Blish v. Thompson Automatic Arms Corporation
| Citation | 64 A.2d 581,30 Del.Ch. 538 |
| Parties | IDA G. BLISH, Complainant Below, Appellant, v. THOMPSON AUTOMATIC ARMS CORPORATION, a corporation of the State of Delaware, MATTHEW J. HALL, THOMAS A. KANE, MORTIMER S. GORDON, EUGENE D. POWERS, RUSSELL MAGUIRE, RUSSELL MAGUIRE & CO., INC., a corporation of the State of New York, and AUTO-ORDNANCE CORPORATION, a corporation of the State of New York, Defendants Below, Appellees |
| Decision Date | 07 December 1948 |
| Court | United States State Supreme Court of Delaware |
[Copyrighted Material Omitted]
For the reasons indicated the decree of the Chancellor as entered below is affirmed.
Issac D. Short, II, and John T. Trimble, of New York City, for appellant.
Clarence A. Southerland, of the firm of Southerland, Berl & Potter and Wolfgang S. Schwabacher, Sydney C. Winton and Robert L London, all of New York City, for Thompson Automatic Arms Corporation, Russell Maguire, Russell Maguire & Co., Inc., Eugene D. Powers and Auto-Ordnance Corporation.
OPINION
This is an appeal from a final decree entered by the Chancellor on the thirteenth day of March, 1942, dismissing the bill of complaint of Ida G. Blish, a stockholder of Thompson Automatic Arms Corporation, a corporation of the State of Delaware, called TAAC, against TAAC, Russell Maguire, Russell Maguire & Co., Inc., a corporation of the State of New York, called Maguire & Co., Eugene D. Powers, Thomas A. Kane, Mortimer S. Gordon, and Matthew J. Hall. Service of summons was made on defendant TAAC, and defendants Russell Maguire, Maguire & Co., and Eugene D. Powers appeared by their solicitors. Defendants Thomas A. Kane, Matthew J. Hall and Mortimer S. Gordon were not served with process and did not appear in this action.
In 1941 TAAC was merged with Auto-Ordnance Corporation, a corporation of the State of New York, called AUTO and on December 8, 1941 AUTO, by order of the Chancellor, was made an additional party and permitted to adopt as its answer to the bill of complaint the answers of other defendants theretofore filed.
The action below was a stockholder's suit brought by the complainant to cancel certain shares of stock of TAAC theretofore issued to defendants Maguire & Co., Eugene D. Powers, Matthew J. Hall, Mortimer S. Gordon and Thomas A. Kane and for the recovery of certain sums alleged to have been unlawfully paid by TAAC for the personal benefit of defendant Maguire, President of TAAC, together with allegations of mismanagement by Maguire of corporate affairs.
The bill of complaint filed below may be divided into two parts: First, allegations charging the illegal issuance of many shares of TAAC stock, which the complainant contends should be ordered cancelled. In this category fall the following shares issued to the following persons: 3,500 shares issued to Maguire & Co., on March 14, 1939; 116,400 shares issued to Maguire & Co., on July 21, 1939; 3,600 shares issued to Thompson and Kane on July 21, 1939; 9,750 shares issued to Powers, Kane and Gordon on July 21, 1939; 20,000 shares "subscription" issued to Maguire & Co. at different periods beginning in March, 1939. Second, allegations charging mismanagement of the affairs of TAAC by Maguire.
The complainant below is the widow of Commander John Blish, United States Navy, who was the inventor of the basic principle of a sub-machine gun known in the field of armaments as the "Tommy Gun." In 1916 Commander Blish and the complainant, being joint owners of the basic patents, incorporated a New York company under the name of Auto-Ordnance Corporation. They assigned the basic patent to AUTO and received in exchange 1250 shares of its original authorized capital stock. Upon the death of the Commander in 1919 his shares were distributed to the complainant, his children and to two other relatives.
In the early years of corporate existence Commander Blish, together with Brigadier General John T. Thompson, his son Colonel Marcellus H. Thompson, and Colonel George H. Harvey, contributed their technical experience and patents to the development of the main product of the company, the "Tommy Gun," and Thomas Fortune Ryan, a prominent New York financier, furnished the corporate funds for experimental and manufacturing purposes.
General Thompson and Ryan died prior to 1939. Colonel Marcellus H. Thompson succeeded his father in AUTO's corporate affairs and the Guaranty Trust Company of New York, called Guaranty, became executor of the Ryan Estate.
From corporate inception until 1939 the joint efforts of those in charge met with many disappointments. AUTO, until 1939, had not commenced the manufacture of guns. On the other hand, in 1921 the Colt Firearms Company manufactured for AUTO 15,000 "Tommy Guns" and from 1922 until 1939 AUTO's entire corporate activity was spent in liquidating these guns upon the open market. Sales did not meet expectations, as in January, 1939 approximately 4500 guns remained unsold. These guns, together with tools, jigs, cutter and fixtures (the patents having long expired) constituted the entire corporate assets of the company.
AUTO from time to time had issued stock to Ryan and others for alleged debts due from the corporation and for improvement patents, so that in January, 1939 there was outstanding, out of an authorized capital stock of 40,000 shares, a total of 25,630 shares, which were owned as follows:
Guaranty, as executor, held a majority of the shares outstanding. In addition, it held promissory notes due the Ryan Estate of approximately $ 1,090,000, together with interest and a chattel mortgage covering AUTO's entire assets.
In January, 1939 the corporate picture of AUTO was one of despair. It was in point of fact insolvent. If AUTO was to continue, new capital had to be obtained or some type of reorganization was imperative.
Upon the death of Ryan, Colonel Thompson, President of AUTO, apparently realized that an interruption would take place in the company's future development, as Guaranty would assume control of the corporation, which in turn would present a hopeless situation insofar as the minority stockholders of AUTO were concerned; thus, Thompson endeavored to obtain new capital in order to liquidate the Ryan Estate indebtedness long prior to January, 1939. In fact, as far back as 1935, Thompson engaged in a series of conferences with Matthew J. Hall, then Vice-President of Automatic Arms Manufacturing Company, with the thought that he could interest Hall in participating with him in raising new capital in order to purchase the majority interest in AUTO held by Guaranty, settle AUTO's debts, reorganize and reconstitute it so that its business might be continued; otherwise, the minority stock would be worthless, since the total assets were not worth in 1935 more than approximately $ 400,000, which represented about 1/5 of the indebtedness to the Ryan Estate.
Thompson and Hall, as a result of their conferences, endeavored to interest others in their plan of reorganization. Discussions were had with Savage Arms Company, Remington Arms Company, Hallgarten & Company, Fenner & Beane, Ungerleider, Van Alstyne, Noile & Company, Cohu & Company, and many other corporations and financial institutions in New York, Detroit and Washington. Each discussion ended in a refusal to invest.
In January, 1939, Hall conferred with Russell Maguire, of Maguire & Co., an underwriter and dealer in securities in New York City, relative to financial assistance for AUTO. A summary letter was given Maguire, after which Hall arranged a meeting with Maguire, Colonel Thompson and Thomas A. Kane, AUTO's general counsel. Repeated conferences were held which resulted in an understanding between Thompson, representing the minority stockholders, and Maguire to form a new corporation to manufacture and sell the "Tommy Gun." The new corporation was to acquire all of the outstanding stock of AUTO, including the complainant's stock and the 18,505 shares of AUTO stock, together with the promissory notes and the chattel mortgage securing the same, held by Guaranty.
As to the compensation that Maguire & Co. was to receive, it was suggested that it take an option from Guaranty on the Ryan shares and indebtedness and sell the same to a new corporation to be organized at a stepped-up price. The understanding further provided that Maguire would enter into an underwriting agreement for the purchase of 300,000 shares of the new corporation's stock at $ 2.00 per share and receive an option of an additional 80,000 shares, and that, when the new corporation acquired 100% of the minority stock of AUTO, they (Thompson and Maguire) would cause the new corporation to cancel AUTO's indebtedness, dissolve it, and continue to operate as AUTO's successor. The understanding further provided for the organization and capitalization of the new corporation, for the determination of its executive personnel, its officers' compensation, and the composition of its board of directors.
Maguire called to see Mr. Van Vleck, a vice-president of Guaranty in charge of the Ryan Estate. Their negotiations lasted for a considerable time. Finally, Van Vleck agreed to sell the Ryan holdings (stock and indebtedness) for $ 529,000, but insisted the transaction be with the new corporation. On February 2 1939 the tentative results of the negotiations were summarized in a...
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