Fidanque v. American Maracaibo Co.

• Decision Date: 05 November 1952
• Citation: 33 Del.Ch. 262,92 A.2d 311
• Parties: FIDANQUE et al. v. AMERICAN MARACAIBO CO. et al.
• Court: Court of Chancery of Delaware

Page 311

92 A.2d 311

33 Del.Ch. 262

FIDANQUE et al. v. AMERICAN MARACAIBO CO. et al.

Court of Chancery of Delaware, New Castle County.

Nov. 5, 1952.

William S. Potter and James L. Latchum, of Berl, Potter & Anderson, Wilmington, and Robert B. Block and Francis S. Levien, New York City, for plaintiffs.

Alexander Nichols, of Morris Steel, Nichols & Arsht, and Stanley Law Sabel, and Daniel E. Chieco of Chadbourne, Hunt, Jaeckel & Brown, New York City, for defendant American Maracaibo Co.

Henry M. Canby, of Richards, Layton & Finger, Wilmington, for defendant Frederick R. Ryan.

BRAMHALL, Vice Chancellor.

Maracaibo is engaged in the production of crude oil and is the owner of royalties and other oil interests in west Texas, Venezuela and Colombia. The holdings in Venezuela and Colombia are designated respectively as the San Antonia de Guanipa concession and the Barco concession. For several years prior to February, 1951, by reason of a substantial indebtedness, Maracaibo was unable to expand its holdings in the oil field. In February of 1951, when this indebtedness was paid in full, Maracaibo then had sufficient cash with which to invest in any oil project which might seem attractive to its management and board of directors. With this purpose in mind it was considered advisable to place on the board of directors men with more experience in the oil industry. Around the middle of 1951 George Easley was made a director. Somewhat later Hadley Case was also added to membership of the board of directors.

It was also recognized that in such an expansion program more aggressive management would be required, since the then president, Frederick R. Ryan, who had been a director of Maracaibo since 1924, and its president since 1935, was then over 70 years of age, in poor health, and was admittedly unable to carry on in any project for the expansion of Maracaibo's interests. A standing committee was also created to consider the advisability of accepting any worthwhile project which might be offered. A number of projects were considered, all of which were for one reason or another eventually rejected. Hadley Case, who was about to become a member of the board of directors of Maracaibo, suggested that Maracaibo acquire his companies, stating that he would only be interested in such a proposition in the event that the management of Case Pomeroy should participate in the management of Maracaibo.

The directors of Maracaibo agreed to consider Case's proposal. It employed one Richard C. Dennis, an expert in appraising values of oil properties, to make a preliminary investigation of the Case Pomeroy properties, to use the result of another appraisal on the domestic properties of Maracaibo with respect to reserves, and to use his own studies and the report of another appraiser of the de Guanipa concession in appraising the South American properties. Dennis was further instructed to get in touch with the management of Case Pomeroy and obtain their basic data with reference to their properties.

Subsequent to the completion of his appraisal but prior to his report to the board of directors of Maracaibo, Dennis was informed by Easley, a director of Maracaibo, of the occurrence of certain events on the Case Pomeroy properties which Case claimed should be considered in the appraisal. Dennis was instructed by Easley to reconsider the properties involved by reason of this later development and make whatever appraisal he considered proper in the light of the later information. As a result of these later instructions, Dennis modified the appraisement by increasing the value which he had placed upon the properties of Case Pomeroy in question by the sum of $321,809.

Subsequently, after checking Dennis' report and obtaining advice from others experienced in the oil industry, the board of directors approved the execution of an agreement for the exchange of a block of stock of Maracaibo, amounting to 36.5764 per cent of its stock to be outstanding, to the stockholders of Case Pomeroy in exchange for all of the outstanding stock of Case Pomeroy, subject, however, to the approval of the stockholders of Maracaibo, at a meeting to be called for that purpose. At the same time the board of directors, in like manner, also approved a contract providing for the employment of Ryan as a consultant at a salary of $25,000 per year, and, further, that upon the death of Ryan, his widow, if she should then be living, should receive annually the sum of $5,000 for a period of five years or until her death, whichever event should first occur. A further consideration set forth in this contract was the agreement of Ryan not to engage, directly or indirectly, in any business competing with Maracaibo.

The board of directors of Maracaibo, after due notice, called a meeting of the stockholders of Maracaibo for May 20, 1952, to consider the advisability of these proposals. Prior to the meeting plaintiffs, as stockholders in Maracaibo, brought this action to enjoin Maracaibo from carrying into effect the exchange of stock as provided in the agreement for exchange of stock and from carrying into effect the employment of Ryan as a consultant. A restraining order was issued by this court in accordance with the prayer of the complaint. At the meeting of stockholders the agreement for exchange and the contract with Ryan were ratified by approximately 85 per cent of the shares of stock represented and approximately 57 per cent of the total outstanding stock of Maracaibo. A few days prior to the date set for the trial, by stipulation of counsel, Ryan was added as a party defendant to the cause.

The depositions, testimony and exhibits offered in evidence in the trial of this case are so voluminous that a discussion of the evidence in detail would be more confusing than helpful. I shall therefore confine my discussion of the testimony to the evidence which, in the consideration of the particular question, I shall consider to be pertinent.

Plaintiffs contend that the consummation of the agreement for the exchange of stock should be enjoined by reason of:

(1) The gross neglect of Maracaibo's interest on the part of the management and board of directors and in particular the alleged fraudulent actions of the director Hadley Case;

(2) The fact that the agreement for exchange of stock would in effect accomplish a merger of Maracaibo with the Case Pomeroy companies without compliance with the statutory requirements;

(3) The fact that the ratification of the action of the board of directors by the stockholders is ineffective because of inadequate consideration, the lack of knowledge on the part of stockholders of all the pertinent facts surrounding the adoption by the board of directors of the agreement for exchange and the fraud of Hadley Case.

Defendants contend:

(1) That the agreement for exchange was entered into in good faith and with due diligence, based upon full and adequate facts and the advice of independent and qualified experts;

(2) That the over-all values of the stock of the two companies are highly favorable to Maracaibo;

(3) That any issues which might have been raised as to the action of the board of directors of Maracaibo have been removed by the ratification of its stockholders.

In the determination of this case I am called upon to consider:

(1) Is the agreement for exchange of stock in effect a merger without compliance with the statutory requirements;

(2) Was there any fraud on the part of Hadley Case or others involved in the transaction;

(3) Did the directors of Maracaibo act in good faith and with due diligence;

(4) Does the contract between Maracaibo and Frederick R. Ryan constitute a gift or waste of corporate assets;

(5) What effect, if any, does the ratification by the stockholders of Maracaibo have upon the agreement for exchange of stock or the contract with Ryan?

1. Does this transaction constitute a merger?

Obviously the transaction is not a merger under Sec. 59, Rev.Code 1935, § 2091, since no attempt has been made to comply with that section of the General Corporation Law. Even if there had been such an attempt, it would not have been successful because the agreement was not ratified by two-thirds of the stockholders of Maracaibo as required by the statute. Since the statute sets forth in detail the procedure to be followed in the event of a merger, it is not a common law merger. See Argenbright v. Phoenix Finance Co. of Iowa, 21 Del.Ch. 288, 187 A. 124, 126. Neither can I agree with plaintiffs' contention that it is a de facto merger. Strictly speaking, a merger means the absorption of one corporation by another, which retains its name and corporate identity with the added capital, franchises and powers of the merged corporation. It is the unit of two or more corporations by the transfer of property to one of them, which continues in existence, the others being merged therein. Argenbright v. Phoenix Finance Co. of Iowa, supra; Fletcher Cyc. Corp., (Perm.Ed.) Vol. 15, Sec. 7041, p. 8.

In this case Maracaibo acquired all the outstanding capital stock of the Case Pomeroy companies, issuing in exchange therefor its own stock. The agreement is between Maracaibo and the stockholders of Case Pomeroy. There is no provision for the liquidation or dissolution of Case Pomeroy. On the contrary, they are continuing to operate as independent units. According to the plan of the management of Maracaibo, because of an unfavorable tax situation, the management of Maracaibo intends to develop its holdings through Case Pomeroy, in which this tax situation does not exist. It is therefore conceivable that Case Pomeroy in the future might even be more active than formerly.

Whether a particular transaction is in reality a merger or otherwise depends to a great extent on the circumstances surrounding each particular case and in determining the question all the elements of the transaction must be considered. There is no magic in the words...