Giuricich v. Emtrol Corp.
| Decision Date | 30 July 1982 |
| Parties | Nicholas L. GIURICICH and Bodo Kalen, Individually, Plaintiffs Below, Appellants, v. EMTROL CORPORATION, a Delaware Corporation, Robert G. Fournie, Earle J. Kennedy, Jr., Kenneth B. Hardy, Jr., Robert G. Fournie, Jr., and Earle J. Kennedy, III, Defendants Below, Appellees. |
| Court | United States State Supreme Court of Delaware |
Upon appeal from Chancery Court. Reversed and remanded.
William Prickett, John H. Small of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, for plaintiffs below, appellants; Kenneth A. Lapatine of Carro, Spanbock, Londin, Fass & Geller, New York City, and Michael L. Hirschfeld (argued) of Seyfarth, Shaw, Fairweather & Geraldson, New York City, of counsel.
David A. Drexler, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendants below, appellees; Lewis R. Mills (argued) of Peper, Martin, Jensen, Maichel & Hetlage, St. Louis, Mo., of counsel.
Before HERRMANN, C. J., McNEILLY, QUILLEN, HORSEY and MOORE, JJ., constituting the Court en banc.
The plaintiffs appeal the denial by the Court of Chancery of their petition for the appointment of a custodian pursuant to 8 Del.C. § 226(a)(1), 1 despite the existence of a shareholder deadlock between the plaintiffs, who own 50% of the stock of defendant Emtrol Corporation (hereinafter "Emtrol"), and Continental Boilerworks, Inc., (hereinafter "Continental"), which controls the remaining 50% of the stock. This deadlock has prevented the election of successor directors indefinitely. This is a case of first impression in this Court.
Plaintiffs are officers and directors of defendant Emtrol who, along with Continental, founded Emtrol which designs, produces and sells industrial air pollution equipment. Defendants are Emtrol and the remaining directors of Emtrol who are all affiliated with Continental as officers, directors, employees, or shareholders.
In order to start up the new corporate entity, plaintiffs agreed to supply technical expertise and Continental agreed to supply the necessary capital. As part of this agreement, in part to protect its investment and also for tax purposes, Continental received 80% of the shares of the fledgling corporation and plaintiffs received the remaining 20%. Plaintiffs, however, were each given an option to acquire an additional 15% of the stock of the corporation, which could be exercised in the first fiscal year that the corporation showed a profit. Pursuant to the agreement, Continental was given control of Emtrol's board of directors 2 to reflect its superior ownership of the shares. No express agreement, however, was made concerning restructuring the board in the event that plaintiffs exercised their option.
In the first fiscal year that Emtrol became profitable, plaintiffs exercised their individual options and together own 50% of the shares of Emtrol. Shortly thereafter, they demanded that the board of directors be restructured to reflect their proportional interest; their demand was flatly refused by the existing board. Despite the parity of interest of plaintiffs and Continental in the enterprise, Continental has retained control of the board of directors and has persisted in its refusal to restructure the board.
Since plaintiffs exercised their options, numerous disputes have arisen between plaintiffs and Continental over such serious things as equal board representations, control and disbursement of corporate funds, corporate dividends, officers compensation, and bonuses. Apparently to guarantee their continued control of Emtrol, the majority of the existing board of directors, in 1979, passed a resolution to amend the bylaws to expand the board from five members to seven members. The majority directors proceeded to appoint two relatives of Continental representatives to fill the new directorships, thus further diluting the plaintiffs' position on the board to a 5-2 status.
On April 8, 1981, plaintiff Kalen, as president of Emtrol called a special shareholder meeting for the purpose of electing successor directors. At this meeting, no director candidate received more than 50% of the voting shares. The parties concede that the shareholders are deadlocked indefinitely, thus unable to elect successor directors and thus perpetuating the control of the present directors.
The Trial Court based its decision in large part upon 8 Del.C. § 226(a)(2), 3 which authorizes the appointment of a custodian in situations involving a division of corporate directors--not a deadlock of stockholders, as here. Appointment of a custodian was refused by the Trial Judge on the ground that, despite the existence of a shareholder deadlock preventing the election of successor directors, "there has been no injury to any vital interests of plaintiffs as stockholders, nor has Emtrol suffered any apparent injury."
The plaintiffs argue that § 226(a)(1), not § 226(a)(2), governs; that the language of § 226(a)(1) is clear and unambiguous and does not include any requirement of irreparable injury or harm as prerequisite to the appointment of a custodian. Thus, they contend that it was error for the Trial Court to apply the standard of § 226(a)(2) in denying the petition for appointment of a custodian under § 226(a)(1) in this case. The plaintiffs assert that they have made the essential prerequisite showing of a shareholder deadlock, in addition to other irreconcilable differences, to justify appointment of a custodian under the provisions of § 226(a)(1).
The defendants, on the other hand, contend that the decision whether to appoint a custodian rests in the sound discretion of the Trial Judge, and because the appointment of a custodian to take over the control of a solvent corporation is a drastic remedy, this remedy should be granted only with great caution and restraint. Consequently, the defendants' argument goes, the Trial Court properly denied the petition of the plaintiffs because they are the managing officers of Emtrol and members of the board; there has been no showing of self-dealing or overreaching by the defendant directors; and since Emtrol is a solvent and prosperous concern, the plaintiffs, as stockholders, benefit from that prosperity.
The Trial Court, and the defendants here, relied upon prior Delaware cases decided upon general equitable principles prior to the enactment of the original § 226 in 1949, 4 the first such statute on shareholder deadlocks; or under § 226 prior to its amendment in 1967; 5 or under § 226(a)(2) which, as has been noted, deals with the appointment of a custodian in the event of a director, not a stockholder, deadlock. 6
Such cases are neither governing nor persuasive in this case dealing with the 1967 amendment of § 226.
The 1949 forerunner of § 226 provided:
Whenever, by reason of an equally divided vote of the stockholders, there shall be a failure to elect directors, and such failure for such reason shall exist at two successive annual elections, or if there shall be a failure to elect directors by reason of an equally divided vote at an election held in accordance with section 224 of this title, the Court of Chancery, on application of any stockholder, may appoint one or more persons to be receivers of and for such corporation, with all the powers and title of a receiver appointed under section 291 of this title and, in addition thereto, the power to continue the corporate business until otherwise ordered by the Court. 8 Del.C., 1953, § 226. (Emphasis supplied) 7
The 1949 Statute thus provided for the appointment of a "receiver" with the full powers of a receiver in an insolvency situation under § 291. With such broad powers, the appointment of a "receiver" for a solvent corporation was a "drastic" remedy indeed. 8
The Delaware Corporation Law was extensively revised in 1967, including the enactment of the present § 226. 56 Del.L.Ch., 50, § 226. See Folk, the Delaware Corporation Law: A Commentary and Analysis, § 226, p. 271 (1972). One of the important changes accomplished was that, under the new Statute, the Court of Chancery was authorized to appoint a "custodian" instead of a "receiver". 9 This was more than a mere change of semantics. 10 The clear change in terminology was accompanied by a limitation on the powers of the appointee. A "receiver" appointed under the predecessor to the current § 226(a) was given "all the powers" of a receiver appointed for an insolvent corporation, in addition to the "power to continue the corporate business until otherwise ordered by the Court." A "custodian" appointed under the present § 226 has the "standby" powers of a receiver, but the Statute specifies that "the authority of the custodian is to continue the business of the corporation and not to liquidate its affairs and distribute its assets except when the court shall otherwise order ..." 8 Del.C. § 226(b). 11
Thus, the powers of a custodian are not as unlimited as the powers of a receiver appointed under the general equitable powers of the court, or under the forerunner to the present § 226(a)(1). "When a legislative body ... amends its prior enactment by a material change of language, the rule of statutory construction presumes that a change in meaning was intended." Daniel D. Rappa, Inc. v. Englehardt, Del.Supr., 256 A.2d 744, 746 (1969); accord Chrysler Corporation v. State of Delaware, Del.Supr., 163 A.2d 239 (1960).
It is for these reasons that we conclude that cases construing the power of the Court of Chancery to appoint a receiver under general principles of equity or former statutes are not dispositive of the scope and effect of the present § 226(a)(1) which has created the new "custodian" remedy in shareholder deadlock situations. 12
Cases dealing with the "director" deadlock provisions of § 226(a)(2) are equally inapposite. See Barry v. Full Mold Processes, Inc., Supra; Wilderman v. Wilderman, Supra. Unlike the shareholder-deadlock provisions of §...
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