Kelly v. Bell – Case Brief Summary (Delaware)

In Kelly v. Bell (Del.Ch. 1969) 254 A.2d 62, affirmed sub nom. Ella M. Kelly & Wyndham, Inc. v. Bell (Del. 1970) 266 A.2d 878, a corporation agreed to continue paying local tax assessments on its existing machinery in exchange for the county's support of state legislation that would gradually eliminate the taxes on all of its machinery.

The legislation passed. On its annual reports to shareholders, the corporation continued to show its machinery payments as "taxes," although, by operation of the new law, the local authorities no longer had the authority to impose "taxes." (See Kelly v. Bell, at pp. 73-74.)

Shareholders brought suit against the directors, alleging that the annual reports fraudulently listed the payments as taxes. The directors moved for summary judgment, relying on the business judgment rule. (See Kelly v. Bell, supra, 254 A.2d at pp. 71-72, 75.)

In opposition to the motion, the shareholders submitted an affidavit from a certified public accountant, who stated that listing the payments as taxes did not conform with generally accepted accounting principles. The court of chancery responded: "That may be. But for present purposes the test is not whether the reporting was in accordance with generally accepted accounting principles but rather whether, under all the evidence, the reporting was fraudulent." (Id. at p. 71.)

The court concluded: "There is not a shred of evidence to show that this procedure was adopted for sinister reasons. Under the circumstances, reporting the payments to stockholders in the form in which they were actually made is not ... fraudulent. Certainly plaintiffs have made no showing that there was any purposeful effort on the part of any defendant to conceal the true nature of what was done from the stockholders." (Ibid.) On appeal, the Delaware Supreme Court affirmed, agreeing that the fraud exception did not apply because "there is no evidence that any director or officer was motivated by expectation of personal gain, by bad faith or by any consideration other than that of doing what was best for the company." (Ella M. Kelly & Wyndham, Inc. v. Bell, supra, 266 A.2d at p. 879.)