Moskowitz v. Bantrell
| Decision Date | 19 April 1963 |
| Docket Number | No. 741962,741962 |
| Citation | 41 Del.Ch. 177,190 A.2d 749 |
| Parties | Samuel MOSKOWITZ, Appellant, v. Myron A. BANTRELL, Paul Fussell, Ralph M. Haney, Leon A. Kahn, Harold W. Sanders, Defendants Below, and Filtrol Corporation, Appellees. |
| Court | United States State Supreme Court of Delaware |
Appeal from an order of the Court of Chancery of New Castle County dismissing plaintiff's complaint. Affirmed.
Russell J. Willard, Jr., of Hastings, Taylor & Willard, Wilmington, and Frank Weinstein, New York City, for appellant.
William S. Potter and Blaine T. Phillips, of Berl, Potter & Anderson, Wilmington, for appellee, Filtrol Corp.
This is a stockholder's suit to compel the declaration of a dividend. It was heard by the Vice Chancellor upon the pleadings, the defendant corporation's motion to dismiss, and affidavits. The Vice Chancellor properly treated the motion as in effect one for summary judgment. He dismissed the complaint on the merits. The stockholder appeals.
Filtrol is a major producer of petroleum cracking-catalysts used by petroleum refiners for the production of high-octane gasoline. It also produces other substances used for refining and drying purposes. Its capital structure consists of 1,312,332 shares of common stock. Plaintiff is the owner of record of 25 shares, acquired in 1958.
Filtrol's fixed assets consist of three manufacturing plants, a processing plant, and clay mining properties from which its raw materials are drawn. It is a wastingasset corporation.
Its operations have been profitable and over a period of years it has accumulated a very large earned surplus. The book value of its physical properties (after depreciation and amortization) is $4,606,000; whereas, its earned surplus as of September 30, 1961 was $25,501,000. This sum is largely invested in short term tax-exempt bonds and government securities.
As above stated the stockholder seeks to compel the declaration of a dividend. He charges:
(1) That the earnings have been permitted to accumulate beyond the reasonable needs of the business of the corporation, and are not needed for the operation of the business or its reasonably anticipated needs;
(2) That such earnings will be subject to the accumulated earnings tax (§§ 531-537, U.S.I.R. Code of 1954);
(3) That the action of the directors in refusing to distribute such accumulated income to the stockholders is arbitrary and is in violation of their fiduciary duties.
The complaint asks for an order directing the distribution to stockholders of such part of the earned surplus as the court may feel to be unnecessary in the operations of Filtrol's business.
The principle of law applicable to the relief sought is well settled. Before a court will interfere with the judgment of the Board of Directors, fraud or gross abuse of discretion must be shown. Bryan v. Aikin, 10 Del.Ch. 1, 82 A. 817; Eshleman v. Keenan, 22 Del.Ch. 82, 194 A. 40; Treves v. Menzies, 37 Del.Ch. 330, 142 A.2d 520; 11 Fletcher Cyc. Corporations, § 5325. In the Eshleman case Chancellor Wolcott, recognizing the court's power to compel the declaration of a dividend, said:
'* * * the court acts only after a demonstration that the corporation's affairs are in a condition justifying the declaration of a dividend as a matter of prudent business management and that the withholding of it is explicable only on the theory of an oppressive or fraudulent abuse of discretion.' 22 Del.Ch. 88, 194 A. 43.
What has plaintiff shown to justify a finding of such an abuse?
The asserted liability to the accumulated earnings tax is clearly without merit. The tax is levied on the corporation's 'accumulated taxable income', which is the net taxable income after payment of Federal income tax. It is shown that for the years 1958-1961 (the only years still open for audit) the dividends paid substantially exceeded such income. We do not understand this contention to be insisted upon; at all events we think that it cannot be sustained.
Upon the issue of the arbitrary withholding of dividends, defendant has filed the affidavit of Myron A. Bantrell, its president. The financial data set forth show the following approximate totals for the period 1952-1961:
Net income $34,211,000
Dividends paid 18,266,000
New plant and property 13,697,000
Research and development 5,162,000
These figures show an excess of expenditures over income of $2,914,000. They also show that the accumulated surplus represents funds available by reason of the statutory percentage depletion, and depreciation and amortization.
The affidavit further avers that Filtrol's sales have declined from $21,434,000 in 1955 to $13,437,000 in 1961, because of various reasons which suggest the necessity for the corporation to maintain a highly liquid position to meet new problems in a developing industry.
Finally, the president states that the company presently has under way new projects at a cost of $7,000,000 to be required within two years; that a potash project under study may involve the expenditure of from $25,000,000 to $40,000,000; and that there...
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