## Facts

- Arden Group, Inc., a Delaware corporation, proposed a recapitalization creating a new Class B common stock with ten votes per share and a class right to elect 75% of the board.
- Class B stock carried reduced dividend rights and transfer limits, and was offered in a share-for-share exchange to all Class A holders.
- The company’s principal stockholder and CEO, Bernard Briskin, sought long-term control after significant business improvement during his tenure.
- The proxy materials disclosed that Briskin demanded the recapitalization and stated that, if not approved, he would oppose or obstruct future corporate transactions that the board might determine were in shareholders’ best interests.
- Stockholders approved the charter amendments at a June 10, 1986 vote, though there was meaningful opposition among common holders.
- A stockholder owning approximately 4.5% of the Class A common stock sued to preliminarily enjoin issuance of Class B stock, alleging the recapitalization was a control-transfer device and that the vote was defective due to coercion and materially misleading disclosures.

## Issues

1. Whether stockholder approval of charter amendments under DGCL § 242(b) is effective when obtained through threats by a director and CEO to obstruct future value-enhancing corporate transactions if the proposal fails.
2. Whether materially misleading proxy disclosures, alone or combined with management threats, render the stockholder vote legally ineffective or make the amendments voidable.
3. Whether a dual-class recapitalization structured to entrench management and transfer control to an insider violates fiduciary obligations when pursued through coercive means.

## Decision

- The Court of Chancery granted a preliminary injunction barring issuance of the Class B stock.
- The court held the stockholder vote was coerced and therefore could not satisfy DGCL § 242(b)’s requirement of stockholder consent to charter amendments.
- The court concluded the charter amendments authorizing the dual-class structure were voidable because the approval process was fatally tainted by the CEO’s threats as a corporate fiduciary.
- The court also addressed disclosure challenges, finding that alleged misstatements and omissions contributed to the unreliability of the vote, although coercion independently supported injunctive relief.

## Legal Principles

- Stockholder consent required by DGCL § 242(b) must be voluntary and informed; a vote obtained through coercive threats by corporate fiduciaries is not effective consent.
- A director or officer owes complete loyalty to the corporation and its stockholders and may not use official power or influence to pressure stockholders by threatening to act against corporate interests if stockholders do not approve a governance change.
- “Coercion” in the voting context turns on the source and nature of the pressure; threats by a fiduciary to misuse corporate power can invalidate an otherwise formal stockholder vote.
- Materially misleading proxy disclosures can undermine the legitimacy of stockholder approval, and when paired with fiduciary threats can support equitable relief and render charter amendments voidable.
- Dual-class voting structures are not per se invalid, but when used as an entrenchment mechanism, courts scrutinize the approval process for faithful adherence to fiduciary duties and proper stockholder decision-making.

## Conclusion

The Court of Chancery preliminarily enjoined Arden’s dual-class recapitalization because the CEO’s disclosed threats to obstruct future beneficial transactions coerced the stockholder vote required for charter amendments under DGCL § 242(b), making the amendments authorizing Class B stock voidable and the contemplated issuance subject to equitable restraint.


Lacos Land Co. v. Arden Grp., Inc., 517 A.2d 271 (Del. Ch. 1986)