Finch v. Warrior Cement Corpo.

• Decision Date: 08 February 1928
• Citation: 16 Del.Ch. 44,141 A. 54
• Court: Court of Chancery of Delaware
• Parties: H. C. FINCH, MINNIE H. STEUERWALD and OSCAR GILBERTSON, v. WARRIOR CEMENT CORPORATION, a corporation of the State of Delaware; GULF STATES PORTLAND CEMENT COMPANY, a corporation of the State of Delaware; A. C. DEER, as President; S. C. STEWARD, as Vice President; and F. W. BOLEY, as Secretary and as Directors, PAUL S. STEWARD, F. A. STEPHENSON, CHARLES CLOSZ, H. I. PRUSSIA, J. W. WINALL, of the Warrior Cement Corporation. ALICE L. STEUERWALD, v. WARRIOR CEMENT CORPORATION, a corporation of the State of Delaware, A. C. DEER, H. I. PRUSSIA, F. A. STEPHENSON, F. W. BOLEY, C. S. STEWARD, PAUL S. STEWARD and A. B. WILDER

141 A. 54

16 Del.Ch. 44

H. C. FINCH, MINNIE H. STEUERWALD and OSCAR GILBERTSON, v. WARRIOR CEMENT CORPORATION, a corporation of the State of Delaware; GULF STATES PORTLAND CEMENT COMPANY, a corporation of the State of Delaware; A. C. DEER, as President; S. C. STEWARD, as Vice President; and F. W. BOLEY, as Secretary and as Directors, PAUL S. STEWARD, F. A. STEPHENSON, CHARLES CLOSZ, H. I. PRUSSIA, J. W. WINALL, of the Warrior Cement Corporation. ALICE L. STEUERWALD, v. WARRIOR CEMENT CORPORATION, a corporation of the State of Delaware, A. C. DEER, H. I. PRUSSIA, F. A. STEPHENSON, F. W. BOLEY, C. S. STEWARD, PAUL S. STEWARD and A. B. WILDER

Court of Chancery of Delaware, New Castle

February 8, 1928

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

STATEMENT OF THE CASES. These two suits, though setting up different causes of action, were so related in respect to the facts involved that they were heard together. Each came on to a final hearing upon amended bill, amended answers, testimony taken orally before the Chancellor, depositions and exhibits all making a voluminous record.

The transaction out of which the two suits arise is the transfer by Gulf States Portland Cement Company, a Delaware corporation (hereinafter referred to as Gulf), of all its assets to Warrior Cement Corporation, a Delaware corporation (hereinafter called Warrior), and certain acts done by the latter and some of its officers after the transfer.

The following brief recital will serve as a sufficient setting of facts to make the ensuing opinion understandable:

Gulf was incorporated in 1918 for the purpose of manufacturing and selling cement. At the time of the transfer of its assets to Warrior, its outstanding capital was 11,425 shares of seven per cent. cumulative preferred stock, each of the par value of $ 100, and 9,569 shares of common stock of no par value. At that time it had outstanding a fixed bonded indebtedness of $ 146,000. The affairs of Gulf became such that its officers and directors concluded that something had to be done to bring new money into the enterprise before the company could hope to continue in business. Various plans looking to a reorganization and further financing were suggested but came to naught. In January, 1925, Stephenson, one of the Gulf stockholders, met the defendant A. C. Deer in Chattanooga, Tennessee. Deer was a successful cement man of practical experience, who by reason of dissension in Signal Mountain Portland Cement Company had a short time before severed his connection with that concern, he having laid out and developed the construction of its plant and served as its manager. Stephenson, who had just returned from a meeting of the Gulf directors at their plant in Demopolis, Alabama, told Deer the Gulf people were considering a plan of reorganization or refinancing of their company and asked Deer if he was willing to formulate an offer of some reorganization scheme to the Gulf. Deer agreed to meet the directors then at Demopolis if they would come up to Chattanooga. On January 30, 1925, four of the Gulf directors with Stephenson accordingly met Deer in Chattanooga for a conference. Deer made them a proposition, but it was rejected. Thereafter Deer and the defendant C. S. Steward, who had been vice president of Signal Mountain Portland Cement Company and had severed his connection therewith, became interested together in securing location for the site of another cement company which they thought of organizing. Several sites were examined by one or the other of them, and various localities in the Selma chalk fields in Alabama were considered. In June, 1925, while Deer was in the vicinity of Demopolis, where the Gulf plant was situated, for the purpose of securing options on lands which in his prospecting he had located, he came across one of the Gulf directors who was down there for the purpose of attending a meeting of the Gulf board at Demopolis the next day. This director, the defendant Closz, tried to arrange for the directors to meet Deer, but failed. Deer, however, went over to Demopolis. Without going into details, it is enough to say that Deer and the Gulf directors reopened discussions upon the possibility of Deer's submitting a plan to rehabilitate the Gulf's affairs. The upshot was that after about three days of negotiations which involved proposals and counter-proposals, Deer submitted to the Gulf board the following proposal, which was accepted as shown at the foot thereof:

"Demopolis Ala., June 18, 1925.

"Proposal of A. C. Deer to Gulf States Portland Cement Co.

"To Gulf States Portland Cement Co., and its Stockholders:

"I make you the following proposition:

"OPTION.

"You to give me an option for four months from and after its approval in legal form by you, to purchase all the assets, good will, and property of every description owned by the corporation, I to assume all the corporation's liabilities, upon the following terms and conditions:

"NEW CORPORATION.

"If, within the said four months, I exercise said option, I am to cause to be chartered and organized a new corporation with a capital stock of $ 750,000.00, 8% preferred stock and 20,000 shares of no par common stock. All said stock is to vote equally. The new corporation is to issue $ 750,000.00, 7% 15 year first mortgage bonds, with a sinking fund to be provided annually for the purpose of redeeming said bonds at maturity, or earlier at any interest bearing date.

"DISPOSITION OF PREFERRED STOCK.

"An audit of the present company's books and quick assets is to be made as of July 1, 1925. Based on this audit, plus any additions at the time this option is exercised, I am to cause the new company to pay to the present company, for its assets, etc, preferred stock of the new company, as above described, of equal value,--the said stock is to be distributed to the preferred stockholders in the present company in proportion to their stock in the present company. I estimate this will give the present holders of preferred stock from 60 to 65 cents on the dollar of their present stock, but guarantee a minimum of 60 cents on the dollar.

"The balance of the preferred stock is to remain in the treasury, subject to the control of the directors of the new company.

"DISPOSITION OF COMMON STOCK.

"The 20,000 shares of common stock in the new company is to be issued to me, in consideration of my services in promoting the new company, assigning to it this option to buy from you, and granting to the new company the exclusive right to use in the Alabama chalk fields a waste heat dryer device or method with air seals, perfected by me. I estimate this dryer will save to the new company, as compared to the present dryer operation of the company, between 30 and 40 lbs of coal to a barrel of cement produced. This should amount to a saving of $ 50,000.00 to $ 60,000.00 per year.

"From this common stock I propose to give to the holders of common stock in the present company at the rate of 1/2 share to each common share of common stock held in the present company.

"DISPOSITION OF BONDS

"I will cause the new company to contract for the sale of its bonds at a commission not to exceed 10%. I propose to actively assist in the sale of these bonds and for that purpose to aid the bond salesmen in forming a syndicate to buy the first $ 300,000.00 of bonds. I am to provide 6,000 shares of said common stock in the new company to be given to purchasers of these first $ 300,000.00 of bonds at the rate of 2 shares of common stock for each $ 100.00 of bonds bought.

"The prior right to buy $ 100,000.00 of these bonds at $ 95.00 per $ 100.00 is to be given to the stockholders in the present company for 30 days after the approval of this option. In case of oversubscription, the subscriptions shall be prorated.

"After the sale of the first $ 300,000.00 of bonds, I will provide the necessary common stock bonus, not to exceed 1 share of common stock for the purchaser of each $ 100.00 of bonds.

"Excepting the common stock delivered to purchasers of bonds and to stockholders in the present company, common stock is to be held in my name and not to be sold or transferred therefrom until the financing of the new company is completed.

"TIME OF ORGANIZATION

"Immediately upon the approval of this option, I propose to begin the plans for the sale of said bonds, and am to cause the organization of the new company when the first $ 300,000.00 of said bonds have been subscribed.

"DISPOSITION OF REVENUE FROM BONDS

"The revenue from the sale of said bonds is to be used, first in paying off the present bonds as far as necessary, and approximately $ 500,000.00 is to be used in rebuilding the present plant into a modern plant, substantially as per layouts heretofore submitted to the present company by me. Any balance is to be added to working capital.

"DEER'S SERVICES

"I will serve as president and general manager of the new company, without salary, until the new plant is in production. In this capacity, I will supervise the construction of the new plant and manage the operation of the present plant until the new plant is put into operation. When the new plant is in operation, the directors are to fix my compensation.

"The new company to pay my necessary traveling expenses and other expenses incurred in carrying on the company's business.

"BOARD OF DIRECTORS

"The directors of the new company are to be eleven in number, six of whom shall be elected from stockholders in the present company and five from new stockholders.

"EXPENSES PRIOR TO ORGANIZATION

"All expenses prior to the organization of the company, incurred by me, shall be paid by me, and if this option is not exercised by me, I am to make no claim against the present company for any...