## Facts

- Katy Industries, Inc. had a controlling stockholder group (the Carroll family) that owned or controlled about 50% of the company’s common stock.
- The Carroll group proposed a going-private transaction and ultimately entered a merger agreement priced at $25.75 per share (after an earlier $22 proposal).
- A third-party bidder group (Steinhardt–Pensler) later made a higher cash offer of $28 per share for all shares.
- Most of the Carroll family was unwilling to sell control to the outside bidder, and the Carroll group terminated the merger agreement pursuant to its contractual rights.
- After the Carroll group strengthened its control position, the outside bidder proposed a new deal at $27.80 per share coupled with an option for a bidder affiliate to purchase up to 20% of Katy’s stock at $27.80, intended to dilute the Carroll family’s voting power.
- Katy’s counsel advised that the legality of issuing such a control-shifting, dilutive option was at least uncertain under Delaware law.
- The board declined to grant the option and instead declared a special cash dividend of $14 per share payable to all shareholders.
- Minority shareholders (Mendel, as a class representative) and the bidder-related plaintiffs sued for injunctive relief.

## Issues

1. Whether a court should issue a mandatory preliminary injunction compelling a board to grant a large stock option principally to dilute an existing controlling stockholder’s voting power in favor of a bidder.
2. Whether the board’s refusal to issue the option, and its decision to pay a large special dividend, likely breached fiduciary duties such that preliminary injunctive relief was warranted.

## Decision

- The Court of Chancery denied the application for a mandatory preliminary injunction requiring the board to grant the 20% stock option to the bidder affiliate.
- The court also declined to enjoin payment of the $14 per-share special dividend.
- Plaintiffs failed to show a sufficient likelihood of success on the merits to justify extraordinary mandatory relief.
- The court was unwilling to compel board action where the proposed device’s legal validity was uncertain and where the request would materially reshape voting power and capital structure.

## Legal Principles

- Mandatory preliminary injunctions compelling affirmative corporate action are extraordinary and require a particularly strong showing of entitlement and necessity.
- Delaware courts generally will not compel a board to employ a novel capital-structure device aimed primarily at reallocating voting power among stockholders to facilitate one bidder’s acquisition.
- Decisions to issue stock or options are ordinarily within the board’s statutory authority and fiduciary discretion; absent a strong showing of fiduciary breach, courts avoid substituting judicial judgment for board judgment at the preliminary-injunction stage.
- A court is especially reluctant to order directors to take action when reputable legal advice indicates the action’s legality is unresolved or uncertain.
- A special dividend paid pro rata to all stockholders is not, without more, shown on a preliminary record to be an improper entrenchment measure warranting injunctive relief.

## Conclusion

The court refused to force the board to issue a control-diluting stock option to a bidder and allowed the company to proceed with a large special dividend, emphasizing the extraordinary nature of mandatory preliminary injunctions, the board’s discretion over capital structure, and the absence of a strong preliminary showing of fiduciary wrongdoing.


Mendel v. Carroll, 651 A.2d 297 (Del. Ch. 1994)