Elster v. American Airlines

Decision Date14 October 1953
Citation34 Del.Ch. 94,100 A.2d 219
PartiesELSTER et al. v. AMERICAN AIRLINES, Inc.
CourtCourt of Chancery of Delaware

Robert C. Barab, of Wilmington, for plaintiffs.

Richard F. Corroon, of the firm of Berl, Potter & Anderson, of Wilmington, and Malcolm A. MacIntyre and Harold M. Childers, of the firm of Debevoise, Plimpton & McLean, of New York City, for defendant.

BRAMHALL, Vice-Chancellor.

The amended complaint filed by plaintiffs alleges that plaintiff William Elster was the owner and holder of shares of common stock of defendant since June of 1951, and that plaintiff Anna F. Cohen was the holder of shares of defendant since February of 1950. It is further averred in the complaint that on or about September 12, 1950, defendant granted options to 30 of its executive employees to purchase a total of 143,000 shares of its common stock at a price of $11.70 per share, and that on or about May 21, 1952, the defendant granted further options to 289 of its executive and supervisory employees to purchase a total of 105,000 shares of its common stock at a price of $12.50 per share.

According to the complaint, plaintiffs' action is based upon the following facts: All of said options are exercisable immediately upon their issuance, with no requirement that the respective optionees remain in the employ of defendant for any specified time. The option plans and the issuance of the options, as adopted by the board of directors of defendant, were in each instance made subject to the approval of the stockholders. At the meeting of the stockholders at which the option plans were presented for approval a substantial minority thereof voted against the plan, the stock of plaintiffs not being voted in favor thereof.

It is also alleged in the complaint that the granting of these options constitutes a gift of valuable corporate assets in that the corporation did not receive from the respective optionees any valid or sufficient consideration in exchange therefor; that the market price of defendant's common stock at the time of the exercise of portions of these options substantially exceeded the option price; and, that no demand has been made upon the managing directors of defendant to rescind the outstanding options because such demand would have been futile, inasmuch as some of the options were issued to directors of defendant and said directors would not take action which might result in a declaration that their own earlier acts were illegal. It is also averred in the complaint that failure to enjoin defendant will result in irreparable injury to defendant and its stockholders.

This court is asked to enjoin defendant from honoring the exercise of the option rights, to direct defendant to take appropriate steps or institute appropriate proceedings to cancel or reacquire such shares of stock as have been issued pursuant to said options or to recover for defendant such profits as may have been made by any resale of stock acquired by the exercise of said options.

Defendant prays for an order, pursuant to Rules of Court of Chancery, Rule 56, Del.C.Ann., directing this court to order the dismissal of the complaint with respect to plaintiff Anna F. Cohen, on the ground that she has ratified the granting of the options of which she complains. Defendant further prays for an order pursuant to Rule 56 for summary judgment, determining that the options, even if granted without consideration, are valid and binding as between the defendant and the optionees under the laws of the State of New York, which defendant contends, are applicable to the enforcibility and validity of stock options as between defendant and the optionees.

Defendant under Rule 12(b)(6) of this court has moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted upon the ground that the prayer of the complaint is solely for injunctive relief, whereas, any injury resulting from the exercise of these options can properly be the subject only of a claim for monetary damages from the directors authorizing the issuance of the options or from the optionees. Defendant further prays for an order pursuant to Rule 23(b), dismissing so much of the complaint on the part of the plaintiff William Elster as concerns the alleged grant of options by defendant on September 12, 1950, prior to the time plaintiff Elster became a stockholder.

I shall first consider the motion for summary judgment as to plaintiff Anna F. Cohen. It is now conceded by both plaintiffs that the stock of Anna F. Cohen was voted in favor of the option plans which she now seeks to attack.

It is well established that a stockholder cannot complain of corporate action in which, with full knowledge of all the facts, he or she has concurred. Finch v. Warrior Cement Corporation, 16 Del.Ch. 44, 141 A. 54. There is no averment in the complaint of any failure on the part of defendant, or of any of those charged with its management, to make full disclosure of all the facts relating to the option plans sought to be attacked. According to the affidavit offered by defendant, which is not disputed, all facts pertinent to the option plans had been placed upon the public records of the New York Stock Exchange and had been forwarded to every stockholder of record of defendant, as required by the regulations of the Securities and Exchange Commission. She therefore had ample notice of all pertinent facts surrounding the adoption of the option plans at the time the shares which she held were voted in favor thereof. Goldboss v. Reimann, D.C.S.D.N.Y., 55 F.Supp. 811.

I therefore conclude that plaintiff Anna F. Cohen has no standing to attack the options issued according to the stock option plan and that summary judgment must be entered against her. Hereafter in this opinion references to 'plaintiff' will refer solely to plaintiff William Elster.

I next consider the question of whether or not the present action is a stockholders' derivative action or an action for the protection of the individual rights of plaintiff. Defendant contends that as to the options granted in September of 1950 the complaint is insufficient on the ground that this is a derivative action and since plaintiff acquired his stock subsequent to September, 1950, plaintiff is prevented under Rule 23(b) of this court from pressing this action as to that option plan. Plaintiff contends that the action is not a derivative action and that therefore Rule 23(b) does not apply. He further states that even if this court should decide that the action is derivative, he would not be prevented from proceeding with his action as to the first option plan because, as he alleges, the wrong to plaintiff is a continuing one.

Certain aspects of the complaint will first be noted. The action is solely against the defendant and does not include the directors and officers of defendant. The injuries of which plaintiff complains, unless we except plaintiff's claim as to the dilution of his stock, consist entirely of injuries to the corporation and its stockholders as a class. Any injury which plaintiff may receive by reason of the dilution of his stock would be equally applicable to all the stockholders of defendant, since plaintiff holds such a small amount of stock in proportion to the amount of stock outstanding that the control or management of defendant would not be affected by the granting of these options, and, further, since there is no averment that the pre-emptive rights of plaintiff as a stockholder are affected by their issuance.

Rule 23(b) of this court provides, in substance, that in any action which may be brought by a stockholder to enforce a secondary right in a corporation it shall be averred in the complaint that the plaintiff was a stockholder at the time of the transaction of which he complains or that his stock thereafter devolved upon him by operation of law. It is further provided therein that the complaint shall set forth with particularity the efforts of plaintiff to secure from the managing directors, and, if necessary, from the shareholders, such action as he desires and his reasons for his failure to obtain such action or for not making such effort.

Plaintiff claims that the value of his stock will deteriorate and that his proportionate share of the stock will be decreased as a result of the granting and exercise of the stock options. Assuming plaintiff's contention is correct, this would apply to the stock of all other stockholders as well. There are cases, of course, in which there is injury to the corporation and also special injury to the individual stockholder. In such case a stockholder, if he should so desire, may proceed on his claim for the protection of his individual rights rather than in the right of the corporation. The action would then not constitute a derivative action. Witherbee v. Bowles, 201 N.Y. 427, 95 N.E. 27; Stinnett v. Paramount-Famous Lasky Corp., Tex.Com.App., 37 S.W.2d 145; Hammer v. Werner, 239 App.Div. 38, 265 N.Y.S. 172, 179. See Fletcher, Cyclopedia Corporations, (Perm.Ed.) Vol. 13, § 5921, p. 281. Under such circumstances, Rule 23(b) would not apply. Here the wrong of which plaintiff complains is not a wrong inflicted upon him alone or a wrong affecting any particular right which he is asserting,--such as his pre-emptive rights as a stockholder, rights involving the control of the corporation, or a wrong affecting the stockholders and not the corporation,--but is an indirect injury as a result of the wrong done to the corporation. Bennett v. Breuil Petroleum Corp., Del.Ch., 99 A.2d 236, opinion of Chancellor Seitz dated August 11, 1953; Ainscow v. Sanitary Co. of America, 21 Del.Ch. 35, 180 A. 614; Miller v. Loft, Inc., 17 Del.Ch. 301, 153 A. 861; Sohland v. Baker, 15 Del.Ch. 431, 141 A. 277, 58 A.L.R. 693; Fleer v. Frank H. Fleer Corporation, 14 Del.Ch. 277, 125 A. 411; Wyles v. Campbell, D.C.Del.1948, 77 F.Supp. 343.

Plaintiff distinguishes ...

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