Kaufman v. Belmont

• Decision Date: 25 January 1984
• Citation: 479 A.2d 282
• Parties: Samuel KAUFMAN, Plaintiff, v. Charles F. BELMONT, John R. Bonniwell, Jerome S. Coles, Alvin H. Schulman and Philip A. Hunt Chemical Corporation, Defendants. . Submitted:
• Court: Court of Chancery of Delaware

Page 282

479 A.2d 282

Samuel KAUFMAN, Plaintiff, v. Charles F. BELMONT, John R. Bonniwell, Jerome S. Coles, Alvin H. Schulman and Philip A. Hunt Chemical

Corporation, Defendants.

Court of Chancery of Delaware,

New Castle County.

Submitted: Jan. 25, 1984.

Decided: May 8, 1984.

On Defendants' motion to dismiss for failure to make a pre-suit demand: GRANTED.

Joseph A. Rosenthal, and Kevin Gross, Morris & Rosenthal, P.A., Wilmington, and Bertram Bronzaft, Garwin, Bronzaft & Gerstein, New York City, for plaintiff.

Jack B. Jacobs, and Bruce M. Stargatt, Young, Conaway, Stargatt & Taylor, Wilmington, and William C. Lucas, and Philip L. Graham, Jr., Sullivan & Cromwell, New York City, for individual defendants.

David A. Jenkins, William T. Allen, and Lewis S. Black, Morris, Nichols, Arsht & Tunnell, Wilmington, and M. Warren Browne, Philip A. Hunt Chemical Corp. Palisades Park, N.J., for corporate defendant.

HARTNETT, Vice Chancellor.

Defendants moved to dismiss this action or in the alternative for a summary judgment of dismissal because of the plaintiff's failure to make a demand on the Board of Directors of the corporation prior to instituting suit, as is required by Chancery Court Rule 23.1. The motion must be granted.

I

This stockholder's derivative action, brought in 1978 on behalf of the stockholders of Philip A. Hunt Chemical Corporation ("Hunt"), alleges that certain directors acted unlawfully by allowing certain of Hunt's officers, who held outstanding stock options, to gain substantial profits to the detriment of the corporation. More specifically, in connection with a tender offer by Turner & Newell Industries ("Turner") for 51% of Hunt's common stock, the directors of Hunt cancelled outstanding stock options which certain officers held and thereby enabled the officers to receive the difference between the tender price and the option price. Such a transaction, plaintiff alleges, amounts to a gift of corporate assets and a breach of fiduciary duty to Hunt and its stockholders.

Nearly three years after the complaint was filed, the defendants filed their first motion to dismiss. I granted that motion in part and dismissed the suit as to certain directors and officers of Hunt but denied the motion as to the directors serving at the time suit was filed who had also been named as defendants. I also permitted the plaintiff to amend the complaint in order to plead with specificity the reasons for the plaintiff's failure to have made a pre-suit demand for redress on Hunt's Board of Directors. Kaufman v. Albin, Del.Ch., 447 A.2d 761 (1982). The plaintiff then filed an amended complaint and, unsatisfied, the defendants renewed their motion to dismiss.

II

In response to the motion to dismiss for failure to make a pre-suit demand, it is necessary to review the complaint in detail to ascertain if the plaintiff has alleged with particularity facts which show that a pre-suit demand for redress of the alleged wrongs would have been futile. Bergstein v. Texas Intern. Co., Del.Ch., 453 A.2d 467 (1982). In the amended complaint it is alleged that a tender offer was made by Turner for at least 51% of the common stock of Hunt on September 12, 1977. Thereafter, the Board of Directors of Hunt determined that the price was fair and unanimously recommended that the stockholders should accept the tender offer. The Board further considered the effect of the proposed tender offer on Hunt's officers and employees who held unexercised common stock options. The directors were advised that Turner intended to purchase stock pro rata from all tendering stockholders, including any officer or employee of Hunt who tendered stock. In order to permit Hunt's employees who held options to benefit from the tender offer, the Board unanimously agreed to accelerate the exercise date of all options held by employees, other than officers. Apparently, that decision is not challenged by the plaintiff. The Board also approved a resolution by which Hunt would cancel the stock options held by the officers and pay to those officers the difference between the exercise price and the tender offer price. It is this resolution which plaintiff attacks. The alleged reason for the separate handling of the officers' options was that, under federal securities law, an actual exercise by the officers of their options and a subsequent sale of the stock to Turner might have resulted in a "short-swing profit" that could not be retained by the officers under the rules of Section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78p(b).

The Board of Directors at the time these resolutions were approved consisted of seven members. Of the seven, only Charles Belmont and John Bonniwell held outstanding stock options. By the time this derivative suit was filed on July 14, 1978, resignations and elections had substantially changed the Board. At that time the Board consisted of nine members, four of whom were members at the time the challenged resolution was approved. Those four members are Charles Belmont, John Bonniwell, Jerome Coles and Alvin Schulman. Thus, only four of the nine persons who were directors when suit was filed had been directors at the time of the approval of the challenged resolution and only two of them benefitted directly from the transaction.

III

The amended complaint alleges that demand on the Hunt Board would have been futile because:

"(a) Defendant-directors Bonniwell, Belmont, Coles and Schulman all actively participated in and voted in favor of the resolution to accept the cancellation of the options of officer-optionees and make a corresponding cash payment to them despite the fact that Hunt's stock option plans did not make provision for such stock option cancellation and payments.

(b) Director-defendants Bonniwell and Belmont were substantial beneficiaries of the option cancellations and corresponding payments.

(c) T & N [Turner], in obtaining the approval of Hunt's Board of Directors for its offer, made a number of commitments prior to and during the pendency of the offer, to Hunt's directors, among them the tacit approval of the cancellation of officer-optionees' options and the corresponding payments. T & N's designees on the Board of Directors, Charles Wilfred Nelson, Nigel Anthony Cutler, George J. Haufler and Stephen R. Petschek, would therefore not institute suit on the transaction, improper on its face, which T & N permitted in order to obtain Board of Director approval of its tender offer.

(d) Director Lause was the hand picked candidate to the Board of Directors of the above eight members of the Board.

(e) The Directors by reason of their hostile interest cannot be expected to initiate a corporate suit to correct the wrongs alleged herein."

The defendants respond that these allegations do not show that a demand on the Hunt Board of Directors immediately before filing suit would have been futile and therefore excused. They point out that five of the nine directors serving when suit was filed were not directors of Hunt when the option cancellation resolution was approved. Thus, defendants argue, a majority of the Board was clearly capable of impartially considering a demand to redress the alleged wrongs and of exercising their business judgment in reviewing the allegations. Furthermore, they say, the plaintiff's attempt to disqualify directors Coles and Schulman from considering the demand due to a "hostile interest" is not factually supported. The defendants do concede, however, that directors Bonniwell and Belmont were disqualified from considering a demand to rectify the alleged wrongs because they were interested as direct beneficiaries of the option cancellation resolution.

IV

In considering a motion to dismiss for failure to make a pre-suit demand pursuant to Rule 23.1, this Court will only look to the pleadings. Bergstein v. Texas Intern. Co., Del.Ch., 453 A.2d 467 (1982). All well-plead facts must be assumed to be true. Roland Intern. Corp. v. Najjar, Del.Supr., 407 A.2d 1032 (1979). Allegations, however, will not be assumed to be true unless there exists specific facts which are sufficient to support the conclusions. Weinberger v. UOP, Inc., Del.Ch., 409 A.2d 1262 (1979); Cohen v. Mayor and Council of Wilmington, Del.Ch., 99 A.2d 393 (1953).

Chancery Court Rule 23.1, which is virtually identical to Fed.R.Civ.P. 23.1, provides in relevant part:

"In a derivative action brought by one or more shareholders or members to enforce a right of a corporation ... [t]he complaint shall ... allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort."

It is a rule of substantive right--not simply a rule of technical pleading. Haber v. Bell, Del.Ch., 465 A.2d 353 (1983); Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984). A plaintiff, therefore, who brings a derivative suit and chooses not to make a demand prior to the filing of suit is faced with the responsibility of demonstrating with particularity why his demand on the board of directors would have been futile. If a plaintiff fails to meet the burden imposed by Rule 23.1, his suit will be dismissed upon a motion to dismiss even if he has an otherwise meritorious claim. Haber v. Bell, supra.

As the Delaware Supreme Court has recently stated: "... [t]he entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability. The business judgment rule is an acknowledgment of the managerial prerogatives of Delaware directors under [8 Del.C.] Section 141(a).... It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.... Absent an abuse of discretion, that judgment will...