Nixon v. Blackwell

• Citation: 626 A.2d 1366
• Parties: Allen NIXON, Harry Matlock, Roy Jolly, Floyd Schisler, Doyle Roach, Doyle Gilliam, John Milbourn, Tony Futrell, Edward Wiseman, Harold Bouland and E.C. Barton & Company, a Delaware corporation, Defendants Below, Appellants, v. Guy C. BLACKWELL, Guy C. Blackwell, III, Carolyn Mai Blackwell, Nancy Ann Blackwell, Trustee for Guy C. Blackwell, III, Nancy Ann Blackwell, Trustee for Carolyn Mai Blackwell, Mai Banks Blackwell, Executrix of the Estate of G. Lawrence Blackwell, Lea Ellen Blackwell, O.G. Blackwell, III, Dr. O.G. Blackwell, Custodian for Claire Blackwell, Laurie Blackwell Black, Janet Porter Blackwell, Dr. O.G. Blackwell, Thomas M. Bizzell, Trustee for Nancy Jane Lauck and Amanda Ann Lauck and St. Timothy Episcopal Church, Plaintiffs Below, Appellees. . Submitted on Oral Argument before a panel of the Court:
• Decision Date: 17 November 1992
• Court: United States State Supreme Court of Delaware

Page 1366

626 A.2d 1366

Allen NIXON, Harry Matlock, Roy Jolly, Floyd Schisler, Doyle

Roach, Doyle Gilliam, John Milbourn, Tony Futrell, Edward

Wiseman, Harold Bouland and E.C. Barton & Company, a Delaware corporation, Defendants Below, Appellants, v. Guy C. BLACKWELL, Guy C. Blackwell, III, Carolyn Mai

Blackwell, Nancy Ann Blackwell, Trustee for Guy C.

Blackwell, III, Nancy Ann Blackwell, Trustee for Carolyn Mai

Blackwell, Mai Banks Blackwell, Executrix of the Estate of

G. Lawrence Blackwell, Lea Ellen Blackwell, O.G. Blackwell,

III, Dr. O.G. Blackwell, Custodian for Claire Blackwell,

Laurie Blackwell Black, Janet Porter Blackwell, Dr. O.G.

Blackwell, Thomas M. Bizzell, Trustee for Nancy Jane Lauck

and Amanda Ann Lauck and St. Timothy Episcopal Church,

Plaintiffs Below, Appellees.

Supreme Court of Delaware.

Submitted on Oral Argument before a

panel of the Court: Nov. 17, 1992.

Resubmitted on Oral Argument before

the Court en Banc: Jan. 12, 1993.

Resubmitted to newly-constituted ¹

Court en Banc: June 7, 1993.

Decided: June 22, 1993.

Rehearing Denied July 28, 1993.

Court Below: In the Court of Chancery of the State of Delaware in and for New Castle County C.A. No. 9041.

Upon appeal from the Court of Chancery. REVERSED AND REMANDED.

Grover C. Brown (argued), P. Clarkson Collins, Jr. of Morris, James, Hitchens & Williams, Wilmington, Tom D. Womack of Barrett, Wheatley, Smith and Deacon, Jonesboro, AR, and A. Wyckliff Nisbet of Friday, Eldredge & Clark, Little Rock, AR, for appellants.

David A. Drexler (argued), of Morris, Nichols, Arsht & Tunnell, Wilmington, for appellees.

Before VEASEY, C.J., HORSEY, MOORE, and WALSH, JJ., and RIDGELY, President Judge (sitting by designation pursuant to art. IV, § 12), constituting the Court en Banc.

VEASEY, Chief Justice:

In this action we review a decision of the Court of Chancery holding that the defendant directors of a closely-held corporation breached their fiduciary duties to the plaintiffs by maintaining a discriminatory policy that unfairly favors employee stockholders over plaintiffs. The Vice Chancellor found that the directors treated the plaintiffs unfairly by establishing an employee stock ownership plan ("ESOP") and by purchasing key man life insurance policies to provide liquidity for defendants and other corporate employees to enable them to sell their stock while providing no comparable liquidity for minority stockholders. We conclude that the Court of Chancery applied erroneous legal standards and made findings of fact which were not the product of an orderly and logical deductive reasoning process. Accordingly, we REVERSE and REMAND to the Court of Chancery for proceedings not inconsistent with this opinion.

I. FACTS

This case involved a five-day trial before the Vice Chancellor. The record is detailed, but only a brief discussion of the salient facts is necessary to an understanding of the issues before us.

A. The Parties

Plaintiffs are 14 minority stockholders of Class B, non-voting, stock of E.C. Barton & Co. (the "Corporation"). The individual defendants are the members of the board of directors (the "Board" or the "directors"). The Corporation is also a defendant. Plaintiffs collectively own only Class B stock, and own no Class A stock. Their total holdings comprise approximately 25 percent of all the common stock outstanding as of the end of fiscal year 1989.

At all relevant times, the Board consisted of ten individuals who either are currently employed, or were once employed, by the Corporation. At the time this suit was filed, these directors collectively owned approximately 47.5 percent of all the outstanding Class A shares. The remaining Class A shares were held by certain other present and former employees of the Corporation.

B. Mr. Barton's Testamentary Plan

The Corporation is a non-public, closely-held Delaware corporation headquartered in Arkansas. It is engaged in the business of selling wholesale and retail lumber in the Mississippi Delta. The Corporation was formed in 1928 by E.C. Barton ("Mr. Barton") and has two classes of common stock: Class A voting stock and Class B non-voting stock. Substantially all of the Corporation's stock was held by Mr. Barton at the time of his death in 1967. Mr. Barton was survived by his second wife, Martha K. Barton ("Mrs. Barton") who died in 1985, and by Dorothy B. Rebsamen and Mary Lee Marcom, his daughter and granddaughter, respectively, from his first marriage. Pursuant to Mr. Barton's testamentary plan, 49 percent of the Class A voting stock was bequeathed outright to eight of his loyal employees. The remaining 51 percent, along with 14 percent of the Class B non-voting stock, was placed into an independently managed 15-year trust for the same eight people. Sixty-one percent of the Class B non-voting stock was bequeathed outright to Mrs. Barton. Mr. Barton's daughter and granddaughter received 21 percent of the Class B stock in trust. The non-voting Class B shares Mr. Barton bequeathed to his family represented 75 percent of the Corporation's total equity.

Ownership interests in the Corporation began to change in the early 1970s following the distribution of Mr. Barton's estate. Mrs. Barton gave certain shares of Class B non-voting stock to her three children, Guy C. Blackwell, Owen G. Blackwell and Martha G. Hestand (the "children"). In 1973 the Corporation purchased all of the Class B stock held in trust for Mr. Barton's daughter and granddaughter at a price of $45 per share. ² Mrs. Barton sold the remainder of her Class B shares to the Corporation in January 1975 at a price of $45 per share. These transactions left Mrs. Barton's three children collectively with 30 percent of the outstanding Class B non-voting stock. The children have no voting rights despite their substantial equity interest in the Corporation. The children are also the only non-employee Class B stockholders.

There is no public market for, or trading in, either class of the Corporation's stock. This creates problems for stockholders, particularly the Class B minority stockholders, who wish to sell or otherwise realize the value of their shares. The corporation purported to address this problem in several ways over the years.

C. The Self-Tenders

The Corporation occasionally offered to purchase the Class B stock of the non-employee stockholders through a series of self-tender offers. During the late 1970s the Corporation attempted to purchase the outstanding Class B shares held by Guy C. Blackwell, Owen G. Blackwell and Martha G. Hestand, the Corporation's only non-employee stockholders. The Corporation first offered to repurchase the children's stock at $45 per share shortly after they acquired it from Mrs. Barton. The children rejected the offer and the stock subsequently split 25-for-1 in 1976. A second unsuccessful repurchase offer was made in 1977. At that time, the Corporation offered the children $8.22 per share. In light of the stock split, this price appears to be approximately four times the amount the Corporation paid for Mrs. Barton's Class B shares three years earlier. In 1979 the Corporation again approached the children and offered to repurchase their stock at a price of $15 per share. Martha Hestand accepted the offer and tendered her shares to the Corporation. Guy and Owen Blackwell, however, refused to sell their shares at that price. The Corporation made no further repurchase offers until May 1985, when the ESOP undertook a tender offer to repurchase 48,000 shares of Class B stock, concurrently with a tender offer by the Corporation for 39,000 Class A and 100,000 Class B shares at a price of $25 per share. The book value of the Class A stock and the Class B stock at that time was $38.39 and $26.35, respectively. The remaining children and the other plaintiffs in the present action refused to sell. ³

D. The Employee Stock Ownership Plan ("ESOP")

In November 1975 the Corporation established an ESOP designed to hold Class B non-voting stock for the benefit of eligible employees of the Corporation. The ESOP is a tax-qualified profit-sharing plan whereby employees of the Corporation are allocated a share of the assets held by the plan in proportion to their annual compensation, subject to certain vesting requirements. The ESOP is funded by annual cash contributions from the Corporation. Under the plan, terminating and retiring employees are entitled to receive their interest in the ESOP by taking Class B stock or cash in lieu of stock. It appears from the record that most terminating employees and retirees elect to receive cash in lieu of stock. The Corporation commissions an annual appraisal of the Corporation to determine the value of its stock for ESOP purposes. Thus, the ESOP provides employee Class B stockholders with a substantial measure of liquidity not available to non-employee stockholders. The Corporation had the option of repurchasing Class A stock from the employees upon their retirement or death. The estates of the employee stockholders did not have a corresponding right to put the stock to the Corporation.

E. The Key Man Insurance Policies

The Corporation also purchased certain key man life insurance policies with death benefits payable to the Corporation. Several early policies insuring the lives of key executives and directors were purchased during Mr. Barton's lifetime with death benefits payable to the Corporation. In 1982 the Corporation purchased additional key man policies in connection with agreements entered into between the Corporation and nine key officers and directors. Each executive executed an agreement giving the Corporation a call option to substitute Class B non-voting stock for their Class A voting stock upon the occurrence of certain events, including death and termination of employment, so that the voting shares could be reissued to new key personnel. In return, the Board adopted a resolution creating a non-binding recommendation that a portion of the key...