-JTL (Del. Ch. May 19, 2025), the 60-plus page post-trial opinion applies an exemplary legal analysis to a complex web of entities controlled by one person, to explain why the valuation of a minority interest failed the entire fairness test—and what the applicable measure of damages requires in the form of a remedy.
Basic Facts
For the benefit of busy lawyers, this is only an extreme precis with bullet points to allow interested readers to determine if they want to review the extensive facts and thorough legal analysis more carefully in order to gain a fuller understanding of the nuances involved.
The essential facts involve a controller who attempted to amend the applicable agreements to provide for a call right and a redemption right that purported to allow him to force-out minority owners at an unfairly low price. The call is referred to in the opinion as the WestCo Call. See Slip op. at 14. The redemption right is referred to as the DVRC Redemption. See Slip op. at 16.
Legal Analysis
- The court begins by explaining that DGCL § 202(b) bars the restriction of shares without the consent of the shareholder. For this reason the attempted restrictions via a bylaw amendment on shares was a statutorily invalid act. The court emphasized that DGCL § 109, which provides for authority to amend bylaws does not supersede the condition to imposing a restriction on shares in Section 202(b). See Slip op. at 21-22.
- The court restates the well-settled principle that the fiduciary duty of a controlling shareholder applies when that controller attempts to amend bylaws. See Slip op. at 25.
- The court provides the reasons why the entire fairness standard applies to self-interested transactions generally. Slip op. at 31.
- In a footnote that extends for about three pages, the court regales the reader with an analysis regarding the materiality of “non-imminent risk,” and questions the “intuition” in the recent Delaware Supreme Court TripAdvisor decision in this context, and in light of the stated purposes of the recently passed SB 21 which sought to minimize non-imminent litigation risk. See footnotes 62 and 89. See also footnote 89.
- The court does an deep dive to dissect the entire fairness standard. See Slip op. 35-39.
- The court acknowledges the primacy of contract but clarifies when it does not bar a fiduciary duty claim. Professor Berle’s venerable twice-testing principle can serve as one example of an exception to that preemption doctrine. See Slip op. at 42-46 and footnote 100.
- The court reminds us that equity allows for flexibility to remedy a breach of the duty of loyalty such that mathematical certainty is not required in proving damages in that context.
- A memorable elucidation of the differences between fair market value and fair value is presented. The court observes that it is not limited in awarding fair market value (which includes discounts like marketability) when a controller takes away equity interests of a minority owner. See Slip op. at 56.
- A fiduciary can be forced to disgorge profit resulting from a breach of fiduciary duty, even if the gain did not come at the beneficiary’s expense in certain circumstances. See Slip op. at 57-60.
- The court makes the noteworthy distinction between the measure of damages in an appraisal case as compared to the damages analysis when a breach of fiduciary duty claim is involved. See Slip op. at 60.
- One of the many treasures in this opinion is the analysis of the competing expert opinions on valuation and how the court finds fault with the experts for both parties. The court selects the parts of each opinion that the court finds reliable, and discards those to which the court does not give any weight.
- Essential reading for any litigant relying on experts is the court’s explanation about the limitation on what additional information an expert may appropriately rely on in rebuttal reports or supplemental expert reports. See Slip op. at 60-68.