Reis v. Hazelett Strip–casting Corp..

• Decision Date: 01 February 2011
• Docket Number: C.A. No. 3552–VCL.
• Citation: 28 A.3d 442
• Parties: Ginette REIS, Plaintiff,v.HAZELETT STRIP–CASTING CORPORATION, Stave Island Limited Partnership, R. William Hazelett, David N. Hazelett, Raymond J. Clavelle, Jr., Craig Snyder and Richard T. Hayden, Defendants.
• Court: Court of Chancery of Delaware

28 A.3d 442

Ginette REIS, Plaintiff,

v.HAZELETT STRIP–CASTING CORPORATION, Stave Island Limited Partnership, R. William Hazelett, David N. Hazelett, Raymond J. Clavelle, Jr., Craig Snyder and Richard T. Hayden, Defendants.

C.A. No. 3552–VCL.

Court of Chancery of Delaware.

Submitted: Oct. 25, 2010.Decided: Jan. 21, 2011.Corrected: Feb. 1, 2011.

Ronald A. Brown, Jr., Marcus E. Montejo, Prickett, Jones & Elliott, P.A., Wilmington, Delaware; Attorneys for Plaintiff.James S. Green, Kevin A. Guerke, Jared T. Green, Seitz, Van Ogtrop & Green, P.A., Wilmington, Delaware; Attorneys for Defendants.

OPINION

LASTER, Vice Chancellor.

The controller of Hazelett Strip–Casting Corporation cashed out the minority shares held by the estate of his deceased brother via a reverse stock split. The plaintiff sued on behalf of the beneficiaries of the estate who would have received shares but for the reverse split. I hold that the reverse split was not entirely fair and award damages of $1,268,850, plus pre- and post-judgment interest, less an offset for amounts already paid.

I. FACTUAL BACKGROUND

These are the facts as found after a two-day trial.

A. Hazelett Strip–Casting Corporation

In 1929, C.W. Hazelett designed and operated the first commercial continuous casting and processing line in the world. In 1949, he invented the twin-belt caster. In 1956, his sons William Hazelett (“Bill”) and S. Richard Hazelett (“Dick”) formed Hazelett Strip–Casting to capitalize on their father's inventions.¹

Located in Colchester, Vermont, Hazelett Strip–Casting manufactures casting machines for the production of aluminum, zinc, lead, and copper strip and related products. A strip-casting machine is a major capital investment costing up to $16 million. Once in service, a strip-casting machine has a useful life of twenty to thirty years. Hazelett Strip–Casting sells between zero and four machines per year. The bulk of the company's stable and recurring revenues come from servicing existing machines and selling spare parts.

Hazelett Strip–Casting has always been a family business. From 1956 until December 27, 1994, Bill and Dick were Hazelett Strip–Casting's only stockholders. Bill owned 800 shares, giving him 69.57% of the equity. Dick owned 350 shares, giving him 30.43%. The brothers did not have a voting agreement, and the corporation's governing documents lacked any supermajority requirements or other provisions that would limit Bill's control as majority stockholder. Dick wrote in his Last Will and Testament dated December 5, 2001, that

I permitted Bill to acquire a majority ownership interest ... without understanding that minority stockholders have in practice almost no legal rights against a majority unless the Corporation were sold. The so-called fiduciary obligation of the majority is inherently too vague to be effective except in around one percent of actual cases. I was late in learning that corporation law, unlike partnership law, is designed to favor unitary control. Nevertheless, the outcome is not entirely unreasonable. Given my brother's temperament, he needed leeway, freedom, and he still needs it. I credit Bill for guiding our corporation to success and for finally allowing me to share in that success to a limited extent.

JX1 at 6.

On December 27, 1994, Bill formed Stave Island Limited Partnership for estate planning purposes and contributed his 800 shares to Stave Island. Bill controlled Stave Island through a two-thirds general partner interest. Bill's wife, Dawn Hazelett, held the remaining one-third general partner interest. A majority of the limited partner interests were held by an irrevocable trust in Bill's name. The other limited partner interests were held by Bill's children and their spouses. By letter dated June 27, 2006, Bill resigned as managing general partner and transferred his general partner interest to Dawn.

At the time of the decisions relating to the reverse split, Hazelett Strip–Casting's board of directors consisted of Bill, his son David N. Hazelett (“David”), and company employees Raymond J. Clavelle, Jr., Craig Snyder and Richard T. Hayden. Bill served as Chairman, President, and Chief Executive Officer, having held these positions from the founding of the company until he passed away during the pendency of this case.² David served as the company's Executive Vice President, having worked in various positions for the company since 1987. Clavelle was the company's General Manager, having worked for the company since 1977. Hayden was the company's Manufacturing Manager, having worked for the company since 1985. Snyder was the company's Engineering Manager, having worked for the company since 2002.

Dick died on July 23, 2002. In his will, he bequeathed his 350 shares to 169 individuals, consisting primarily of past and present company employees. The five defendants were bequeathed a total of 20 shares. Plaintiff Ginette Reis received two shares. She spent her career providing cleaning services to the company. Janet Patterson received two shares. She had worked as Dick's librarian. Dick's will named Reis and Patterson as executors for his estate (the “Estate”). The will was probated before the Probate Court in and for Chittendon County, Vermont (the “Probate Court”).

B. Bill And David Respond To The Bequests.

Bill and David did not relish the prospect of Dick's shares being distributed to 169 individuals. They cited assorted specific objections, including the notion that Hazelett Strip–Casting would “lose [its] close corporation status” under Delaware law, which they understood to mean that “there would be additional reporting and notice requirements.” Trial Tr. (David) 84; see JX26 at 1 (“HSCC would lose its ‘close corporation’ status under Delaware corporate law, requiring expensive large corporation procedures to be followed.”). Their belief was heartfelt, but incorrect. Hazelett Strip–Casting never opted to qualify as a close corporation, which requires specific provisions in a corporation's charter. See 8 Del. C. § 342. Nor was Hazelett Strip–Casting an S–Corporation, which would have limited the number of stockholders it could have. See 26 U.S.C. §§ 1361–79 (2011). Hazelett Strip–Casting was simply a closely held corporation in the generic sense, and the distribution of Dick's shares would not have changed anything about its governance.

The defendants also worried that KeyBank N.A., Hazelett Strip–Casting's primary lender, would balk at 169 new stockholders. Bill and Dick had pledged their shares to secure Hazelett Strip–Casting's loans, and the defendants did not believe KeyBank would accept 169 additional individual pledges. Trial Tr. (David) 65. This was a rational concern, but it turned out KeyBank was willing to work with the legatees.

The defendants also professed fear that shares would end up in the hands of disgruntled former employees of the company. At a probate hearing in February 2005, two such individuals asserted that they were entitled to shares under the will. The defendants testified that the individuals had sued or threatened to sue the company. The defendants thought that if the individuals obtained shares, they would interfere with the management of the business and “[t]he very ‘being’ of HSCC and its ability to continue as an ongoing business would be jeopardized.” JX26 at 1. In assessing the magnitude of this threat, the defendants appear to have overestimated the rights available to minority stockholders and underestimated the authority of the board of directors under Section 141(a) of the Delaware General Corporation Law (the “DGCL”), 8 Del. C. § 141(a).

Having reviewed the record, heard the living defendants testify, and read Bill's deposition, I believe that Bill and David deeply disliked the idea of their family-owned company suddenly being opened up to outsiders. What ultimately drove the company's response to the threatened distribution of Dick's shares was their conception of Hazelett Strip–Casting as the family business that Bill co-founded, built, and wanted to pass on intact to his children, without 169 co-owners. The other directors, all senior company employees, understandably channeled Bill and David's sentiments.

C. Bill And David Try To Buy The Estate's Shares.

On October 25, 2004, Hazelett Strip–Casting offered to purchase the Estate's 350 shares for $1,500 per share. Bill set the price unilaterally. When questioned about the price in his deposition, Bill said he “just pulled it out of the air.” The defendants characterize this remark as sarcasm from a self-made nonagenarian who ran out of patience with the deposition process. The fact remains that Bill set the price without input from anyone else or any valuation analysis. The record contains ample evidence that Bill was a self-confident and sometimes headstrong individual who was the dominant force at his company. Although Bill did not phrase his answer optimally for litigation defense, his candid response fell close to the mark.

David communicated Bill's figure to Reis and Patterson. In his letter, David described the $1,500 price as “more than twice the $715 per share amount provided for in the old Stock Purchase Agreement.” JX2 at 2. That agreement was executed in 1981 and entitled the Estate to put its shares to the company at that price. It did not give the company a call. Adjusted for inflation, the $715 price equated to $1,485.85 in 2004 dollars, without affording any value to the growth and success of the company over the intervening 23 years.

David also observed that the price was “$571.43 per share higher than the $928.57 per share amount of the [2003] Gallagher Flynn valuation.” JX2 at 2. The Estate obtained that valuation for estate tax purposes, where a low valuation is desirable. Bill recognized that a higher valuation “would only have raised the value of Dick's estate above his IRS exemptions and would have obligated the estate to pay high estate taxes.... The only one to gain...