Henderson v. Plymouth Oil Co.

• Decision Date: 04 December 1925
• Citation: 131 A. 165,15 Del.Ch. 40
• Court: Court of Chancery of Delaware
• Parties: WILLIAM R. HENDERSON, ALBERT R. BUDD, WALTER J. WILSON and FLOYD B. LOCKHARDT, and others, Intervenors, v. PLYMOUTH OIL COMPANY, a corporation organized and existing under the laws of the State of Delaware, MICHAEL L. BENEDUM, SARAH N. BENEDUM, JOSEPH C. TREES, TREES DEVELOPMENT COMPANY, LIMITED, LEVI SMITH, JEROME G. FARQUHAR, WILLIAM E. HUSTON, EDWARD C. STEARNS, THOMAS R. COWELL, WALTER S. HALLANAN, FOSTER B. PARRIOTT, ADDISON F. HOLLIDAY, JR., CHARLES ADAMS, H. B. DAVENPORT, JOHN LAING, JOHN M. HOLLIDAY, RAY v. HENNEN, JOHN S. HANLON, ADDISON B. DALLY, JR., OVID D. ROBINSON, ELLSWORTH D. ROBINSON, J. L. KIRKLAND, H. D. MCCRACKEN, M. E. DAVIS, ARTHUR G. FLORES, D. A. MCCASKEY, C. H. HUSTON, ANNE A. ADAMS, THOMAS R. COWELL, BETTY COWELL and NILES W. BOTTOMFIELD

131 A. 165

15 Del.Ch. 40

WILLIAM R. HENDERSON, ALBERT R. BUDD, WALTER J. WILSON and FLOYD B. LOCKHARDT, and others, Intervenors, v. PLYMOUTH OIL COMPANY, a corporation organized and existing under the laws of the State of Delaware, MICHAEL L. BENEDUM, SARAH N. BENEDUM, JOSEPH C. TREES, TREES DEVELOPMENT COMPANY, LIMITED, LEVI SMITH, JEROME G. FARQUHAR, WILLIAM E. HUSTON, EDWARD C. STEARNS, THOMAS R. COWELL, WALTER S. HALLANAN, FOSTER B. PARRIOTT, ADDISON F. HOLLIDAY, JR., CHARLES ADAMS, H. B. DAVENPORT, JOHN LAING, JOHN M. HOLLIDAY, RAY v. HENNEN, JOHN S. HANLON, ADDISON B. DALLY, JR., OVID D. ROBINSON, ELLSWORTH D. ROBINSON, J. L. KIRKLAND, H. D. MCCRACKEN, M. E. DAVIS, ARTHUR G. FLORES, D. A. MCCASKEY, C. H. HUSTON, ANNE A. ADAMS, THOMAS R. COWELL, BETTY COWELL and NILES W. BOTTOMFIELD

Court of Chancery of Delaware, New Castle

December 4, 1925

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

BILL IN EQUITY. Rule to show cause why a preliminary injunction should not issue restraining the individual defendants from transferring, and the Plymouth Oil Company from permitting to be transferred, about seven hundred thousand shares of common stock of the latter standing in the names of the former. The principal object of the bill is to recover alleged secret profits charged to have been fraudulently secured by the individual defendants as promoters or associates of the promoters of the Plymouth Oil Company in connection with certain transactions entered into by it soon after its organization and while it was under the control and domination of its promoter-organizers. These alleged profits are in the form of the shares of stock above mentioned and the proceeds of sale of other shares similarly issued but sold by various individual defendants and in the form of dividends heretofore paid by the company on the shares charged to have been fraudulently issued as aforesaid. The bill seeks a cancellation of the shares now standing in the names of the individual defendants and an accounting for the proceeds of sale of the shares sold as aforesaid by them and the dividends heretofore paid to them.

The following outline of facts will constitute a sufficient preface to the opinion which follows:

One Frank T. Pickrell and associates were the owners of an oil and gas lease and adjoining permits embracing about forty-one thousand acres of State University lands located in Reagan County, Texas. In May, 1923, Pickrell and his associates completed the drilling of a well known as Santa Rita No. 1 which struck oil of high quality in commercial quantities at a depth of a little over three thousand feet. This discovery validated Pickrell's drilling permit into a lease covering 2,560 acres. Immediately upon the discovery of oil the Pickrell group commenced drilling two additional wells. In order for the permits in the balance of the forty-one thousand acres (about 38,500 acres) to be validated into leases, it appears to have been necessary under the law of Texas not only for the two wells already started to be completed, but also for at least four other wells to be drilled at locations fixed with respect to certain combinations of permits, and that each should yield in commercial quantities, prior to July, 1924. After the expenditure of about two hundred thousand dollars in prosecution of their work Pickrell and his associates were financially unable to proceed with the drilling operations necessary for a validation of the balance of their permit lands and they accordingly looked for outside assistance to aid them in their venture. Negotiations were entered into with certain men in Pittsburgh who had considerable financial resources looking towards a sale to them by the Pickrell associates of an interest in a portion of the Reagan County properties. These Pittsburgh men are referred to in the bill as M. L. Benedum and associates. One Edward C. Stearns was their spokesman and entered into the contract of purchase hereinafter referred to in their and his own behalf, though his agency is not disclosed on the face of the contract.

The Pittsburgh group made a very extensive study of the Pickrell field. This study was conducted by practical oil men of wide experience and oil geologists of accepted repute in their profession. It is unnecessary to detail the careful investigations and study which the agents of the Pittsburgh group made during the approximate month of time they devoted to the task. Their conclusion was that the discovery well, Santa Rita No. 1, was fed from an extensive underground reservoir of oil which lay under an anticlinal formation.

The Pickrell discovery revealed oil at a distance of two hundred miles from any proven field. The Pittsburgh group were so convinced that the properties were of great value that they decided to conclude their negotiations for the purchase of an interest therein. They came to terms with Pickrell and his associates. These terms were embodied in a contract between Pickrell speaking for himself and associates on the one side, and Edward C. Stearns speaking, as before stated, in reality, though not in form, for himself and his associates on the other. Before signing the contract Pickrell wanted to know with whom he was in fact dealing so that he might be satisfied that Stearns would perform his proposed obligations. When given the personal guaranty of several of the defendants who were known to be men of large means, he was willing to sign and did sign the contract. The contract was dated October 5, 1923. Under its terms Pickrell and associates agreed to sell and Stearns agreed to buy a three-fourths interest in the four sections (2,560 acres) validated by the discovery well into a lease and a like interest in twelve other sections (7,680 acres) immediately surrounding the four, the rights in these twelve sections being as yet only permit rights which, as before stated, needed to be proved up before ripening into leases. Date of settlement was fixed by the contract as November 5, 1923. This date was subsequently enlarged to November 15 by mutual agreement between the parties. The three-fourths interest which Stearns was to acquire in the 10,240 acres to be conveyed and the one-fourth interest therein which Pickrell and associates were to retain, were to be respectively secured through the instrumentality of a corporation which the contract stipulated should be formed to be known as Big Lake Oil Corporation, to which Stearns was to transfer all of his rights under the contract in consideration of all its capital stock in the amount, as finally determined by the parties, of four million dollars, three-fourths of which, or three million dollars, should be held by Stearns and one million dollars thereof should be held by Pickrell and associates.

The consideration which Stearns was to pay for the three-fourths interest purchased by him was, as follows:

"(a) The sum of $ 200,000, one-fourth in cash, and the remainder in three equal payments of 30, 60 and 90 days. Also an additional sum sufficient to refund to Pickrell the amounts expended to date in the drilling of the two uncompleted wells.

"(b) One-fourth of the capital stock of a corporation (Big Lake Oil Company) to be organized to take over the properties, with the right to Pickrell to designate two out of seven directors.

"(c) Completion by Stearns (and not by the Big Lake Oil Company) of the two wells then drilling, and the drilling within a stipulated time of four additional wells, the location of which was to be approved by Pickrell."

The evidence shows that the estimated sum necessary to make the refund called for in "(a)" and to drill the four wells mentioned in "(c)" was two hundred and fifty thousand dollars. Thus Stearns obligated himself to pay, or lay out, cash in the sum of four hundred and fifty thousand dollars.

There were other considerations in the contract in the form of covenants which bound Stearns in numerous particulars with respect to location of wells, reconveyance under certain conditions in case of a dry hole in any one section and refusal to drill another well, etc., all of which were intended mostly for the benefit of Pickrell and to secure the validation into leases of his permit rights on the remaining thirty-eight thousand five hundred acres still standing in his name or control. It is not necessary to detail these provisions of the contract.

The Big Lake Oil Company was organized and its certificate of incorporation recorded on October 16, 1923.

Shortly thereafter the defendant Plymouth Oil Company was organized with an authorized capital of 1,200,000 shares, divided into 150,000 shares of preferred stock of the par value of five dollars each and 1,050,000 shares of common stock of the par value of five dollars each. The preferred stock was entitled to a seven per cent. cumulative dividend with the customary preferences as to dividends and as to assets upon dissolution, was redeemable at six dollars per share on or after January 1, 1926, and was convertible into common stock on a share for share basis. The certificate of incorporation was recorded October 20, 1923. The purpose of the corporation's existence appears to have been to acquire the shares of Big Lake Oil Company, which Stearns was to receive when his rights under the Pickrell contract were transferred to it, and to assume Stearn's obligations to pay the cash and finance the drilling called for by his contract with Pickrell.

Big Lake Oil Company duly purchased Stearns' rights under the Pickrell contract and agreed to issue to Stearns all its capital stock therefor, as had been agreed. Just when the stock was actually issued does not appear. Stearns' offer to Big Lake Oil Company bore date October 20, 1923. The exact date of its acceptance appears from...