Herald Company v. Seawell, 691-70
| Decision Date | 29 December 1972 |
| Docket Number | 692-70.,No. 691-70,691-70 |
| Citation | 472 F.2d 1081 |
| Parties | The HERALD COMPANY, Plaintiff-Appellee (Cross-Appellant), v. Donald R. SEAWELL et al., Defendants-Appellants (Cross-Appellees). |
| Court | U.S. Court of Appeals — Tenth Circuit |
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Arthur J. Goldberg, New York City (Jay H. Topkis, Mark H. Alcott and Robert S. Smith of Paul, Weiss, Rifkind, Wharton & Garrison, New York City; William C. McClearn and Edwin S. Kahn of Holland & Hart, Denver, Colo., and Walter J. Predovich and Lester L. Ward, Jr., of Predovich & Ward, Pueblo, Colo., on the brief) for defendants-appellants.
Robert Swanson, Denver, Colo. (Fred E. Neef, Denver, Colo., on the brief) for plaintiff-appellee.
Before HILL, SETH and BARRETT, Circuit Judges.
This is an appeal from a judgment in the District of Colorado, D.C., 315 F. Supp. 497, in a stockholders' derivative action. The suit was filed on behalf of the Denver Post, Inc., a Colorado newspaper publishing corporation, by the Herald Company, a New York corporation and a minority stockholder, seeking relief for the Denver Post corporation against its officers and directors for misconduct, breach of trust, and misuse of corporate assets.
There were 94,015 shares of capital stock of the Denver Post, Inc., outstanding in early 1960.1 The corporate charter then provided for cumulative voting and for three directorships. These positions were held by E. Ray Campbell, also president and general counsel, Helen G. Bonfils, also secretary-treasurer, and E. Palmer Hoyt, also editor and publisher. The plaintiff corporation in this action is wholly owned, through other corporations, by Samuel I. Newhouse, owner of one of the nation's largest newspaper chains. Early in 1960, Newhouse set out to acquire at least an interest, and controlling interest if possible, in the Denver Post. May Bonfils Stanton, sister of Helen Bonfils, was the first to display an interest in selling her corporate shares in the Denver Post. On May 27, 1960, Newhouse purchased the Stanton stock, which amounted to 14,724 shares and which now constitutes 18% of the Denver Post outstanding stock, at $240 per share. On July 7, 1960, the Denver Post corporation purchased 19,574 shares of Denver Post stock held by the Denver U. S. National Bank as trustee for the Children's Hospital Association at $260 per share. This purchase was authorized by a unanimous vote of the corporate directors. The Children's Hospital stock was then carried on the balance sheet of the Denver Post as treasury stock.
Without doubt, the Post directors had for some years prior to acquisition of the Children's Hospital stock been considering the promulgation of some kind of a plan providing an opportunity for its employees to participate in the stock ownership of the Post. Such plans had been adopted by a number of corporations in the United States publishing large metropolitan newspapers. Palmer Hoyt became publisher of the Post in 1946, and soon thereafter began discussing the possibility of employee stock ownership with the directors and others in the Post organization. The consideration of such a plan continued throughout the 1950's and culminated in the actual creation of the Employees Stock Trust Plan in 1961. During this period, Hoyt and others personally investigated other employee stock ownership plans then in effect. Among the plans considered were those used by the Kansas City Star, the Cincinnati Inquirer and the Milwaukee Journal. As early as 1954, Hoyt went to Milwaukee a number of times to assess that plan, and it was eventually determined some form of the Milwaukee plan was best suited for the Post needs.
It is evident during this period of consideration the directors were fully aware of the many labor difficulties encountered by several of the large metropolitan daily newspapers of the country, including those encountered by Newhouse. The directors sincerely felt employee stock ownership would promote a better employer-employee relationship. It is equally true the directors knew employee stock ownership would eventually lock control of the corporation in the employees and eliminate the possibility of any outsider gaining stock control of the corporation.
By the time the Children's Hospital stock was purchased, the evidence is clear the directors had firmly determined to effectuate a plan for employee stock ownership. The contract of purchase expressly envisioned the use of that stock for the very purpose.2
Upon the purchase of the Children's Hospital stock, the directors employed the law firm of Holland and Hart to further consider and to put into legal form an employees stock ownership plan. Mr. Hart personally visited the Milwaukee Journal to familiarize himself with that form of plan. By the fall of 1960, the Employees Stock Trust Plan was finalized for presentation to a special meeting of the Post stockholders. Notice of the meeting, as required by law, was sent out, and the meeting was held on November 30, 1961. The proposed plan was approved by all of the stock ownership except the 18% held by Newhouse. Shortly thereafter, the plan was formally adopted and put into legal effect by the directors.
Under the plan, the Post corporation sold its stock to the trust at a formula price based upon book value of the stock and the actual earnings by the corporation from year to year. In the hands of the trust, each share was broken down into ten trust units and thus sold to employees. In effect, this would enable an employee to invest in the stock in small amounts. At the outset, the directors transferred 1600 shares of the treasury stock to the trust and Bonfils donated 1600 shares of her personally owned stock to the trust, all for the purpose of resale by the trust to employees. Subsequent to these initial transfers, supplemental transfers and sales were made by the Post corporation of approximately 3400 shares from the treasury stock. As of December, 1969, 415 of the eligible 1159 employees had purchased shares from the trust. This involved investments amounting to nearly one million dollars and 8.3% of the total outstanding corporate stock. This employer-employee relations accomplishment was achieved in spite of the constant cloud of strife between Newhouse and the directors and the threats of litigation.
At this point in the recitation of the evidence generally, the participation of Newhouse and the plaintiff corporation in the affairs of the Post corporation has considerable significance. The plaintiff, The Herald Company, is a New York corporation and is wholly owned, through other corporations, by Samuel I. Newhouse. By 1960, Newhouse had accumulated a chain of about 15 metropolitan newspapers, at least five magazines, and at least 30 television stations. In addition, he owned a news gathering-distribution service, was a large producer of newsprint, and was one of the largest printers of rotogravure newspaper supplements. In the latter field he was a competitor of one of the Post's operations.
At least as early as the first few months in 1960, Newhouse made connections in Denver for the purpose of exploring the possibility of acquiring at least a controlling interest in the Post corporation. Through a Denver lawyer, he acquired information pertaining to the corporate structure of the Post, the list of stockholders, and much other information pertinent to the internal affairs of the newspaper. As early as April, 1960, he made known his willingness to pay ten million dollars for a controlling interest in the paper. Within a short time, on May 27, 1960, through his Denver emissary he was able to consummate the purchase of the May Bonfils Stanton stock. The exhibits reflect nearly a constant flow of information from early 1960 to the date this suit was brought concerning the business affairs of the Post from the Denver attorney to Newhouse or to one of his agents in New York or Washington, D. C. Directions from Newhouse or one of his agents to the Denver attorney flowed freely during this entire period. As a proxy for the Newhouse stock, the Denver attorney appeared at all stockholder meetings. The February, 1970, pre-trial conference order filed in this case settles completely any question concerning knowledge on the part of Newhouse as to the very corporate acts complained about.
In that order, it was stipulated that Newhouse knew by July 11, 1960, the purchase price, installment payment and interest provisions of the contract for purchase of Children's Hospital stock; that in 1960 Newhouse's attorneys considered the legality of the stock purchase and urged him to challenge the transaction by court action as well as advised him to hire special counsel to investigate the sale; from 1961 Newhouse believed that the stock trust was designed to prevent his securing control; that it constituted an improper diversion of corporate assets; and, that it served no proper corporate purpose.
In his deposition, Newhouse frankly admitted that notwithstanding the recommendation of his attorney, Anderson, he decided not to take any action in 1960 or early 1961 in regard to the Children's Hospital stock purchase. "I was hoping that, if I didn't adopt a hostile attitude, if I was cooperative with them, at some point they would realize that I am not such a bad operator and I might be invited to the board."3 There certainly can be no question about knowledge of Newhouse concerning the formation and adoption of the Employees Stock Trust plan. The evidence shows that he was advised at the time of the purchase of the Children's Hospital stock by the Post that the stock would probably be used for some kind of an employees benefit plan; he knew about the giving of the notice of the special stockholders meeting, and a written memorandum was filed on his behalf with the Post corporation opposing the adoption of any such plan. His agents requested a postponement of the special meeting called for the purpose of...
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