Hoffman v. Dann

• Decision Date: 17 November 1964
• Parties: Arthur HOFFMAN, Erwin H. Ezzes, Herman Koenigsherg and Virginia S. Hudson et al., Appellants, v. Sol A. DANN et al. and Mary L. Gallo et al., Plaintiffs Below, Appellees, and Chrysler Corporation et al. and Paul C. Ackerman et al., Defendants Below, Appellees.
• Court: United States State Supreme Court of Delaware

Page 343

205 A.2d 343

42 Del.Ch. 123

Arthur HOFFMAN, Erwin H. Ezzes, Herman Koenigsherg and Virginia S. Hudson et al., Appellants, v. Sol A. DANN et al. and Mary L. Gallo et al., Plaintiffs

Below, Appellees,

and

Chrysler Corporation et al. and Paul C. Ackerman et al.,

Defendants Below, Appellees.

Supreme Court of Delaware.

Nov. 17, 1964.

Reargument Denied Dec. 4, 1964.

Appeal from Court of Chancery in and for New Castle County.

Howard M. Handelman, Wilmington, and Norman Annenberg, New York City, for appellant objector Ezzes.

Frank J. Miller, of Foulk, Walker, Miller & Wakefield, Wilmington, for appellant objector Koenigsberg.

Irving Morris and J. A. Rosenthal, of Cohen, Morris & Rosenthal, Wilmington, for appellant objector Judson et al.

Sotiere S. Kapsalis, Wilmington, and Bader & Bader, New York City, for appellant Hoffman.

William E. Taylor, Jr., Wilmington, Norman S. Nemser and Stanley Nemser, and Irving Steinman, New York City, for plaintiffs appellees Mary L. Gallo and James A. Gallo.

Daniel O. Hastings, Clarence W. Taylor and Russell J. Willard, Jr., of Hastings, Taylor & Willard, Wilmington, Lewis M. Dabney, Jr., Liebman, Eulau & Robinson, New York City, and Dann, Rosenbaum Bloom & Kaufman, Detroit, Mich., for plaintiffs appellees in the Dann action except Sol A. Dann.

Richard F. Corroon of Berl, Potter & Anderson, Daniel L. Herrmann, of Herrmann, Bayard, Brill & Russell, S. Samuel Arsht, of Morris, Nichols, Arsht & Tunnell, Robert H. Richards, Jr., of Richards, Layton & Finger, John J. Morris, Jr., and Albert W. James, of Morris, James, Hitchens & Williams, and Clyde M. England, Jr., Wilmington, Francis S. Bensel and Robert Ehrenbard of Kelley, Drye, Newhall, Maginnes & Warren, David W. Peck and Howard T. Milman, of Sullivan & Cromwell, and Milton Pollack, New York City, for certain defendant appellees.

Sol A. Dann, Detroit, Mich, plaintiff appellee, in pro. per.

WOLCOTT and CAREY, JJ., and STIFTEL, Judge, sitting.

WOLCOTT, Justice.

These are appeals from a judgment of approval of the settlement of a stockholders' derivative action brought in behalf of Chrysler Corporation. The settlement approved disposed of two stockholders' derivative actions which had been consolidated for the purpose of settlement. In the two actions 17 separate causes of action, involving in all 70 separate claims, were asserted against 97 individual and corporate defendants.

The causes of action may be divided into three classifications: (1) charges that certain officers of Chrysler had personally profited from transactions between Chrysler and suppliers in which they had a financial interest; (2) charges that some of the defendants as officers and directors had mismanaged Chrysler from 1956 to 1961, and (3) charges that the Incentive Compensation Plan of Chrysler and its Stock Option Plans were not soundly devised, and were unfair to Chrysler's stockholders.

Prior to the agreement of settlement the plaintiffs had conducted fairly extensive discovery proceedings, and agreed to the terms of the settlement only on the condition that they be permitted further discovery in order to determine whether or not the claims asserted in the complaints had sufficient merit to demonstrate the unfairness of the proposed settlement. Additional discovery was allowed which thereafter proved to be elaborate. The final result was that plaintiffs concluded that, except for the cause of action based upon the unfairness of the Incentive Compensation Plan, no cause of action set forth in the complaints could be successfully prosecuted to recovery because of the lack of probative evidence.

Accordingly, plaintiffs represented to the stockholders in the notice calling a stockholders meeting to approve the proposed settlement that, with the exception of the cause of action based upon the Incentive Compensation Plan, there was no possibility of recovery in any substantial amount for the benefit of Chrysler and its stockholders.

Thereafter, the stockholders, at the special meeting called for the purpose, overwhelmingly approved the proposed settlement and a modification of the Incentive Compensation Plan which was part of the proposed settlement.

In addition, following the stockholders meeting the Chancellor appointed an amicus curiae to report to him on the relevant issues to be tendered at the hearing on the proposed settlement, and as to proof which would be of assistance to him in passing on the fairness of the settlement. The amicus filed an elaborate report with the Chancellor analyzing the evidence of record and suggesting other areas in which additional proof might be desirable.

Subsequently, an extensive hearing upon the fairness of the proposed settlement was held before the Chancellor. He ultimately approved the settlement. From his judgment of approval these appeals are taken by various objecting stockholders who had appeared at the hearing before the Chancellor to oppose the settlement.

Fundamentally, the settlement agreed upon by the parties and approved by the Chancellor provides that the actions herein be dismissed with prejudice and releases be delivered to the defendants, with the exception of the defendant Newberg, and, in return, that the Chrysler Incentive Compensation Plan be amended by stockholder action to accomplish what both plaintiffs and defendants say is a better Incentive Compensation Plan than that formerly in effect.

These appeals were taken only by certain stockholder objectors appearing at the hearing upon the settlement. None of the plaintiffs have appealed but appear in this Court as appellees along with the defendants. Only one of the objectors, viz., Ezzes, attacks the approval of the settlement on the ground that some of the causes of action asserted in the complaints are not in fact worthless but, to the contrary, offer hope of substantial recovery for the benefit of Chrysler.

We first consider the arguments made by the appellant Ezzes that certain of the causes of action offer hope of substantial recovery for the benefit of Chrysler. In doing so, however, we consider only those specific causes of action brought to our attention by Ezzes in his brief and at the argument.

First, Ezzes argues that the incentive compensation computations for the years 1955, 1957, 1960 and 1962 were made in violation of the Incentive Compensation Stockholders' Resolution of 1956. The argument is that nonoperating income was improperly included in consolidated net earnings of Chrysler for those years in order to compute the total amount payable as incentive compensation.

For the years in question the payment of incentive compensation was governed by the Stockholders' Resolution of 1956 authorizing the payment of incentive compensation not to exceed 5% 'of the consolidated net earnings for that fiscal year (as reported in the Annual Report to the stockholders).'

In the computations in question all income of Chrysler resulting from its automobile business as well as from its investments, interest on loans, and profits from other sources were included in consolidated net earnings for the purpose of computing incentive compensation. Ezzes argues that the phrase 'consolidated net earnings' used in the Resolution of 1956 necessarily excluded earnings from any source not connected with its main business venture, i. e., the making and sale of automobiles. It is argued that the improper inclusion of the so-called nonoperating income for the years in question resulted in an increase in incentive compensation of slightly over $2,000,000 which may readily be recovered from the defendants.

The Resolution of the Stockholders of 1956 does not exclude in terms so-called nonoperating income, but refers generally to 'consolidated net earnings.' Chrysler is actually a diversified business and has earnings arising from other than the manufacture and sale of automobiles. It has earnings derived from its Air-Temp, Missile, Defense and Space Divisions which are nonautomobile sources, and from some other diversified sources such as catering service, vending machines in its plants, etc.

If the stockholders intended to exclude income from sources other than the manufacture and sale of automobiles from the Incentive Compensation Plan, that should have been made specific in the Resolution authorizing such payments. This follows from the provision in the Resolution that incentive compensation was to be based on the Annual Report to stockholders, which included earnings from all sources as consolidated earnings.

Ezzes, however, cites in this connection three cases which he argues control the question.

He cites Schwartz v. Miner, 37 Del.Ch. 575, 146 A.2d 801. This case was a derivative action on behalf of a corporation which had a Profit-Sharing Trust Plan providing for contribution by the corporation of a percentage of its consolidated net profits. The corporation made an investment in the stock of a supplying company which it later sold at a loss. In determining later the amount to be distributed under the Profit-Sharing Plan, the loss thus occasioned was not deducted from the net profits. The Chancellor held that the corporation under the Plan was not required to deduct the net loss from the sale of capital assets in determining the amount to be distributed.

The case, however, does not stand for the proposition for which Ezzes cites it. The Plan involved in the Schwartz case provided for a contribution by the corporation to the Profit-Sharing Trust of a percentage of 'consolidated net profits * * * exclusive of capital gains or losses.' We think the Chancellor approved the exclusion of the capital loss from the computation of consolidated net profits of the corporation by reason of the precise exclusion in the Plan, itself, and not upon any theory that consolidated net earnings of necessity must be exclusive of so-called nonoperating income.

Ezzes also cites Lieberman v. Becker, Del., 155 A.2d 596. We think, however, ...