Carey v. Pennsylvania Enterprises, Inc.

• Decision Date: 31 May 1989
• Docket Number: No. 88-5968,88-5968
• Citation: 876 F.2d 333
• Parties: CAREY, Edward, v. PENNSYLVANIA ENTERPRISES, INC.; Obara, Frank J., Jr.; Barbera, Michael J.; Ferrucci, Mark A. Appeal of Edward M. CAREY.
• Court: U.S. Court of Appeals — Third Circuit

Page 333

876 F.2d 333

CAREY, Edward, v. PENNSYLVANIA ENTERPRISES, INC.; Obara, Frank J., Jr.;

Barbera, Michael J.; Ferrucci, Mark A.

Appeal of Edward M. CAREY.

No. 88-5968.

United States Court of Appeals, Third Circuit.

Argued April 27, 1989.

Decided May 31, 1989.

H. Robert Fiebach, David M. Doret (Argued), Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pa., Bour, Gallagher, Foley, Cognette, Cowley & Douglass, Scranton, Pa., Gadsby & Hannah, Boston, Mass., for appellant.

Richard Z. Freemann, Jr. (Argued), Walter M. Einhorn, Jr., Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., for appellee.

Before SEITZ, SLOVITER and GREENBERG, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

This is a diversity case involving a dispute between a Pennsylvania corporation, Pennsylvania Enterprises, Inc. (PEI), and one of its shareholders, the resolution of which is governed by Pennsylvania law. The shareholder, Edward Carey, challenged the validity of a corporate election in which his position opposing the split of PEI's stock as proposed by management lost by a narrow margin. Thus, he commenced this action on October 31, 1988, in the district court to enjoin implementation of the result of the election. After a trial, the district court in a memorandum opinion upheld the management's position and on December 8, 1988, entered a final judgment denying Carey an injunction. Carey appeals from that order.

Carey presents several arguments to demonstrate that some of the votes counted in favor of the PEI management should have been disallowed, and other arguments that additional votes in his favor should have been counted. We conclude that Carey is correct in his assertion that the Dividend Reinvestment Plan (DRIP) votes, i.e., the votes of additional shares acquired by PEI shareholders by reinvestment of cash dividends, without which there was insufficient support to approve the stock split, were improperly counted. Thus, we will reverse the judgment of the district court without addressing any of Carey's other contentions, since their disposition could not change our result. ¹

I. FACTUAL AND PROCEDURAL BACKGROUND

Carey, a citizen of New York, owns or owned approximately 109,000 shares of PEI, a publicly held Pennsylvania corporation with its principal place of business in Wilkes-Barre, Pennsylvania. In 1987 and 1988 Carey, through a corporation he controlled, made several unsuccessful offers to buy PEI. Thereafter, as the district court found:

[o]n or about September 9, 1988, PEI announced to its shareholders that it intended to convene a special meeting of shareholders to be held on October 12, 1988 [in Wilkes-Barre] to vote upon a proposal to amend the Articles of Incorporation of PEI by authorizing an increase in the number of authorized shares of common stock from 5 million to 10 million shares; to reduce the stated value of said shares from $10 per share to $5 per share; and to authorize a split in the common stock on a 2 shares for 1 share basis.

Carey v. Pennsylvania Enterprises, Inc., No. 88-1777, slip op. at 5-6 (M.D.Pa. Dec. 8, 1988). Carey opposed this proposal, as he apparently considered that it would result in a wider distribution of PEI stock, making it more difficult for him to acquire the company.

Adoption of the amendment required the approval of the voters representing a majority of PEI's outstanding shares of stock, since there was no provision in PEI's articles of incorporation requiring a super-majority. See Pa. Stat. Ann. tit. 15, Sec. 1805 (Purdon 1988 Supp.). Thus, votes representing 1,350,171 of the 2,700,341 outstanding shares were required for the proposal to succeed.

The board of directors of PEI fixed September 2, 1988, as the record date for the meeting; thus the owner of each share as recorded on PEI's books at the close of business on that date was entitled to vote on the proposal at the October 12, 1988, meeting. See Pa.Stat.Ann. tit. 15, Sec. 1509 (Purdon 1967). The parties do not dispute the district court's finding that:

[a]s of the record date, 79,118 shares of the Defendant's stock were issued and outstanding under the Dividend Reinvestment Plan (DRIP). Manufacturer's Hanover Trust was the administrator of this plan and the shares were held by Loriot & Co. and Cede & Co., as nominees of the administrator. Loriot & Co. and Cede & Co. were listed on Defendant PEI's documents as the record holders of these shares. Carey, slip op. at 13.

Nor do the parties dispute that one of the provisions of the DRIP plan addressed who would be entitled to vote the shares in the plan as follows:

21. Will a participant be able to vote the shares held in his account under the Plan?

Yes, all of the participant's full shares--those registered in the name and those credited to the account of the participant under the Plan--will be included on one proxy mailed to the participant in the regular manner.

App. at 796 (emphasis in original).

Solicitation of proxies by PEI in support of the amendment began on or about September 9, 1988. As explained by PEI, "PEI's proxy form ... included both the record and DRIP shares held by each shareholder." Brief of Appellee at 20. ² Inasmuch as in almost every instance the owner of DRIP shares was also a record owner of other shares, a proxy distribution to the record owners covered the majority of the DRIP shares. After requesting a shareholder list from PEI on September 14, 1988, and receiving it approximately one week later, Carey on or about October 3, 1988, also began soliciting proxies in opposition to the management proposal from PEI shareholders. It is undisputed that since the shareholders' list showed Loriot and Cede as the record owners of the DRIP shares Carey was aware that they were the owners. ³ It is also not disputed, as found by the district court, that "[p]roxies for [the DRIP] shares ... were issued directly to the beneficial holders," Carey, slip op. at 13, rather than to Cede and Loriot and thus to the extent that the DRIP owners were record owners Carey's proxy forms should have reached them. However, PEI admits that Carey's proxy form did not state the number of DRIP shares owned by the shareholder. Brief of Appellee at 20. We also note that both management and Carey used professional firms to assist in the solicitation of proxies.

As authorized by the Pennsylvania Business Corporation Law.Pa.Stat.Ann. tit. 15, Sec. 1512 (Purdon 1967), PEI appointed as judges of the election three employees of the Corporation Trust Co. of Wilmington, Delaware: Frank J. Obara, Jr., Michael J. Barbera, and Mark A. Ferrucci. These three individuals were charged to oversee the conduct of the meeting and determine the results of the voting.

It is uncontested that the October 12, 1988, meeting began at approximately 10:00 a.m., and that the beneficial holders of DRIP shares cast their votes, which were counted by the judges of election. At approximately 11:09 a.m. the polls were declared closed by the chairman of the meeting, the president of PEI, with no objection being made by anyone present. ⁴ The meeting was then adjourned until November 22, 1988, when the certified results of the election were to be announced. ⁵

After the judges collected the votes cast, representatives of Carey and PEI management were permitted, from October 25 through October 27, 1988, to review the proxies and tally sheets used in the voting. The judges held hearings on October 28 1988, during which they ruled on challenges to votes and proxies by both Carey and the PEI management. Based on the rulings, it appeared that of the 2,700,341 outstanding shares, 2,226,147 had been counted and credited, and that the proposal had passed with 1,373,968 votes in favor, 829, 399 against, and with 28,780 regarded as abstentions. Since the proposal required 1,350,171 shares in favor, it seemed that PEI management had received support from 23,797 shares more than needed.

Carey contends that in calculating the results, the judges made several erroneous decisions. To affect the outcome of the election these decisions individually or in combination need only result in shifting a net 23,798 shares away from approval of the amendment.

One of Carey's challenges was that although the recordholders of the DRIP shares were Loriot and Cede, for voting purposes the judges wrongfully attributed these shares to their beneficial owners. This challenge was crucial inasmuch as invalidation of the affirmative DRIP votes would have reduced the affirmative vote to less than a majority of the outstanding stock in PEI. The election judges resolved this challenge against Carey, ruling:

It is obvious to the judges that Loriot & Co., holder of DR[I]P shares passed the right to vote shares to the participants in the Plan. This is evidenced by the inclusion of these shares in the management proxy, further evidenced by past practice of Loriot in all cases where it held such shares, as well as publication of this practice in public documents (not submitted to the judges, but known to them). The judges credited both management and opposition proxies with the appropriate DR[I]P shares due them. To disenfranchise a whole category of holder due to the lack of a formal appointment would be unfair, in our opinion. App. at 357. ⁶

Carey also made four other objections. First, he claimed that the judges refused to count 160,865 votes ⁷ received after the closing of the polls. Second, the judges accepted as valid, management proxy cards consisting of the actual telecopied reverse side of each proxy card, containing the shareholder's name, signature and vote, stapled to a photostated obverse side, containing the appointment language. Third, the judges counted all the shares of shareholders who voted by proxy telegrams by calling an 800 number, even though some of these telegrams did not include the number of shares owned. Fourth, although Carey's proxy materials were never delivered to the beneficial...