## Facts

- American Investment Company (AIC), a Delaware corporation, had millions of common shares outstanding and multiple series of preferred stock, including noncallable 5.5% Series B preferred held by the plaintiffs.
- AIC entered a merger in which Leucadia American Corp., a Leucadia, Inc. subsidiary, acquired control of AIC.
- Under the merger, AIC common stockholders were cashed out for $13 per share, eliminating their equity interest.
- AIC preferred stockholders were not cashed out; they remained preferred stockholders of the surviving corporation, now controlled by Leucadia.
- In connection with the merger, AIC adopted changes affecting preferred stock mechanics, including an increased dividend and a funded, periodic redemption program over time while retaining the existing “redemption by lot” feature.
- Preferred stockholders sued alleging (i) the AIC directors (all common stockholders, and largely representing major common holders) breached fiduciary duties by favoring common stockholders and “freezing in” preferred stockholders into a Leucadia-controlled company, and (ii) the merger and related changes triggered a separate class vote for the preferred.
- Plaintiffs initially sought to enjoin the merger; the court denied preliminary injunctive relief, the merger closed, and plaintiffs pursued damages post-closing.

## Issues

1. Whether AIC’s directors breached fiduciary duties to preferred stockholders by approving a merger that cashed out common stock while leaving preferred stock outstanding in a Leucadia-controlled surviving corporation.
2. Whether merger-related changes to preferred dividend and redemption provisions “adversely affected” preferred rights so as to require a separate class vote under the charter and Delaware law.

## Decision

- The Court of Chancery entered judgment for AIC, its directors, and Leucadia American Corp.
- The court held the directors did not breach fiduciary duties to the preferred stockholders by approving the transaction structure.
- The court held the preferred stockholders were not entitled to a separate class vote because the merger-related modifications did not adversely affect their preference rights.

## Legal Principles

- Preferred stock rights are primarily contractual; the scope of preferred protections is determined chiefly by the certificate of incorporation and related charter terms.
- Absent a violation or adverse alteration of bargained-for preference rights, directors may seek to maximize value for common stockholders as the residual equity.
- A complaint that preferred stockholders were “frozen in” after a change of control, without loss of contractual preferences, does not by itself establish a fiduciary breach.
- Charter class-vote protections triggered by “adverse” effects require a showing of a substantive diminishment of the preferred’s contractual rights; changes that are neutral or beneficial (such as increased dividends and a funded redemption program) do not constitute an adverse change.

## Conclusion

The Court of Chancery rejected preferred stockholders’ challenge to a merger that cashed out common stock while leaving preferred stock outstanding, holding that the directors complied with fiduciary duties by honoring the preferred’s contractual rights and that no separate preferred class vote was required because the merger-related changes did not adversely affect the preferred’s charter-based preferences.


Dalton v. Am. Inv. Co., 490 A.2d 574 (Del. Ch. 1985)