Capella University: BUS-3021 - Business Law Case Executive Briefing

This report provides an executive briefing on the case of Benihana of Tokyo, Inc. v. Benihana, Inc., heard in the Delaware Court of Chancery in 2006. The case involved a dispute between Benihana of Tokyo, the majority shareholder, and Benihana Inc., its subsidiary, over a stock sale by a director to a company where the director had a principal interest. Benihana of Tokyo argued a breach of fiduciary duty by the directors. The court, applying Delaware law, ruled in favor of the directors, citing the business judgment rule, as the board was aware of the director’s interest and the transaction was approved by disinterested directors. The case highlights the application of the business judgment rule, which protects directors' decisions from judicial scrutiny if made in good faith, with reasonable care, and in the best interest of the company. The analysis extends to how this rule could influence other businesses and their decisions, like those of Geode capital management LLC and General Motors.

Running head: FUNDAMENTALS OF BUSINESS LAW 1
Fundamentals of business Law
Name
Institution

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Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del. Ch. 2006)
This was a case that occurred in the Delaware court of Chancery in 2006. It involved
Benihana of Tokyo and Benihana Inc., an American restaurant company which was its
subsidiary. Benihana of Tokyo was the main shareholder of Benihana Inc. owning about 51% of
its total shares. In 2003, the operator of Benihana Inc. realized that many of the facilities in the
restaurant needed to be renovated since they were aging. An upgrade was also needed for them
to be able to compete well in the market. An agreement was thus reached to implement a
renovation and construction plan. In the process the company started experiencing financial
difficulties, so the directors decided to approve an insurance of 20 million dollars. A Benihana
director sold the stock to a company known as BFC. It also happened that the same director was
the main owner of BFC. Once the stock sale was approved, Benihana of Tokyo disagreed with
this move and thus filed a lawsuit against the directors of Benihana Inc.
Benihana of Tokyo argued that by allowing one of the directors to negotiate the deal they
had breached their fiduciary duty. This was because the director’s interests involved both the
selling and buying parties. The board of Benihana Inc. knew that the director negotiating the deal
was a principle in BFC Company, but they were not aware that he had negotiated on behalf of
BFC.
In the judgment, the court looked at the Delaware law, which allowed a safe harbor for
any interested transactions. The law stated that the board of directors was aware of the director’s
relationship and interests since it had been disclosed to them. The board had in good faith
authorized the contract between the two companies by a positive vote by the majority of the
directors who were not interested (Del. Code Section 144(a) (1).

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Benihana of Tokyo protested this claim, arguing that the directors were not aware that the
director had negotiated the deal hence the law did not apply in that case. The court however
concluded that the decision was covered by the business judgment rule since a significant
amount of time had been spent in the process before the decision was made and the transaction
had been approved by most of the disinterested directors and was a fair deal.
This case affects other businesses through the application of the business judgment rule.
This rule protects the directors of a business from any allegations about how they conduct the
business. If they are involved in any cases regarding this, the court usually doesn’t question the
decisions made by the board of directors since it is assumed that they are made using standards
of care and prudence.
For example, Geode capital management LLC has shares in general motors, but is not
directly part of the board of directors in that company (CNN business, 2019). If the board of
directors of general motors’ was to make a decision that the Geode capital management LLC was
against and the case was taken to court, the board of directors would likely win the case using the
business judgment rule.

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REFERENCES
CASE
Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del. Ch. 2006)
ONLINE RESOURCES
CNN business. (2019). GE - General Electric Co Shareholders - CNNMoney.com. Retrieved
from https://money.cnn.com/quote/shareholders/shareholders.html?
symb=GE&subView=institutional
Investopedia. (2016). Business Judgment Rule. Retrieved on 6th October from
https://www.investopedia.com/terms/b/businessjudgmentrule.asp
LexisNexis. (n.d.). Benihana of Tokyo, Inc. v. Benihana, Inc. | Case Brief for Law School |
LexisNexis. Retrieved on 6th October from
https://www.lexisnexis.com/community/casebrief/p/casebrief-benihana-of-tokyo-inc-v-
benihana-inc
Quimbee. (n.d.). Benihana of Tokyo, Inc. v. Benihana, Inc. Retrieved on 6th October from
https://www.quimbee.com/cases/benihana-of-tokyo-inc-v-benihana-inc.