## Facts

- A Delaware public-utility holding company had multiple classes of cumulative preferred stock with dividend arrearages.
- After returning to substantial net profits, the board declared a regular quarterly dividend on certain prior preference cumulative preferred shares, payable in January 1949.
- Before declaring the dividend, the board obtained an independent appraisal indicating asset values supported legally available surplus and that the dividend would not impair capital.
- The board also obtained consistent opinions from three outside attorneys that the dividend would be lawful under Delaware law.
- A stockholder objected, claiming the company’s assets had been overvalued and offering an alternative valuation under which the dividend would be unlawful.
- The stockholder did not allege fraud, self-dealing, or bad faith by directors; the claim was that the directors’ valuation methodology and conclusions were wrong.
- The stockholder sought a preliminary injunction to restrain payment of the declared dividend.

## Issues

1. Whether equity should enjoin payment of a board-declared dividend based on an alleged overvaluation of assets when directors acted in good faith and without fraud or bad faith.
2. To what extent a court will second-guess directors’ asset valuation and surplus determination for dividend purposes when supported by independent experts and legal advice.
3. Whether the stockholder met the showing required for a preliminary injunction to stop payment of the dividend.

## Decision

- The court denied the stockholder’s motion for a preliminary injunction.
- The court permitted the company to pay the dividend as declared.
- The court accepted that the directors had a reasonable, good-faith basis—supported by independent appraisal and outside legal opinions—to conclude sufficient surplus existed for the dividend.
- The court declined to substitute its judgment for the directors’ on a technical valuation dispute absent a showing of fraud, bad faith, or clear abuse of discretion.

## Legal Principles

- Directors’ determinations of asset value and available surplus for dividends are generally protected as business judgments when made in good faith after reasonable investigation.
- A stockholder seeking to enjoin a dividend must show more than disagreement with valuation methods; the showing ordinarily requires fraud, bad faith, or clear abuse (e.g., arbitrary or reckless valuation).
- Directors may rely on competent independent appraisers and outside legal counsel in deciding whether dividends are legally payable, and such reliance supports a finding of due care and good faith.
- Because a preliminary injunction is extraordinary relief, it is not granted where the plaintiff fails to demonstrate a strong likelihood of proving the dividend unlawful in light of the directors’ informed process.

## Conclusion

The court refused to stop payment of a preferred-stock dividend where directors, acting without fraud or bad faith, relied on independent appraisal and outside legal opinions to determine sufficient surplus existed; a stockholder’s competing valuation was insufficient to justify injunctive relief.


Morris v. Standard Gas & Elec. Co., 63 A.2d 577 (Del. Ch. 1949)