« AnteriorContinuar »
II. STOCKHOLDERS' RIGHTS TO INFORMATION
A. STOCKHOLDERS LIST INSPECTION
No state grants stockholders a broader right to a list of fellow stockholders than does Delaware. General Time Corp. v. Talley Industries, Inc.,' held that, if the plaintiff was a shareholder and his purpose was germane to that position, he was entitled to the list. Chief Justice Wolcott wrote:
In short, we are of the opinion that when a stockholder establishes his status as such, and seeks production of a stockholders' list for a purpose germane to that status, such as a proxy solicitation, he is entitled to its production.
It might well be asked what circumstances then would constitute a defense to the demand. Each case must depend upon its particular facts, but we point out that in the Theile case an individual owning one share of stock was denied a list when it appeared that his purpose was to sell it for a "sucker list." This position was not novel in 1968 when General Time was decided. The Chief Justice cited a case from the 1920's 10 in support of the proposition that “the desire to solicit proxies for a slate of directors in opposition to management is a purpose reasonably related to the stockholder's interest as a stockholder."
The opposition to legitimate list production is now simply a delay tactic which the courts have thwarted by requiring an expedited trial on the merits, often within ten days of the complaint, if the need can be shown."
Defenses have fallen right and left. If one purpose is proper, it is irrelevant that another may not be." Lack of SEC approval for the materials to be mailed is irrelevant." Indeed, it is no bar to production of the list that one purpose of the stockholder may be to use the list to violate the securities laws. It is irrelevant that the stockholder bought his shares just so he could demand the list ;1o and litigation pending elsewhere where the list demand might also have been made, for instance in discovery, is no defense."
Therefore, the short answer in stock list cases is, if you are a stockholder in a Delaware corporation and you have a purpose relevant to that status, be it for solicitation of proxies or tenders, you may get the stockholders' list as promptly as you need it. Indeed, a management's attempt to delay a dissident by compelling him to copy stock ledger cards by hand can be thwarted by an order directing the furnishing of a computer tape. 17a
B. BOOKS AND RECORDS INSPECTION
The Delaware law recognizes generally a stockholder's interest in access to corporate information. Once a meritorious suit is brought, in Delaware at least, wide access to corporate information is available. Delaware trial courts have adopted Rules of Civil Procedure in nearly all respects identical to the federal model. In discovery matters, the rules are read liberally, enabling both plaintiffs and defendants full examination of those of their adversaries' books and papers which are not privileged and “appear reasonably calculated to lead to the discovery of admissible evidence".1
* 240 A. 20 755, 756 (Del. Supr, 1968).
10 State er rel Theile v. Cities Service Co., 115 A. 773 (Del. Supr. 1922). This right is so clear that, before jurisdiction was granted to the Court of Chancery in 1967, the list was obtained as of right, by the use of a writ of mandamus.
11 240 A. 2d at 756. Some cases have held that the corporation is entitled, however, to a specification of purpose beyond mere expression of a desire to confer with other stock. hollers, e.g., Northwest Ind18tries v. B. P. Goodrich Co., 260 A. 2d 428 (Del. Supr. 1969): Weisman v. Western Pacific Industries, Inc., C. A. No. 4833 (Del. Ch. filed September 2, 1975).
12 In tender offer cases, the time has been even shorter. 13 General Time Corp. v. Talley Industrics, supra note 9.
16 Kerkorian v. Western Air Lines, Inc., 253 A. 20 221 (Del Ch.) af'd, 254 A. 20 240 (Del. Supr. 1969); Mite Corp. v. Heli-Coil Corp., 256 A. 2d 885 (Del. Ch. 1969).
15 Sack v. Cadence, C. A. No. 4747 (Del Ch., filed April 9, 1975).
18 Trans World Airlines, Inc. v. State, 183 A. 2d 174 (Del. supr. 1962); Mite Corp v. Heli-Coil, supra note 14.
17 E. L. Brure Co. v. State er rel. Gilbert, 144 A. 20 533 (Del. Supr. 1958): State er rel Armour v. Gulf Sulphur Corp., 233 A. 20 457 (Super. Ct.), af'd 231 A. 2d 470 (Supr. Ct. 1967).
172 Tennetics, Inc. v. A. J. Industries, Inc., C. A. 4592 (Del. Ch. filed September 4, 1974). 18 Del. Ch. Ct. R. 26(b)(1).
But what about before suit, when the stockholder has a legitimate question about a transaction he has cause to think unsavory? Long before the federal rules, a Delaware stockholder, for a proper purpose and at reasonable times, had a broad right to review the books and records of his company. Chief Justice Pennewill in State ex rel Cochran v. Penn-Beaver Oil Co., 143 A. 257 (Del.Supr. 1926), in granting a peremptory writ of mandamus permitting such inspection, wrote:
Under the common law a stockholder had the right to examine the books and records of the company, and that right could not be taken away except by a statute that expressly or by necessary implication authorized it. There is
no such statute, and we conclude that the provision in that certificate of incorporation of defendant company, under which the relator was denied the right to inspect the company's records, forms no part of its charter and should be disregarded.
The extent and scope of the privilege granted must depend in a large degree upon the company's treatment of the relator's legitimate request, and the extent to which the company has furnished to its stockholders, by financial statements and otherwise, information relative to the conduct and condition of its business. The stockholder is entitled to reasonable information from his company along this line, and we do not think it would be ordinarily
denied.20 A books and records review is a powerful and appropriate weapon to investigate improper transactions. As Chief Justice Southerland wrote in Nodana Petroleum Corp, v. State es rel. Brennan :
* * * we find that plaintiff did sufficiently state the purpose of his inspection, i.e., the investigation of improper transactions. The corporation appears to admit that this is a proper purpose; at all events we have no doubt
about it.” (emphasis supplied). Unlike stocklist cases, where the burden of proving improper purpose falls on the company, the burden of such proof in a books and records case falls on the plaintiff'. And the plaintiff must need his relief. In a recent case, the Chancellor noted that, if the stockholder is litigating against the corporation in another court and has the means in the other court to require inspection of books and records, such a factor would be considered in determining the propriety of the stockholders' purpose. If, however, the stockholder has no such means in the other litigation, the pendency of litigation elsewhere is no more a defense than it would be in a stock list case.23
The stockholders' right to access is not unlimited however, the Delaware courts recognize that the stockholder, being under no fiduciary duty to the corporation as such, may misuse confidential information to the detriment of the corporation itself. Under such circumstances, access will be denied.*a
Nonetheless, upon balance, the stockholder's right to inquire into the affairs of his company and to communicate with fellow stockholders is fully as broad in Delaware as anywhere in the country.
C. PROXY MATERIALS
Using the concepts of common law fraud, Delaware courts have repeatedly condemned misleading proxy solicitation, Three cases, one in which dissidents
19 A corporate director's right to review his company's records is virtually absolute. State eu rel. Diron v. Missouri-Kanse8 Pipe Line Co., 36 A. 2d 29 (Del. Supr. 1944); Henshaw v. American Cement Corp., 252 A. 2d 125 (Del. Ch. 1969). But see, State ex rel. Farber v. Seiberling Rubber Co., 168 A. 2d 310 (Del. Supr. 1961).
20 143 A. at 259, 61. Delaware, like other States, permits neither the satisfaction of idle curiosity, Insuranshares Corp. v. Kirchner, 5 A. 2d 519 (Del. Supr. 1939); nor harrass. ment, State eo rel. Brumley v. Je88ilp & Moore Paper Co., 77 A. 16 (Del. Supr. 1910). As the Court in the Cochran case said: "While it is the duty of the court to protect the rights of stockholders. It is equally their duty to safeguard the rights of the corporation as such." 143 A. at 260.
21 123 A. 2d 243, 245 (Del. Supr. 1956). See also Sack v. Cadence Industries, infra note 23.
22 DPP Inc. v. Interstate Brands Corp., C. A. No. 4856 (Del. Ch. filed October 2. 1975).
23 Compare Sack v. Cadence Industries, C. A. No. 4747 (Del. Ch., filed April 9, 1975). (a "books and records" case in which broad discovery was ordered) with state ex rel. Foster v. Standard Oil Co., 18 A. 20 235 (Del. Supr. 1941); Trans World Airlines, Inc. v. State ea rel Porterie, 183 A. 20 174 (Del. Supr. 1962) (both stock list cases).
23a See State ex rel Armour & Co. v. Gulf Sulphur Corp., supra note 17; Fontaine v. Altamil, C. A. 3165 (Del. Ch. filed January 8, 1970).
were enjoined and two in which management was enjoined, will serve to illustrate the Delaware court's approach.
In Empire Southern Gas Co. v. Gray,* the corporation sought to enjoin a dissident faction of officers from soliciting proxies by a statement which appeared to have, but had not, come by authority of the directors. The Court placed “the burden of candor" on the solicitor of proxies and enjoined the use of the misleading material. The Court's statement of the law is as valid today as it was then:
Would a stockholder reading the notice, the proxy statement and the proxy be likely to obtain the impression that the proxy was being solicited by authority of the board of directors of the complainant company? I believe that he would so conclude, unless it is to be implied that the law will assume each stockholder will read and examine the various documents through the eyes of one who is placed on guard as to the possible existence of misleading statements. To expect or to require such a procedure of stockholders would remove the law beyond reason or reality. The accepted and desirable tendency has been to place the burden of candor upon those who would communicate with stockholders rather than to require the stockholders to be eternally
vigilant.24 In Gerlach v. Gillam," certain stockholders of United Printers and Publishers, Inc., sought to enjoin the consummation of transactions which would have personally benefitted the corporation's dominant director. The stockholders having ratified the transaction, management argued that the claim for injunctive relief was precluded. The Court disagreed, finding that ratification had been based on a false and misleading proxy statement which had failed to disclose the dates of the challenged contracts, how they were negotiated, and the dominant director's role in their negotiation. The Court let its previous interlocutory injunction stand.
In Campbell v. Loew's, Inc.,” Loew's president had solicited proxies which he sought to use to remove certain directors for cause. The proxy materials had presented only the case for removal and the directors under attack had been denied a stockholders' list to use in reply. Finding that stockholders had been deprived of the opportunity to hear both sides, the Chancellor ruled the proxies invalid for use on the removal question. However, following a detailed review of the specific and cumulative effect of a number of claimed misrepresentations together with the "whole impact ... the proxy material conveyed to the average reader," the Court declined to invalidate the proxies for other purposes.
Delaware courts are barred by federal law from taking jurisdiction over violations of federal proxy rules. The substantial result, however, is less than meets the eye. Twenty years ago, in the context of an election review, Vice Chancellor Seitz pointed out that violations of the securities acts were often independent violations of state law as well. The court wrote:
24 There is a heavy equitable flavor to Delaware cases in this area, as well. In in re Seminole Oil & Gas Corp., 150 A. 2d 20 (Del. Ch. 1959), for example, the Court found that both management and dissidents were guilty of material misstatements; the misrepresentations were offsetting and the court declined to impose the economic burden of resolicitation on a small corporation.
25 46 A. 20 741 (Del. Ch. 1948). The Empire Southern case turned aside an argument that a review of the corporate election thus tainted was the sole remedy for proxy fraud. Both remedies exist side by side.
28 46 A. 2d at 746. Equally instructive are the cases which, after carefully weighing all the evidence including the motives of the parties, have found no material misrepresentation to require that the proxy materials be condemned, e.g., Sive v. Brady, 184 A. 20 602 (Del. Ch. 1962); Lynch v. Vickers Energy Corp., 351 A. 570 (Del. Ch. 1976): American Hardware Corp v. Savage Arms Corp., 135 A. 2d 725, (Del. Ch.) aj'd 136 A. 21 690 (Supr. Ct. 1957).
27 139 A. 20 591 (Ch. 1958). 29 134 A. 2d 852 (Ch. 1957).
23 134 A. 2d at 865. A proxy procured to commit a fraud concealed from shareholders Is of no effect. Chief Justice Southerland in Dolese Bro8. Co. v. Brown, 157 A. 2d 784, 788 (Del. Supr. 1960), wrote: Defendant argues that when a meeting of stockholders has heen held, and corporate action authorized by the use of general proxies permitting the exercise of unlimited discretion by the proxy holder, and that action is duly taken, the stockholder ordinarily cannot later repudiate the action of his agent. As a general proposition, this is correct [eitation omitted). But that rule has no application to a case such as this, in which the dominating director is charged with using the proxies to commit a fraud concealed from the stockholders whose vote is necessary to accomplish it, and In which no rights of third persons are affected.
*) $ 27 of the Securities Exchange Act of 1934. 15 U.S.C. $ 78an, provides, in part: The district courts of the United States . . . shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or rules and regulations thereunder.
However, I think it should be made clear that some acts which constitute violations of the Securities Exchange Act and the rules and regulations formulated thereunder may also be cognizable in a Section 31 proceeding as independent wrongs for which this court would grant a remedy, even if
the Securities Exchange Act had never been passed. Somewhat later, Judge Rodney in the federal district court recognized that evidence that would establish proxy fraud under federal law would condemn a proxy statement in the state court. Any securities practitioner knows that securities fraud cases, like most other kinds of cases, are controlled by their peculiar facts. Thus, where we do not have the luxury of identity, as in Kaufman, comparisons between Delaware and federal proxy cases are difficult to make. Materiality, as it relates to misrepresentations, is a slippery concept even in the most deft of judicial hands. Nevertheless, Delaware Courts have come to respectable grips with the concepts involved in the deception of shareholders. The Court in Gerlach v. Gillam, for example, required "complete candor" and held inadequate proxy material that by omission of "essential information" made it impossible for stockholders to “make an objective evaluation of the proposed transaction.” 33 Vice Chancellor Marvel, in a tender offer case, held that the offeror:
... had a duty to exercise complete candor in its approach to the minority stockholders of TransOcean for a tender of their shares, namely a duty to make a full disclosure of all of the facts and circumstances surrounding the offer for tenders, including the consequence of acceptance and that of refusal and, insofar as the price offered is concerned that it not be one which would induce the acceptance of an unconscionable bid by an unwary stockholder at a price below the market or otherwise unreasonable under the facts and circumstances attending such offer for tenders of stock.” [Emphasis sup
plied] % Delaware courts look to the entire effect of the information presented. Specific candor will not suffice if the totality of the information tends to mislead; and, conversely, isolated errors when placed in the larger context may not mislead at all. Thus, in Campbell v. Loew's, Inc., supra., the court looked not only to the accuracy of various factual representations but also to the cumulative effect of the factual presentation to determine what “the whole impact of the proxy material conveyed to the average reader." **
III. MANAGEMENT RESPONSIBILITY
A. FIDUCIARY CAPACITY AND THE LIMITATIONS ON THE BUSINESS JUDGMENT RULE
The Delaware statute provides : “The business and affairs of every corporation * * * shall be managed by or under the direction of a board of directors who may be removed by a majority of the stockholders at any time." 38
Overshadowing specific duties, a long and unchallenged line of Delaware cases makes clear that the primary duty of a director is, as a fiduciary, to deal fairly and justly with the entrusted assets in pursuit of the business objectives of the corporation. Vice Chancellor Marvel quoted the following language from an earlier case.
31 Investment Associates, Inc. v. Standard Power & Light Corp., 48 A. 20 501, 510 (Del. Ch. 1946), aff'il 51 A. 20 572 (Del. Supr. 1947).
32 Kaufman v. shoenberg, 154 F. Supp. 64 (D. Del. 1954). The same proxy materials had previously been attacked in the Delaware Chancery Court, where they had been cleared. Kaufman v. Shoenberg, 91 A. 20 786 (Del. Ch. 1952). The Federal court dismissed as res judicata a complaint containing the same allegations of misrepresentation and omission as had been made in the State court. The Court said: An examination of the two complaints reveals that the same affirmative allegations of misrepresentation and omission are included verbatim in the present case as were made in the State court action. These allegations in both suits are directed toward the same proxy statement which was submitted by defendant to its stockholders in June, 1951. Clearly, the judgment sought in this action, which is identical with that sought in the Chancery suit, is inconsistent with the final adjudication of the Chancellor. It is also clear to me that the evidence necessary to enable plaintiff to prevail herein would have been sufficient to authorize a recovery by her in the State court. (Emphasis supplied) 154 F. Supp. at 66, 67.
33 139 A. 2d at 594. Compare Empire Southern Gas Co. v. Gray, supra note 25.
34 Lynch v. Vickers Energy Corp., 351 A. 2d 570 (Del. Ch. 1976). The plaintiff, Lynch, was a minority stockholder of Trans-Ocean. Vickers owned the majority of the TransOcean stock and wanted, by buying up the minority, to take Transocean private.
35 134 A. 2d at 865 ; compare In re Seminole Gas Corp., supra note 24.
36 8 Del. C. $ 141--Directors have numerous specific statutory powers which complement the general power. There is a specific enumeration in E, Folk, The Delaware General Corporation Law, Appendix II, Statutory Powers of Directors Corporation, p. 611.
It is fundamental that directors stand in a fiduciary relation to the corporation and its shareholders, and that their primary duty is to deal fairly and justly. It is a breach of this duty, wholly apart from any consideration of pre-emptive rights, for directors to make use of the issuance of shares to accomplish an improper purpose, such as to enable a particular person or group to maintain or obtain voting control, against the objection of share
holders from whom control is thereby wrested. 37 Not only directors, but officers as well, are treated as fiduciaries for the benefit of the corporation, its shareholders and creditors.* The much cited business judgment rule serves to protect the acts of both directors and officers in those cases where their expertise is greater than the court's. Such protection only obtains, however, if the officials have paid informed attention to their duties. Chancellor (now Justice) Duffy in Kaplan v. Centeo Corporation * in finding a substantial judgment for the plaintiff in a derivative suit explained this crucial limitation on the protection of the rule :
Application of the (business judgment) rule depends upon a showing that informed directors did, in fact, make a business judgment authorizing the transaction under review. And, as plaintiff argues, the difficulty here is that evidence does not show that this was done. There were director-committeeofficer references to the realignment but none of these, singly or cumulatively, show that director judgment was brought to bear with specificity on the
transactions. (Emphasis supplied.) Of course, the business judgment rule is wholly inapplicable if the transaction in question is not “at arms-length”.40
It is said that the business judgment rule, when applicable, creates a presumption of good faith and requires a showing of bad faith or abuse of discretion to mount a successful challenge." This presumption, however, can either be rebutted altogether; as in a situation of self dealing, or where the directors have passed "an unintelligent or unadvised judgment”. The rule can lose a portion of its force if, for example, the questioned transaction was done in haste. In a situation where full director attention is questionable, the court may carefully scrutinize the questioned transaction though granting some quantum of weight to the presumption of sound business judgment."
There are, of course, other substantial limitations on officers of the corporation. Officers' powers and duties arise from the corporation law, the charter, the bylaws, and board resolution. By-laws and resolutions must not be contrary to the certificate of incorporation or a clear statutory or common law policy.45 Very little authority or power in corporate officers is presumed. However, when dealing with the rights of third parties, the ordinary principles of agency and equity law frequently hold the corporation to transactions which were not in fact authorized in advance. 40
USE OF INSIDER INFORMATION Directors who purchase their corporation's stock from outside minority shareholders are held to the standards of a fiduciary. Delaware courts have expressly held that an insider, possessed of special knowledge of future plans or secret resources of his corporation, owes a fiduciary duty to a stockholder who is ignorant
37 Condec v. Lunkenheimer, 230 A. 20 769, 775 (Del. Ch. 1967), quoting from Yasik v. Wachtel, 17 A. 2d 309, 313 (Del. Ch. 1941).
39 Bovay v. H. M. Bullesby & Co., 38 A. 20 808. 813 (Del. Supr. 1944). 39 284 A. 2d 117, 124 (Del. Ch. 1971). See also Mitchell v. Highland-Western Glass Co., 167 A. 831, 833 (Del. Ch. 1933).
4" David J. Greene & Co. v. Dunhill International, Inc., 249A. 28 427. 430 (Del. Ch. 1968); Sterling v. Mayflower Hotel Corp., 93 A. 2d '107 (Del. Supr. 1952) ; Sinclair Oil Corp. v. Levien, 280 A, 2d 717 (Sup. Ct. 1971), See p. 19 infra.
It is said that the business judgment rule, when applicable, creates a presumption of good faith and requires a showing of bad faith or abuse of discretion to mount a successful challenge." This presumption, however, can either be rebutted
11 Warshaw v. Calhoun, 221 A. 2d 487, 493 (Del. Supr. 1966); Parges V. Varisco Sales Corp., 32 A. 2d 148, 151-2, (Del. Ch. 1913): Sinclair V. Levien, 280 A. 2d 717 (Del. Supr. 1971); Getty Oil Co. v. Skelly Oil Co., 267 A. 2d 883 (Del. Supr. 1970); Meyerson v. El Paso Natural Gas Co., 246 A. 2d 789 (Del. Ch. 1967).
42 E.g.. Sinclair Oil Corp v. Levien, 280 A. 2d 717 (Sup. Ct. 1971).
14 E.g., Gimhel v. Signal Cos. Inc., 316 A. 2d 599, 615 (Del. Ch.), afi'd, 316 A. 2d 619 (Del. Supr. 1974).
45 Burr v. Burr Corporation. 291 A. 21 409, 410 (Del. Ch. 1972); Prickett v. American Steel and Pump Corp., 253 A. 20 86. 88 (Del. Ch. 1969); Kerb8 v. California Eastern Airways, 30 A. 20 652. 659 (Del. Supr, 1952).
48 Folk, op cit, pp. 71-72.