Mendel v. Carroll

The Carroll family (defendant) owned roughly a 50 percent interest in Katy Industries, Inc. (Katy), which effectively gave the family control over Katy. The Carroll family proposed a buyout of all non-Carroll shares of Katy common stock at $22 per share. Eventually, Katy entered into a merger agreement with an entity controlled by the Carroll family with a share price of $25.75 per share. Later, Pensler Capital Corporation partnered with Steinhardt Enterprise Inc. (Steinhardt Pensler) to offer to purchase all of Katy’s outstanding shares for $28 per share. Except for Barry Carroll, the Carroll family had no interest in selling their shares. Ultimately, the Carroll family exercised its right to terminate the merger agreement. The Carroll family also purchased more stock to ensure greater than 50 percent ownership after Barry Carroll indicated he intended to sell his shares. After the Carroll family reestablished majority control, Steinhardt Pensler proposed a merger agreement with a price of $27.80 per share and a stock option agreement granting Steinhardt Pensler the option to purchase 1.8 million shares of Katy stock. Katy’s legal counsel concluded it was unclear whether the granting of the option would be legal. Katy decided not to pursue a merger with a dilutive option. Instead, the Katy board endorsed a plan to issue a special cash dividend of $14 per share. A shareholder of Katy, Herbert Mendel (plaintiff) filed an action in the Delaware Court of Chancery, seeking an order requiring the Katy board to grant the stock option to Steinhardt Pensler and enjoining Katy from declaring the special dividend.