## Facts

- Three brothers (Eugene “Gene,” Francis, and Richard Julian) jointly owned and worked in three related companies: Eastern States Construction Service, Inc. (ESCS), Benchmark Builders, Inc. (Benchmark), and Eastern States Development Company, Inc. (ESDC).
- Each company had a separate stockholders’ agreement governing employment-related share ownership and buyback rights, including mandatory retirement and redemption at age 72.
- In December 2005, Gene stopped working and asserted he could “retire” before age 62 while retaining his shares until age 72.
- Francis and Richard contended Gene’s cessation of employment triggered company rights to redeem his shares as of December 31, 2005, at contractually specified book-value measures.
- In December 2005, Benchmark’s board approved two bonuses: (1) $1,000,000 paid to a management entity that distributed the money equally to Francis and Richard, and (2) $300,000 paid to director Steven Bomberger.
- The bonus approval occurred at a brief board meeting without meaningful advance notice, independent advice, or documented investigation.
- The bonuses were unprecedented relative to Benchmark’s prior practice and constituted more than 22% of Benchmark’s adjusted income for 2005.
- Francis and Richard understood the bonuses would reduce Benchmark’s net book value at year-end, decreasing the valuation used for a potential redemption of Gene’s Benchmark shares.
- After trial, Gene pursued claims including breach of fiduciary duty based on self-interested bonus compensation, while Francis and Richard asserted contractual rights regarding redemption of Gene’s shares.

## Issues

1. Whether the stockholders’ agreements permitted Gene to voluntarily retire before age 62 and retain his ESCS, Benchmark, and ESDC shares until age 72, and, if not, what redemption rights and valuation dates applied.
2. Whether Benchmark’s directors breached fiduciary duties by approving self-interested bonuses, what standard of review governed, and what remedy was appropriate if the bonuses were not entirely fair.

## Decision

- The court held Gene lacked a contractual right to retire before age 62 and retain his shares until age 72.
- The court required Gene to sell his ESCS shares to ESCS at net book value as of December 31, 2005.
- The court required Gene to sell his ESDC shares at the agreement’s specified “adjusted net book value” as of December 31, 2005.
- As to Benchmark, the court found Gene’s employment had been effectively terminated earlier, but Benchmark’s repurchase right based on that earlier event was waived by non-enforcement; Gene could retain his Benchmark shares, but could not compel Benchmark to redeem them before age 72.
- The court held the Benchmark bonus awards were self-interested director-compensation decisions subject to entire fairness review, with defendants bearing the burden of proof.
- The court found the bonus process and amounts were not entirely fair and ordered disgorgement of the $1.3 million in bonuses.

## Legal Principles

- Stockholder agreements governing employment-related ownership and redemption are enforced according to their terms; courts will not infer an early-retirement right to retain shares absent contractual support.
- Directors who stand on both sides of a compensation decision (including payouts benefiting controlling directors) face entire fairness review absent effective independent protections.
- Entire fairness requires proof of both fair dealing (process) and fair price (substance); deficiencies in deliberation, independence, disclosure, timing, and justification can establish unfair dealing.
- Under entire fairness, interested directors bear the burden to prove fairness and may be ordered to provide equitable relief, including disgorgement, when they fail to meet that burden.
- Waiver principles can bar a corporation from enforcing a contractual repurchase right based on an earlier triggering event if the right was not timely asserted, without creating a reciprocal right for the shareholder to compel redemption.

## Conclusion

The Court of Chancery enforced the companies’ stockholder agreements to reject an asserted early-retirement right and to determine redemption rights and valuation, and it applied entire fairness to invalidate self-interested Benchmark director bonuses approved without independent protections, ordering disgorgement of the $1.3 million paid.


Julian v. E. States Constr. Serv., Inc., 2008 Del. Ch. LEXIS 86 (Del. Ch. 2008)