Cheff v. Mathes
Delaware Supreme Court
199 A.2d 548 (Del. 1964)
Holland Furnace Company (Holland) (defendant) was a furnace manufacturer and sold its furnaces by directly hired retail salesmen. This practice was unique in the business and management considered it to be a main reason for the company’s success. Cheff was a director and the CEO of Holland and he owned 6,000 shares of Holland stock. In June 1957, Cheff met with Arnold Maremont, the chairman of the board of Motor Products Corporation (Motor Products) (defendant). Maremont asked Cheff about the possibility of a merger between Holland and Motor Products, but because of Holland’s unique sales practice, which Maremont did not care for, Cheff decided that a merger was not feasible. Around the same time, Maremont began buying shares of Holland stock on the open market, even though he indicated to Cheff that he no longer had interest in the company. Soon, Maremont owned 55,000 shares in Holland. After an investigation of Maremont, the Holland board of directors found that he had a reputation for coming in and liquidating a number of companies. By August 1957, Motor Products owned about 100,000 shares of Holland. At that time, Maremont demanded that he be put on the Holland board of directors—a request that Cheff declined. At that point, Maremont purchased more shares of Holland. Then, in October 1957, the Holland board of directors (defendants) authorized a corporate purchase of 155,000 shares of Holland back from Motor Products. The purchase price was above market price, but not unreasonable given the controlling nature of the shares. A few months later, Mathes, et al. (plaintiffs) brought suit against Holland, its board, and Motor Products, alleging that the primary purpose of Holland’s purchase of stock from Motor Products was to effectuate a perpetuation of control by the Holland directors. The Delaware Court of Chancery agreed, finding in favor of the plaintiffs. The defendants appealed.
Rule of Law
Holding and Reasoning (Carey. J.)