Manufactured Deadlocks? The Problematic “Bad Faith Defense” to Forced-Sales of Delaware Corporations Under Section 226 of the Delaware General Corporation Law

Abstract

Title 8, Section 226 of the Delaware General Corporation Law authorizes courts to force the sale of Delaware corporations when the stockholders or directors are in a state of complete deadlock. Some courts have tentatively acknowledged that a party may successfully oppose the sale by arguing that the stockholder bringing a Section 226 action has done so in bad faith by manufacturing a deadlock in the hopes of obtaining a court-ordered sale (i.e., the “bad faith defense”). This Note explores the idea of the manufactured deadlock in Section 226 actions, through the lens of Shawe v. Elting, a recent, highly publicized case where the Delaware Chancery Court ordered the sale of a profitable company against the wishes of a 50% owner. There exist inherent problems in attempting to determine whether an ostensible deadlock between business owners is authentic or manufactured. An examination of cases grappling with deadlock in business dissolution actions, which are analogous to those brought under Section 226, highlights these issues. In light of the fundamental difficulties in determining whether a deadlock is legitimate or fabricated, courts should move towards rejecting the legitimacy of the “bad faith defense” to court-ordered sales entirely.