Capital Investments, Inc. v. Whitehall Packing Co., Inc.

• Decision Date: 29 June 1979
• Docket Number: No. 76-683,76-683
• Citation: 280 N.W.2d 254,91 Wis.2d 178
• Parties: CAPITAL INVESTMENTS, INC., Plaintiff-Respondent, v. WHITEHALL PACKING COMPANY, INC., Daniel Meilman, Myron Meilman, and Jack Meilman, Defendants-Appellants.
• Court: Wisconsin Supreme Court

Page 254

280 N.W.2d 254

91 Wis.2d 178

CAPITAL INVESTMENTS, INC., Plaintiff-Respondent, v. WHITEHALL PACKING COMPANY, INC., Daniel Meilman, Myron Meilman, and Jack Meilman, Defendants-Appellants.

No. 76-683.

Supreme Court of Wisconsin.

Argued May 30, 1979.

Decided June 29, 1979.

Bradley D. Armstrong, John Walsh (argued) and Brynelson, Herrick, Gehl & Bucaida, Madison, on brief, for defendants-appellants.

LaVern G. Kostner (argued) and Kostner, Ward, Galstad & Koslo, Arcadia, on brief, for plaintiff-respondent.

COFFEY, Justice.

The plaintiff-respondent, Capital Investments, Inc., a capital risk lender, (hereinafter Capital) commenced this action against Whitehall Packing Company, Inc. and its shareholders (hereinafter collectively referred to as Whitehall) seeking the specific performance of certain provisions of a financing agreement executed December 28, 1972. Capital alleged that in June, 1976 Whitehall breached the provisions of their contract by refusing to elect to its Board of Directors two designees of Capital, as provided for in the conditions of the loan indenture. Whitehall contends that pursuant to the terms of the loan agreement Capital's right to Board representation was terminated in March, 1976.

During 1972 Whitehall became interested in the acquisition of a meat processing facility in Sioux Falls, South Dakota. Financing for this project was sought from Capital who submitted a memorandum proposal in November 16, 1972 outlining the terms and conditions upon which Capital would make the loan to Whitehall. During the succeeding month representatives of the parties met on several occasions to discuss the terms of the loan agreement. The Whitehall representatives, although objecting, were advised by their counsel to acquiesce in the board representation provision requested by Capital, lest they upset the proposed financing agreement.

On December 26, 1972 all of Whitehall's shareholders consented to and signed a document entitled an "Informal Action of Directors and Shareholders" authorizing the defendants' Board of Directors to enter into a $1,100,000 loan agreement with Capital. This memorandum document ("informal action") further provided for the amendment of Whitehall's Articles of Incorporation. The amendment adopted "The majority affirmative voting requirements permitted by sec. 180.25 of the Wisconsin Business Corporation Law." The document did not authorize the seating of any Capital representatives on the Whitehall Board of Directors.

Thereafter, Whitehall and Capital on December 28, 1972 entered into a financing contract denominated an "Agreement Respecting First Mortgage Notes and Warrants for the Purchase of Common Stock." The financing agreement, drafted by Capital's legal counsel, was essentially a detailed expansion of the November 16, 1972 memorandum proposal which had included Capital's request for board representation. The Terms of the financing agreement provided that Whitehall would borrow $1,100,000 from Capital and three other investment companies (Moramerica Capital Corp., Catholic Family Life Ins. Co. and Abbott Capital Corp.). In consideration of the loan, Whitehall agreed to issue mortgage notes maturing December 12, 1985 and bearing interest at 11% Per annum and to issue ten year Stock Purchase Warrants ¹ on 436 shares of the corporation's common stock with a par value of $100. The purchase price for the stock subject to the warrants was to be determined by the stock's book value at the time the warrants were exercised. The contract specified that Capital would receive $500,000 worth of the mortgage notes and stock warrants for 242 shares of the Whitehall common stock. The loan contract set forth the division of the remaining notes and warrants among the other investment firms.

The language contained in Article 5.1 of the agreement further provided for Capital's right to designate two individuals to be elected to the five member Whitehall Board of Directors "so long as any portion of the stock is held by any of the Purchasers." ("Stock" refers to that purchased through the exercise of the Warrants.) This agreement, consistent with Capital's representation on Whitehall's Board of Directors, detailed that in certain areas of corporate management and control the two Capital designated directors would possess greater veto and decision-making powers than any of the other directors. Specifically, the prior written consent of the two Capital designated directors (referred to in the agreement as "The Noteholders' Representatives") was required in order for the appellant corporation to: (1) assume any further indebtedness or incur indebtedness totalling in excess of $4,500,000; (2) effect a material change in corporate management; (3) authorize the payment of dividends or the purchase, redemption or acquisition of outstanding shares of Whitehall's capital stock; (4) authorize a recapitalization of the corporate financial structure; (5) increase officer or director compensations; (6) enter into an employment contract for a period greater than two years or providing for more than a $10,000 a year salary; (7) establish or enter into a pension or profit sharing program; (8) discount or sell accounts receivable; (9) purchase or lease any fixed asset having a cost of more than $10,000 per fiscal year; (10) lease or sell any substantial portions of the corporate assets, property or business; (11) acquire any new subsidiaries; (12) enter into any contract in the ordinary course of business with any person, partnership or corporation related to the immediate family of any Whitehall shareholder, director or officer; (13) permit any shareholder, director or officer to engage in a competitive business.

At the next shareholder's meeting following the execution of the agreement, two representatives designated by Capital were elected to Whitehall's Board of Directors. The two Capital representatives continued to be elected to the Whitehall Board of Directors each of the succeeding years until 1976.

On March 31, 1975 Whitehall's indebtedness to the financing conglomerate was fully satisfied, thus extinguishing the mortgage notes. On March 6, 1976 Capital exercised all of its outstanding stock warrants and purchased a total of 242 shares of common stock. The exercise of Capital's right to purchase the stock warrants was in compliance with a 1974 contract modification that shortened the ten-year period for the stock purchase to one year following the satisfaction of the mortgage.

The total price for the 242 shares of stock was slightly more than $120,000 or a price per share of $496. Together with the one share of stock Capital owned prior to the exercise of the stock warrants, Capital's 243 shares of Whitehall common stock represents slightly more than 15% Of the outstanding voting shares in the corporation. The record is silent as to whether the remaining lenders (Moramerica, Catholic Family Life and Abbott) exercised the warrants they held pursuant to the 1972 agreement.

At the June, 1976 annual Whitehall corporate meeting including directors and shareholders, the two Capital representatives were not re-elected to the Board of Directors. The Whitehall shareholders relied on Article 14 of the 1972 agreement reciting that "All covenants, agreements, representations and warranties made herein . . . shall bind and inure to the benefit of the respective parties hereto . . ., so long as any of the notes or warrants are outstanding" in refusing to elect the two Capital representatives. Whitehall contends that with full payment having been made of the outstanding indebtedness to Capital and the other members of its conglomerate, extinguishing the mortgage notes, and the 242 stock warrants exercised, as of March 6, 1976 the contract obligation requiring two Capital representatives on the Board of Directors was terminated pursuant to Article 14 of the agreement.

The trial court rejected Whitehall's contentions finding no ambiguity between Articles 14, 5 and 5.1 of the agreement. The court further found that Article 14 providing for the continuation of the agreement "so long as any of the Notes or any of the Warrants are outstanding" did not control in terminating Capital's right to Board representation provided in Article 5.1 entitled "Representation on Board of Directors." The court noted the termination of the right to representation was specifically set forth in the following language of Article 5.1: "The obligations in this section shall continue in force as long as any portion of the Warranty Stock is held by any of the purchasers." Therefore, the court concluded that even though all the mortgage notes had been paid in full and the Stock Warrants fully exercised, Capital as an owner of Warrant Stock was entitled to the election of two designees in June, 1976. The decision of the court further states that Capital's right to board representation will continue as long as any of the Warrant Stock purchasers hold the stock. The court also concluded that the terms of the loan agreement, as ratified by subsequent corporate and shareholder action, constituted a lawful shareholder's agreement for the designation of two positions on the Board of Directors. The court noted that it is not contrary to public policy to recognize a substantial minority investment with voting rights disproportionate in comparison to its total stock holdings.

Issues:

1. Did the December 28, 1972 loan agreement provide that the respondent may designate two of the directors to be elected annually to the appellants' Board of Directors in perpetuity even though the loan's mortgage notes have been paid and all Stock Warrants exercised?

2. Is a provision in a corporate loan contract dealing with the selection of board directors and granting these directors greater voting rights contrary to the public policy underlying Ch. 180, Stats., the corporation's articles of amendments and bylaws?

The fundamental question...