Kennedy v. Emerald Coal And Coke Co.

• Decision Date: 09 December 1944
• Citation: 28 Del.Ch. 405,42 A.2d 398
• Parties: JULIAN KENNEDY, JR., Complainant Below, AND O'DONNEL ISELIN; O'DONNELL ISELIN AND COLUMBUS O'DONNELL ISELIN, II, Trustees Under Deed of Trust, Dated April 26, 1932, for Lewis Iselin, Marie I. Lafarge, and Adrienne M. Gilbert; LOUISE M. ISELIN and ERNEST ISELIN, JR., Executors of the Estate of Adrian Iselin; Ernest Iselin, Liquidating Partner of A. Iselin & Company; ADLIN CORPORATION; COLUMBUS O'DONNELL ISELIN, II; JOSEPH W. KENNEDY; KATHERINE W. KENNEDY; LOUISE KENNEDY; LOWBAR GAS COAL COMPANY; AND THOMAS W. KENNEDY, Intervening Complainants Below, Appellants, v. EMERALD COAL AND COKE COMPANY, a corporation of the State of Delaware, Respondent Below, Appellee
• Court: Supreme Court of Delaware

42 A.2d 398

28 Del.Ch. 405

JULIAN KENNEDY, JR., Complainant Below, AND O'DONNEL ISELIN; O'DONNELL ISELIN AND COLUMBUS O'DONNELL ISELIN, II, Trustees Under Deed of Trust, Dated April 26, 1932, for Lewis Iselin, Marie I. Lafarge, and Adrienne M. Gilbert; LOUISE M. ISELIN and ERNEST ISELIN, JR., Executors of the Estate of Adrian Iselin; Ernest Iselin, Liquidating Partner of A. Iselin & Company; ADLIN CORPORATION; COLUMBUS O'DONNELL ISELIN, II; JOSEPH W. KENNEDY; KATHERINE W. KENNEDY; LOUISE KENNEDY; LOWBAR GAS COAL COMPANY; AND THOMAS W. KENNEDY, Intervening Complainants Below, Appellants, v. EMERALD COAL AND COKE COMPANY, a corporation of the State of Delaware, Respondent Below, Appellee

Supreme Court of Delaware

December 9, 1944

Appeals from decrees of the Court of Chancery for Sussex County.

Houston Wilson, of Georgetown, William S. Potter, of Wilmington, and Ralph H. Frank, of Pittsburgh, Pennsylvania (Leonard K Guiler and J. P. Fife, both of Pittsburgh, and Southerland Berl & Potter, of Wilmington, of counsel), for appellants.

Richards Layton & Finger, of Wilmington, and Thorp, Bostwick, Reed & Armstrong, of Pittsburgh, Pennsylvania (Earl F. Reed, of Pittsburgh, Pennsylvania, Caleb S. Layton, of Wilmington, and Charles M. Thorp, Jr., of Pittsburgh, Pennsylvania, of counsel), for appellee.

Layton C. J., Richards, Rodney, Speakman and Terry, JJ., sitting.

OPINION

Layton, C. J.

The court has before it an appeal from a decree of the Court of Chancery for Sussex County dismissing the complainant's bill of complaint; an appeal from a decree of the same court dismissing a petition for leave to file a bill of review on the ground of after discovered evidence; and a petition filed in this court for leave to amend a proposed bill of review.

The complainant and intervenors are stockholders of Emerald Coal and Coke Company, the respondent, incorporated in this State in 1908. By the bill of complaint it was sought to enjoin, as being in violation of rights of stockholders, the consummation of a plan of financing whereby 122,457 shares of the respondent's stock were proposed to be issued to three corporations having interlocking directors with the respondent, namely Hillman Coal and Coke Company, Pittsburgh Steel Company, and Pittsburgh Coke and Iron Company; and also to enjoin the execution of contracts with the last two named companies to supply them with a substantial part of the coal the respondent expected to produce during a period of twenty years.

The Vice-Chancellor, before whom the cause was heard, after a lengthy hearing and elaborate argument orally and by briefs, advised dismissal of the bill of complaint in an opinion reported in 26 Del.Ch. 302, 28 A.2d 433, and a decree of dismissal was entered on November 22, 1943.

Briefly, the material facts are these. Julian Kennedy, Sr., father of the complainant and of one of the intervenors, was active in the formation of the respondent corporation. The original capitalization was 15,000 shares of stock of a par value of $ 100.00 a share. From time to time, however, the capitalization was changed by charter amendment, and in 1938, the authorized capital was 500,000 shares of no par stock.

In 1908, the respondent acquired about 10,000 acres of undeveloped coal lands, situated in Greene County, Pennsylvania, for $ 2,790,000.00, or about $ 283.00 an acre. Subsequent purchases were made increasing the acreage to over 11,000 acres, containing an estimated 83,850,000 tons of recoverable coal. From 1908 to 1930, the respondent was inactive. No development work was undertaken and no coal was mined. The corporation had no source of income whatever. Certain expenses constantly accrued. Carrying charges, including taxes and interest on borrowed money, were met by stock subscriptions by the stockholders at par; and these charges and expenses were capitalized and added to the original investment. In 1941, the carrying charges amounted to about $ 3,000,000.00.

In 1930, J. H. Hillman, Jr., an experienced operator in coal lands, became interested in the respondent's coal lands. He knew Julian Kennedy, Sr., then the respondent's president, and submitted to him a plan of development which contemplated the purchase of an adjoining mining property, known as the Edward mine, upon which he held an option, lying between the respondent's field and the Monongahela River, and the acquirement of a right of way over the Frick property which, in turn, lay between the Edward mine and the river, thereby affording to the respondent's field water transportation and eliminating a serious marketing handicap. Mr. Hillman proposed also to purchase 9000 shares of the respondent's stock at par.

The plan, with some modifications, was found acceptable. The Edward mine was bought, and the right of way acquired for a cash consideration and a wheelage charge of 3 1/2 cents a ton for coal hauled over the right of way. In addition to the 9000 shares of stock bought by Mr. Hillman, 12,854 shares were issued to the stockholders at par to provide funds to discharge corporate indebtedness, and Mr. Hillman subscribed for and accepted a proportionate number of these shares. All of the shares bought by Mr. Hillman were finally transferred to Hillman Coal and Coke Company, a Hillman corporation, which at the time of the trial, owned 11,939 out of a total issue of 57,543 shares of the respondent's stock, or approximately 20%.

In 1930, Mr. Hillman was made president of the respondent, and thereafter directed its affairs. Hillman Coal and Coke Company, through its officers and personnel, conducted the respondent's business, supplied office space, engineering services at cost, transported coal through subsidiaries and sold supplies to workmen and miners. From 1930 to 1941, some development work was done, and some coal mined and sold, but never in an amount sufficient to cover the costs. Money was obtained principally through advances made by Hillman Coal and Coke Company, and as of March 1, 1941, the respondent had current liabilities exceeding $ 2,225,000.00, of which amount over $ 1,600,000.00 was evidenced by demand notes held by the Hillman corporation. There was also a mortgage debt of $ 656,000.00. The current assets were slightly in excess of $ 70,000.00; and the ratio of current liabilities to current assets was 32 to 1. The financial condition of the respondent was most serious.

For some time prior to December 5, 1940, three of the seven directors of the respondent corporation were to be classed as Hillman representatives. At a meeting of the board held on that date, Ernest Iselin, who had been a member for ten years without ever having attended a board meeting, resigned; and on motion of the complainant, Joseph W. Kennedy, J. M. Leithead was elected to fill the vacancy, thereby for the first time giving the Hillman group a majority of the board membership.

At this meeting the financial condition of the company was considered. Mr. Hillman stated that Pittsburgh Steel Company had advanced a large sum of money, and would advance more, for the development and equipment of the respondent's mine, and that as one of the inducements he had on August 14, 1940, addressed a letter to that company, obligating the respondent to furnish all or at least 80% of the company's high volatile coal requirements for two of its steel plants for a period of twenty years. This action was approved by the board of directors. Upon Mr. Hillman's recommendation a committee of five, of which two members only were of the Hillman group, was appointed to prepare a plan of refinancing, and subsequently Mr. Hillman submitted a plan which proposed to obtain additional needed money for development work, to eliminate to a great extent the company's current demand indebtedness, and to interest large consumers of coal in the respondent, by issuing 122,457 shares of stock at $ 12.00 a share, of which 30,000 shares were to be sold to Pittsburgh Steel Company, a like number to Pittsburgh Coke and Iron Company, and 62,457 shares to Hillman Coal and Coke Company. It was also proposed that the respondent issue second mortgage bonds in the amount of $ 796,000.00 to Hillman Coal and Coke Company in exchange for the same amount of the respondent's demand notes held by that company. The committee did not meet as a whole, but the plan was discussed with all of the members and was acceptable to all of the members of the committee except Joseph W. Kennedy. At a meeting of the board of directors held on February 18, 1941, the plan submitted by the committee was approved in its essentials; but it was decided that the new shares should be first offered to the existing shareholders at the same price of $ 12.00 a share, the right to subscribe therefor nonassignable and limited to ten days; that a registration statement relating to the offering of the shares should be filed with the Securities and Exchange Commission; that the shares not subscribed for should be issued to the three named corporations; and that a meeting of the stockholders should be called to consider the execution of a second mortgage to secure the bonds to be issued to the Hillman Coal and Coke Company.

Mr. Hillman and his associates controlled Hillman Coal and Coke Company. He and an associate were directors of Pittsburgh Steel Company, Mr. Hillman being a member of the executive committee of the board of directors. Mr. Hillman and two associates were directors of Pittsburgh Coke and Iron Company, and he and one of his associates were two of the four members of the executive committee of that company's board. While the Hillman interests did not, as it appears, control the two companies, they undoubtedly exercised a large influence in their affairs.

A meeting of the stockholders was called to...