Kaplan v. Wyatt

• Decision Date: 27 June 1985
• Citation: 499 A.2d 1184
• Parties: Fed. Sec. L. Rep. P 92,345 Jerome KAPLAN, Plaintiff Below-Appellant, v. Oscar S. WYATT, Jr., WJS Shipping Associates, Inc., a Delaware corporation, and the Coastal Corporation, a Delaware corporation, Defendants Below, Appellees. . Submitted:
• Court: Supreme Court of Delaware

Page 1184

499 A.2d 1184

Fed. Sec. L. Rep. P 92,345

Jerome KAPLAN, Plaintiff Below-Appellant, v. Oscar S. WYATT, Jr., WJS Shipping Associates, Inc., a Delaware corporation, and the Coastal Corporation a Delaware corporation, Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted: June 27, 1985.

Decided: Oct. 9, 1985.

Upon appeal from Court of Chancery. Affirmed.

Melvyn Weiss (Argued), of Milberg, Weiss, Bershad, Specthrie & Lerach, New York City, and Irving Morris and Kevin Gross of Morris and Rosenthal, Wilmington, for plaintiff below, appellant.

Henry N. Herndon, Jr. (Argued) and Richard D. Kirk of Morris, James, Hitchens & Williams, Wilmington, and James B. May and Roger J. Hawke of Brown, Wood, Ivey, Mitchell & Petty, New York City, for the Special Litigation Committee of The Coastal Corp.

A. Gilchrist Sparks of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant below, appellee WJS Shipping Associates, Inc.

Louis J. Finger of Richards, Layton & Finger, Wilmington, for defendant below, appellee Oscar S. Wyatt, Jr.

Roderick R. McKelvie of Ashby, McKelvie & Geddes, Wilmington, and Robert E. Walls, Houston, Texas, for defendant below, appellee The Coastal Corp.

Before McNEILLY and MOORE, Justices, and O'HARA, Judge.

McNEILLY, Justice.

Jerome Kaplan, a shareholder of the Coastal Corporation (Coastal), appeals from the Court of Chancery's decision in favor of Coastal's Special Litigation Committee motion to dismiss Kaplan's derivative suit. The primary issue on appeal is whether the Court of Chancery erred in its application of the guidelines for granting a corporation's request to dismiss a derivative suit as set forth in this Court's decision of Zapata v. Maldonado, Del.Supr., 430 A.2d 779 (1981). We conclude that the Court of Chancery correctly formulated and applied the guidelines of Zapata.

I

The factual circumstances which give rise to this appeal involve the alleged acts of impropriety of Oscar S. Wyatt, Jr. and the investigation conducted by Coastal's Special Litigation Committee (the Committee).

On February 4, 1981, Jerome Kaplan filed a derivative action on behalf of Coastal naming Coastal, Oscar S. Wyatt, Jr. and WJS Shipping, Inc. (WJS) as defendants. Coastal engages in the business of exploring, producing, and processing oil and gas and other resources. Oscar Wyatt is the founder of Coastal, its Chairman of the Board, and Chief Executive Officer.

Kaplan's amended complaint alleges that (1) Wyatt "interpositioned" himself in the "Rotterdam Spot Market" and thereby participated in and profited personally from oil trading activities which rightfully belonged to Coastal; (2) Wyatt wrongfully caused Coastal to enter on unfair terms into a sale and leaseback transaction for an oil tanker with WJS; and (3) Wyatt received excessive compensation from Coastal, including excessive amounts for the lease of his personal airplane to the corporation. Kaplan's amended complaint also contains general allegations of wrongful activity but does not identify any specific transactions which Wyatt may have participated in or profited from at the expense of the corporation.

In response to Kaplan's suit, Coastal's Board of Directors appointed two outside directors, Messrs. Raymond M. Holliday and J. Howard Marshall, II., to form the Committee. Holliday was an attorney and certified public accountant. Also, he was the Chairman of the Board of the Hughes Tool Company and served as an outside director for several other public corporations. Holliday was elected to Coastal's Board of Directors about a month after Kaplan filed his complaint. After the Committee filed its report and the motion on behalf of defendant Coastal to dismiss the suit, Holliday died.

Marshall is a member of Coastal's Board of Directors, and retired former executive of Allied Chemical Corporation, Ashland Oil and Refining Company, and Signal Oil and Gas Company. Marshall was approved as an independent director of Coastal as a result of a consent decree in an unrelated action by the Securities and Exchange Commission against Coastal. Prior to consenting to Marshall's election to the Board and appointment to the Committee, the SEC conducted an interview with him to examine his independence and his ability and willingness to represent the public interest since he is also a businessman. Also, several companies with which he is affiliated have done business with Coastal. For example, Marshall and members of his family are 16% owners of Koch Industries (Koch), a large, privately-held oil company. Coastal and Koch engage in the business of buying and selling oil. In 1983, the annual dollar volume of business between Coastal and Koch was $266 million, which amounts to less than 2% of Koch's sales. Also, Koch sold Coastal the oil tanker "Coastal Kansas".

Marshall is a 50% shareholder of the Petroleum Corporation (Petco). Petco engages in oil exploration. Subsidiaries of Coastal have participated in limited partnerships with Petco and have contributed large amounts of money to Petco's programs. Petco also owned a 38% interest in Independent Refining Corporation (IRC). Petco, however, sold its interest in IRC prior to the appointment of the Committee. Marshall's business connections are disclosed in relevant reports by Coastal and in its annual Proxy Statement.

To help Holliday and Marshall with their investigation, Special Litigation Committee retained the firm of Brown, Wood, Ivey, Mitchell and Petty (Brown, Wood) as the Committee's counsel and Ernst and Whitney as independent outside accountants. Neither firm had prior dealings with Coastal.

In the course of their investigation, the Litigation Committee interviewed 140 people throughout the world, including 49 employees and 25 people who had no connection with Coastal. Coastal's officers and in-house counsel gathered some of the documents used in the investigation and were present at some of the interviews. At each of these interviews attorneys from Brown, Wood were present and took handwritten notes. Following the interviews, the handwritten notes were transcribed into typewritten memos, and then the handwritten notes were destroyed. Brown, Wood received in the vicinity of $500,000 for its efforts in fees and reimbursements.

One of the interviews conducted by the Committee was with Harry Durels, an oil trader. Prior to this interview, Mr. Durels had met with Melvyn Weiss, Kaplan's attorney, and Joseph Roeber in a London restaurant. Following the meeting, Roeber prepared a memo based on his impressions of the meeting (the Roeber Memo). The memo contains no evidence of Wyatt's wrongful actions alleged in the complaint.

Before interviewing Durels, the Committee requested a copy of the Roeber Memo from Weiss, but he did not respond to the request. Therefore, when the Committee interviewed Durels they did not question him on the Roeber Memo because at the time they did not know its contents. A copy of the Roeber Memo was finally made available to the Committee after Weiss received assurances he would not be sued for libel. After receiving the Roeber Memo the Committee forwarded a copy of it to Durels for his comment.

Also interviewed by the Committee were Julio, Roberto, and Jose Iglesias, who own almost all of the stock of the Mobile Bay Refining Company (Mobile Bay). Coastal and Mobile Bay engaged in oil transactions amounting to millions of dollars. The Iglesiases denied any knowledge of any wrongdoing by Wyatt in any transaction in which they were involved or about which they had knowledge.

In order to fully investigate the matters alleged in the complaint, the Committee repeatedly requested that Kaplan and Weiss provide the Committee with information on specific instances of wrongdoing. Kaplan did not respond to the requests because he did not trust the Committee.

The Committee conducted a thorough investigation of the two transactions named in the complaint. The first is the sale and leaseback agreement between Coastal and WJS for the oil tanker "Coastal Kansas". Coastal purchased the "Coastal Kansas" from Koch in April, 1978. Because of his interest in Koch, Marshall abstained from the Board's consideration of the agreement. About a year later, the Coast Guard found that the tanker was not seaworthy. In March of 1980, Coastal entered into a sale and leaseback agreement with WJS. At that time, WJS was a partnership in which Wyatt's son Carl had a controlling interest. WJS purchased the tanker for $1 million plus repairs, which were originally anticipated to be $9 million and later rose to $10 million. According to the agreement, Coastal would lease back the tanker from WJS for $1,970,000 per year for ten years, but that figure was later reduced to $1,845,000 per year. However, the lease figure appearing in the annual reports is $2.7 million.

Wyatt avoided participation in the negotiation or any transaction relating to the "Coastal Kansas". The agreement was reviewed by all appropriate departments of Coastal and approved by the Executive Committee of the Board of Directors.

The Committee investigated the entire transaction and found that the negotiations had been at arms length, and that the agreement was reasonably fair to Coastal.

The other transaction thoroughly investigated by the Committee was the lease arrangement between Wyatt and Coastal for his personal Westwind aircraft. The Committee reviewed the lease and related documents, including accounting reports, maintenance records, and flight logs. Also, they interviewed Wyatt and Coastal employees from the Legal, Aviation, and Internal Audit Departments. They also received an independent analysis from the General Manager of the Westwind Division of Atlantic Aviation. The investigation revealed that ambiguities in the lease resulted in $60,000 in overpayments to Wyatt, and that a lack of care in the administration of the lease resulted in billing errors of $135,000. Wyatt promptly repaid these sums to...