Gagliardi v. TriFoods Intern., Inc.
| Decision Date | 03 June 1996 |
| Docket Number | No. 14725,14725 |
| Citation | 683 A.2d 1049 |
| Court | Court of Chancery of Delaware |
| Parties | Eugene D. GAGLIARDI, Jr., Plaintiff, v. TRIFOODS INTERNATIONAL, INC., et al., Nominal Defendant, G.J. Hart, Frank A. Adams, Grotech Capital Group, Inc., Grotech Partners II, L.P., Grotech Partners III, L.P., Grotech Partners IIID, L.P., Grotech Partners IIIC, L.P., Don J. Casturo, Point Venture Associates, L.P., Point Venture Partners Pennsylvania, L.P., and Brian Fleming, Defendants. Civil Action . Submitted: |
ALLEN, Chancellor.
Currently before the Court is a motion to dismiss a shareholders action against the directors of TriFoods International, Inc. and certain partnerships and individuals that own stock in TriFoods. In broadest terms the motion raises the question, what must a shareholder plead in order to state a derivative claim to recover corporate losses allegedly sustain by reason of "mismanagement" unaffected by directly conflicting financial interests?
Plaintiff, Eugene Gagliardi, is the founder of the TriFoods, Inc. and in 1990 he induced certain persons to invest in the company by buying its stock. In 1993 he was removed as Chairman of the board and his employment with the company terminated. He continues to own approximately 13% of the company's common stock. The business of the company has, according to the allegations of the complaint, deteriorated very badly since Mr. Gagliardi's ouster.
The suit asserts that defendants are liable to the corporation and to plaintiff individually on a host of theories, most importantly for mismanagement. The matter is before the Court on defendants' motion to dismiss the derivative aspects of the complaint for failure to show that the preconditions established by Rule 23.1 for litigation of a derivative suit have been satisfied in this instance and, with respect to any alleged direct or individual claims, to dismiss those allegations for failure to state a claim.
To structure discussion of the issues raised by this motion, I address each of the six counts of the amended complaint seriatim, ruling on the legal sufficiency under Rule 12(b)(6) or Rule 23.1 as the case may be, before turning to the next count of the complaint. For the reasons set forth below, I conclude that, with the exception of a single claim that survives when read sympathetically in the light of a recent Supreme Court precedent (see Count II infra respecting breach of employment contract), the amended complaint is subject to dismissal at this time. To a very limited extent, as indicated below, I will permit the filing of a further amendment to correct deficiencies that may be correctable. (See Count III infra, respecting p 67(e) of the Amended Complaint).
The first count of the amended complaint alleges that Gerard J. Hart (TriFoods' former president), five other identified officers or employees of TriFoods, and other persons presently unknown were paid grossly excessive compensation. Only with respect to Hart is there any specificity. As to him it is alleged that "defendants paid him ... a salary of at least $245,000, expenses of an unknown amount and stock options of 880,768 shares." There is no allegation of the value of the options when granted (or at any other time). In addition, it is alleged that the company paid for an apartment for Hart ($3,600 per month), that later, when the company moved its offices to Connecticut, it paid to rent accommodations for Hart there at a similar price and that it leased two cars for his use. In terms of facts, that is all that is alleged.
These allegations, if proven, fail in my opinion to constitute a claim requiring the corporation to come forward and prove the reasonableness of the compensation paid. See Krebs v. California Eastern Airways, Inc., Del.Supr., 90 A.2d 652, 655 (1952); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 817 (1984); Wilderman v. Wilderman, Del.Ch., 315 A.2d 610 (1974) (); see also Michelson v. Duncan, Del.Supr., 407 A.2d 211 (1979); Steiner v. Meyerson, Del.Ch., 1995 WL 441999 (July 18, 1995).
To state a derivative claim for excessive compensation, a shareholder must either plead facts from which it may reasonably be inferred that the board or the relevant committee that awarded the compensation lacked independence (e.g., was dominated or controlled by the individual receiving the compensation), in which event proof of such allegations would cast upon the officer the burden to prove that the compensation paid was objectively reasonable in the circumstances or plead facts from which it may reasonably be inferred that the board, while independent, nevertheless lacked good faith (i.e., lacked an actual intention to advance corporate welfare) in making the award. No allegations concerning Hart's control, domination or fraudulent manipulation of the corporate process that fixed his compensation is made. In the absence of facts casting a legitimate shadow over the exercise of business judgment reflected in compensation decisions, a court, acting responsibly, ought not to subject a corporation to the risk, expense and delay of derivative litigation, simply because a shareholder asserts, even sincerely, the belief and judgment that the corporation wasted corporate funds by paying far too much.
The amended complaint falls very far short of this standard. Count I fails to state a claim upon which relief may be granted.
Count II joins two different claims of "fraud" under a single count. I will discuss them separately. The first concerns allegations of false statements to the board that caused plaintiff to be removed from office. The second concerns alleged false statements made by Hart to the Connecticut Development Authority.
The allegations respecting false statements to the board are essentially as follows: Hart and Gagliardi were the two most senior officers of the company. They had come to disagree about fundamental business questions. Gagliardi criticized decisions or actions taken by Hart. Hart announced to the TriFoods board that he had received an offer of employment with Con-Agra that he was prepared to accept (or had accepted). Hart stated to the board that "either Hart or Gagliardi had to go." As a result, Gagliardi was fired in 1993. It was untrue "that Hart had accepted an offer ..."; "in fact Hart had not received such an offer." This untruth was stated to the board with intent to deceive. As a result, TriFoods is in breach of Gagliardi's employment contract.
The rights asserted in this aspect of Count II are individual. Do these allegations state a claim? In the absence of an allegation of a contractual term in Mr. Gagliardi's employment relation with TriFoods, I assume that the contract referred to was an at-will contract. It is well settled that, generally, under an at-will contract, an employer may terminate an employee without good cause and more specifically, it is clear that an employer may choose between employees who do not work well together, and terminate one of them without justifying that choice to the fired employee or a court of law. E.I. DuPont de Nemours & Co. v. Pressman, Del.Supr., 679 A.2d 436 (1996) (en banc ). Certainly, the allegation that Hart told the board "either Hart or Gagliardi had to go" forced on the board the obligation to make some choice. Can the members of the board or the corporation have liability, in the context of an at-will employment contract, based on the substance of that choice, when the only allegation is that the board has been deceived? In my opinion such allegations fail to state a claim for breach of contract against the corporation or the members of its board. Pressman does acknowledge potential liability for an employer who terminates an at-will employee through a process that involves deception and lies concerning the plaintiff, but that was a case in which the corporation itself was apparently actively involved in deception and the deception involved plaintiff's job performance. Here, the allegation is only that the board and corporation were deceived as to a background fact, not the material fact that Hart and Gagliardi could not (in Hart's view) work together effectively.
Defendants Hart and Adams are alleged to be the active agents of deception. As to the claim against them for damages arising from the termination of Gagliardi's employment, it conceptually is not a fraud claim as to plaintiff, since the allegedly false statement was made to a third person (the board) and, if it was material to the board (the presence of the "him or me" statement perhaps makes the materiality of the Con-Agra offer statement questionable), it did not induce Gagliardi to do anything that would constitute reliance. 1 Rather, the claim against Hart and Adams, to the extent it succeeds, is a claim of interference with an at-will contract. Such a claim would be a difficult one to sustain since Hart clearly did have a legal privilege to present a "him or me" ultimatum to the board and the board plainly had the right to choose. But assuming the allegation of falsity to be true and assuming for these purposes that materiality can be shown, I am not persuaded at this stage that there is no possibility that such liability can be found. Thus, with respect to these defendants this claim will not be dismissed at this time.
The second aspect of Count II relates to another time period. In paragraph 61 et seq. the amended complaint alleges that in 1994 Hart and Adams "misrepresented to CDA ...
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