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Senator HARTKE. Is that true in all the States?
Mr. CROMPTON. I cannot speak for all the States. It certainly is true in Delaware.
Senator HARTKE. Would it not be better if you had uniformity in that, and predictability in that field?
Mr. CROMPron. I think there is already a very expansive Federal rule for such remedies under the Securities and Exchange Act.
Senator HARTKE. Thank you, Mr. Crompton.
RESOURCE DOCUMENT ON DELAWARE CORPORATION LAW
TABLE OF CASES
Allaun v. Consolidated Oil, 147 A.256 (Del.Ch. 1929). American Hardware Corp. v. Savage Arms Corp., 135 A.20 725 (Del.Ch. 1957), aff'd 136 A.2d 690 (Del. Supr. 1957).
Armour, State ex rel. v. Gulf Sulphur Co., 233 A.2d 457 (Del.Super.) aff*d 231 A.2d 470 (Del.Supr. 1967).
Baron v. Allied Artists Pictures Corporation, 337 A.2d 653 (Del.Ch. 1975).
Canada Southern Oils, Ltd. v. Manabi Exploration Co., 96 A.2d 810 (Del.Ch. 1953).
Carl M. Loeb, Rhoades & Co. v. Hilton Hotels Corp., 222 A.2d 789 (Del.Supr. 1966).
Cheff v. Mathes, 199 A.2d 548 (Del.Supr. 1964).
Chinctti v. Chinetti-Garthwaite Imports, Inc., C.A, 5025, (Del.Ch., filed March 10, 1976).
Cochran, State ex rel. v. Penn-Beaver Oil Co., 143 A.257 (Del.Supr. 1926).
David J. Greene & Co. v. Dunhill International, Inc., 249 A.20 427 (Del.Ch. 1968).
Diamond v. Oreamuno, 24 N.Y. 2d 494 (1969).
Dixon, State ex rel. v. Missouri-Kansas Pipe Line Co., 36 A.2d 29 (Del.Supr. 1944).
Dolese Bros. Co. v. Brown, 157 A.2d 784 (Del.Supr. 1960).
DPF Inc. v. Interstate Brands Corp., C.A. No. 4856 (Del.Ch. filed October 2, 1975).
E. L. Bruce Co. v. State ex rel. Gilbert, 144 A.2d 533 (Del.Supr. 1958).
Essential Enterprises Corp. v. Automatic Steel Prod., 159 A.2d 288 (Del.Ch. 1960).
Farber, State ex rel. v. Seiberling Rubber Co., 168 A.2d 310 (Del.Supr. 1961).
Gimbel v. Signal Cos. Inc., 316 A.2d 599 (Del. Ch.) aff'd 316 A.2d 619 (Del. Supr. 1974).
Gottlieb v. Hayden Chemical Corp., 90 A.2d 660 (Del. Supr. 1952).
Greyhound Corporation, The v. Heitner, C.A. No. 132, 1975 (Del. Supr., filed April 15, 1976).
Gulla, In re, 115 A, 317, (Del. Ch. 1921).
1. P. Grifin Holding Corp. v. Mediatrics, Inc., C.A. No. 4056 (Del. Ch, filed January 30, 1973).
Insuranshares Corp. v. Kirchner, 5 A.2d 519 (Del. Supr. 1939), Investment Associates, Inc. v. Standard Power & Light Corp., 48 A. 20 501 (Del. Ch. 1946), aff'd 51 A.2d 572 (Del. Supr. 1947). Jackson, In re, 81 A. 992 (Del. Ch. 1911). Johnston v. Greene, 121 A.2d 919 (Del. Supr. 1956). Kaplan v. Center Corporation, 284 A.2d 117 (Del. Ch. 1971). Kaufman v. Schoenberg, 91 A.2d 786 (Del. Ch. 1952). Kaufman v. Schoenberg, 154 F. Supp. 64 (D. Del. 1954). Keenan v. Eshelman, 2 A.2d 904 (Del. Supr. 1938). Keller v. Wilson & Co., 190 A. 115 (Del. Supr. 1936). Kerbs v. California Eastern Airways, 90 A.2d. 652 (Del. Supr. 1932).
Kerkorian v. Western Air Lines, Inc., 253 A.2d 221 (Del. Ch.) afi'd 251 A.2d 240 (Del. Supr. 1969).
Kors v. Carey, 158 A.2d 136 (Del. Ch. 1969).
Mansfield Hardware Co. v. Johnson, 268 F.2d 317 (5th Cir.), cert, den. 361, U.S. 885 (1959).
Meyerson v. El Paso Natural Gas Co., 246 A.2d 789 (Del.Ch. 1967).
Nodana Petroleum Corp. v. State ex rel., Brennan, 123 A.2d 243 (Del. Supr. 1956).
Northwest Industries v. B. F. Goodrich, Co., 260 A.2d 428 (Del. Supr. 1969).
Pennsylvania Mutual Fund, Inc., v. Todhunter International Inc., C.A. No. 4845 (Del. Ch. filed August 5, 1975), 1 Del. J. Corp. Law 229 (1976).
Petty v. Penntech Papers, Inc., 347 A.2d 140 (Del. Ch. 1975).
Raab v. Villager, A.2d (Del. Supr., 1976), C.A. Nos. 5, 56, 73, and 99, 1975 (Del. Supr., filed April 12, 1976).
Sack v. Cadence Industries, C.A. No. 4747 (Del. Ch. filed April 9, 1975),
Brady, 184 A.2d 602 (Del. Ch. 1962).
Tannetics, Inc. v. A. J. Industries, Inc. C.A. 4592 (Del.Ch, filed September 4, 1974).
Theile, State ex rel. v. Cities Service Co., 115 A. 773 (Del. Supr. 1922). Tonopah United Water Co., In re, 139 A. 762 (Ch, 1927). Topkis v. Delaware Hardware Co., 2 A.2d 114 (Del.Ch. 1938). Trans World Airlines, Inc. v. State ew rel Porterie, 183 A.2d 174 (Del.Supr. 1962).
Tweedy, Browne & Knapp v. Cambridge Fund, Inc., 318 A.2d 635 (Del.Ch. 1974).
Universal City Studios, Inc. v. Francis I. duPont & Co., 334 A.2d 216 (Del.Supr. 1975).
Warshaw v. Calhoun, 221 A.2d 487 (Del Supr, 1966).
Weisman v. Western Pacific Industries Inc., C.A. No. 4833 (Del.Ch. filed September 2, 1975).
Western Airlines, Inc. v. Allegheny Airlines, Inc., 313 A.2d 145 (Del.Ch. 1973). Yasik v. Wachtel, 17 A.2d 309 (Del.Ch. 1941).
I. STOCKHOLDER CONTROL
Stockholders control a Delaware corporation. Their control is brought to bear at regular and special stockholders meetings. They can also act instantly through written consents by holders of that percentage of stock necessary to perform the act in question.'
Managers can thus be changed in whole or in part either by the stable body of stockholders or, as after a tender offer, by a new group of stockholders who have bought out the old. Although these propositions may seem obvious, it seems desirable, as a basis, to set out the theme before going to the variations.
B. ANNUAL MEETING
To guarantee that the stockholders' franchise is honored, the directors, and therefore, management, must face the stockholders at least once a year. Efforts of management to avoid this confrontation have met with little success in Delaware. Annual meetings to elect directors are required by statute. The courts are firm that postponement of this requirement will not be permitted. Vice Chancellor Brown recently wrote:
the spirit of 8 Del.C. 8 211(c) indicates that where more than thirteen months have elapsed without a meeting of shareholders to elect directors and application is made by a shareholder for Court intervention because of this, the Court has a duty to make sure that such a meeting and election take place as promptly as possible, and normally this can only be guaranteed by the
entry of an order fixing a definite date for the event to take place. Nor have the courts been charitable to a management which, without proper business reasons, would use the literal language of the statute to alter the meeting date, so as to rush competitors for control unprepared to an earlier meeting than they had reason to expect. Justice (now Chief Justice) Herrman roundly condemned the practice :
Management contends that it has complied strictly with the provisions of the new Delaware Corporation Law in changing the by-law date (for the annual meeting). The answer to that contention, of course, is that inequitable
action does not become permissible simply because legally possible. Delaware courts, on equitable grounds, hold dissidents to an annual meeting date of which they had been on notice for some time;' and a delay in an annual meeting inadvertently, or at least not inequitably, brought about was not condemned since the meeting was promptly re-scheduled.
Direct stockholder control at any time was legislated in 1967 through Section 228(a) which allows a corporation to dispense altogether with an actual meeting of stockholders and permits them to act by written consent. This section, together with the provision for removal of directors without cause,' permits immediate and direct control by the majority of the stockholders, (followed by full disclosure to the entire body of shareholders), including, where appropriate, the ouster of management.
18 Del.C. && 211222, and 228(a).
28 Del.c. $ 211(b). Unless the necessary number of stockholders have consented in writing to the action pursuant to 8 Del.C. $ 228(a). Folk, Corporation Law Developments 1969, 56 Va. L. Rev. 755. 784 (1970).
3 Tweedy, Browne d Knapp v. Cambridge Fund, Inc., 318 A. 2d 635, 637 (Del. Ch. 1974). See also Prickett v. American Steel and Pump Corporation, 251 A. 2d 576 (Del. Ch. 1969); 1. P. Griffin Holding Corp. v. Mediatrics, Inc., C. A. No. 4056, (Del. Ch., filed January 30, 1973) ; In re Jackson, 81 A. 992 (Del. Ch. 1911); In re Gulla, 115 A. 317 (Del. Ch. 1921).
* Schnell v. Chris-Craft Industries, Inc., 285 A. 20 437, 439 (Sup. Ct. 1971). 5 American Hardware Corp. v. Savage Arms Corp., 135 Á. 20 725 (Del. Ch. 1957), aff'd, 136 A. 20 690 (Del. Supr. 1957).
In re Tonopah United Water Co., 139 A. 762 (Ch. 1927) (an error in the notice for the proper date made the meeting of questionable validity, therefore, a later date was acceptable).
78 Del. C. $ 141(k).
8 Professor Cary. Federalism and Corporate Law: Reflections Upon Delaware, 83 Yale L. J. 663. 669 (1974) (hereinafter cited as Cary, Federalism Article), considers Section 228, which grants direct control to the majority of shareholders, somehow anti-democratic because the procedure provides disclosure to the minority only after the fact. First, speed is often desirable. Second, the proxy rules and Delaware law require disclosure before the fact if consents are solicited. Third, Section 228(c) requires full disclosure after the fact in every case. It is true that the consent procedure balances the interest of prompt action, when necessary votes are in hand, against a lost opportunity for a preliminary injunction if no solicitation is required. However, abuses are subject to correction by judicial review ; see, e.g., Chew v. Inverness Management Corp., 352 A. 2d 426 (Del. Ch. 1976).
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.” u
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;14 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."
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".18
*240 A. 2d 755, 756 (Del. Supr, 1968).
10 State es 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 stockholders, e.g., Northroest Industries v. B. F. Goodrich Co., 260 A. 20 428 (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 Industries, supra note 9.
14 Kerkorian v Western Air Lines, Inc., 253 A. 20 221 (Del. Ch.) ag'd, 254 A. 2d 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. 20 174 (Del. supr. 1962); Mite Corp v. Heli-Coil, supra note 14.
17 E. L. Bruce Co. v. State er rel. Gilbert, 144 A. 2d 533 (Del. Supr. 1958): State er rel Armour v. Gulf Sulphur Corp., 233 A. 20 457 (Super. Ct.), aff'd 231 A, 2d 470 (Supr. Ct. 1967).
178 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 ea 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 ex rel. Brennan : 21
* * * 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.
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 circumstances, access will be denied.ma
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 er 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 harrassment, State ex rel. Brumley v. Jessup & 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.
23 DPF 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. 2d 174 (Del. Supr. 1962) (both stock list cases).
234 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).