McDermott Inc. v. Lewis

• Decision Date: 09 December 1986
• Parties: McDERMOTT INCORPORATED, a Delaware Corporation, Defendant Below, Appellant, v. Harry LEWIS and Nina Altman, Plaintiffs Below, Appellees. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 206

531 A.2d 206

56 USLW 2179

McDERMOTT INCORPORATED, a Delaware Corporation, Defendant Below, Appellant, v. Harry LEWIS and Nina Altman, Plaintiffs Below, Appellees.

Supreme Court of Delaware.

Submitted: Dec. 9, 1986.

Decided: Sept. 16, 1987.

Upon appeal from the Court of Chancery. REVERSED.

Charles F. Richards, Jr., Esquire, of Richards, Layton & Finger, Wilmington, Richard F. Nolan (argued), and Dennis E. Glazer, of Davis Polk & Wardwell, New York City, of counsel, for appellant.

Norman M. Monhait, of Morris & Rosenthal, Wilmington, Mordecai Rosenfeld (argued), of Mordecai Rosenfeld, P.C., New York City, and A. Arnold Gershon, of A. Arnold Gershon, P.C., New York City, of counsel, for appellees.

Before CHRISTIE, C.J., HORSEY and MOORE, JJ.

MOORE, Justice:

We confront an important issue of first impression--whether a Delaware subsidiary of a Panamanian corporation may vote the shares it holds in its parent company under circumstances which are prohibited by Delaware law, but not the law of Panama. Necessarily, this involves questions of foreign law, and applicability of the internal affairs doctrine under Delaware law.

Plaintiffs, Harry Lewis and Nina Altman, filed these consolidated suits in the Court of Chancery in December, 1982 seeking to enjoin or rescind the 1982 Reorganization under which McDermott Incorporated, a Delaware corporation ("McDermott Delaware"), became a 92%-owned subsidiary of McDermott International, Inc., a Panamanian corporation ("International"). Lewis and Altman are stockholders of McDermott Delaware, which emerged from the Reorganization owning approximately 10% of International's common stock. Plaintiffs challenged this aspect of the Reorganization, and the Court of Chancery granted partial summary judgment in their favor, holding that McDermott Delaware could not vote its stock in International.

We conclude that the trial court erred in refusing to apply the law of Panama to the internal affairs of International. There was no nexus between International and the State of Delaware. Moreover, plaintiffs concede that the issues here do not involve the internal affairs of McDermott Delaware. Thus, we decline to follow Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir.1984), which prohibited a similar device involving a Panamanian subsidiary seeking to vote the shares it held in its Panamanian parent. Accordingly, we reverse. In so doing, we reaffirm the principle that the internal affairs doctrine is a major tenet of Delaware corporation law having important federal constitutional underpinnings.

I.

International was incorporated in Panama on August 11, 1959, and is principally engaged in providing worldwide marine construction services to the oil and gas industry. Its executive offices are in New Orleans, Louisiana, and there are no operations in Delaware. International does not maintain offices in Delaware, hold meetings or conduct business here, have agents or employees in Delaware, or have any assets here.

McDermott Delaware and its subsidiaries operate throughout the United States in three principal industry segments: marine construction services, power generation systems and equipment, and engineered materials. McDermott Delaware's principal offices are in New Orleans.

Following the 1982 Reorganization, McDermott Delaware became a 92%-owned subsidiary of International. The public stockholders of International hold approximately 90% of the voting power of International, while McDermott Delaware holds about 10%.

The stated "principal purpose" of the reorganization, according to International's prospectus, was to enable the McDermott Group to retain, reinvest and redeploy earnings from operations outside the United States without subjecting such earnings to United States income tax. The prospectus also admitted that the 10% voting interest given to McDermott Delaware would be voted by International, "and such voting power could be used to oppose an attempt by a third party to acquire control of International if the management of International believes such use of the voting power would be in the best interests of the stockholders of International." An exchange offer, and thus the Reorganization, was supported by 89.59% of McDermott Delaware stockholders. ¹

The applicable Panamanian law is set forth in the record by affidavits and opinion letters of Ricardo A. Durling, Esquire, and the deans of two Panamanian law schools, to support the claim that McDermott Delaware's retention of a 10% interest in International, and its right to vote those shares, is permitted by the laws of Panama. Significantly, the plaintiffs have not offered any contrary evidence.

Mr. Durling, an expert on Panamanian corporate law, ² stated:

7. Article 35 of Panamanian Cabinet Decree No. 247, dated July 16, 1970, which amended the General Corporation Law of Panama, added provisions which are applicable only to certain corporations incorporated under the laws of Panama. Article 35 states:

"Shares of a corporation owned by [an]other corporation in which the former corporation owns the majority of shares shall not be entitled to vote at Meetings of Shareholders nor shall be deemed as issued and outstanding shares for purposes of quorum."

8. Article 37 of Panamanian Cabinet Decree No. 247 specifically limits the prohibition on voting contained in Article 35 to those corporations registered with the National Securities Commission of Panama or those corporations whose shares are sold to the public within Panama. Article 37 states:

"The provisions contained in the foregoing Articles 34, 35 and 36 shall be applicable to corporations registered in the National Securities Commission and those whose shares are sold on the market, even though such corporations do not offer their own shares to the public."

Article 37 of Cabinet Decree No. 247 of 1970, as amended by cabinet Decree No. 30 of 1972.

9. I have examined a Certificate issued by the National Securities Commission (of Panama) to the effect that International is not registered with that Commission, and have therefore ascertained that International is not registered with that Commission. Accordingly, the prohibition set forth in Article 35 of Cabinet Decree No. 247 does not apply to International unless its stock is sold on the market in Panama. No Panamanian corporation, except one whose shares are either (a) registered with the National Securities Commission or (b) sold on the Panama market, is subject to the limitations of Article 35 of Cabinet Decree No. 247.

10. There is no general public policy of the Republic of Panama in favor of precluding Panamanian corporations from selling or issuing stock to their subsidiaries or precluding a subsidiary from voting any stock held of its Panamanian corporate parent, except for those corporations falling within the scope of Article 37. It is generally accepted by Panamanian counsel that, with the exceptions described above, subsidiaries may vote the stock held in their parent corporations.

11. A recent opinion of the General Attorney of Panama, dated May 2, 1984, has interpreted the proviso of Article 37 relating to shares "sold in the market," to mean that if a corporation's shares are sold in a private manner in Panama to a number of persons not exceeding 10 per year, such shares will not be considered to have been "sold in the market." ... To the best of my knowledge, none of International's securities has been sold to primary or secondary purchasers in Panama.

12. Based upon the foregoing, I am of the opinion that:

(a) McDermott Delaware can lawfully vote its shares in International at any of International's shareholders meetings;

(b) the provisions contained in Section 17 of Panama's General Corporation law are not applicable to shares held by McDermott Delaware, one of International's subsidiaries; and

(c) the retention by McDermott Delaware of a 10% interest in the voting power of International pursuant to the reorganization is lawful under applicable Panama law.

Appendix to Appellant's Opening Brief at A-178 to A-181. (Emphasis added).

Bonifacio Diez Fernandez, Dean of the Law School of the Catholic University, agreed that McDermott Delaware could vote its shares of International stock:

Regarding the second item of your consultation, the Corporation Law of Panama, Law 32 of February 26, 1927, does not contain any provision prohibiting a Panamanian corporation to vote the shares owned by another corporation in which the first corporation owns the majority of the shares.

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It is a principal of law that in matters of public law one can only do what is expressly allowed by the law; while in private law all acts not prohibited by law can be performed. This principal is acknowledged by Law 32 of 1927, numeral 11 Artile [sic] 19, when it states that the corporation may perform all types of legal businesses even if they are not contained in the objects of the corporation, specified in its Articles of Incorporation or its Amendments.

I have already stated in the preceding paragraphs that Article 35 of Cabinet Decree No. 247 is not applicable to corporations in general, but only to those registered with the National Securities Commission and to those who sell their shares within the national territory, in accordance to the provisions of Article 37 of said Decree No. 247.

Therefore, I am of the opinion that, in the absence of an expressed prohibition, a Panamanian corporation may vote the shares owned by another corporation in which the first owns the majority of shares.

Appendix to Appellant's Opening Brief at A-200 to A-201 (original) and A-206 to A-207 (English translation) (Emphasis added).

Finally, Dr. Edgardo Molina Mola, Dean of the Law School of the National University of Panama (Universidad de Panama), opined that McDermott Delaware could vote its International shares:

In item 2 of your letter, you consult me if the corporation law of Panama forbids...