Abercrombie v. Davies

• Decision Date: 16 January 1956
• Citation: 123 A.2d 893,35 Del.Ch. 599
• Court: Court of Chancery of Delaware
• Parties: James S. ABERCROMBIE, Phillips Petroleum Company, a corporation, and Sunray Oil Corporation, a corporation, Plaintiffs, v. Ralph K. DAVIES, Signal Oil and Gas Company, a corporation, The Hancock Oil Company, a corporation, The Globe Oil and Refining Company, a corporation, Lario Oil and Gas Company, a corporation, Ashland Oil & Refining Company, a corporation, Deep Rock Oil Corporation, a corporation, Samuel B. Mosher, Garth L. Young, John W. Hancock, J. Howard Marshall, Harold A. Black, Francis L. Jehle, Rexford S. Blazer, Sandford M. Burnam, American Independent Oil Company, a corporation, and Security First National Bank of Los Angeles, California, a corporation, Defendants.

Page 893

123 A.2d 893

35 Del.Ch. 599

James S. ABERCROMBIE, Phillips Petroleum Company, a corporation, and Sunray Oil Corporation, a corporation, Plaintiffs, v. Ralph K. DAVIES, Signal Oil and Gas Company, a corporation The Hancock Oil Company, a corporation, The Globe Oil and Refining Company, a corporation, Lario Oil and Gas Company a corporation, Ashland Oil & Refining Company, a corporation, Deep Rock Oil Corporation, a corporation Samuel B. Mosher, Garth L. Young, John W. Hancock, J. Howard Marshall, Harold A. Black, Francis L. Jehle, Rexford S Blazer, Sandford M. Burnam, American Independent Oil Company, a corporation, and Security First National Bank of Los Angeles, California, a corporation, Defendants.

Court of Chancery of Delaware, New Castle County.

Jan. 16, 1956.

On Motion for Reargument April 30, 1956.

Supplemental Opinion June 20, 1956.

John J. Morris, Jr. (of Morris, James, Hitchens & Williams), Wilmington, and Joseph W. Moore (of Fouts, Amerman & Moore), Houston, Tex., for plaintiff James S. Abercrombie.

Robert H. Richards, Jr., and Stephen E. Hamilton, Jr. (of Richards, Layton & Finger), Wilmington, for plaintiffs Phillips Petroleum Co. and Sunray Oil Corp.

Richard F. Corroon and David F. Anderson (of Berl, Potter & Anderson), Wilmington, and Francis M. Shea, Warner W. Gardner and Vern Countryman (of Shea, Greenman, Gardner & McConnaughey), Washington, D. C., for defendants Signal Oil & Gas Co., The Hancock Oil Co., Lario Oil & Gas Co., Ralph K. Davies, The Globe Oil & Refining Co., Samuel B. Mosher, Garth L. Young, John W. Hancock, Harold A. Black, Francis L. Jehle, and J. Howard Marshall.

William Duffy, Jr., Wilmington, for defendant American Independent Oil Co.

Defendants Ashland Oil & Refining Co., Deep Rock Oil Corp., Rexford S. Blazer, Sandford M. Burnam and Security First Nat. Bank, Los Angeles, Cal., failed to appear.

SEITZ, Chancellor.

This is the decision on plaintiffs' motion for summary judgment. Plaintiffs' motion asks this Court to declare invalid an agreement between certain stockholders and their agents dealing with corporate stockholder and director action. Plaintiffs are not parties to the agreement which concerns a Delaware corporation of which these plaintiffs are stockholders.

In 1947, a Delaware corporation known as American Independent Oil Company ('American') was organized to exploit a concession for oil and gas in the Kuwait-Saudi Arabian Neutral Zone in the Middle East. The three plaintiffs, James S. Abercrombie, Phillips Petroleum Company and Sunray Oil Corporation (called 'Abercrombie', 'Phillips', and 'Sunray' or 'plaintiffs') and seven of the defendants became the stockholders of American. ¹ Under the Organization Agreement as supplemented, it was contemplated that each stockholder would be allowed to name to the board of directors one director for each 5,000 shares of stock held. The Certificate of Incorporation provided for cumulative voting. In line with the amount of stock purchased, one director was named by plaintiff, Abercrombie, four by plaintiff, Phillips and one by plaintiff, Sunray. Two were named by defendant, Signal, two by defendant, Hancock, one each by defendants, Davies, Globe and Lario, Deep Rock, and Ashland. Allied Oil Company elected one but Allied has since been acquired by Ashland. Consequently, Ashland now elects two directors. Reference herein to 'defendants' will embrace only Signal, Hancock, Davies, Globe and Lario, and Ashland unless otherwise indicated.

At all times since the organization of American the number of directors has been 15. At times certain directors have resigned and by unanimous consent of the board the resigning director has been permitted to 'name' his successor. Therefore, at all times the directors of American have been and are those selected by the respective stockholders in proportion to the amount of stock owned by each.

The defendant Davies was elected president of American at the first board meeting and countinues as such.

In March 1953, American discovered oil, but expensive exploration work continues. The stockholders have advanced or guaranteed substantial sums.

On March 30, 1950, certain defendants in this litigation executed a so-called Agents' Agreement ('Agreement'). Plaintiffs were not parties thereto and there is a question as to when some one or more of them first learned of its existence, but I deem that issue immaterial.

The defendants Davies, Signal, Hancock, Globe, Lario and Ashland, who together own a majority of American's outstanding stock, entered into the Agreement with the following designated agents, who are also defendants: W. W. Vandeveer, Davies, Jehle, John W. Hancock, Marshall, Black, Mosher and Young. The agents who signed the Agreement were all acting as directors of American when they signed and 'represented' the defendants in accordance with their respective stock ownerships. In fact the agents and directors are the same and each is a ranking officer of the corporate shareholder he represents. The terms of the Agreement are developed herein.

On December 9, 1954, a directors' meeting was held in Chicago at which all directors were present. A resolution was then adopted calling for a special meeting of the board to be held on December 16, for the purpose of considering and taking action, inter alia, upon proposed amendments to the by-laws, one of which would authorize the board to remove any officer without cause.

This resolution received the affirmative votes of the six directors 'representing' plaintiffs and the director representing Deep Rock. The two directors representing the defendant Ashland also voted for the resolution, although they were parties to the Agreement. The other defendants who were parties to the Agreement opposed the resolution. Without narrating the details it is sufficient to say that the appearing parties to the Agreement there stated that Ashland's directors violated the Agreement when they voted as they did.

Preliminarily, no question is raised as to plaintiffs' rights to attack the validity of the Agreement because they are non-parties.

Defendants devote a substantial portion of their brief to the point that this case cannot be properly decided upon plaintiffs' motion for summary judgment. They first contend that there are material issues of fact. Obviously, if material facts are in issue plaintiffs' motion must be denied. But plaintiffs argue that the Agents' Agreement is invalid on its face as a matter of Delaware Law. How then can it be material to this issue whether the directors in fact discharged their duties properly or otherwise acted in accordance with the trust imposed upon them? Such facts are not material to a disposition of the claim upon which plaintiffs' complaint is founded. I fail to find any dispute as to a material fact.

Defendants also urge that the case cannot properly be decided on the pending motion; that defendants should be allowed to prove facts within plaintiffs' control; and that sound judicial administration requires a denial of the motion. I cannot find any merit to any of these arguments in view of the scope of plaintiffs' complaint. If the Agreement is invalid on its face as a matter of law then these other factors cannot affect the result no matter how worthy are the individuals concerned or how large are the amounts of money involved.

Nor do I see any merit to defendants' argument that plaintiffs have no standing to attack the Agreement because of their unclean hands. If, as defendants say, plaintiffs are seeking to vary some alleged understanding among the founders of American including plaintiffs concerning its future control that does not preclude plaintiffs from showing the illegality of this Agreement. This Agreement was executed by defendants and plaintiffs are not parties. The action by plaintiffs which forms the basis for their alleged unclean hands is thus not related to this Agreement.

Defendants say that plaintiffs do not show that the Agreement has been or will be used and so their complaint should be dismissed as premature. This is an action for a declaratory judgment and there is clearly an actual controversy concerning the validity of the Agreement. Moreover, defendants' directors raised the question of a violation of the Agreement by Ashland's agents in connection with the December directors' meeting. I conclude that under the present facts plaintiffs may attack the legality of the Agreement.

This brings us to a consideration of plaintiffs' contentions. Plaintiffs first urge that the Agreement is invalid because 'it deprives the board of directors of their statutory function of management of the business of the corporation', 1) by placing control in a minority of the board or an arbitrator or 2) because under the provisions of the Agreement meetings of the board become a mere sham and the directors are prevented from acting as a board. Plaintiffs also say the Agreement is invalid be-because it is a voting trust which is illegal for failure to comply with the Delaware Statute governing voting trusts. 8 Del.C. § 218.

A consideration of plaintiffs' first argument requires an elaborate statement of the provisions of the Agreement. The stated purpose of the Agreement is found in its Preamble:

'Whereas, the parties do hereby agree and declare that the intent and purpose of this Agreement is to provide a means whereby the parties hereto may initiate or maintain in effect any general policy, plan, or program affecting American Independent Oil Company which said parties should determine to be to their joint benefit, interest and advantage, and to the best interest of all stockholders of American Independent Oil Company, and to that end to elect or retain or replace any officer, executive or employee of said company.'

The Agreement provided that the contracting shareholders should deposit with the agents their certificates for shares of American, the certificates to be...