Sneider v. Transcontinental & Western Air

• Decision Date: 24 August 1948
• Docket Number: Civil Action No. 1144.
• Citation: 79 F. Supp. 339
• Parties: SNEIDER v. TRANSCONTINENTAL & WESTERN AIR, Inc.
• Court: U.S. District Court — District of Delaware

79 F. Supp. 339

SNEIDER v. TRANSCONTINENTAL & WESTERN AIR, Inc.

Civil Action No. 1144.

District Court, D. Delaware.

August 24, 1948.

Howard Duane, of Wilmington, Del., and Abraham L. Pomerantz and Leonard I. Schreiber, of Pomerantz, Levy, Schreiber & Haudek, all of New York City, for plaintiff.

Aaron Finger, of Richards, Layton & Finger, all of Wilmington, Del., and Gerald B. Brophy, Leonard P. Moore, and George A. Spater, of Chadbourne, Wallace Parke & Whiteside, all of New York City, for defendant.

LEAHY, District Judge.

Observations and Conclusions.

Plaintiff, on the basis of the pleadings and affidavits, urges the amendment modifying the agreement requiring Hughes Tool Company to take the stock at market value was fraudulent, because it results in an unjust benefit to Hughes at the expense of the remaining shareholders and because this is particularly bad, here, where the directors, who negotiated the agreement, were controlled by Hughes. Plaintiff claims if there is to be equity financing, it should be accomplished by offering new stock to all of defendant's present stockholders at a substantial discount — or, "bargain rates" — rather than benefiting Hughes. Although he does not precisely say so, plaintiff, by necessary implication, admits ex the market value agreement equity financing to the public would be probable. This is a compulsive implication because defendant's broker affiants state when conditions permit equity financing, it would be much easier to secure with the Hughes "option agreement"¹ out of the way. Since these postulates are not exactly controverted, they are accepted as true and I assume equity financing may be arranged in the foreseeable future.

In opposition to the sought injunction, defendant urges that its board of directors, acting independently, concluded the amended agreement was for the best interest of all stockholders, was without fraud and was approved by the overwhelming majority of the non-Hughes TWA stockholders. Defendant also states, since it is the considered opinion of the directors, the stock might decline on account of the adverse affairs of TWA and thus it is the interest of all stockholders that this agreement be consummated by Hughes taking the stock at 10; otherwise Hughes might get many more shares of stock as the market falls below 10, and benefit accordingly if the stock should later rise.

So far as the record indicates, the purpose of the amended agreement was to eliminate uncertainty caused by the original option agreement in order to facilitate and make possible new financing. Although TWA's proxy statement does not say so, I assume the contemplated financing means equity financing, for the option agreement, and consequent uncertainty as to the future number of public offered shares would be irrelevant to creditor financing. Creditors are interested only in the amount of capital in $s and are not at all interested in the number or price of subordinated interests represented by common shares. Admittedly, Transcontinental & Western Air, Inc., is in need of financing. If it be proved at trial elimination of the option agreement will facilitate that financing, then I think that would be a sufficient justification for modifying the option agreement.

At the time of the main argument for an injunction pendente lite, plaintiff's counsel categorically stated that with the book value of the stock at a large minus figure, equity financing was not only improbable but impossible in the foreseeable future. However, at the second argument on leave to allow plaintiff to file further affidavits and other writings, counsel for plaintiff conceded that equity financing was possible if the stock were offered to the stockholders at a substantial discount without the elimination of the option agreement. I do not think it pertinent whether the sought financing might be accomplished in a more beneficial manner to the stockholders. As long as equity financing is said to be possible and probable, the choice of means belongs to the directors and not to the courts on a motion for a preliminary injunction, especially where there has been overwhelming stockholder approval.² Further than that, even if the board is controlled, and I assume that it is, I do not see how that is material if there are possible alternatives prerequisite to equity financing, because on the record before me responsible financial affiants of defendant have stated that the choice adopted is more likely to make equity financing successful.

The relief which plaintiff seeks calls for one of the extraordinary equitable remedies. It is the rule of this circuit and district that an injunction pendente lite does not issue where parties are in serious dispute on conflicting questions of fact and law. Reynolds International Pen Co. v. Eversharp, D.C.Del., 63 F.Supp. 423, citing Warner Bros. Pictures v. Gittone, 3 Cir., 110 F. 2d 292; Murray Hill Restaurant v. Thirteen Twenty One Locust, 3 Cir., 98 F.2d 578; Hand v. Missouri-Kansas Pipe Line Co., D.C.Del., 54 F.Supp. 649; Oneida Community v. Fouke Fur Co., D.C.Del., 286 F. 757; General Talking Pictures v. Stanley Co., D.C.Del., 42 F.2d 904; Popular Mechanics v. Fawcett, D.C.Del., 1 F.Supp. 292; United States v. Weirton Steel Co., D.C. Del., 7 F.Supp. 255. If plaintiff is to prevail ultimately in a matter involving $10,000,000 and 1,000,000 shares of TWA, he is required — I am not saying he cannot — to gather more and vital proofs than to be found in the present paper record before me. I conclude the restraining order should be dissolved and the motion for injunction should be denied.

These observations are made on the findings which I take from the pleadings and the other papers so far filed. Here are the

Findings

1. Plaintiff is a New York citizen. Defendant, Transcontinental & Western Air, Inc., is a Delaware corporation.

2. Plaintiff is the owner of 100 shares of common stock of defendant.

3. Plaintiff has been a stockholder of defendant prior to April 19, 1946 and was such at the time of the transactions complained of.

4. Hughes Tool Company owns 452,100 or approximately 45.85% of the outstanding shares of TWA.

5. By notice dated July 15, 1948, stockholders of TWA were advised of a special meeting to be held August 10, 1948 in Kansas City, Missouri, to consider (1). increasing the authorized common stock of TWA from 3,000,000 to 4,000,000 shares and (2). approving an offer by TWA to Hughes to issue 1,034,423 shares of TWA common stock to Hughes in exchange for $10,000,000 principal amount of Subordinated Convertible 2-3/4% Notes issued by TWA and all accrued interest thereon.

6. On August 3, 1948, plaintiff, here, brought suit on his behalf and on behalf of other stockholders of TWA, similarly situated, to enjoin defendant from taking any steps entering into agreements to convert the Subordinated Convertible 2¾% Notes in the principal amount of $10,000,000 and accrued interest thereon issued by TWA and owned by Hughes, into 1,034,423 shares of the common stock of TWA as proposed in a proxy statement sent by TWA to its stockholders.

7. Prior to June 15, 1948, TWA suffered large financial losses; it passed through several financial crises.

8. For instance, during 1946, new four-engine Lockheed Constellation Aircraft purchased by TWA were grounded by Government order until certain modifications were made. And in October 1946, all pilots of TWA were on strike for three weeks; no planes, as a result, were operated during this period. It followed, and because of rising cost levels, TWA lost $14,347,836 during 1946.

9. 1946 losses wiped out TWA's earned surplus, its capital surplus, and impaired capital to the extent of some $700,000, thus leaving a capital of $4,203,886.

10. Book value of TWA's common, as a result of such adversities, reduced from $18.80 at the end of 1945 to $4.26 at the end of 1946.

11. During 1945-1946, TWA borrowed $40,000,000 from Equitable Life Assurance Society of the United States on condition it could not borrow more without Equitable's consent.

12. Then in January 1947, TWA needed other funds. The only source from which such could be raised, which must be subordinated to the Equitable loan, was Hughes, the holder, as stated, of the largest block of TWA common.

13. In 1947, Hughes lent $10,000,000 to TWA and TWA issued to Hughes its Subordinated Convertible 2¾% Notes due June 2, 1956 but convertible into TWA common at the election of Hughes, at any time prior to the Notes' maturity, at the average of the closing price of the common on the New York Stock Exchange on each of the last ten business days prior to the receipt of the notice of exercise of the right to convert, but at a price not...