Liese v. Jupiter Corp.

• Decision Date: 28 February 1968
• Citation: 241 A.2d 492
• Parties: G. Burton LIESE and Claude M. McDonald, Plaintiffs, v. The JUPITER CORPORATION et al., Defendants (two cases).
• Court: Court of Chancery of Delaware

Page 492

241 A.2d 492

G. Burton LIESE and Claude M. McDonald, Plaintiffs, v. The JUPITER CORPORATION et al., Defendants (two cases).

Court of Chancery of Delaware, New Castle County.

Feb. 28, 1968.

Potter, Anderson & Corroon, by Richard F. Corroon, Wilmington, for plaintiffs, G. Burton Liese and Claude M. McDonald.

Baker, Botts, Shepherd & Coates, by John E. Bagalay, Jr., Alvin M. Owsley, Jr., and John Kirkland, Houston, Tex., of the Texas Bar, for plaintiff G. Burton Liese.

Young, Conaway, Stargatt & Taylor, by H. Albert Young, and Edward Maxwell, 2nd, Wilmington, and Friedman, Koven, Salzman, Koenicsberg, Specks & Homer, by Sheldon O. Collen, and Howard R. Koven, Chicago, Ill., of the Illinois Bar, and Ross, Hardies, O'Keefe, Babcock, McDugald & Parsons, by William W. Brackett, Chicago, Ill., of the Illinois Bar, for individual defendants.

Connolly, Bove & Lodge, by Januar D. Bove, Jr., Wilmington, for defendant The Jupiter Corporation.

DUFFY, Chancellor:

These are actions consolidated for trial in which the real adversaries are the holders of preferred and common stock respectively. The objective is management control of The Jupiter Corporation, a Delaware corporation ('Jupiter'), and the decision as to this includes a construction of Jupiter's certificate of incorporation relating to voting rights of the preferred stock.

I

A. The parties and the contentions:

Jupiter is a diversified company with operating divisions in the fields of transportation, construction and real estate, among others. One of these is a gas gathering oil and gas division which derives its principal revenues from the servicing of off-shore wells in the Gulf of Mexico owned by Union Oil Company of California ('Union'), Kerr-McGee Oil Industries, Inc., and Phillips Petroleum Company ('Phillips'). Jupiter's common stock is listed and is held by approximately 12,000 common stockholders. The preferred stock is not listed; there are about 8,000 preferred stockholders.

Plaintiff G. Burton Liese owns some 111,000 preferred shares, which is about 20% Of the outstanding preferred. At all pertinent times Mr. Liese has been and is a director and vice-president of Jupiter. Mr. McDonald is neither a director nor officer of the company.

The individual defendants are the 'common stock directors' and principal officers of Jupiter who are now exercising management control of the corporation. ¹

Jupiter has not paid any dividend on the preferred stock since January 1, 1966. Under the charter, quarterly dividends on that stock are payable on the first days of January, April, July and October. At the time of trial, six preferred dividends had been 'passed.'

Plaintiffs contend that the preferred stockholders are entitled to elect a majority of the nine-member Jupiter board because (i) payments have been made on contractual indebtedness and accrued dividends on the preferred stock have not been paid; and (ii) accrued and unpaid dividends on the preferred are in arrears in an amount equivalent to three full quarter-yearly dividends.

Defendants contend that there has not been any gas gathering income for any period for which dividends have not been paid and, hence, no such dividends are accrued or unpaid. Defendants also raise certain other defenses which are considered hereafter.

B. The background

In 1962 Jupiter acquired the business and assets of Commonwealth Oil Company, a Florida corporation ('Commonwealth'), under a merger in which the Commonwealth stockholders received a new issue of Jupiter preferred stock. All or substantially all of the preferred stock issued by Jupiter resulted from that merger.

The Jupiter charter carefully and completely relates the preferred stock to the gas gathering system in a way that suggests that Jupiter and Commonwealth wanted the benefits of merger without its unitizing impact. But while the seeds of division were planted in the charter, they did not germinate until 1966 when gas gathering revenues were reduced by some 65%.

In December 1962 the Federal Power Commission instituted an investigation of, among other things, the gas transportation rates charged by Jupiter for servicing the off-shore wells.

In January 1966 the Presiding Examiner filed his initial decision which was most unfavorable to Jupiter. The proceedings were eventually ended by an FPC order effective May 15, 1966 which was based upon an offer of settlement made by Jupiter. That order reduced corporate jurisdictional revenues to approximately $500,000 annually (from a $1,500,000 level) and required Jupiter to escrow $1,602,298 against a contingent liability for severance taxes imposed by the State of Louisiana and actually collected and held by Jupiter. At present revenue levels any and all net gas gathering income goes to the holders of preferred stock, while the holders of the common, in effect, pay the income taxes on it.

The annual meeting of the corporation was noticed by management for June 21, 1967. Without attempting to particularize all of the events of that day, I note that the common stockholders elected a board of nine directors, six of whom were 'common' directors and three of whom were 'preferred' directors. The holders of preferred stock, or certain of them, met and elected five 'preferred' directors. Each side then elected a slate of officers and purported to act as management of the company. The chaotic consequence of all of this is referred to hereafter.

C. The actions

The first of the suits consolidated for trial, Civil Action 2565, was filed on February 17, 1967 and is designated as a class suit brought on behalf of all preferred stockholders; it seeks a determination by the Court to the effect that under Jupiter's charter the preferred stockholders have, as a matter of law, the right to elect a minimum majority (5) of Jupiter's board, and an order for the call of a meeting for that purpose.

The second suit, Civil Action 2630, was filed on June 21, 1967 and is designated as a petition to review the election of directors. In that case plaintiffs seek a declaration by the Court that the five directors elected by preferred stockholders on June 21 were validly elected.

II

I first consider the petition to review the election of directors under 8 Del.C. § 225. ² At this point I assume, without deciding, that there has been a default in the payment of one or more dividends on the preferred stock and, under the charter, the holders of preferred stock had the right to elect a minimum majority of Jupiter's board.

Plaintiffs contend that this was done on June 21 and since that date G. Burton Liese, R. G. Rice, John D. Kirkland, Harold Burrow and Alvin M. Owsley, Jr., have constituted a majority of the board.

The notice of the annual meeting sent by management provided that one of the purposes of the meeting was to elect directors for the ensuing year. At that meeting Mr. Kirkland, acting for and with Mr. Liese and other preferred stockholders, sought recognition from the Chair and attempted to move the nomination of five (preferred) directors to the nine-man board. He was ruled out of order. Mr. Kirkland and other preferred stockholders then 'convened' another meeting of Jupiter stockholders in a different room in the same building, after first inviting all stockholders present to meet with them.

Mr. Liese was selected as chairman of that meeting. It was determined that a quorum of common stockholders was not present and thereafter common stockholders did not participate in those proceedings. About 60% Of the outstanding preferred stock was represented in person or by proxy. And it was at that time and circumstance that Messrs. Liese, Rice, Kirkland, Burrow and Owsley were said to have been elected as directors of the corporation. Thereafter they met and elected corporate officers. ³

At the same time all of the above was taking place the meeting of stockholders noticed and called by management as the annual meeting was continuing elsewhere; nine directors were elected, including three 'preferred' directors.

A. The contentions

Plaintiffs contend that the provisions in the charter which shift majority voting powers to the preferred became operative as a result of default in the payment of dividends, and that the notice of annual meeting sent by management was sufficient notice to all stockholders under the corporate charter. In short, plaintiffs say that all stockholders were notified that a meeting was to take place for the election of directors, that a majority of the preferred stockholders took the position that the preferred stockholders were entitled to elect five directors and did so.

B. The charter

Section Fourth A 6(b) of the Jupiter charter provides as follows:

'* * * At any time when default voting rights shall, pursuant to the provisions of this Section 6(b) of Part A, be vested in Preferred Stock, the President, or any Vice President, or the Secretary or the Treasurer of the corporation shall, upon the written request of the holders of record of at least ten percent (10%) of the total number of shares of Preferred Stock outstanding, addressed to the Secretary of the corporation, call a special meeting of holders of Preferred Stock and of any other class or classes of stock having voting power with respect to the election of directors. Such meeting shall be held at the earliest practicable date at the place at which the last preceding annual meeting of stockholders of the corporation was held, but may be held at the time and place of the annual meeting if such annual meeting is to be held within 60 days after such additional voting rights shall be vested in Preferred Stock. If such meeting shall not be called by the proper officer of the corporation as required within 20 days after personal service of the said written request upon the Secretary of the corporation, or within 20 days after mailing the same within the United States of America by registered mail addressed to the Secretary of the corporation...