860 A.2d 41 (Pa. 2004), Warehime v. Warehime

Citation:860 A.2d 41
Party Name:Michael WAREHIME, Appellee v. John A. WAREHIME, Appellant. [1]
Case Date:October 20, 2004
Court:Supreme Court of Pennsylvania
 
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860 A.2d 41 (Pa. 2004)

Michael WAREHIME, Appellee

v.

John A. WAREHIME, Appellant. 1

Supreme Court of Pennsylvania

October 20, 2004.

Argued May 13, 2003

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[Copyrighted Material Omitted]

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Joseph C. Korsak, York, for J. Warehime, appellant.

Grant Stearns Palmer, Matthew J. Siembieda, David F. Girard diCarlo, Philadelphia, for Independent Directors Committee.

Patricia Proctor, Alfred W. Putnam, Stephen Burke Schott, Philadelphia, for M. Warehime, Appellee.

Before: CAPPY, C.J., CASTILLE, NIGRO, NEWMAN, SAYLOR and LAMB, JJ.

OPINION

Chief Justice CAPPY.

The question before this court is whether the Superior Court erred in reversing the trial court's order denying preliminary injunctive relief. For the reasons that follow, we conclude that the Superior Court did indeed err and therefore reverse.

This matter involves an intra-family dispute over the control of Hanover Foods Company ("HFC"). 2 The factual and procedural history is remarkably complex. In brief, Alan Warehime ("Alan") was the chairman and chief executive officer ("CEO") of HFC from 1956 to 1989. Alan was the father of three children: John Warehime ("John"), Michael Warehime ("Michael"), and Sally Warehime ("Sally"). 3 In 1988, Alan created two voting trusts, one with his children and the other with his five grandchildren. Alan was designated as the sole voting trustee for both trusts. By their terms, both trusts were due to expire in 1998, ten years after their creation.

In 1989, John was appointed chairman and CEO of HFC. John gained further control over HFC when, upon Alan's death in 1990, he became the voting trustee of both trusts and acquired control over the majority of the voting shares of the corporation. 4

Following John becoming the voting trustee of the voting trusts, several other family members expressed unhappiness

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over the way John was running HFC; boardroom disagreements escalated. In 1994, John eliminated cumulative voting rights, thus effectively preventing anyone other than himself from electing any members of the board. Promptly after the elimination of cumulative voting rights, John removed Michael, Sally, and an independent director from the Board; he replaced them with three hand-picked directors of his own choosing.

The removal of Michael and Sally did not, however, end the internecine disputes. Various actions were filed against John and HFC by Michael, Sally, and other shareholders. Michael and Sally also made it known that they were interested in removing John as the chairman of the board of HFC as soon as John lost control of the majority of HFC's voting stock upon the expiration of the voting trusts in 1998.

Viewing this potential change in corporate management as a negative, several members of John's hand-picked Board formed a body which they termed the "Independent Directors Committee" and drafted a plan ("the Plan"). The Plan proposed issuing 10,000 shares of Class C stock to HFC's 401k plan. These Class C shares would normally be nonvoting. Yet, in the event that there was disagreement among members of the Warehime family regarding election of members of the Board or other related matters, a complex change in the voting power of each class of shares would take place. If such a dispute were to occur within five years of the creation of the Class C stock, the Class C shares would be entitled to 35 votes a piece. Critically, these Class C shares were to be voted by three of HFC's directors, individuals whom John had appointed to the Board. The Class A stock, which is normally nonvoting, would in the event of a dispute be entitled to 1/10th of a vote a piece. The Class B stock would retain its same voting power of one vote per share.

The net effect of this Plan was that in the event of a dispute among Warehime family members, a majority of the Class B shareholders would not be able to determine the outcome of a vote for a period of five years after the Plan was created. Rather, John, John's children, and John's hand picked directors would be in control of 50.06% of the vote. Accordingly, the Plan created just enough votes to ensure that John, John's children, and the directors hand-picked by John would retain control over the corporation for years after the voting trusts expired. On February 13, 1997, notice was sent to HFC shareholders, informing them that there would be a vote on the Plan on February 24, 1997.

On February 21, 1997, Michael filed an action in equity against John, requesting preliminary injunctive relief; it is this action which is the subject of the instant appeal. Michael requested that the trial court enjoin the convening of the February 24, 1997 shareholder meeting or, in the alternative, enjoin John from voting the voting trust shares in favor of the Plan.

The trial court held a hearing. Following the hearing, the trial court denied Michael's request for preliminary...

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