Cottrell v. Pawcatuck Co.
| Decision Date | 28 September 1955 |
| Docket Number | No. 465,465 |
| Citation | 116 A.2d 787,35 Del.Ch. 309 |
| Parties | Helen E. COTTRELL, Plaintiff, v. The PAWCATUCK COMPANY (formerly the C. B. Cottrell & Sons Company), a Delaware Corporation, Harris-Seybold Company, a Delaware Corporation, Donald C. Cottrell, Ridley Watts, Arthur M. Cottrell, Jr., and Charles P. Cottrell, Jur., Defendants. Civil Action |
| Court | Court of Chancery of Delaware |
Arthur G. Logan and Aubrey B. Lank of Logan, Marvel, Boggs & Theisen, Wilmington, and A. A. Berle, Jr., Rudolph P. Berle and Robert H. Seabolt, of Berle, Berle, Agee & Land, New York City, for plaintiff.
Henry M. Canby and Louis J. Finger, of Richards, Layton & Finger, Wilmington, for defendants, The Pawcatuck Company, and others.
Richard F. Corroon, of Berl, Potter & Anderson, Wilmington, and Paul J. Bickel and Elmer Jacobs, Cleveland, Ohio, for defendant Harris-Seybold Company.
SEITZ, Chancellor.
Plaintiff brought this action as a stockholder of what was then the C. B. Cottrell and Sons Company 1 ('old company') to enjoin a sale of its 'non-liquid' assets to the other corporate defendant, Harris-Seybold Company ('Harris'). Actually the assets were sold to what is now a wholly owned subsidiary of Harris, here designated as the 'new company'.
For reasons set forth in the Court's opinion, plaintiff did not obtain a restraining order or preliminary injunction preventing the consummation of the sale. See Cottrell v. Pawcatuck Co., Del.Ch., 106 A.2d 709.
Subsequent to the consummation of the sale this case was tried and this is the decision after final hearing. Plaintiff still seeks rescission of the contract and restoration of the status quo. She seeks, alternatively, damages against all the individual defendants, (directors of the old company) against Harris and against the new company. Plaintiff claims that the purchase price specified in the agreement of November 9, 1953, was grossly inadequate and that the agreement was executed by the old company acting through its majority directors and majority stockholders in reckless disregard of and deliberate indifference to the rights of the minority stockholders. Defendants deny the charges.
Preliminarily, I conclude that plaintiff has the burden of proof and while the directors and majority stockholders owed a fiduciary duty to the plaintiff nothing appears which would divest their actions of the presumption of good faith. The stock ownership of the directors and the possibility that some of them would continue with the new company do not destroy this presumption. This has been repeatedly held in Delaware. Bennett v Breuil Petroleum Corp., Del.Ch., 99 A.2d 236.
Plaintiff first claims that there was no valid director approval of the agreement of sale as required by the Statute, 8 Del.C. § 271. Plaintiff says some of the directors lacked knowledge of values and proceeded to vote approval though uninformed. Time does not permit an analysis of the situation. But I conclude that the action taken at the directors' meeting of November 12, 1953 to authorize the sale of assets did not violate the Delaware Statute, 8 Del.C. § 271. See Allied Chemical & Dye Corporation v. Steel & Tube Co., 14 Del.Ch. 64, 122 A. 142. It is true that not all the directors were fully conversant with all the value factors involved. But that does not mean the approval is invalid. See Schiff v. RKO Pictures Corp., Del.Ch., 104 A.2d 267, 268, at page 279. To the extent lack of knowledge is material, I think it more appropriate to consider it in connection with the question of the alleged fraud in the fixing of the purchase price.
It appears that the majority stockholders of this essentially 'family' corporation decided to sell the stock but when it appeared that not all the stock could be sold the 'deal' was converted into a sale of assets. Essentially the 'selling' majority group of stockholders were interested in receiving a sum which would give them $500 per share for their stock but this does not mean that the aggregate figure was unrelated to their opinion as to the reasonable value of the assets sold.
This is a typical case where each side emphasizes certain value factors and minimizes others, leaving the Court the task of sorting out these various factors and thereafter according them appropriate weight. The imponderables and pitfalls inherent in this process are noted in Bonbright, Valuation of Property, p. 251, et seq.
The agreed purchase price for the assets purchased amounted to $3,553,997 subject to certain inventory adjustments which ultimately reduced the price to $3,194,448. The purchaser paid the old company by cash, by certain of its shares of stock, and by the assumption of its liabilities. The old company retained assets worth about $2,500,000.
Plaintiff claims that the going concern value of the assets sold, which in reality constituted the business and inventory, amounted to at least $5,650,000. Defendants contend that the going concern value was not in excess of $4,000,000 and probably less.
I have no doubt that here the going concern value is vastly more important than book value. Compare Allied Chemical & Dye Corporation v. Steel & Tube Co., above. The disparity in the going concern value between that suggested by plaintiff and that urged by defendants is so great that not even in a 'valuation' case can both be reasonable.
Plaintiff's expert stated that the going concern value of the assets sold came to $5,650,000. The general basis for his figures are shown by the following figures taken from plaintiff's brief:
Earning Value $6,150,000
Rockets Value 300,000
($6,450,000)
Less: Adequate Cash for Working Capital purposes and therefore 800,000
required to be advanced by the Purchaser in order for the
business to function
Going Concern Value of the assets sold $5,650,000
Since 'earnings value' is the substantial item involved in the chart let us see how this figure was reached. The testimony was that this emerged from the following process:
1. A three year moving average 2 from 1946 to 1953 was compiled, using the figures for the annual net income before income taxes.
2. The average was charted, and on the basis of the expert's evaluation of future prospects the curve was levelled off at $1,175,000 per annum exclusive of profits from rocket operations (hereafter discussed).
3. The projected annual net profits figure of $1,750,000 was reduced by estimated annual taxes of $611,000 leaving an estimated net annual income after taxes of $564,000, once again, exclusive of rocket profits.
4. The expert then applied several methods and various rates of capitalization to this figure and presumably came up with the earnings figure of $6,150,000 to which was added $300,000 for rockets and from which was deducted an item of $800,000 representing, says plaintiff, the additional working capital required to be advanced by the purchaser. The resultant figure is $5,650,000 which plaintiff says is the minimum going concern value of the assets sold.
In her brief plaintiff has treated the $300,000 rockets' profit as an unrestricted plus in arriving at going concern value. This is contrary to the report of plaintiff's own expert. The report of plaintiff's expert indicates that the rocket profits are to be considered for two years only and the estimated figure is before taxes.
I pass by the foregoing infirmities in plaintiff's approach and consider the reasonableness of plaintiff's going concern value figure of $6,150,000. Necessarily implicit in the earnings value used by plaintiff's expert is a capitalization rate of about eleven times the estimated net annual income after taxes of $564,000. Plaintiff contends this is a reasonable capitalization rate.
Defendants claim that seven or eight times such earnings would be the highest justified for this corporation. Eight times would amount to $4,512,000. If we add some reasonable figure for rockets' profits (I take $75,000) we arrive at a figure of $4,587,000. From this we deduct the $800,000 which plaintiff admits the purchasing corporation had to advance (since it took the business without its cash) and we come to a going concern value for the assets sold of $3,787,000 for which the purchaser paid $3,194,448. This disparity is substantial but if we adopt a capitalization figure of seven we arrive at a figure approximating the amount actually received for the assets sold.
Thus, assuming without deciding that plaintiff's estimate of...
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