Gow v. Consolidated Coppermines Corporation

• Decision Date: 15 February 1933
• Citation: 165 A. 136,19 Del.Ch. 172
• Court: Court of Chancery of Delaware
• Parties: PAUL A. GOW, v. CONSOLIDATED COPPERMINES CORPORATION, a corporation of the State of Delaware, THOMAS BARDON, CHARLES K. BLANDIN, SAMUEL BRENNER, JOSEPH B. COTTON, WILLIAM B. CRAVATH, WILLIAM S. GORDON, RAY W. HIGGINS, ROBERT D. HOFFMAN, NORMAN E. LAMOND and A. MCC. WASHBURN

165 A. 136

19 Del.Ch. 172

PAUL A. GOW, v. CONSOLIDATED COPPERMINES CORPORATION, a corporation of the State of Delaware, THOMAS BARDON, CHARLES K. BLANDIN, SAMUEL BRENNER, JOSEPH B. COTTON, WILLIAM B. CRAVATH, WILLIAM S. GORDON, RAY W. HIGGINS, ROBERT D. HOFFMAN, NORMAN E. LAMOND and A. MCC. WASHBURN

Court of Chancery of Delaware, New Castle

February 15, 1933

PETITION TO REVIEW CORPORATE ELECTION. Petition filed under Section 31 of the General Corporation Law (Revised Code 1915 § 1945, as amended by 35 Del. Laws, c. 85, § 15) to hear and determine the validity of the election of certain of the individual respondents as directors of Consolidated Coppermines Corporation, and the titles of certain other of said individual respondents to the respective offices of president, vice-president and treasurer of the corporation.

The corporation was created under the general law of this State in 1922. The provision of its certificate of incorporation which is material to the pending controversy is as follows:

"Eighth The government of the corporation shall be vested in, and its affairs shall be conducted by a Board of nine Directors.

"1. The Directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, each consisting of one-third of the whole number of the Board of Directors, and all Directors of the corporation shall hold office until their successors are elected and qualified. At the meeting held for the election of the first Board, the Directors of the first class shall be elected for a term of one year; the Directors of the second class for a term of two years; and the Directors of the third class for a term of three years and at each annual election the successors to the class of Directors whose terms shall expire that year shall be elected to hold office for the term of three years, so that the term of office of one class of Directors shall expire in each year."

The regularly adopted by-laws of the corporation contained a provision defining the constitution of the board of directors, the classification of directors, and the terms of their office identical with that found in and just quoted from the certificate of incorporation.

The annual meeting of the stockholders for the election of directors to fill expiring terms was called to convene on May 3, 1932. The meeting was preceded by a vigorous campaign for proxies. This campaign was waged by two committees--one favoring the management and known as the Adee committee, the other opposed to the management and known as the Higgins committee. Each committee addressed letters to the stockholders and carried on a debate by mail.

At the meeting the Higgins committee appeared to have a majority. The proxies obtained by that committee were used not only in voting for successors to the three outgoing directors, but as well to amend the by-laws by striking out the existing by-law relating to the constitution of the board of directors and substituting therefor another provision. The new by-law which is claimed to have been adopted, provides for a board of fifteen instead of nine directors and retains the old scheme of classification by which the terms of office of a group of three expire each year.

The Higgins group, relying on the adoption of the new by-law proceeded to elect six new directors. The board, as then claimed to be augmented, met in due course and elected officers for the ensuing year.

The Adee faction who were in possession of the corporation, refused to recognize the amendment of the by-laws as lawful and declined to surrender their control over the corporation. The rivalry between the two sets of directors and officers occasioned the filing of the pending petition which seeks a judicial determination of the question of who are the lawful directors and officers of the corporation.

The following are the issues involved: Was the membership of the board of directors lawfully raised from nine to fifteen? Were certain proxies entitled to vote? Dependent on the principles controlling the answers to those questions, who are the directors of the corporation and what set of officers is entitled to be declared to be invested with the offices?

Numerous stockholders intervened on the petitioner's side of the cause. Answers were duly filed. A reference of the cause was made to a master who held extended hearings, and filed his report.

The master's report found that the amendment of the by-laws was void and therefore ineffective to alter the size of the board as fixed in the certificate of incorporation. This finding made it unnecessary for him to consider some of the questions touching proxies and votes based thereon, which the solicitors for the parties raised and argued before him. It necessarily followed from this finding that the six persons who claimed to have been elected to the board to fill the new places which the amendment to the by-laws sought to create were not directors, and the master so found. It remained for the master to make a finding upon who were elected as directors to succeed the three directors who composed the outgoing class. This aspect of the case required the master to pass on the propriety of several types of proxy as lawful authority for the voting of the shares of stock which they purported to represent. The questions raised in that connection appear in the opinion. The master found that Higgins and Bardon (two of the Higgins faction) and Merritt (a member of the Adee faction) were elected. The master found finally that the officers who base their titles to office upon the authority of the board as thus constituted by the master's findings, were the lawful officers of the corporation.

Exceptions have been taken to the master's report by both sides--thirty-two by the petitioner and intervenors and eight by the respondents. The Chancellor's opinion answers the substance of the points raised by the exceptions in so far as they are relied upon. They are therefore not set forth in detail.

Caleb S. Layton, of the firm of Richards, Layton & Finger, and Cravath, DeGersdorff, Swaine & Wood, of New York City (Robert H. Richards, Jr., of Wilmington, William D. Whitney and R. L. Gilpatric, both of New York City, and D. S. Holmes, of Duluth, Minn., on the brief), for petitioners.

Christopher L. Ward, Jr., and Arthur G. Logan, of the firm of Marvel, Morford, Ward & Logan, and Joseph B. Cotton, of New York City (William S. Gordon, of New York City, John W. Neukon, of Duluth, Minn., and Samuel Brenner and Roy F. Wrigley, both of New York City, on the brief), for respondents.

OPINION

THE CHANCELLOR:

1. Was the number of directors lawfully increased from nine to fifteen? If the board was so increased in number, it was solely due to the amendment of the by-laws. The master found that this amendment was void and that therefore the six new directorates had not been created. He based his finding on the legal proposition that it was not permissible to effect a change in the number of directors of this particular corporation through a by-law amendment. His view was that as the charter of the corporation provided that the board should consist of nine members, the subject was beyond the jurisdiction of the by-laws; and that the only way the number could be changed was by an amendment of the charter--a procedure which no one claims was followed.

The master's view was that those matters which the statute permits to be defined and regulated in the certificate of incorporation or the charter, are, under the principle of gradation of authority referred to in Gaskill v. Gladys Belle Oil Co., 16 Del.Ch. 289, 146 A. 337, beyond the reach of the inferior authority of the by-laws to change or alter. In any conflict between the charter and the by-laws with respect to a matter which the statute authorizes the former to deal with, he held that the by-laws must give way, even though they also are authorized by the statute to deal with the matter.

The charter provision touching directors is the same now as it was in 1922 when the corporation was formed. It is set out in the statement of facts. The original by-laws contained the same provision touching directors as did the charter, and in this respect both charter and by-laws remained unchanged down to the date of the 1932 annual meeting of stockholders.

In 1922, when the corporation was formed, it is clear that the statute authorized the "fixing and altering the number of its directors" in the by-laws. Section 2 par. 6, of the act as it then existed [Revised Code 1915, § 1916 (6)]. That the number of directors might also be fixed in the certificate of incorporation is not so clearly evident under the act as it then existed. If the constitution of the board could in 1922 be provided for in the charter, justification for it, so far as the statute is concerned, must be found solely in two clauses then appearing in the act, viz., (a) the provision found in Section 3 (Revised Code 1915, § 1917) that every corporation created under the act should, in addition to the powers enumerated in Section 2 (Revised Code 1915, § 1916), possess inter alia "the powers * * * given in its charter or in its certificate under which it was incorporated, so far as the same are necessary or convenient to the attainment of the objects set forth in such charter or certificate of incorporation"; and (b) the provision found in Section 5, par. 8 [Revised Code 1915, § 1919 (8)], that "the certificate of incorporation may also contain any provision which the incorporators may choose to insert for the regulation of the business and for the conduct of the affairs of the corporation, and any provisions creating, defining, limiting and regulating the powers of the corporation, the...