Ina post-trial opinion issued on May 19, 2025, in the case captioned Ban v. Manheim, C.A. No. 2022-0768-JTL, the Court of Chancery applied and analyzed a number of fundamental corporate doctrines to award the Plaintiff, a minority stockholder, damages resulting from (1) the Defendant controller’s forced purchase of Plaintiff’s ownership interests in a corporation; and (2) a limited liability company’s (LLC) redemption of the 90% membership interest owned by its non-managing member, a limited partnership in which the Plaintiff had been a partner.
BACKGROUND
The facts of this case center on two Delaware entities, Delaware Valley Regional Center, LLC (“DVRC”), and its manager, West 36th, Inc. (“WestCo”), which was controlled by the Defendant Manheim. Manheim unilaterally adopted a new LLC agreement for DVRC that empowered WestCo to redeem a DVRC member’s interest for the lesser of its appraised/fair market value or the amount of the member’s capital account (the “DVRC Redemption Right”) if WestCo (or Manheim, as its controller) so determined. Manheim also caused WestCo to adopt a bylaw that purported to empower holders of a majority of WestCo’s shares (Manheim) to require any other stockholder to sell its shares to the majority (the “WestCo Call Right”). Ultimately, Manheim exercised both rights, which divested the Plaintiff Ban of his interest in WestCo and his indirect interest in DVRC. In so doing, Manheim arbitrarily undervalued Ban’s ownership interest in both entities and did not provide any support for his calculated valuations.
Ban brought suit to challenge Manheim’s purchase of his ownership interest in WestCo. Thereafter, Ban filed a second action challenging DVRC’s redemption of his indirect interest. The Court consolidated the actions, and they proceeded through trial. Ban alleged that Manheim’s exercise of the WestCo Call Right was statutorily invalid and that the exercise of both the WestCo Call Right and the DVRC Redemption Right were self-interested transactions that breached Manheim’s fiduciary duty of loyalty. Manheim largely conceded liability, choosing instead to contest damages. Manheim argued that Ban should be awarded damages based on the fair market value of his ownership interests rather than the fair value of such.
LEGAL ANALYSIS
The Court determined that Manheim stood to gain a benefit not shared with other stockholders through the adoption and exercise of both the WestCo Call Right and the DVRC Redemption Right (i.e., as addressed infra, receipt of the Plaintiff’s shares at an arbitrary and low price and receiving replacement equity). Therefore, the Court found that Manheim’s adoption and exercise of these provisions constituted self-interested acts subject to the entire fairness standard of review.
WestCo Call Right
First, the Court determined that Manheim’s exercise of the WestCo Call Right violated Section 202(b) of the DGCL because it would require a transfer of Ban’s already-issued shares without his consent. Next, the Court assessed whether adoption and/or exercise of the WestCo Call Right constituted a breach of fiduciary duty. The Court determined that neither adoption nor exercise of the WestCo Call Right was procedurally or substantively fair. Adoption of the WestCo Call Right was unfair as it materially changed the value of Ban’s interests. In addition, the Court noted that Manheim adopted and structured the WestCo Call Right by implementing a statutorily invalid bylaw mechanism; exercised the WestCo Call Right at a time of his own choosing and unilaterally; and set an arbitrarily low price for the value of Ban’s ownership interests despite the provision requiring a price of fair market value.
DVRC Redemption Right
Turning to the DVRC Redemption Right, the Court found that it was not procedurally fair because (1) it was unilaterally structured and exercised to eliminate Ban’s interest in DVRC; (2) it was approved only by interested directors and without Ban’s knowledge or approval; (3) it was structured unfairly and punitively by requiring Ban to receive the lesser of the appraised/fair market value of his interests or the value of his capital account; and (4) the price paid was arbitrarily calculated by Manheim with no support for his valuation. In addition, the Court considered DVRC’s post-transaction payment of millions to Manheim and another entity to conclude that the DVRC Redemption Right was also not substantively fair because it did not fairly value Ban’s interest.
Damages
Ban presented expert opinions to assist the Court with its valuation of his damages. Despite bearing the burden of proof under the entire fairness standard, Manheim only presented a rebuttal expert. In its assessment of damages, the Court found some aspects of the experts’ work credible while finding other aspects not so credible. Importantly, the Court declined to consider “new’ information offered in the supplemental expert reports. Specifically, the Court declined to consider a new economic model presented in Ban’s supplemental expert report, while noting that it would have accepted an updated or refined version of the original report that accounted for the newly obtained information. The Court noted that experts “can make adjustments to [their] opinions to reflect late-breaking discovery, account for the evidence adduced at trial, or respond to criticisms from the other side,” but “new” information not introduced on those bases is not acceptable and will not be considered.
Ultimately, the Court rejected Manheim’s assertion that Ban was entitled to the “fair market value” of his ownership interest rather than “fair value.” It noted that using fair market value as a standard would reward Manheim for his breaches of the duty of loyalty through his mismanagement of the entities. Thus, the Court used its discretion to award Ban a “fairer price” than fair market value.
TAKEAWAYS
While touching on core corporate issues such as the fiduciary duty of loyalty, entire fairness, and valuation of a stockholder’s interest, this opinion reminds us of the Court’s disdain for arbitrary valuations and reinforces the importance of carefully, properly, and fairly calculating a stockholder’s interest—especially when that stockholder is subject to a unilateral call or the redemption right of a controller. This opinion is also a good reminder of the Court’s expectations regarding expert submissions. Practitioners should be mindful that the Court generally will not accept an expert’s introduction of new information in a supplemental report and should ensure that initial submissions fairly and appropriately present all likely theories.