Delaware Court of Chancery
525 A.2d 1001 (Del. Ch. 1987)
Health Chem (Chem) is a Delaware corporation. The public holds 40 percent of Chem’s stock, Marvin Speiser (plaintiff) 10 percent, Leon Baker (defendant) 8 percent, and Health Med Corporation (Med) (defendant) 42 percent. Chem owns Medallion Corp. (Medallion), which owns 95 percent of Med’s equity in convertible preferred stock, representing 9 percent of the voting power. Medallion can convert its preferred stock to common any time, which would give it 95 percent voting power. After conversion, Med would be barred by Delaware law from voting. Del. Code Ann. tit. 8, § 160(c). Speiser and Baker each own 50 percent of Med’s common stock. Speiser and Baker are Med’s only directors. Because of this circular ownership structure, Speiser and Baker have effective control of Chem, though they own less than 35 percent of the company. Speiser and Baker’s relationship turned sour, and Baker refused to attend Med’s shareholder meetings. Without Baker, the company’s quorum requirement was not met. Speiser sued to force an annual meeting. Baker answered with a mingled counterclaim and affirmative defense, arguing that no meeting should be convened because Speiser would take control of Med in breach of fiduciary duties owed to other shareholders. Baker asked for a declaratory judgment that Med cannot vote its Chem shares. Speiser moved to dismiss Baker’s counterclaim.
Rule of Law
Holding and Reasoning (Allen, J.)
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