Anadarko Petroleum Corp. v. Panhandle Eastern Corp.

• Decision Date: 19 January 1988
• Citation: 545 A.2d 1171
• Parties: ANADARKO PETROLEUM CORPORATION, a Delaware corporation, and Pan Eastern Exploration Company, a Delaware corporation, Plaintiffs Below, Appellants, v. PANHANDLE EASTERN CORPORATION, a Delaware corporation, Panhandle Eastern Pipe Line Company, a Delaware corporation, Trunkline Gas Company, a Delaware corporation, Anadarko Production Company, a Delaware corporation, R.L. O'Shields, R.D. Hunsucker, and R.C. Dixon, Defendants Below, Appellees. . Submitted:
• Court: Supreme Court of Delaware

Page 1171

545 A.2d 1171

57 USLW 2017

ANADARKO PETROLEUM CORPORATION, a Delaware corporation, and Pan Eastern Exploration Company, a Delaware corporation, Plaintiffs Below, Appellants, v. PANHANDLE EASTERN CORPORATION, a Delaware corporation Panhandle Eastern Pipe Line Company, a Delaware corporation Trunkline Gas Company, a Delaware corporation, Anadarko Production Company, a Delaware corporation, R.L. O'Shields R.D. Hunsucker, and R.C. Dixon, Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted: Jan. 19, 1988.

Decided: June 23, 1988.

Reargument Denied Aug. 12, 1988.

William Prickett (argued), Vernon R. Proctor, Wayne J. Carey of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, Keith A. Jones (argued) of Fulbright & Jaworski, Washington, D.C., Charles H. Still of Fulbright & Jaworski, Houston, Tex., and Dan A. Spencer of Anadarko Petroleum Corp., Houston, Tex., for appellants.

Lawrence A. Hamermesh (argued) and Leone L. Ciporin of Morris, Nichols, Arsht & Tunnell, Wilmington, Frank Douglass and Charles G. King of Scott, Douglass & Luton, Houston, Tex., and David B. Tulchin, Hyman L. Schaffer and Norman Feit of Sullivan & Cromwell, New York City, for appellees.

Before CHRISTIE, C.J., MOORE and WALSH, JJ.

WALSH, Justice:

This is an appeal from a decision of the Court of Chancery granting summary judgment against Anadarko Petroleum Corporation ("Anadarko") in its suit against three of its former directors and its former parent, Panhandle Eastern Corporation ("Panhandle"), for an alleged breach of fiduciary duty in modifying certain contracts, the so-called disputed agreements, between Anadarko and Panhandle. The lawsuit arises from a spin-off of Panhandle's wholly-owned subsidiary, Anadarko, through a stock dividend. After the stock dividend was declared but prior to the date of distribution, Panhandle and the Anadarko board of directors approved the disputed agreements. Anadarko argues that the disputed agreements are voidable because they are unfair and were approved in violation of fiduciary duties owed to the prospective stockholders of Anadarko. The Court of Chancery ruled as a matter of law that the former directors of Anadarko owed a fiduciary duty only to the parent corporation, Panhandle, at the time the disputed agreements were approved. Further, because Anadarko's claims with respect to the validity of the disputed agreements were premised on the existence of a fiduciary duty owed to the prospective stockholders of Anadarko, the court granted summary judgment against Anadarko.

This appeal presents a novel issue: whether a corporate parent and directors of a wholly-owned subsidiary owe fiduciary duties to the prospective stockholders of the subsidiary after the parent declares its intention to spin-off the subsidiary. We conclude that prior to the date of distribution the interests held by Anadarko's prospective stockholders were insufficient to impose fiduciary obligations on the parent and the subsidiary's directors. Accordingly, we affirm the decision of the Court of Chancery.

I

Panhandle, through its subsidiaries, Panhandle Eastern Pipeline Company ("Pipeline") and Trunkline Gas Company ("Trunkline"), is engaged in the pipeline transportation of natural gas. Prior to September, 1986, another Panhandle subsidiary Anadarko Production Company ("Production") through its subsidiary Anadarko was engaged in the exploration and production of crude oil and natural gas.

On August 20, 1986, Panhandle's board of directors voted unanimously to effect a spin-off of Panhandle's production and exploration assets by distributing one share of Anadarko common stock for each issued and outstanding share of Panhandle stock held of record on September 12, 1986. The date for distribution of the stock dividend was set at October 1, 1986. To advise Panhandle's shareholders and the market place of the impending spin-off, Panhandle and Anadarko issued an Information Statement for Anadarko Common Stock ("Information Statement") dated August 29, 1986. Further, on September 18, 1986, Panhandle furnished a list of its stockholders of record as of September 12, to Anadarko's transfer agent to facilitate the distribution of the stock dividend.

In order to enhance the value of the spin-off, representatives of Panhandle and Anadarko met with representatives of the New York Stock Exchange for the avowed purpose of creating a market for Anadarko stock prior to the date of distribution. The New York Stock Exchange approved the application and trading began in Anadarko stock on September 8, 1986. From September 8, 1986, to October 1, 1986, Panhandle and Anadarko stock were traded in essentially three forms. First, Panhandle's stock was traded the "regular way" reflecting the combined value of Panhandle and Anadarko. A share of Panhandle traded the regular way included a due bill which required the seller to deliver to the buyer the Anadarko stock dividend if and when it was distributed. Second, Panhandle stock was traded "ex-distribution." This form of trading reflected only the value of Panhandle, with the seller retaining the right to the Anadarko stock dividend. Finally, trading in Anadarko stock was effected on a "when-issued" basis, reflecting the value of Anadarko as an independent entity. Between September 8 and October 1, approximately three million shares of Anadarko shares were traded on a when-issued basis; one million of Panhandle shares were sold on an ex-distribution basis; and more than five million shares of Panhandle were traded the regular way.

Following board approval of the spin-off dividend, Panhandle began restructuring existing contracts between Panhandle and Anadarko. Initially an effort was made to modify the existing contracts through negotiations between the operating staffs of Anadarko and Panhandle. On September 11, Anadarko's board approved modifications to a prior "take or pay" agreement, requiring Anadarko to reduce the advance price of gas sold to Panhandle on a short term basis. After failing to modify the remaining agreements through negotiations, on September 30, 1986, Anadarko's board of directors met to resolve all the outstanding impasse issues relating to the spin-off.

Five of the then seven Anadarko directors participated in the September 30 board meeting. Only one director, James T. Rodgers ("Rodgers"), was not affiliated with Panhandle or one of its subsidiaries. At the meeting Rodgers was joined by Robert J. Allison, Jr., ("Allison") a director of both Anadarko and Panhandle, in protesting the terms of the disputed agreements as being unfair to Anadarko. Further, the board was advised by Anadarko's General Counsel that it owed a fiduciary duty to Anadarko's prospective stockholders which would be breached if the board approved the unfair contracts.

The disputed agreements were approved by Anadarko's board by a 3-2 vote. (Rodgers voted against all of the modifications and Allison voted against five and abstained on one). Following the approval of the agreements the three inside directors ¹ resigned, effective October 1, 1986, and were replaced by four new directors. The newly constituted board reviewed the disputed agreements and based on an opinion by outside counsel that the contracts were unfair and voidable, the board voted unanimously to rescind the agreements. ²

II

The linchpin of Anadarko's attack on the terms of the disputed agreements is the claim that the agreements were crafted adversely to Anadarko's interests by entities who were in a fiduciary relationship to Anadarko's prospective shareholders. This assertion assumes significance because if such a relationship exists Panhandle and its designated directors are required to demonstrate the entire fairness of the disputed agreements. See Sinclair Oil Corporation v. Levien, Del. Supr., 280 A.2d 717, 720 (1971); see also Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 110 (1952); Gottlieb v. Heyden Chemical Corp., Del.Supr., 91 A.2d 57, 58 (1952).

It is a basic principle of Delaware General Corporation Law that directors are subject to the fundamental fiduciary duties of loyalty and disinterestedness. Specifically, directors cannot stand on both sides of the transaction nor derive any personal benefit through self-dealing. Guth v. Loft, Inc., Del.Supr., 5 A.2d 503 (1939); Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984); Marciano v. Nakash, Del.Supr., 535 A.2d 400, 403 (1987). However, in a parent and wholly-owned subsidiary context, the directors of the subsidiary are obligated only to manage the affairs of the subsidiary in the best interests of the parent and its shareholders. See Sinclair Oil Corporation v. Levien, 280 A.2d at 720; Goodman v. Futrovsky, Del.Supr., 213 A.2d 899, 902 (1965).

Anadarko acknowledges that a parent does not owe a fiduciary duty to its wholly owned subsidiary. However, Anadarko argues that Panhandle's actions relating to the spin-off have established a class of stockholders to whom fiduciary duties are owed. Specifically Anadarko contends that by setting a record date for the dividend distribution and by establishing a market for Anadarko shares to be traded on a when-issued basis, Panhandle has created a fiduciary relationship with the prospective shareholders of Anadarko. As a result, Panhandle and the inside directors of Anadarko have assumed responsibility for demonstrating that the agreements are entirely fair to Anadarko's new shareholders--a formidable burden in view of the obvious one-sidedness of the agreements.

Anadarko first argues that record ownership passed to Anadarko's prospective stockholders as of September 12, the record date for the stock dividend. The argument follows that as record owners, the prospective stockholders of Anadarko were owed fiduciary duties by Panhandle and Anadarko's former directors. In support of this argument, Anadarko relies on the fact that the disputed agreements were approved after the record date and...