Baker v. Providence & Worcester Co.

• Decision Date: 30 July 1976
• Citation: 364 A.2d 838
• Parties: George P. BAKER et al., Plaintiffs, v. PROVIDENCE AND WORCESTER COMPANY, a Delaware Corporation, Defendant.
• Court: Court of Chancery of Delaware

Page 838

364 A.2d 838

George P. BAKER et al., Plaintiffs, v. PROVIDENCE AND WORCESTER COMPANY, a Delaware Corporation, Defendant.

Court of Chancery of Delaware, New Castle County.

Submitted April 5, 1976.

Decided July 30, 1976.

Opinion and Orders on pending motions.

Bruce M. Stargatt, Young, Conaway, Stargatt & Taylor, Wilmington, for plaintiffs.

Edmund N. Carpenter, II, Allen M. Terrell, Jr., Richards, Layton & Finger, Wilmington, for defendant.

QUILLEN, Chancellor:

Plaintiffs, court appointed trustees of the Penn Central Transportation Company, and stockholders of defendant Providence and Worcester Company (P & W), instituted this action attacking the validity of certain restrictive voting provisions in P & W's charter and seeking to enjoin the adoption of related amendments as well. Both parties have moved for summary judgment, acknowledging that there is no genuine issue as to any material fact. The trustees have also moved under Rule 23(c)(1) for an order determining that the suit shall be maintained as a class action. This is the decision on all motions.

Defendant P & W is a Delaware corporation. Its certificate of incorporation provides in Article Ninth:

'NINTH: Meetings of the stockholders may be held at such city, town or village within or without the State of Delaware as may be named in the By-Laws. The annual meeting shall be held at such time as required by the By-Laws; and at all meetings stockholders, holding or representing by proxy not less than twenty-five hundred shares, shall be necessary to constitute a quorum of the corporation, and each stockholder shall be entitled to one vote for every share of the common stock of said company owned by him not exceeding fifty shares, and one vote for every twenty shares more than fifty, owned by him; provided, that no stockholder shall be entitled to vote upon more than one fourth part of the whole number of shares issued and outstanding of the common stock of said company, unless as proxy for other members.'

Plaintiffs, as trustees of Penn Central, own 9,551 or 28% Of defendant's 35,000 outstanding shares, the largest single holder of P & W stock. There are 617 other shareholders but the next largest holding is of less than 1,000 shares. The above provisions of the charter effectively restrict plaintiffs to only 485 votes or approximately 3% Of the total voting powers. And, on July 6, 1972 amendments to the charter were approved by the shareholders over plaintiffs' negative votes which would increase P & W's stock twenty-fold to 1,400,000 no par value common shares and amend Article Ninth so that voting restrictions and quorum requirements would be retained in the same proportionate ratio after the re-capitalization as before it.

The voting restrictions challenged in this action have existed in the defendant's Certificate of Incorporation since incorporation in Delaware and in the legislative charters of its predecessor corporation which was dually incorporated in both the State of Rhode Island and the Commonwealth of Massachusetts since 1844. On July 31, 1969 P & W, a small railroad company operating a line between Worcester, Massachusetts and Providence, Rhode Island, was merged into a Delaware corporation which is the defendant herein.

The Penn Central Transportation Company (Penn Central) acquired its stock in P & W more or less involuntarily. In 1892 P & W leased its properties to the New York, New Haven and Hartford Railway (New Haven) for 99 years. During the early years of this century the New Haven acquired 9,551 shares of P & W stock. Subsequently, in 1962 the Pennsylvania Railroad filed with the ICC an application to merge with another railroad company, the New York Central Railroad. At that time the New Haven was in reorganization and the ICC required as a condition of approval of the desired merger between the Pennsylvania and the New York Central that the companies also take over the New Haven, including its lease with P & W and its P & W stock. The companies agreed and the new Penn Central thereby acquired most of the New Haven's assets, including the shares of P & W stock. The Penn Central went into bankruptcy in 1970 and plaintiffs, as trustees of its property, acquired the P & W stock.

The purchase agreement made by the Pennsylvania and the New York Central, and the New Haven trustees, which agreement became a part of the New Haven reorganization plan, gave the Pennsylvania and the New York Central the power to instruct the New Haven trustees to disaffirm any New Haven lease which they did not wish to assume. Accordingly, the Pennsylvania Railroad advised the New Haven trustees that they should disaffirm the lease of the P & W line. Pursuant to Pennsylvania Railroad's request, the New Haven trustees disaffirmed the P & W lease on January 16, 1967 and in May of that year filed with the ICC an amendment to the New Haven reorganization plan. Under the terms of the reorganization agreement the merging parties, now the Penn Central Transportation Company (Penn Central), would continue to operate the line, but for the account of P & W rather than as lessee.

Mindful of the experience of other railroads, P & W was apprehensive about the potential injury it might suffer if its properties were so operated for its account. It therefore opposed disaffirmance of the lease and strongly urged that its line be included in the Penn Central operation. Hard fought proceedings ensued, during which the merging parties objected to P & W's inclusion in the merger and to having to assume the restrictive character of the voting provisions of P & W's charter. The ICC reached a compromise with the merging parties and sustained P & W's vigorous efforts to be part of the Penn Central operation, but subject to the condition that the charter provisions concerning voting be amended to provide for one vote for each share of P & W stock.

Meanwhile, the proposed merger of the former Rhode Island-Massachusetts corporation into a newly formed Delaware corporation, mentioned above, was presented to P & W's stockholders on September 11, 1968 prior to the ICC's 'one share, one vote' stipulation and before Penn Central's acquisition of the New Haven's P & W stock. The agreement of merger was signed on December 9, 1968, one week after the ICC had entered its order directing P & W to change the Article Ninth provision of its charter. The ICC approval of the merger agreement was rendered on February 18, 1969.

Under the compromise, P & W had been given until June 30, 1969 to eliminate the restrictions on voting in its charter. Approximately two months prior to that deadline Penn Central and P & W stipulated to an extension of time for P & W to correct its charter until December 31, 1969. According to the terms of the stipulation, which gave recognition to Penn Central's objection to P & W's new Delaware certificate of incorporation, Penn Central agreed not to file suit attacking the P & W charter before the December 31, 1969 deadline. In return, P & W agreed not to raise this delay as a defense in any such action. Stipulations for further extensions ultimately extended the date to June 30, 1970.

Notwithstanding this reservation of rights, P & W perfected its Delaware incorporation on July 31, 1969, abandoning its New England legislative charters presumably for the advantages of being incorporated under the Delaware General Corporation Law.

Confronted with a choice between changing its charter-granted voting rights with the prospect of domination by Penn Central, or attempting to independently operate its own railroad for the first time in about eighty years, P & W reversed itself and withdrew its demand for inclusion in the Penn Central operations. At the same time, P & W applied to the ICC to take up independent operation of its railroad properties. Two months later, Penn Central went into reorganization under Section 77 of the Bankruptcy Act and the newly appointed trustees also shifted from the earlier stance of the Penn Central management and now argued that P & W Should be included in its operation.

Ultimately, on August 25, 1967, the ICC sustained P & W's right to operate independently. It was to begin separate operation on December 30, 1972. It actually resumed possession and operation of its properties on February 3, 1973.

Earlier, in July, 1972, the controversial amendment to P & W's certificate, which retains the voting ratios but increases the numbers proportionate to the increase of authorized stock, was passed at a stockholders' meeting. P & W sought ICC approval of the amendment over the opposition of the trustees who took that opportunity to challenge the legality of P & W's voting provisions. The complaint in this action, which will determine the merit of P & W's submission was filed October 10, 1972. The case was delayed by a lengthy effort to resolve the dispute without litigation here.

This rather intricate history of the economic relations among the parties is particularly relevant to the propriety of the action being maintained as a class action, in that it puts into sharp perspective the competitive posture of the parties in relation to the P & W properties. Significantly, when the P & W began independent operation in 1973, it was, and remains, in direct competition with the Penn Central which operates another line through the same general area. In a real sense, the action is a struggle for control over those properties through control of the corporation itself.

I turn initially to the question of whether the suit may be maintained as a class action. Court of Chancery Rule 23(c)(1). The class which plaintiffs purport to represent consists of all P & W stockholders who presently own 51 or more shares. As of May 10, 1972, the record date for the July, 1972 special meeting of P & W stockholders, P & W had a total of 618 stockholders, of whom 87 owned 51 or more shares.

In order to prevail on their motion to establish this suit as...