Plaintiff was a common shareholder who sued, in effect, to compel the board to declare such dividends as would be necessary to return control to directors elected by the common. The Chancery Court rejected plaintiff's claim, holding that the directors have discretion to declare dividends or to refrain from doing so. The exercise of that discretion is not unbounded, of course. A board elected by the preferred does have a fiduciary duty to see that the preferred dividends are brought up to date as soon as possible in keeping with prudent business management.
Two conceptions of the business judgment rule compete in the cases--some view it as a rule of abstention, while others treat it as a substantive standard of review. As its invocation of an "abuse of discretion" standard suggests, Allied Artists leans towards the view that the business judgment rule is a substantive standard of review, albeit a quite deferential one. That impression perhaps is confirmed by the relatively extensive analysis in the decisions of the firm's ability to pay a dividend in the circumstances.
Ironically, however, everyone seems to have ignored the fact that over half of Allied's preferred stock was owned by a single shareholder--Kalvex, Inc.--which owned almost none of Allied's common stock. Because the preferred voted as a class without benefit of cumulative voting, Kalvex controlled the outcome of board elections, despite owning only 7 percent of Allied's total equity. As a result, there was a substantial interlock between the two companies? boards and management. Allied's president, for example, was also the president of Kalvex.
The result in Baron rests uneasily in today's post-Unocal jurisprudence, in which Delaware courts have been much more sensitive to issues of management entrenchment. In addition, it's noteworthy that Kalvex's principals were using a technically lawful set of actions to entrench themselves in office. Jack Jaobs and Leo Strine, among other modern Delaware jurists, have revealed themselves to be quite sensitive to appropriate invocations of the court's equitable powers under Schnell v. Chris-Craft. See, e.g., Strine's opinion in Portnoy v. Cryo-Cell Intern., Inc., 940 A.2d 43 (Del.Ch.,2008.), in which he noted "the potency of a good old-fashioned inquiry under precedent such as Schnell, which proscribes conduct that is disloyal in the well-understood sense that it was undertaken not to advance corporate interests, but to entrench managers in office." Id. at 71. See also Frantz Mfg. Co. v. EAC Industries, 501 A.2d 401, 407 (Del.,1985.) (holding that "Schnell prohibits incumbent management from entrenching itself by taking action which, though legally possible, is inequitable.").
It would not take a particularly aggressive application of those principles to a Baron-like fact pattern to force Kalvex to pay the required dividends.