## Facts

- Benihana of Tokyo, Inc. (BOT) held roughly 51% of the voting stock of Benihana, Inc., a Delaware corporation operating the Benihana restaurant chain.
- Benihana, Inc. needed substantial capital to renovate restaurants and pursued outside financing.
- The company retained an investment banker to evaluate financing alternatives and recommended issuing convertible preferred stock.
- A Benihana director, John E. Abdo, was also a principal/officer/director of BFC Financial Corporation (BFC), which expressed interest in purchasing the preferred stock.
- Abdo presented BFC’s proposal to the board and then recused himself and left while the remaining directors deliberated and voted.
- A majority of disinterested directors approved issuing $20 million of convertible preferred stock to BFC with specified economic and conversion terms.
- BOT objected that the deal was conflicted, would dilute BOT’s voting power, and was legally questionable; the board reconsidered and again approved the financing.
- BOT filed derivative and class claims alleging the issuance was unauthorized, reflected disloyalty and bad faith (including an alleged purpose to dilute BOT’s control), and constituted corporate waste.
- After trial, the Court of Chancery entered judgment for the defendants; BOT appealed.

## Issues

1. Whether the certificate of incorporation authorized the board to issue the challenged series of convertible preferred stock, including rights characterized as contractual preemptive rights.
2. Whether the transaction was properly approved as an interested-director transaction under 8 Del. C. § 144(a)(1), such that business judgment review applied.
3. Whether the board breached the duty of loyalty by approving the financing primarily to dilute BOT’s voting control rather than to meet corporate capital needs.
4. Whether the terms of the preferred stock issuance constituted corporate waste.

## Decision

- The Delaware Supreme Court affirmed the judgment for the corporation and directors.
- The certificate of incorporation authorized the issuance and the board’s fixing of the preferred stock’s rights and preferences, including the challenged provisions.
- The transaction satisfied 8 Del. C. § 144(a)(1) because the board knew Abdo’s relationship to BFC, Abdo did not participate in the vote, and a majority of disinterested directors approved the transaction in good faith.
- With § 144(a)(1) satisfied, the decision was reviewed under the business judgment rule, and BOT failed to show disloyalty, bad faith, or other grounds to overturn it.
- The Court upheld the finding that the board’s principal purpose was raising needed renovation capital; any dilution of BOT’s control was incidental.
- The waste claim failed because the consideration and terms were within a range a reasonable decisionmaker could accept, and the company received substantial benefit from the financing.

## Legal Principles

- A corporation’s certificate of incorporation may authorize the board to issue preferred stock and determine its rights and preferences; absent a charter prohibition, such issuances are valid if within that grant of authority.
- Under 8 Del. C. § 144(a)(1), an interested-director transaction is not void or voidable solely due to the interest if material facts about the director’s relationship or interest are disclosed to or known by the board and a majority of disinterested directors authorizes the transaction in good faith.
- For § 144(a)(1), knowledge that a director is on both sides of the transaction can be sufficient disclosure of the interest; the statute does not require disclosure of every detail of the director’s role in negotiations where the board understands the director’s conflicted status.
- When § 144(a)(1) is satisfied, the transaction is generally reviewed under the business judgment rule, and challengers must prove disqualifying conduct (e.g., bad faith) or waste to obtain relief.
- Directors do not breach loyalty merely because a bona fide financing dilutes a stockholder’s voting power; liability turns on whether dilution was the primary purpose (improper) or an incidental effect of a legitimate corporate objective.
- Corporate waste requires an exchange so one-sided that no person of ordinary, sound business judgment could view the consideration as adequate.

## Conclusion

The court upheld Benihana, Inc.’s convertible preferred stock financing because it was authorized by the charter, approved by a disinterested board majority with sufficient disclosure under § 144(a)(1), entitled to business judgment deference, and not so one-sided as to constitute waste; the record supported that the financing primarily served corporate capital needs rather than a plan to dilute the controller’s voting power.


Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del. 2006)