## Facts

- Stockholders brought a derivative action against directors of Holland Furnace Company, a Delaware corporation, challenging a board-approved repurchase of shares from a large shareholder bloc associated with Motor Products Corporation.
- Holland’s directors were led by a family-affiliated control group holding a significant minority position and managing a direct, door-to-door sales model viewed as central to the company’s success.
- After Holland rejected a proposed merger, Motor Products’ chairman (through Motor Products and related holders) accumulated a large block of Holland stock and sought board representation.
- The board investigated the accumulating shareholder and received reports characterizing him as a “liquidator” associated with takeovers, asset sales, and corporate breakups.
- Directors also received information indicating employee and salesforce unrest and fear that a takeover would abandon Holland’s sales system and destabilize operations.
- In October 1957, the board authorized Holland to repurchase 155,000 shares from the Motor Products-related sellers at $20 per share, a premium over market and above a cited “net quick asset value” metric.
- Directors asserted the repurchase served corporate aims (stability, protection of policies and personnel, and potential use of shares for an option plan); plaintiffs alleged the true purpose was to eliminate a control rival and preserve incumbents.

## Issues

1. When directors authorize a defensive repurchase of corporate shares that also tends to preserve their control, who bears the burden to justify the transaction as proper under fiduciary duties?
2. Under what conditions is a premium repurchase from a potential acquirer a permissible protective measure rather than an improper entrenchment transaction?
3. Whether the price paid was so excessive as to constitute waste or evidence of bad faith.

## Decision

- The Delaware Supreme Court agreed that the directors bore the burden to justify the repurchase because it had the effect of maintaining them in control.
- The court reversed the finding of liability, holding the directors met their burden by showing good faith, reasonable investigation, and a corporate purpose.
- The court concluded the board reasonably perceived a threat to the corporation’s policies, personnel, and business model and acted to protect the enterprise, not solely to entrench itself.
- The court held the premium price was not so excessive as to constitute waste, noting that control blocks commonly command a premium.

## Legal Principles

- When directors use corporate funds for a stock repurchase and a material effect is preservation of control, directors must justify the transaction by showing good faith, reasonable investigation, and a proper corporate purpose.
- A defensive repurchase can be consistent with fiduciary duties if directors reasonably believe, based on investigation, that the selling shareholder poses a threat to the corporation’s policies, personnel, or continued business.
- The incidental effect of entrenchment does not invalidate a defensive measure if the primary purpose is corporate protection rather than personal benefit.
- Paying a premium to eliminate a perceived control-related threat is not waste per se; the inquiry is whether the price is so disproportionate to value as to indicate bad faith or waste.

## Conclusion

The court placed the burden on directors to justify defensive share repurchases affecting corporate control, but held that a repurchase at a premium is permissible when directors, acting in good faith after reasonable investigation, reasonably view the counterparty as a threat to the corporation and the price is not wasteful.


Cheff v. Mathes, 199 A.2d 548 (Del. 1964)