''Benihana of Tokyo, Inc. v. Benihana, Inc.''
906 A.2d 114(Del. 2006) was a case in the
Delaware Supreme Court
The Delaware Supreme Court is the sole appellate court in the United States state of Delaware. Because Delaware is a popular haven for corporations, the Court has developed a worldwide reputation as a respected source of corporate law decisions, ...
between Benihana of Tokyo, Inc., and its subsidiary
Benihana, Inc. that concerned the duty of loyalty between a company and its
directors
Director may refer to:
Literature
* ''Director'' (magazine), a British magazine
* ''The Director'' (novel), a 1971 novel by Henry Denker
* ''The Director'' (play), a 2000 play by Nancy Hasty
Music
* Director (band), an Irish rock band
* ''D ...
. The court held that a Board's approval of an issuance and purchase of
preferred stock
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...
was a valid exercise of its
business judgment
The business judgment rule is a case law-derived doctrine in corporations law that courts defer to the business judgment of corporate executives. It is rooted in the principle that the "directors of a corporation... are clothed with hepresumpti ...
under
Delaware
Delaware ( ) is a state in the Mid-Atlantic region of the United States, bordering Maryland to its south and west; Pennsylvania to its north; and New Jersey and the Atlantic Ocean to its east. The state takes its name from the adjacent Del ...
law.
Facts
Benihana of Tokyo owned approximately 51% of Benihana, Inc. The latter was having financial difficulties and its directors approved an issuance of $20 million of preferred stock. A company called BFC bought the stock in a deal that was negotiated by a Benihana director. The same Benihana director was also a principal owner of BFC. After the directors approved the stock sale, Benihana of Tokyo disagreed with the sale and purchase and filed a derivative lawsuit against the directors.
Procedural facts
Benihana of Tokyo sued Benihana, arguing the directors had breached their
fiduciary duty
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...
by allowing a director to negotiate the deal, when he had an
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...
acting for both the buying and selling parties. The trial court held for the directors, stating that the board knew that the director was a principal of BFC, but that the board was not informed that the director had negotiated the deal on behalf of BFC. The trial court also found that the decision was within the bounds of the business judgment rule.
Issue
There were two prominent issues in this case. The first was whether the directors breached their fiduciary duties in allowing a director with conflicting interests to be involved in the deal. The second was whether there was a
safe harbor in the business judgment rule.
Judgment
The
appellate court
A court of appeals, also called a court of appeal, appellate court, appeal court, court of second instance or second instance court, is any court of law that is empowered to hear an appeal of a trial court or other lower tribunal. In much of ...
affirmed the lower court's decisions. The appellate court applied Delaware law, which provided safe harbor for an interested transaction. The law states, "the material facts as to the director's relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors, and the board in good faith authorizes the contract or transaction by an affirmative vote of the majority of the disinterested directors." Del. Code Section 144(a)(1). Benihana of Tokyo argued that this law was not applicable because the directors did not know that the director negotiated the deal.
Ultimately, the appellate court found that because the directors spent significant time on the process of making their decision, and because the transaction was a fair deal that was approved by a majority of disinterested directors, it was covered by the business judgment rule.
See also
*
United States corporate law
United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance ...
Notes
{{reflist
United States corporate case law