Reis v. Hazelett Strip-Casting Corp.
28 A.3d 442
Del. Ch.2011Background
- Hazelett Strip-Casting controlled by Bill Hazelett; estate of Dick Hazelett owned 350 shares and faced distribution to 169 legatees.
- Executors Reis and Patterson sought to monetize Dick’s shares; board feared dilution and loss of close-corporation status, power dynamics, and lender concerns.
- Board approved a reverse split (1 share becomes 1/400 of a share) to bypass executors and facilitate a cash-out-like outcome.
- Valuation firm SMK provided a 2005 baseline value; later 2008 amendments claimed to implement the split, but objections persisted.
- Court ultimately held the reverse split was not entirely fair, awarded damages equal to the fair value of the fractional interests, and ordered offsets for amounts already paid to the Estate.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the reverse split was entirely fair under entire fairness review | Reis argued unfair process and self-dealing by controller/directors | Defendants claimed market-like pricing and fair dealing; protections insufficient for entire fairness | No; reverse split reviewed under entire fairness; unfair dealing tainted price |
| Whether Section 155(2) fair value remedy applies appraisal-like standard | Fair value should be determined akin to appraisal to protect minority | Section 155(2) directs cash payout of fair value determined by the board | Section 155(2) supports board-side determination; however, here entire fairness governs remedy |
| What valuation standard and method should govern fair value | Appraisal-like figures and going-concern value should guide fair value | Use market-based or observed prices; avoid double-counting controller self-dealing | Fair value determined through going-concern approach with normalizing adjustments; blended value adopted |
| Whether the directors’ independence and protective devices affected the review standard | Independent committee or majority-of-minority required to avoid entire fairness | No protective devices; controller had controlling influence | Reverse split subjected to entire fairness; burden on fiduciaries to prove fairness |
| What is the proper remedy and offsets arising from pre-payments to the Estate | Damages should reflect fair value per fraction; no improper offset | Offsets for amounts prepaid and interest should reduce damages | Damages equal to fair value per fractional interest; offset for prepaid amount and interest applied; net judgment awarded |
Key Cases Cited
- Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (two-component fairness: fair dealing and fair price; unitary standard of entire fairness)
- Tri-Continental v. Battye, 74 A.2d 71 (Del. 1950) (going-concern value; consideration of all relevant factors in value)
- Sterling v. Mayflower Hotel Corp., 93 A.2d 107 (Del. 1952) (minority shall receive substantial equivalent in value; going concern concept aligns with appraisal)
- Rosenblatt v. Getty Oil Co., 493 A.2d 929 (Del. 1985) (fair price inquiry tied to ongoing value; appraisal framework)
- Applebaum v. Avaya, Inc., 812 A.2d 880 (Del. 2002) (fair value vs. fair price; section 155(2) context in reverse splits; implications for remedies)
- Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156 (Del. 1995) (unitary entire fairness analysis; price and process considered together)
- Weinberger (see above), as cited in opinion (Del. 1983) (reiterates two aspects of fairness and potential remedies)
- Kahn v. Lynch Commc'n Sys., Inc., 669 A.2d 79 (Del. 1995) (context of enhanced scrutiny and fair dealing considerations)