Julian v. Eastern States Construction Service
Delaware Chancery Court
2008 Del. Ch. LEXIS 86 (2008)
- Written by Steven Pacht, JD
Facts
Brothers Gene Julian (plaintiff), Francis Julian (defendant), and Richard Julian (defendant) owned shares in and worked for Eastern States Construction Service, Inc. (ESCS), Benchmark Builders, Inc. (Benchmark), and Eastern States Development Company, Inc. (ESDC) (collectively, Julian businesses) (collectively, defendants). Steven Bomberger (defendant) was Benchmark’s president. Francis, Richard, and Bomberger were directors of Benchmark. In late 2005, Gene announced his intent to retire from ESCS and ESDC. As a result, Francis and Richard sought to compel Gene to sell his shares in ESCS and Benchmark at the shares’ net book value as of December 31, 2005. At a December 20 Benchmark meeting, Benchmark’s board approved a $1 million bonus to Eastern States Group Management Company (Management) and a $300,000 bonus to Bomberger (collectively, the bonuses). That board meeting ran for less than 30 minutes; no legal or business advisers attended or were consulted beforehand. Per Francis, Richard, and Bomberger, Benchmark paid the bonuses to reward management for a successful year and to reduce Benchmark’s cash on hand so that Benchmark would have fewer assets if it were sued. But Francis and Richard understood that paying the bonuses would reduce the net book value of Benchmark’s stock as of December 31, which would reduce what Benchmark would have to pay Gene for his shares. Moreover, Richard acknowledged that the bonuses were a reaction to Gene’s unexpected retirement. Management distributed its $1 million bonus equally to Francis and Richard. The bonuses—which constituted more than 22 percent of Benchmark’s adjusted income—were unprecedented for Benchmark. Benchmark paid no bonuses between 1996 and 1998, and its 1999 through 2004 bonuses never exceeded 3.36 percent of adjusted income. Notably, Benchmark had a better year in 2004 than in 2005. Gene filed suit in Delaware Chancery Court, alleging, among other things, that Francis, Richard, and Bomberger breached their fiduciary duties because the bonuses—which were self-interested transactions—were not entirely fair. Francis and Richard responded that the bonuses were entirely fair despite the relatively informal board process, noting that the Julian businesses were family run and had small boards and that the meeting approving the bonuses was similar to other Julian-business board meetings. Bomberger argued, among other things, that the Julian businesses paid similar bonuses in prior years. The court issued its findings after a trial.
Rule of Law
Issue
Holding and Reasoning (Parsons, J.)
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