Bender v. Memory Metals, Inc.

• Citation: 514 A.2d 1109
• Parties: 2 UCC Rep.Serv.2d 1650 Susan BENDER, Plaintiff, v. MEMORY METALS, INC., a Delaware corporation, Defendant. . Submitted:
• Decision Date: 12 June 1986
• Court: Court of Chancery of Delaware

Page 1109

514 A.2d 1109

2 UCC Rep.Serv.2d 1650

Susan BENDER, Plaintiff, v. MEMORY METALS, INC., a Delaware corporation, Defendant.

Court of Chancery of Delaware New Castle County.

Submitted: June 12, 1986.

Decided: July 30, 1986.

Louis J. Finger and Gregory V. Varallo of Richards, Layton & Finger, Wilmington, and Stein, Davidoff & Malito, New York City, for plaintiff.

A. Gilchrist Sparks, III, and Donald E. Reid, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant.

OPINION

JACOBS, Vice-Chancellor.

The plaintiff, Susan Bender, is the owner of 100,000 shares of the issued and outstanding common stock of defendant Memory Metals, Inc. ("Memory"). Ms. Bender filed this action on March 26, 1986, seeking to compel Memory to reissue to her a certificate for 100,000 shares of Memory common stock without the restrictive investment legend that is imprinted on her present certificate. In its answer Memory denied that it has any obligation to issue a new, unrestricted stock certificate to the plaintiff. Memory also moved to stay this action pending the outcome of a lawsuit brought on March 11, 1986 by Memory's Chief Executive Officer against the plaintiff and her husband in the United States District Court for the Southern District of New York. Rogen v. Bender and Scheer, 86 Civ. 2058 (MJL) ("the New York action").

Both parties subsequently filed cross-motions for summary judgment. This is the decision of the Court, after briefing and argument, on the parties' cross-motions for summary judgment and on the defendant's motion to stay.

I. The Facts

Except where otherwise noted, the facts are undisputed. Memory was formed as a Delaware corporation in 1981 and is engaged in the business of developing and commercially exploiting advances in metallurgy. One of Memory's founders, and at all relevant times its Chief Executive Officer, is Neil E. Rogen ("Rogen"), who owns approximately 30% of Memory's outstanding common shares and is Memory's largest single stockholder.

At present Memory has issued and outstanding 6,315,000 common shares which are traded over the counter. When it was founded in 1981, Memory issued 1,000 shares to Rogen. In March, 1983, Memory issued an additional 1,950,000 shares to Rogen in return for Rogen's transfer to Memory of certain patent rights, a transaction that was recorded on Memory's books at $.01 per share. Approximately 1,400,000 additional shares were issued to other officers of Memory at $.01 per share, and thereafter 2,000,000 more shares were issued pursuant to private offering memoranda. Finally, in March, 1985, Memory sold an additional 1,100,000 shares pursuant to a public offering under a Registration Statement filed with the Securities and Exchange Commission ("SEC") on April 28, 1984.

When Rogen received his additional 1,950,000 shares in March, 1983, he sold 100,000 of those shares to the plaintiff, Susan Bender, in a private transaction. Although there is now a dispute as to what was to be the consideration for those shares, it is undisputed that the consideration included the payment by Ms. Bender of $.01 per share, i.e., a total of $1,000 in cash, to Rogen. It is also undisputed that Ms. Bender paid Rogen the $1,000. Because the 100,000 shares sold to the plaintiff were not registered under the Securities Act of 1933 ("the 1933 Act") ¹ the certificate representing her shares was imprinted with the following legend:

THE SECURITIES REPRESENTED HEREBY WERE ISSUED IN A TRANSACTION NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 IN RELIANCE ON EXEMPTIONS FROM REGISTRATION UNDER SECTIONS 3(b) AND 4(2) THEREOF AND REGULATION D THEREUNDER, AND SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS UNDER AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR, IN THE WRITTEN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY, EXEMPT FROM THE REGISTRATION PROVISIONS OF SAID ACT.

It is this restriction that the plaintiff seeks to have eliminated from her shares by asking this Court to direct Memory to issue a new certificate without such legend.

The plaintiff held her legended shares continuously for two and one-half years. During that time no one challenged her ownership of or entitlement to the shares. In September, 1985, Rogen orally advised Joseph Greenberger, Esquire, a member of the New York law firm that serves as Memory's outside counsel, of his claim that Ms. Bender was not entitled to her 100,000 shares. The basis for Rogen's claim was that as part of the consideration for the sale of his shares to Bender in March, 1983, Ms. Bender's husband, Perry Scheer, was to perform certain financial services for Memory, but Mr. Scheer did not perform the agreed-upon services. ² Rogen then asked Mr. Greenberger to write Mr. Scheer a letter asserting Rogen's claim and demanding the return of the 100,000 shares. Mr. Greenberger wrote such a letter on Mr. Rogen's behalf. ³

Insofar as the record discloses, the Rogen/Greenberger conversation in September, 1985 marked the first time that Rogen ever communicated his claim to anyone. The Rogen claim is vigorously disputed: plaintiff and her husband deny that Mr. Scheer agreed to perform any services for Memory as consideration for plaintiff's 100,000 shares. They contend that the only consideration agreed to was the payment by plaintiff of $1,000 cash to Rogen.

Rogen did nothing further to pursue his claim until February, 1986, when the plaintiff instructed her broker, Bear Stearns & Co., to sell her shares. Because the shares were restricted, Bear Stearns advised the plaintiff that they would not execute a sale without an opinion of counsel (as required by the legend on the certificates) that a sale would be exempt under the 1933 Act. On or about February 26, 1986, the plaintiff, through Bear Stearns and her counsel, furnished Memory's counsel with the documentation required by SEC Rule 144, i.e., a Form 144 Notice of Proposed Sale of Securities that disclosed the circumstances of the plaintiff's original purchase of her shares and her intention to sell the shares in the public market. Plaintiff's representatives also requested Memory's counsel to furnish the opinion of counsel required by the legend on her stock certificate.

There then followed a series of telephone conversations and an exchange of correspondence between counsel for Ms. Bender and counsel for Memory. The upshot of these exchanges was that Mr. Greenberger, and later others in his firm, as counsel for Memory, refused to issue the requested opinion and refused to recommend that Memory register any transfer of the plaintiff's shares. ⁴ Memory's counsel's took the position that because of Rogen's claim that the full consideration for the stock had not been received, they could not opine that the requirements of SEC Rule 144 (a 1933 Act exemption upon which the plaintiff was relying) had been met. ⁵

Plaintiff's counsel protested Memory's counsel's position. In response, Memory's counsel invited plaintiff's counsel to render their own opinion to Memory that a transfer of the stock would be exempt under Rule 144. Plaintiff's counsel did so. They furnished to Memory's counsel their opinion that the documentation submitted by Ms. Bender was sufficient to permit a sale of her shares without registration under both Rule 144 and Section 4 of the 1933 Act (15 U.S.C. § 77d, irrespective of the merits of the dispute between Rogen and Mr. Scheer.

On March 11, 1986, Rogen filed his New York action against the plaintiff and her husband as the named defendants, charging them with breach of contract and common law fraud and seeking both damages and replevin of the 100,000 shares. The New York action does not appear to have progressed beyond the pleading stage. Mr. Rogen never sought or obtained an injunction in the New York action or in any other action to restrain the transfer of the plaintiff's shares, nor did he seek to obtain a lien on those shares.

On March 13, 1986, the plaintiff's counsel renewed their demand that Memory permit the transfer of the shares. Memory's counsel rejected that demand. On April 3, 1986, plaintiff's counsel supplemented their earlier opinion to incorporate their independent investigation of the facts, on the basis of which they again opined to Memory that the dispute between Messrs. Rogen and Scheer was legally immaterial to Memory's obligation to issue a new, clean certificate to the plaintiff and to register a transfer of her shares. Again Memory's counsel took the position that the existence of the Rogen/Scheer dispute created a genuine risk that Memory might be exposed to civil and criminal liability under the 1933 Act, if the shares were permitted to be transferred and if thereafter the Rogen/Scheer dispute were resolved in Rogen's favor. On that basis Memory's counsel again refused to furnish a favorable transfer opinion and took the position that Memory had no obligation to register a transfer of the plaintiff's shares. ⁶

II. Defendant's Motion To Stay

I first address the defendant's motion to stay. Memory contends that to the extent the Rogen/Scheer dispute is material to a resolution of this action, it would be wasteful to litigate the dispute in Delaware. Memory further argues that by application of the traditional forum non conveniens factors governing motions to stay (see Parvin v. Kaufmann, Del.Supr., 236 A.2d 425, 427 (1967) ), it would serve the orderly and efficient administration of justice for the entire dispute to be resolved in New York.

The short answer is that Memory's motion rests on an incorrect premise. A prior resolution of the Rogen/Scheer contract dispute that is the subject of the New York action is not essential to resolve this action, which is one brought by a stockholder against the corporation to compel the issuance of a stock certificate. The two causes of action are conceptually distinct. As stated in Kanton v. United States Plastics, Inc., 248 F.Supp. 353, 363 (D.N.J.1965):

"Be that as it may, the issue before ...