Benihana Of Tokyo, Inc. v. Benihana, Inc.

Facts

Rocky Aoki founded P and D. D owned and operated Benihana restaurants in the United States and other countries. Aoki owned 100% of P until 1998 when he pled guilty to insider trading charges. In order to avoid licensing problems, Aoki transferred his stock to the Benihana Protective Trust. The trustees of the Trust were Aoki's three children (Kana Aoki Nootenboom, Kyle Aoki and Kevin Aoki) and Darwin Dornbush (who was then the family's attorney, a Benihana director, and, effectively, the company's general counsel). D has 6 million shares of Class A common stock outstanding. Each share has 1/10 vote, and the holders of Class A common are entitled to elect 25% of the directors. There are approximately 3 million shares of Common stock outstanding. Each share of Common has one vote, and the holders of Common stock are entitled to elect the remaining 75% of Benihana's directors. P owned 50.9% of the Common stock and 2% of the Class A stock. The nine-member board of directors is classified, and the directors serve three-year terms. Aoki married Keiko Aoki, and conflicts arose between Aoki and his children. Aoki had changed his will to give Keiko control over P. Joel Schwartz, Benihana's president and chief executive officer also was concerned about this change in control. He discussed the situation with Dornbush, and they briefly considered various options, including the issuance of sufficient Class A stock to trigger a provision in the certificate of incorporation that would allow the Common and Class A to vote together for 75% of the directors. Many of the restaurants were old and outmoded. A Construction and Renovation Plan anticipated an overhaul that would last at least five years and cost $56 million or more. Wachovia offered to provide D a $60 million line of credit for the Construction and Renovation Plan, but the restrictions Wachovia imposed made it unlikely that D would be able to borrow the full amount. D would only be able to borrow 1.5 times its earnings before interest, taxes, depreciation, and amortization (EBITDA). EBITDA was far below the $40 million required to access the full credit limit. The board met and reviewed all the financing alternatives, and the executive committee recommended that D issue convertible preferred stock. The plan anticipated issuance of $20,000,000 of preferred stock, convertible into Common stock; (ii) dividend of 6% +/- 0.5%; (iii) conversion premium of 20% +/- 2.5%; (iv) buyer's approval required for material corporate transactions; and (v) one to two board seats to the buyer. At trial, Joseph testified that the terms had been chosen by looking at comparable stock issuances and analyzing the Morgan Joseph proposal under a theoretical model. After another board meeting, it was discovered that BFC Financial Corporation was interested in buying the new convertible stock. Joseph sent BFC a private placement memorandum. Abdo negotiated with Joseph for several weeks they agreed to the Transaction on the following basic terms: (i) $20 million issuance in two tranches of $10 million each, with the second tranche to be issued one to three years after the first; (ii) BFC obtained one seat on the board, and one additional seat if D failed to pay dividends for two consecutive quarters; (iii) BFC obtained preemptive rights on any new voting securities; (iv) 5% dividend; (v) 15% conversion premium; (vi) BFC had the right to force D to redeem the preferred stock in full after ten years; and (vii) the stock would have immediate 'as if converted' voting rights. The entire board was officially informed of BFC's involvement. Abdo made a presentation on behalf of BFC and then left the meeting. The board did know that Abdo was a principal of BFC. After discussion, the board reviewed and approved the Transaction, subject to the receipt of a fairness opinion. Aoki's counsel sent a letter asking the board to abandon the Transaction and pursue other, more favorable, financing alternatives. The board then approved the Transaction. Three more transactions were received, but none were considered superior. D and BFC executed the Stock Purchase Agreement. The board met and approved resolutions ratifying the execution of the Stock Purchase Agreement and authorizing the stock issuance. It was then reported on the three alternative proposals that had been rejected by the ad hoc committee. P filed this action against all of Benihana's directors, except Kevin Aoki, alleging breaches of fiduciary duties; and against BFC, alleging that it aided and abetted the fiduciary violations. The board voted once more to approve it even after the allegations in P's complaint. The trial court held that D was authorized to issue the preferred stock with preemptive rights and that the board's approval of the Transaction was a valid exercise of business judgment. P appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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