## Facts

- MGM Grand Hotels, Inc., a Delaware corporation, agreed to a cash-out merger with an affiliate of Bally Manufacturing Corporation.
- All outstanding shares were to be converted into rights to receive cash.
- Public common stockholders were to receive $18 per share; holders of Series A Redeemable Preferred Stock were to receive $14 per share.
- Kirk Kerkorian, directly and through Tracinda Corporation, controlled MGM by owning about 69% of the common stock and 74% of the preferred stock, participated in negotiating the merger, and agreed to vote his shares in favor, assuring stockholder approval.
- A preferred stockholder filed a class action on behalf of preferred holders (excluding Kerkorian and Tracinda) seeking to enjoin the merger, alleging the merger consideration was unfairly allocated between common and preferred.
- The complaint also alleged breaches of fiduciary duty by directors and the controlling stockholder, including criticisms of process such as proceeding without a special committee and without obtaining an independent fairness opinion before committing to the transaction.

## Issues

1. Whether directors and the controlling stockholder breached fiduciary duties to preferred stockholders by approving a merger that allegedly unfairly allocated consideration between common and preferred shares.
2. How to evaluate preferred stockholder claims where the asserted injury concerns (a) contractual preference rights stated in the charter and (b) equitable rights shared with common stockholders.
3. Whether the plaintiff met the requirements for a preliminary injunction, including a reasonable probability of success on the merits and a balance of equities favoring injunctive relief.

## Decision

- The Court of Chancery denied the motion for a preliminary injunction.
- The plaintiff did not show a reasonable probability of success on the merits that the allocation was unfair or that defendants breached fiduciary duties.
- The record did not support applying a stringent fairness review based on controlling-stockholder self-dealing where any relative benefit to public common holders was largely funded by the controller’s own cross-class holdings.
- The plaintiff’s process criticisms did not, on the preliminary record, demonstrate a duty-of-care violation sufficient to enjoin the merger.

## Legal Principles

- Preferred stock is contractual with respect to its “preferential” rights; those rights are governed by the certificate of incorporation and related instruments, and courts generally enforce the bargain as written.
- When preferred stockholders assert rights shared with common stockholders (equitable interests in receiving fair treatment in a transaction affecting all equity), directors owe fiduciary duties with respect to those shared interests.
- Absent a contractual provision guaranteeing equal per-share merger consideration, preferred stockholders do not have an automatic legal entitlement to receive the same merger price per share as common stockholders.
- Preliminary injunctive relief requires, at minimum, a showing of a reasonable probability of success on the merits and that the equities justify enjoining the transaction; speculative valuation disputes and unsupported claims of conflicted dealing are insufficient on a limited record.

## Conclusion

The court refused to stop the cash-out merger because the preferred holders did not show a likely fiduciary or contractual violation, and it clarified that preferred shareholders’ preference rights arise from contract while fiduciary protections apply only to interests they share with common stockholders.


Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584 (Del. Ch. 1986)