Dalton v. American Investment Company

American Investment Company (AIC) (defendant) received an offer from Household Finance Corporation (HFC) to enter a merger under which HFC would acquire all shares of AIC’s common stock and preferred stock for $12 per share and $25 per share, respectively. The proposed merger did not come to fruition, and AIC’s president continued to seek a buyer. Another company, Leucadia, proposed a merger in which AIC’s common stockholders would be cashed out for $13 per share, but the preferred stockholders would not be cashed out at all. To make the deal more attractive to the preferred stockholders, dividends on preferred stock were increased, and a fund was added for the purpose of redeeming the preferred stock over a period of 20 years. AIC’s board of directors accepted the offer, which was put to a shareholder vote. The common stockholders overwhelmingly approved the proposal. A majority of Series B preferred stockholders voted against it, but a majority of AIC stockholders—including the other series of preferred stock—voted in favor of it. The proposal was approved and implemented, with AIC merging into HFC and HFC being renamed AIC. Mary G. Dalton and other preferred stockholders (the preferred stockholders) (plaintiffs) brought suit against AIC and various members of its board of directors in the Delaware Chancery Court, alleging that the board breached a duty of fair dealing. The preferred stockholders pointed to the aborted HFC proposal, whose terms were much more favorable to AIC’s preferred stockholders, and suggested that AIC’s president actively solicited an inferior offer. AIC countered that the preferred stockholders lacked a contractual right to a buyout of the preferred shares at any price.