Preston v. Allison

• Decision Date: 27 September 1994
• Docket Number: No. 296,1994,296,1994
• Citation: 650 A.2d 646
• Parties: Seymour PRESTON, Jr. and Andrew F. Puzder, Defendants Below-Appellants, v. John A. ALLISON and John F. Kooken, Plaintiffs Below-Appellees. . Submitted:
• Court: Supreme Court of Delaware

Page 646

650 A.2d 646

Seymour PRESTON, Jr. and Andrew F. Puzder, Defendants Below-Appellants, v. John A. ALLISON and John F. Kooken, Plaintiffs Below-Appellees.

No. 296,1994.

Supreme Court of Delaware.

Submitted: Sept. 27, 1994.

Decided: Dec. 14, 1994.

Upon appeal from the Court of Chancery. AFFIRMED.

William O. LaMotte, III, Thomas R. Hunt, Jr., Michael L. Vild of Morris, Nichols, Arsht & Tunnell, Wilmington, and Scott A. Edelman (argued); David J. Wolfson of Milbank Tweed Hadley & McCloy, New York City, of counsel, for appellants.

R. Franklin Balotti (argued), Daniel A. Dreisbach, Matthew J. Ferretti, and Todd C. Schiltz of Richards, Layton & Finger, Wilmington; Andrew E. Bogen of Gibson, Dunn & Crutcher, Los Angeles, CA, of counsel, for appellees.

Before VEASEY, C.J., WALSH and BERGER, JJ.

BERGER, Justice:

This is an appeal from a decision of the Court of Chancery overturning the results of an election of directors and declaring, pursuant to 8 Del.C. § 225, that appellees, John A. Allison and John F. Kooken, are the duly elected directors of US Facilities Corporation ("US Facilities"). The issue we address is whether an admitted mistake in effectuating beneficial stockholders' voting instructions should be corrected by the Court of Chancery, notwithstanding the holding in Williams v. Sterling Oil of Oklahoma, Inc., Del.Supr., 273 A.2d 264 (1971). We conclude that, where one is required by law to hold his or her shares beneficially, the investor should not be disenfranchised as the result of the record stockholder's mistaken submission of conflicting proxies. Accordingly, we affirm.

I.

The relevant facts are undisputed. US Facilities, a Delaware corporation, has approximately 5.7 million shares of common stock outstanding. The company has a nine member staggered board of directors, with three directors elected each year to serve a three year term. Dr. L. Steven Medgyesy and appellees were nominated by the company for re-election as directors at the 1994 annual meeting, held on May 25, 1994. US Facilities sent its stockholders proxy cards, a notice of the meeting, and a proxy statement on April 19, 1994.

On April 25, 1994, William P. Foley, II ("Foley"), President and Chief Executive Officer of Fidelity National Finance, Inc. ("Fidelity"), contacted his counterpart at US Facilities and proposed a merger in which Fidelity would acquire all the outstanding shares of US Facilities for $15 per share. Foley explained that his merger proposal would expire on April 29, 1994, and that, if US Facilities was unwilling to enter into negotiations, Fidelity would commence a proxy solicitation in opposition to management. Foley was not satisfied with the response he received from US Facilities. Accordingly, Fidelity distributed a proxy statement dated May 3, 1994, seeking the election of appellants as directors of US Facilities and proposing the adoption of a stockholder resolution calling for the sale or merger of the company.

On May 26, 1994, the independent company retained to act as inspector of elections certified that appellants had been elected to replace appellees by a vote of 2,216,430 to 2,192,622. In certifying this result, the inspector refused to count 80,424 shares beneficially owned by members of a US Facilities retirement plan. In 1988, the company adopted a retirement plan (the "Plan") pursuant to the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ 1001 et seq. ("ERISA"). The Plan offers several investment options for its participants, including a fund consisting of common stock of US Facilities. As mandated by ERISA, the US Facilities stock purchased on behalf of Plan participants is held in trust. 29 U.S.C. § 1103. Plan participants are entitled to vote their shares, but must do so by instructing the Plan trustee, the Dreyfus Trust Company ("Dreyfus"). ¹ As of the record date for the 1994 annual meeting, the Plan held 80,481 shares of US Facilities common stock.

In accordance with its responsibilities as trustee, Dreyfus distributed the company's initial proxy solicitation materials to Plan participants in April 1994. On May 20, 1994, Dreyfus sent the Fidelity proxy materials and US Facilities' revised materials to Plan participants by overnight mail. In response to these mailings, Dreyfus received instructions to vote 80,386 of the Plan shares in favor of appellees and to "withhold authority" with respect to 38 shares. ² Unfortunately, neither the Dreyfus employee responsible for voting the shares, nor the contact person at the proxy tabulation firm hired to assist Dreyfus, had any prior experience with proxy contests. As a result, when they saw that there were two different proxy cards, they decided that both cards had to be submitted to the inspector of elections. Thus, Dreyfus instructed BONY to submit the revised management proxy, marked to show that 80,386 Plan shares were voted for appellees and the Fidelity proxy, marked to show that 80,386 Plan shares were voted against appellants.

These "mirror-image" proxies were intended by Dreyfus to confirm, from either perspective, the Plan participants' instructions--the 80,386 shares were to be voted in favor of the management slate and against the Fidelity slate. BONY executed the proxy cards exactly as instructed and submitted each proxy to the appropriate proxy solicitor. The solicitors, in turn, submitted those proxies to the inspector of elections. The inspector determined that the two proxies were inconsistent on their face and could not be reconciled. Therefore, the inspector refused to count the 80,386 shares voted on behalf of the Plan participants. All agree that, had those votes been counted, appellees would have prevailed.

II.

The sole issue before this Court is whether the Court of Chancery departed from established legal principles in holding that the Plan shares should be voted in accordance with the participants' intent, even though that intent could not be discerned from the two irreconcilable proxies submitted on their behalf. This is a question of law that is subject to de novo review. City Investing Co. Liquidating Trust v. Continental Casualty Co., Del.Supr., 624 A.2d 1191, 1194 (1993).

The leading authority on this point is Williams v. Sterling Oil of Oklahoma, Inc., Del.Supr., 273 A.2d 264 (1971). In that case, Parker, Bishop & Welsh, Inc. ("PBW"), a brokerage firm, submitted two proxies voting the same shares for opposite positions. Both proxies were signed by the same person and came in envelopes postmarked the same day. The election inspectors initially left the PBW shares out of their tabulation. However, before the inspectors' final report had been submitted, a PBW officer gave them an affidavit explaining the two proxies. The affidavit stated that PBW wanted to vote all of its shares in favor of management; that the employee who submitted the dissident proxy did so by mistake and without authority; and that PBW declared the dissident's proxy to be void and of no effect. Based upon that affidavit, the inspectors included PBW's shares in their final tabulation as having been voted in favor of management. The Court of Chancery, although recognizing that election inspectors perform only a ministerial function, held that they properly counted the PBW shares because the two conflicting proxies were the result of an "obvious clerical mistake." Williams v. Sterling Oil of Oklahoma, Inc., Del.Ch., 267 A.2d 630, 633 (1970). This Court reversed:

We hold the proper rule to be that, in the exercise of their ministerial functions and powers, the inspectors of an election must reject all identical but conflicting proxies when the conflict cannot be resolved from the face of the proxies themselves or from the...