Warehime v. Warehime

• Decision Date: 20 October 2004
• Parties: Michael WAREHIME, Appellee v. John A. WAREHIME, Appellant.
• Court: Pennsylvania Supreme Court

860 A.2d 41

580 Pa. 201

Michael WAREHIME, Appellee v. John A. WAREHIME, Appellant.¹

Supreme Court of Pennsylvania.

Argued May 13, 2003.

Decided October 20, 2004.

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 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 injunctive relief. As the cornerstone for its opinion, the trial court stated that the impending expiration of the voting trusts introduced what the court deemed to be "instability" into HFC. Tr. ct. slip op., dated 6/24/1997, at 4. In the trial court's view, this "instability" was due to the fact that upon the expiration of the voting trusts, John would no longer have control over the corporation and that other shareholders could band together and vote to remove John and all of John's hand-picked members of the Board and replace them with a yet undetermined management. Id. The trial court found that this anticipated instability interfered with HFC's ability to raise equity capital and threatened HFC's corporate good health. Id. at 8-9.

The trial court opined that the Plan prevented such instability and thus was a positive good. Furthermore, it determined that the Plan did not present a conflict of interest between John's private interests and his duties as voting trustee. Id. at 34. Rather, the Plan reflected a good faith effort to serve the best interests of HFC since it assured stability in the governance structure of HFC for a five-year period. See id. at 41-42. Accordingly, on June 24, 1997, the request for a preliminary injunction was denied. The following day, John convened a meeting and voted all of his shares as well as all of the trust shares in favor of the Plan, and the Plan was therefore adopted.

Michael appealed to the Superior Court which reversed. Warehime v. Warehime, 722 A.2d 1060 (Pa.Super.Ct.1998). The court concluded that John had breached his duty of loyalty to the trust beneficiaries. We, in turn, reversed on appeal. Warehime v. Warehime, 563 Pa. 400, 761 A.2d 1138 (2000) ("Warehime I"). In Warehime I, we stated that since John had acted in good faith and did not act for his own personal benefit, then he did not violate his fiduciary duties as voting trustee. Accordingly, we reversed the Superior Court and remanded for that court to consider the other issues that had been raised by Michael but not addressed by the lower court.

The Superior Court on remand denied relief to Michael on all but one of his claims. Warehime v. Warehime, 777 A.2d 469 (Pa.Super.Ct.2001) ("Warehime II"). On Michael's corporate democracy claim, however, the court granted Michael relief. The court reasoned that the Plan was designed to make it

impossible for the owners of a majority of HFC's Class B voting shares to replace John ... and the other directors at the conclusion of the voting trusts in 1998 .... Thus, the opposition shareholders were completely divested of any power to affect the outcome of any vote in which there was disagreement .... Therefore, the [P]lan systematically deprived the Class B voting majority of the impact of their right to vote.

Id. at 477. The Superior Court found such a situation to be unacceptable, noting that it interfered with a shareholder's right to vote, a right which "is among the most fundamental rights of ownership of voting shares." Id. (citing Reifsnyder v. Pittsburgh Outdoor Adver. Co., 405 Pa. 142, 173 A.2d 319, 322 (1961)).

John filed a Petition of Allowance Appeal. We granted allocatur. For the following reasons, we conclude that the Superior Court erred in its choice of standard of review for this matter. Furthermore, upon application of the appropriate standard of review, we find that the Superior Court improperly reversed the trial court's order. Accordingly, we reverse.

The first step of our analysis is to determine our appropriate standard of review. In conducting its review of this matter, the Superior Court commenced its analysis of this matter by stating that since the trial court held exhaustive hearings in this matter, then its "appropriate standard of review is for an appeal from a final decree rather than from a preliminary injunction." Warehime II, 777 A.2d at 477. Accordingly, it stated that it would review this matter for an abuse of discretion or error of law. Id. As an aside, the court recognized that "different standards of review are employed during an appeal from a preliminary injunction as opposed to a permanent injunction[.]" Yet, it flatly concluded that "the outcome of this case is the same under either standard." Id. The Superior Court did not, however, set forth the standard of review for preliminary injunction matters nor apply that standard to this case.

We must now determine whether the Superior Court was correct in viewing this matter as an appeal from final injunctive relief. As noted supra, the Superior Court reasoned that since the trial court held extensive hearings in this matter, then its denial was in the nature of a denial of permanent injunctive relief. Id. We reject this reasoning. The mere holding of hearings with regard to a motion for a preliminary injunction does not somehow morph that motion into a request for a permanent injunction. In fact, our rules specifically contemplate that hearings may be held on requests for preliminary injunctions. See Pa.R.Civ.P. 1531. Accordingly, the matter is properly viewed as an appeal from the denial of preliminary...