## Facts

- Allied Artists Pictures Corp. amended its charter in 1954 to authorize preferred stock with cumulative quarterly dividends payable only “as and when declared” by the board from legally available funds.
- The charter provided that if six or more quarterly preferred dividends were in default, preferred stockholders could elect a majority of the board until all arrears were paid or placed in trust and the current dividend was paid or provided for.
- Allied later experienced financial distress and stopped paying preferred dividends; after six quarterly defaults, preferred stockholders exercised the charter right to elect a board majority.
- Allied entered an installment arrangement with the IRS to satisfy a tax deficiency, conditioned on not paying dividends without IRS consent.
- John G. Baron, a common stockholder, alleged directors intentionally refused to declare dividends in years when funds were available to keep preferred arrears outstanding and maintain preferred-controlled board elections.
- Baron sought equitable relief under 8 Del. C. §§ 225 and 227 to invalidate the 1973 and 1974 director elections and compel a new election; he did not seek payment of the dividend arrears.
- The actions concerning the 1973 and 1974 elections were consolidated and submitted on cross-motions for summary judgment with no material fact dispute asserted by either side.

## Issues

1. Whether the directors wrongfully or fraudulently declined to declare and pay preferred dividend arrearages to entrench themselves by preserving preferred stockholders’ contractual right to elect a board majority.
2. Whether such conduct, if shown, warranted relief under 8 Del. C. §§ 225 and 227 to invalidate the 1973 and 1974 elections and order a new election.

## Decision

- Summary judgment was entered for Allied and the other defendants.
- The court refused to invalidate the 1973 and 1974 director elections and declined to order a new election or appoint a master.
- The court held the record did not show fraud, bad faith, or gross abuse of discretion in the board’s dividend decisions.
- The court concluded there was no legal basis to override the charter’s dividend and voting provisions through election-relief statutes.

## Legal Principles

- The decision to declare dividends is committed to the board’s business judgment and is reviewable only for fraud, bad faith, or gross abuse of discretion.
- Charter language providing that dividends are payable only when declared by the board confers managerial discretion; the existence of legally available surplus does not, by itself, create a duty to declare dividends.
- Courts will respect contractual allocations of voting power in a certificate of incorporation, including preferred voting rights triggered by dividend arrearages, and will not indirectly rewrite that bargain by compelling dividend declarations to alter control.
- Allegations of entrenchment based on dividend nonpayment require evidence sufficient to overcome the presumption that directors acted for legitimate corporate reasons, including financial volatility and contractual constraints such as creditor or tax-payment arrangements.

## Conclusion

The Court of Chancery upheld Allied’s 1973 and 1974 director elections, holding that dividend policy remained within the board’s discretion and that the plaintiff failed to show fraud, bad faith, or gross abuse of discretion sufficient to justify judicial interference with the charter’s preferred-dividend and voting-rights scheme.


Baron v. Allied Artists Pictures Corp., 337 A.2d 653 (Del. Ch. 1975)