Karasik v. Pacific Eastern Corp.

• Decision Date: 06 August 1935
• Citation: 180 A. 604,21 Del.Ch. 81
• Court: Court of Chancery of Delaware
• Parties: TILLIE KARASIK, v. PACIFIC EASTERN CORPORATION, (formerly known as the Goldman Sachs Trading Corporation) a corporation organized and existing under the laws of the State of Delaware, Defendant, WALTER E. SACHS, ARTHUR SACHS, HOWARD J. SACHS, SAMUEL SACHS, HOWARD J. SACHS and NELLIE L. SACHS, Executors of the Estate of Harry Sachs, Deceased, SIDNEY J. WEINBERG, HENRY S. BOWERS, ERNEST D. LOVEMAN, RALPH JONAS, WADDILL CATCHINGS, GRANT KEEHN, SAMUEL W. ANDERSON and HAMILTON v. BAIL, Intervenors - Defendants

180 A. 604

21 Del.Ch. 81

TILLIE KARASIK, v. PACIFIC EASTERN CORPORATION, (formerly known as the Goldman Sachs Trading Corporation) a corporation organized and existing under the laws of the State of Delaware, Defendant, WALTER E. SACHS, ARTHUR SACHS, HOWARD J. SACHS, SAMUEL SACHS, HOWARD J. SACHS and NELLIE L. SACHS, Executors of the Estate of Harry Sachs, Deceased, SIDNEY J. WEINBERG, HENRY S. BOWERS, ERNEST D. LOVEMAN, RALPH JONAS, WADDILL CATCHINGS, GRANT KEEHN, SAMUEL W. ANDERSON and HAMILTON v. BAIL, Intervenors - Defendants

Court of Chancery of Delaware, New Castle

August 6, 1935

BILL FOR AN INJUNCTION restraining the settlement of suits pending in this court, the United States District Court for the Southern District of New York and in the Supreme Court of New York. The cause was referred to Christopher L. Ward, Sr Esquire, as special master to take testimony and report his findings with recommendations. The hearings before the master were extended, commencing on November 27, 1933, and continuing at frequent intervals until April 18, 1934. The testimony comprises over seven thousand pages, the exhibits over twenty-one hundred pages and briefs of the solicitors filed before the master over nine hundred pages. The master made an exhaustive study of the case as it was presented on the record and the briefs. His conclusions of law and fact and his recommendation are embodied in a report of three hundred and forty-two pages. He has recommended that the bill be dismissed.

Both the complainant and defendants have excepted to the master's report. The report and exceptions thereto now came on for hearing before the Chancellor, whose memorandum in disposing of the same follows.

Bill dismissed.

Harry Rubenstein, and Herman H. Oppenheimer, of New York City, for complainant.

Ivan Culbertson, and Whitney North Seymour, of the firm of Simpson, Thacher & Bartlett, of New York City, for defendant Pacific Eastern Corporation.

Caleb S. Layton, of the firm of Richards, Layton & Finger, and Robert M. Benjamin, of the firm of Parker, Finley & Benjamin Samuel J. Silverman, and Walter Pollak, all of New York City for Walter E. Sachs, Arthur Sachs, Howard J. Sachs, Samuel Sachs, Howard J. Sachs and Nellie L. Sachs, Executors of the Estate of Harry Sachs, deceased, Sidney J. Weinberg, Henry S. Bowers and Ernest D. Loveman, intervening defendants.

William Prickett, and Selig Edelman and Philip Levison, both of New York City, for Ralph Jonas, intervening defendant.

OPINION

THE CHANCELLOR:

The court is indebted to the master for the thorough and painstaking manner in which he has studied the record in this cause and given symmetry to what, but for his report, would appear to one who approaches it with no previous intimacy, a mass of tangled detail. The master's report is of such character that the labor of the court in passing upon the exceptions is very much facilitated.

All the suits which the settlements propose to compromise involve the same subject matter. They are suits filed by stockholders of a Delaware corporation formerly known as The Goldman Sachs Trading Corporation and now known by the name of Pacific Eastern Corporation (herein called Pacific Eastern). The suits may be referred to as the "primary suits." The defendants in those suits are the officers and directors of Pacific Eastern, the members of a partnership called Goldman Sachs and Company, a firm of bankers and investment bankers which had a management contract with the corporation, and certain other individuals. The primary suits were filed by the complaining stockholders in their derivative right, and the bills asserted a ground of action for large damages in behalf of the defendant company. The gist of the complaint in each case was that the individual defendants and the partnership had so managed the assets of the corporation that the same were wilfully and recklessly squandered and wasted in the amount of many millions of dollars, for which an accounting to the corporation was prayed.

The suit in Delaware bears the abbreviated caption of Cantor, et al., v. Sachs, et al. It was before this court on a prior occasion when an opinion was filed touching an aspect of it not material to the pending bill. See 18 Del.Ch. 359, 162 A. 73.

While the primary suits were pending, negotiations for settlement were opened. On August 8, 1933, the defendants in the primary suits, all except Jonas, arrived at a basis of compromise with the directors of Pacific Eastern. Only one of the defendants, Walter Sachs, was a director when the settlements were negotiated. He took no part in them on the corporation's side. Jonas was left out of the settlement of August 8, 1933. He had before him the prospect of remaining the sole defendant. He felt aggrieved that he should have been thus abandoned and left to defend the suits alone, especially since he had had far less contact with the matters charged as grievances in the primary suits than his settling co-defendants had had. Jonas expressed his resentment. Certain remarks of Judge Hofstadter in one of the suits in the Supreme Court of New York fortified his feeling that his resentment was justified. Negotiations were opened with Jonas on about August 10, 1933. He made a final offer of settlement on August 24, 1933, solely, it appears, as a peace-buying proposition. On the next day, viz., August 25, 1933, the directors considered the Jonas offer and resolved upon its acceptance.

The offers of settlement were submitted to the stockholders of Pacific Eastern for approval or rejection. While there was no legal requirement that the stockholders should be called upon to express their desires in the matter, yet the directors, acting upon the advice of their attorney, deemed it best, under all the circumstances, that the stockholders should pronounce the final word of approval or disapproval. There were 5,765,081 shares of Pacific Eastern outstanding and entitled to vote. Of these shares 3,691,963 were present at the stockholders' meeting. Of the shares which voted 3,041,517 voted in favor of the settlements and 10,178 voted in opposition thereto. Stock held by the defendants in the primary suits did not vote.

The compromises thus arrived at involve the granting of general releases to the defendants in the primary suits. The settlement reached with the defendants other than Jonas provides for the receipt by Pacific Eastern of one hundred thousand shares of its stock and eighty-five thousand dollars in cash, which allowing three dollars per share as the market value of the stock, makes the equivalent of three hundred and eighty-five thousand dollars. Of this amount Pacific Eastern would receive a net of not less than two hundred and ten thousand dollars, the balance going for costs and fees. From the Jonas settlement, Pacific Eastern will receive forty thousand dollars net. The total of net yield to Pacific Eastern, if the settlements go through, will therefore be two hundred and fifty thousand dollars. If book-value of the stock be the measure of its worth, the net to the corporation would be four hundred and fifty thousand dollars. The gross would be three hundred and eighty-five thousand dollars or five hundred and eighty-five thousand dollars, according as the stock is appraised at market value or book value.

It is these settlements in compromise of pending litigation which the pending bill seeks to enjoin.

The solicitors for the complainant take the view that the transfer to the corporation of one hundred thousand shares of its own stock yields nothing to the corporation. Both before the master and in their argument at the bar and on their briefs, they rather derided the suggestion that the corporation in receiving one hundred thousand shares of its own stock, gained anything. Their view is that all that the ownership of the shares results in is a reducing of outstanding capital liability. This, they say, gives the corporation nothing. They are plainly in error--so plainly so that if it were not for their tenacious insistence upon the contention, I would not deem it a point meriting an answer. The answer is that the stock when acquired becomes treasury stock which may be sold by the corporation and realized upon as any other asset; or, if it is desired not to sell the stock, its retention by the corporation increases pro tanto the asset value underneath the stock held by the general body of the stockholders who are in a material though not technical sense the corporation, so to speak.

The bill attacks the settlements as fraudulent. It charges first that the amount of the claim for which a decree can be secured in any one of the primary suits is as much as one hundred million dollars, and that any settlement which yields to the corporation a net of only two hundred and fifty thousand dollars (or even four hundred and fifty thousand dollars) is so grossly inadequate as to be a fraud on dissenting stockholders. It charges next that the directors and dominant stockholders of Pacific Eastern in approving of the settlement were under the control and domination of the defendants in the primary suits or some of them. The answers deny that the settlement is an improvident one and deny that the action of the directors and stockholders of Pacific Eastern was in any wise induced or controlled by the defendants in the primary suits or any of them. The answers insist that under all the circumstances the settlements were in the best interests of the Pacific Eastern Corporation and that the directors and stockholders were actuated by good faith in approving of them.

That a great disparity in value between what a corporation receives in exchange for what it gives up, may be a prima facie badge of fraud on the dissenting minority was held in...