Bennett v. Breuil Petroleum Corp.
| Citation | 34 Del.Ch. 6,99 A.2d 236 |
| Parties | BENNETT v. BREUIL PETROLEUM CORP. et al. |
| Decision Date | 11 August 1953 |
| Court | Court of Chancery of Delaware |
Aaron Finger, of Richards, Layton & Finger, Wilmington, Homer H. Woods, of Hodgson, Russ, Andrews, Woods & Good-year, Buffalo, N. Y., for plaintiff.
James R. Morford and William Marvel, of Morford, Bennethum & Marvel, Wilmington, and John H. Cantrell and Roy L. Sullivan, of McInnis, Cantrell, Thompson and Sullivan, Oklahoma City, Okl., for defendant Breuil Petroleum Corp.
James R. Morford, of Morford, Bennethum & Marvel, Wilmington, and C. A. McKenzie, Oklahoma City, Okl., for defendants James F. Breuil, Sr., Maxine M. Breuil, James F. Breuil, Jr., Alicia Breuil Lammerts and Leland K. MacFarland.
SEITZ, Chancellor.
By his complaint, plaintiff, William H. Bennett, seeks to cancel stock issued under a plan adopted by the requisite statutory vote. Plaintiff claims the plan is illegal because it constitutes an oppressive exercise by the majority stockholder of an admitted legal right. Plaintiff further claims that the stock sold under the plan was sold for a grossly inadequate consideration.
This was originally an action between the plaintiff and corporate defendant to restrain the issuance of stock under the plan and to prevent the defendant corporation from treating the plaintiff's option as terminated pending final decision. At the preliminary injunction argument it appeared that the stock had been issued prior to service of the restraining order. This court therefore filed a memorandum opinion deciding that since the relief requested could not be granted the restraining order should be vacated and the preliminary injunction denied. Before any order was entered on the opinion the plaintiff sought and obtained an order permitting him to amend his complaint, over objection, to convert it into a complaint for cancellation of stock. As a part of the amendment plaintiff added as parties defendant all the stockholders receiving the 'new' stock. Thereafter counsel agreed to permit the restraining order to remain extant pending disposition of the corporate defendant's motions to dismiss and for summary judgment. Still later the individual defendants filed similar motions and adopted the corporate defendant's objections plus others. This opinion disposes of the motions of both the corporate and the individual defendants.
The disposition of defendants' motions requires a rather long statement of the material facts. If the complaint sets forth a legally recognized claim for relief and if any material fact is in dispute, the defendants' motions must fall. Unless otherwise indicated the factual statement may be taken to have been admitted by the parties.
Prior to the adoption of the plan in dispute the corporate defendant, Breuil Petroleum Corporation, had authorized and outstanding 1,000,000 shares of $1 par value stock held as follows:
William H. Bennett (plaintiff) 423,500
James F. Breuil, Sr 562,000
Maxine M. Breuil (wife) 2,500
James F. Breuil, Jr. (son) 1,500
Alicia Breuil Lammerts (daughter) 1,500
Leland K. MacFarland 1,000
David D. Nash 1,000
Warren Mundie 2,000
Frederick Ott 2,500
Mrs. Frederick Ott 2,500
Mr. and Mrs. Ott are not parties because they did not purport to exercise their option under the plan hereafter described. The defendant, James F. Breuil, Sr., is alleged to dominate and control the defendant corporation. Reference to 'Breuil' will embrace only Breuil, Sr. Defendants deny any improper domination and control. The shares held by Breuil's wife, son and daughter were gifts from him. The defendant, Robert P. Lammerts, is his son-in-law and Leland K. MacFarland is a salaried employee of the defendant as well as being vice president, secretary and treasurer. The Board of Directors consists of Breuil and his wife, plus Robert P. Lammerts, Leland K. MacFarland and William H. Bennett. (Bennett's present status is clouded by his purported resignation.)
Plaintiff and Breuil were associated in business for many years. They organized the present corporate defendant in 1949 to engage in the production of crude oil. Plaintiff alleges and defendant deny that during the last few years relations between plaintiff and Breuil became strained; that plaintiff had difficulty in obtaining recognition in the corporate defendant's business; that Breuil's wife, son-in-law and MacFarland, as the other directors, have been completely responsive to Breuil's will. Defendants contend that plaintiff has failed, neglected and refused to take an interest in or become informed concerning the corporate defendant's problems.
Plaintiff claims that in 1951 Breuil offered to buy his stock and plaintiff indicated his willingness to sell. Defendants deny the offer but it is admitted that plaintiff gave Breuil a ninety-day option to purchase the stock for $1,250,000 payable in cash, amounting to about $2.95 per share. Plaintiff received $1,000 cash for the option. Plaintiff alleges that Breuil did not exercise the option because a government regulation pertaining to the borrowing of funds prevented Breuil from financing the purchase. Defendants say the option was allowed to expire because the price was too high. Later, about July 1952, plaintiff alleges that Breuil made another offer to plaintiff to buy his stock for $1,000,000 (about $2.35 per share). However, Breuil's offer provided that payment was to be made in fifteen year debentures of the corporate defendant bearing 4% annual interest and such debentures were to be subordinated to all other corporate obligations, future as well as present. Plaintiff alleges that he declined the offer because he felt that it was unfair. Defendants deny that any offer was made by Breuil. Plaintiff alleges and defendants deny that Breuil does not want him in the corporation.
At the annual meeting of the stockholders held March 3, 1953 a resolution was passed authorizing the directors to devise a plan to make available sufficient capital funds to relieve its critical financial condition in order to continue its existence. At the directors' meeting of the same date the chairman appointed a committee consisting of MacFarland and Lammerts to present such a plan. Plaintiff did not attend these meetings though he had notice thereof. Later he was sent minutes thereof.
Thereafter plaintiff received notice of a special meeting of the Board of Directors to be held March 16, 1953. He did not attend. Later he was advised of a special meeting of the stockholders to be held March 27, 1953. Plaintiff was present by proxy. It appears that at these meetings, as a part of a financing plan, amendments to the certificate of incorporation were proposed and adopted changing the $1 par value of the 1,000,000 shares to 40cents per share, reducing the capital account from $1,000,000 to $400,000, increasing the number of authorized shares to 2,000,000 shares with a par value of 40cents per share, and denying stockholders' preemptive rights, except upon consent of and under terms granted by the holders of a majority of the stock. At the same time the stockholders authorized the issuance of stock rights to the record stockholders to purchase their pro rata share of the 1,000,000 additional shares of stock at 40cents per share upon certain terms and conditions including a restriction that the rights or options were not to be transferable and had to be exercised within fifteen days.
The stated purposes for the issuance of additional shares was to relieve the corporation's critical financial condition by raising additional capital. Plaintiff admits, as did his proxy in opposing the action taken at the stockholders' meeting, that defendant is not in good financial condition as a producing company. But plaintiff claims that defendants' motive for issuing the new shares in the way described and for the price mentioned, was improper in that the majority deliberately caused the stock to be issued to impair plaintiff's interest and to force him out of the corporation upon the management's own terms. This is vehemently denied by defendants.
As a starting point it must be conceded that action by majority stockholders having as its primary purpose the 'freezing out' of a minority interest is actionable without regard to the fairness of the price. See Allaun v. Consolidated Oil, 16 Del.Ch. 318, 147 A. 257; Bodell v. General Gas, 15 Del.Ch. 420, 140 A. 264. The corporate defendant and its controlling stockholders say that this is a sheer dispute over a matter of business judgment and is for the Board of Directors and stockholders to resolve, not the court.
Let us first consider which side has the burden and the extent thereof. I believe that plaintiff has the burden of proving bad faith or improper motive because I believe defendants are entitled to start with a presumption of good faith. I cannot agree with plaintiff that merely because Breuil is the controlling stockholder, the burden of showing good faith and proper purpose is shifted to the defendants. I say this because I do not believe that Breuil is on 'both sides of the transaction' in the sense that he has an adverse personal interest. Compare Allied Chemical & Dye Corporation v. Steel & Tube Co., 14 Del.Ch. 1, 120 A. 486; Karasik v. Pac. Eastern Corporation, 21 Del.Ch. 81, 180 A. 604. However, on the merits due consideration will be given to Breuil's controlling position and interest.
Defendant say the plaintiff makes charges and does not set forth any facts. I cannot agree. It seems to me that plaintiff has set forth a legally recognized claim and the pleadings and affidavits have raised a substantial factual dispute as to the legal propriety of the motives of the corporate defendant and its controlling stockholder which can only be resolved by a hearing. See language in Steven v....
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