Belle Isle Corporation v. MacBean

• Decision Date: 14 September 1946
• Citation: 49 A.2d 5,29 Del.Ch. 261
• Court: Court of Chancery of Delaware
• Parties: BELLE ISLE CORPORATION, a Delaware corporation, v. T. LEONARD MacBEAN, E. JANE MacBEAN, and OAKDALE CONTRACTING COMPANY, INC., a New York corporation

49 A.2d 5

29 Del.Ch. 261

BELLE ISLE CORPORATION, a Delaware corporation, v. T. LEONARD MacBEAN, E. JANE MacBEAN, and OAKDALE CONTRACTING COMPANY, INC., a New York corporation

Court of Chancery of Delaware, New Castle

September 14, 1946

Leonard G. Hagner, (Clinton DeWitt Van Siclen and Wilbur R Shook, both of New York City, of counsel), for complainant.

Stewart Lynch, of the firm of Lynch & Herrmann, (Bacal and Koenig, of New York City, of counsel), for defendants.

OPINION

SEITZ, Vice-Chancellor.

The complainant corporation seeks a preliminary injunction to prevent the various defendants from exercising any of the rights of ownership in connection with certain shares of the complainant corporation's stock allegedly owned by the defendants, pending the ultimate determination by this court of the complainant's right to have such shares cancelled or to have certain monetary relief.

The application for the preliminary injunction was heard exclusively on affidavits which were of a magnitude to dismay even the most hearty. It was also apparent that the less than cordial relationship existing between the parties tended to result in more heat being generated than light shed.

The complainant Belle Isle Corporation, a Delaware corporation, filed a bill of complaint naming as defendants T. Leonard MacBean, E. Jane MacBean and Oakdale Contracting Company, Inc. (hereafter referred to as Oakdale). It is not disputed that E. Jane MacBean is the wife of T. Leonard MacBean, nor that Oakdale is dominated and controlled by T. Leonard MacBean. The reading of an earlier opinion of this court in other litigation involving these parties, among others, will aid in painting the background of this picture. See Appon, et al., v. Belle Isle Corporation, et al, ante p. 122, 46, A.2d 749.

Three separate issuances of the complainant's stock to the defendants are attacked in the bill of complaint, but for purposes of the complainant's application for a preliminary injunction we need only consider two of them. The first transaction involves the issuance of 75,000 shares to the defendant T. Leonard MacBean (actually 55,000 shares were issued to him and 20,000 shares to his wife, E. Jane MacBean) on June 5, 1944, pursuant to a resolution which was allegedly passed (denied by complainant) at a directors' meeting held June 3, 1944. Services rendered to the corporation by the defendant T. Leonard MacBean from 1928 to 1944 allegedly constituted the consideration for the issuance. The complainant corporation vigorously denies that there was in fact any such consideration, but I find it unnecessary at this time to determine this disputed question of fact.

The second transaction now attacked is the issuance of 25,000 shares to the defendant Oakdale on June 25, 1940, pursuant to a resolution passed at a directors' meeting held June 22, 1940. The alleged consideration for this issuance consisted of services rendered the corporation by the personnel of Oakdale and the settling of the so-called Gonsoulin litigation in which Belle Isle was involved. Complainant's grounds for attacking this transaction are manifold.

Let us now consider the transactions separately, bearing in mind that this is an application for a preliminary injunction which imposes upon complainant the burden of showing a reasonable probability of ultimate success if it is to have the relief requested.

The complainant corporation seeks to have cancelled the 75,000 shares of its stock issued to the defendant, MacBean pursuant to authority allegedly given by resolution of the board of directors passed at a meeting held on June 3, 1944. The complainant asserts numerous reasons why the transaction was invalid and the defendant MacBean not only denies these contentions vehemently, but asserts several grounds in support of the legality of the issuance of the shares in question.

Many of the grounds asserted in support of and in opposition to the legality of the issuance of the 75,000 shares are premised upon facts which are seriously in dispute and which cannot properly be determined at this stage of the proceeding.

Aside from these grounds, however, the complainant corporation contends that no quorum was present at the June 3, 1944 directors' meeting when the issuance of the stock in question was allegedly authorized as partial compensation for MacBean's past services to the corporation. The defendant MacBean on the contrary contends that a quorum was present under conditions hereinafter discussed.

The following by-laws of the corporation were admittedly part of the written corporate by-laws at the date of the meeting held June 3, 1944:

"[Article II] Section 5. NUMBER AND QUORUM: -- The number of directors shall be TEN. A majority of the directors shall constitute a quorum for the transaction of business. Directors need not be stockholders.

* * * * *

"[Article V] Section 3. INCREASE OF NUMBER OF DIRECTORS: -- The number of directors of the corporation shall be fixed by the By-Laws and shall not be altered except at a stockholders' meeting by a vote of the stockholders owning 75% of the shares entitled to vote thereon. In case of any increase in the number of directors the additional directors may be elected by the directors, or by the stockholders at an annual or special meeting by a plurality vote."

Article II, Section 5 had been amended by a resolution of the stockholders adopted June 7, 1939, whereby the number of directors was increased from seven to ten. All parties concede that this increase was made in 1939 in order to provide for representation to the so-called Ware-Wasson group when it performed a certain agreement involving the corporation's stock. The so-called Ware-Wasson agreement expired June 30, 1940 without ever being carriedout so that this group never was represented on the board of directors.

No meeting of the stockholders or of the board of directors of complainant corporation was held between June 30, 1940 (when the Ware-Wasson agreement expired) and June 3, 1944, the date on which the directors allegedly authorized the issuance of the 75,000 shares here involved. The importance of this time interval will appear.

It is conceded by the defendants that at the meeting of June 3, 1944 there were present only the following four directors: MacBean, Huppuch, Irish and Corcoran. And it is undisputed that at no time during the period with which we are here concerned was any formal amendment to the by-laws ever adopted changing the number of directors from the ten provided for by Article II, Section 5.

It necessarily follows that if the by-law provision calling for ten directors was operative at the meeting of June 3, 1944, then a quorum of directors under Delaware law as applied to the charter and by-laws of the corporation would be six directors. This is so because it was held in Bruch v. National Guarantee Credit Corporation, 13 Del.Ch. 180, 184, 116 A. 738, 740, that "The rule is that the number necessary to constitute a quorum, under a by-law such as appears in this case, is a majority of the entire board notwithstanding there may be vacancies in the board at the time." The pertinent by-law provision of the corporation involved in the Bruch case was in substance identical with the complainant corporation's by-law governing quorum requirements, and, as a consequence, the quoted principle is operative.

As stated, only four directors were present at the June 3, 1944 meeting and one of these was the defendant, MacBean. Passing complainant's contention that defendant MacBean, being interested in the transaction, could not be counted for quorum purposes, it is clear that even including MacBean for quorum purposes there was no quorum present at the June 3 meeting unless, as defendant contends, "by Established Practice to the Contrary Acquiesced in by the Stockholders", the quoted by-law (Article II, Section 5) was amended so as to provide for only seven directors.

The defendant MacBean's case turns then, at this time, exclusively on whether or not the corporation's by-law had been amended by custom so that at the June 3, 1944 meeting it had a board of seven directors rather than ten. Of course, if defendant MacBean is correct then, assuming MacBean could be counted, there was a quorum present at the June 3, 1944 meeting.

It is true, as defendant states, that in the case of In re Ivey & Ellington, Inc., 28 Del.Ch. 298, 42 A.2d 508, this court recognized the principle of amendment of corporate by-laws by a course of conduct inconsistent therewith. Clearly, however, one who contends that a written by-law has been amended by custom inconsistent therewith has the burden of establishing the existence of such a custom. Upon the undisputed facts, the defendant MacBean has failed to meet this burden, and it is not apparent that facts which would vary such a conclusion will be available to the defendant at the final hearing.

Almost dispositive of the defendant's contention as to the amendment by custom is the undisputed fact that there was no meeting either of the stockholders or directors between June 30, 1940 and June 3, 1944. The June 30, 1940 date of course represents the expiration date of the Ware-Wasson agreement, and clearly the by-law provision as to directors would not have been changed prior to that date, because the by-law provision was amended to increase the number of directors from seven to ten in order to effectuate in part the Ware-Wasson agreement. From June 30, 1940 to the directors' meeting date of June 3, 1944 -- when the issuance of the stock in question was allegedly authorized -- no stockholders' meetings or directors' meetings were held. I cannot conceive how total stockholder and director inaction can form the basis for a custom...