Loft, Inc. v. Guth

Decision Date17 September 1938
Citation23 Del.Ch. 138,2 A.2d 225
CourtCourt of Chancery of Delaware
PartiesLOFT, INCORPORATED, v. CHARLES G. GUTH, THE GRACE COMPANY, INC. OF DELAWARE, a corporation of the State of Delaware, and PEPSI-COLA COMPANY, a corporation of the State of Delaware

[Copyrighted Material Omitted]

BILL TO IMPRESS A TRUST in favor of the complainant upon all the shares of stock of Pepsi-Cola Company, a Delaware corporation, registered in the name of the defendant, Charles G. Guth, and in the name of the defendant, The Grace Company Inc. of Delaware, a Delaware corporation, to secure a transfer of said shares to the complainant, and for an accounting.

Heard on bill, joint and several amended answer of the defendants answers to interrogatories filed by the respective parties, oral testimony taken before the Chancellor and exhibits.

Clarence A. Southerland, of the firm of Ward & Gray, and David L. Podell, Hays, Podell & Shulman, and Levien, Singer & Neuburger, all of New York City (Clarence A. Southerland, of Wilmington, and David L. Podell, Herman Shulman, Benjamin Algase, Herbert M. Singer, and Herbert L. Barnet, all of New York City, on the brief), for complainant.

Robert H. Richards and Caleb S. Layton, of the firm of Richards, Layton & Finger, and Whitney N. Seymour and Francis X. Fallon, Jr., of the firm of Simpson, Thacher & Bartlett, of New York City, for defendants.

OPINION

THE CHANCELLOR:

The complainant will be herein referred to as Loft, the defendant Pepsi-Cola Company as Pepsi and The Grace Company, Inc. of Delaware, as Grace.

Guth became a director and vice-president of Loft on or about July 27, 1929. He was elected and became a director and the president of Loft on March 20, 1930, and continued in both capacities until October 21, 1935. On that date he resigned as president after serious differences arose between himself and a majority of the other directors and after many of the five thousand employees of the company went on a strike.

Guth is for all practical purposes the owner of Grace. When reference is herein made to Grace it is as though the mention were of Guth.

Guth and Grace are the holders of about ninety-one per cent of the issued stock of Pepsi, which was incorporated on August 10, 1931. The complainant contends that said stock equitably belongs to it. The bill seeks its recovery. Three principal blocks of stock go to make the total sought to be recovered. They consist of one hundred thousand shares issued by Pepsi to Grace on or about September 14, 1931, in accordance with the terms of the contract hereinafter referred to between Guth and Roy C. Megargel dated July 23, 1931; ninety-seven thousand five hundred shares acquired by Pepsi on or about January 1, 1934, in the so-called Megargel settlement and by Pepsi subsequently transferred to Guth; and forty thousand shares acquired by Grace in December, 1934, in settlement of Pepsi's open account indebtedness to it at that time of $ 46,286.49.

Loft claims that these shares together with all gains and profits which either Grace or Guth has derived therefrom, belong to it.

The nature of the complaint which the bill makes was stated by me on the occasion when exceptions to interrogatories were disposed of (21 Del.Ch. 361, 191 A. 879, 881), as follows:

"Briefly described, the gravamen of the bill is that Guth while he was the president and the controlling influence in Loft, Inc., caused a certain very desirable business proposition which was made to him as the president of the complainant, to be diverted from the complainant to a newly formed corporation, the defendant Pepsi-Cola Company, most of the shares of the capital stock of which he and his personal holding corporation, the defendant The Grace Company, acquired.

"The business referred to is that of manufacturing a syrup and carbonated beverage made therefrom, known as Pepsi-Cola' which is marketed under a trademark of that name--a syrup that is compounded by a secret formula. The trademark and formula were acquired by Pepsi-Cola Company from one Megargle who, the bill alleges, approached Guth as president of the complainant, with a proposition that the business of exploiting the beverage be entered upon by the complainant.

"The bill alleges that the complainant was equipped with facilities for both the wholesale manufacture of the drink and its distribution through a large chain of stores in which the complainant sold candies and soft drinks, etc., and other food products for consumption by the public.

"It is further alleged by the bill that the complainant was financially able to engage in the proposed new business and make the same successful.

"Notwithstanding the attractiveness of the proposition, and that the complainant possessed the manufacturing and wholesale and retail facilities, and the financial resources to carry it through, the bill charges that Guth did not submit the proposal to the directors of the complainant for their consideration. He is charged with having personally appropriated to himself the opportunity which Megargle's suggestion offered, and to have thereby succeeded in acquiring large profits and gains.

"Not only did Guth thus abuse his power to his own advantage to deprive the complainant of the opportunity of embarking upon the profitable Pepsi-Cola business, but, the bill alleges, he went further in profiting himself at the expense of the complainant. He caused the complainant's laboratories and other plant facilities to be used, the time of its employees to be spent, in the manufacture of Pepsi-Cola syrup, its credit to be employed in the purchase of materials and ingredients entering into the finished product, and its many stores to sell and advertise Pepi-Cola in place of the established soft drink known as Coca-Cola, thereby measurably popularizing the new beverage. These things, the bill charges were all done at the expense of the complainant and without profit or advantage to it.

"The result, the bill alleges, is that Guth and The Grace Company, which he and members of his family own, are in possession of many shares of stock of Pepsi-Cola Company which are of great value and which, by reason of the foregoing brief sketch of facts, ought in equity be decreed to belong to the complainant, subject of course to all proper charges found on an accounting to be due to the defendants."

In 1931 Loft operated one hundred and fifteen stores largely located in the congested centers of population along the Middle Atlantic seaboard. The preceding year it acquired the so-called Happiness and Mirror chains of stores. When the bill was filed it operated about two hundred stores. These stores sold at retail candies, confections, ice cream, carbonated and other soft drinks and other food products such as are to be had in light lunch establishments. It engaged also in a wholesale candy business. It had a large manufacturing plant at Long Island City, New York, where it manufactured candies, ice cream and fountain syrups, and prepared most of the articles of food which it sells in the stores. It was a substantial company with assets having a value in 1931, exclusive of goodwill, of nine million dollars. Its net asset position was amply sufficient to finance the Pepsi-Cola enterprise.

Loft was a large consumer of Coca-Cola syrup which when mixed with carbonated water produces the nationally known and popular drink called "Coca-Cola. " There is evidence in the record which shows that Loft during the years 1929, 1930 and during eight and one-half months of 1931, purchased an average of 31,584 gallons of Coca-Cola syrup per year. It dispensed Coca-Cola in the form of the carbonated beverage over the fountains in its stores at five cents per glass. The cost to it for the syrup was about $ 1.48 per gallon.

Guth as president of Loft thought that the Coca-Cola company ought, in view of Loft's large consumption of its syrup to give to Loft a jobber's discount. This, the Coca-Cola Company refused to do. Numerous conferences were had between Loft representatives, principally Guth, and Coca-Cola representatives. The controversy over price caused a sense of grievance on Guth's part.

As a result, Guth considered the advisability of Loft's dropping Coca-Cola from its merchandising and supplanting it with some other so-called cola drink.

Accordingly on May 19, 1931, we find a memorandum addressed by Guth to V. O. Robertson, Loft's vice-president, as follows: "Mr. Robertson: Why are we paying the full price for coca-cola? Can you handle this or would you suggest our buying Pebsaco (Pepsi-Cola) at about $ 1.00 per gallon? C. G. G." On May 30, 1931, Robertson replied: "We are not paying quite full price for Coca-Cola. We pay $ 1.38 (sic. should be $ 1.48) instead of $ 1.50 (sic. should be $ 1.60) but we pay too much. I am investigating as to pepsi-cola. V. O. R."

When Guth's memorandum of May 19, 1931, was written Pepsi-Cola syrup was being compounded and marketed by National Pepsi-Cola Company, a company which Megargel controlled. The Pepsi-Cola beverage had been on the market for twenty-five or more years. It appears, however, to have been localized in its sales in the southern part of the country. It was not known in the consumers trade in the area where Loft's stores were located. Coca-Cola was the popular and well known cola drink in that area. Many millions had been spent on popularizing it. For any strange cola beverage to try to supplant or to compete with Coca-Cola in popular demand would be an exceedingly ambitious undertaking. Yet Guth considered making the try so far at least as the Loft trade was concerned.

It so happened that on the very day before Guth's memorandum to Robertson, viz., on May 18, 1931, a petition in bankruptcy had been...

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