Rosenthal v. Burry Biscuit Corporation

• Decision Date: 16 June 1948
• Court: Court of Chancery of Delaware
• Parties: RICHARD L. ROSENTHAL, v. BURRY BISCUIT CORPORATION, a Delaware corporation, and GEORGE W. BURRY

60 A.2d 106

30 Del.Ch. 299

RICHARD L. ROSENTHAL, v. BURRY BISCUIT CORPORATION, a Delaware corporation, and GEORGE W. BURRY

Court of Chancery of Delaware, New Castle

June 16, 1948

Arthur G. Logan, of the firm of Logan, Duffy & Boggs, for plaintiff.

John J Morris, Jr. and Howard L. Williams, of the firm of Hering Morris, James & Hitchens, (James V. McNamara, of Paterson, N J., of counsel), for defendants.

David F. Anderson, of the firm of Southerland, Berl & Potter) amicus curiae.

OPINION

SEITZ, Vice-Chancellor:

This is the decision on defendants' motion to dismiss the amended complaint for failure to state a cause of action, and for the reason that the plaintiff was not a stockholder of record at the time of the transaction of which he complains. ^[1]

The factual allegations of the amended complaint are taken to be true for purposes of disposing of the motion to dismiss. I shall therefore set forth the allegations at some length.

Between April 23 and May 16, 1945, plaintiff purchased 2,500 shares of the common stock of Burry Biscuit Corporation (hereinafter called the "Corporation"), and the stock so purchased was represented by street certificates standing in the names of brokers. On January 28, 1946, plaintiff caused his stock to be transferred into his name upon the books of the Corporation.

The defendant Corporation is a Delaware corporation engaged in the manufacture and sale of biscuits, crackers and related products. The Corporation's annual report for the fiscal year ending October 31, 1945, showed that it had then outstanding 405,224 shares of common stock.

The individual defendant George B. Burry (hereinafter called "Burry") has at all times since the organization of the Corporation been its president and a member of its board of directors. On January 18, 1946, Burry was, and still is, ^[2] the owner of 44,890 shares of the Corporation's common stock. Burry has selected, dominated and controlled the board of four directors at all times since the organization of the Corporation, and through the solicitation of management proxies he and his nominees have controlled all meetings of stockholders.

Burry has received a substantial salary for services rendered by him since the organization of the Corporation. His salary has always consisted of a fixed amount, plus an amount equal to 3% of the consolidated net profits after taxes of the Corporation and its subsidiaries. The fixed part of his salary started at $ 12,000 for the first year and was gradually increased until in January of 1945 the board of directors authorized the payment of a salary to Burry of $ 30,000 per year plus 3% of the net profits. An estimate of Burry's percentage of profit for the fiscal year ending October 31, 1945, was approximately $ 7,800. With the elimination of the corporate excess profit taxes in 1946, the corporate profits after taxes were anticipated to be much greater with a consequent increase in Burry's compensation.

Starting with a fiscal year 1946, Mr. Burry will receive as compensation for his services to the Corporation and its subsidiaries under the January, 1945, resolution of the board of directors in excess of $ 50,000 per year.

On September 28, 1945, the Burry-dominated board of directors passed a resolution granting Burry an option to purchase at any time within 5 years from September 28, 1945, 50,000 shares of the common stock of the Corporation at $ 6.00 per share. The resolution further provided that the 50,000 shares might be purchased at one time, or in such amounts and at such times as Burry desired, but that no part of the option could be exercised within 6 months from September 28, 1945. It further provided that if Burry resigned or was discharged, or died prior to the expiration of the option, he or his estate, as the case might be, might take up the unexercised portion of the shares of stock purchasable under the option within 6 months from the date of such resignation, discharge, or death. The resolution granting the option stated that it was being granted "in order to afford George W. Burry an opportunity to acquire by investment a substantial interest in the corporation." This resolution, which is now under attack, was passed while plaintiff was the equitable but not the registered owner of his stock.

Plaintiff alleges that no consideration was paid or given by Burry or received by the Corporation for the option, and that it was not granted in consideration of any services rendered, but was and still is a gift.

When the option was granted, the Corporation's common stock was and still is listed on the New York Curb Exchange. On the option date 2,700 shares of the Corporation's common stock were sold at prices ranging from a low of 6-7/8 to a high of 7-1/8, the closing price being 7-1/8. For the week ending Friday, September 28, 1945 -- the date the option was granted -- 18,200 shares were sold on the Curb Exchange for a high of 7-3/8 and a low of 6-5/8.

The Corporation's stock had been rising in value for some time prior to September 28, 1945, and Burry and the other directors at that time saw that the net sales of the Corporation were rising steadily and rapidly and that profits were rapidly increasing. They knew or were in a position to know that for the fiscal year ending October 31, 1945, the corporate records would show vastly increased sales, and profits more than doubling those for the previous fiscal year. They likewise knew or should have known that by virtue of the proposed elimination of the excess profits taxes the Corporation's common stock would probably rise sharply in value. At the same time, Burry and his associates had plans for the future development of the Corporation to broaden the scope of future operations, and they believed the Corporation held great promise for expansion and greater profits.

After the release of the results of operations for the fiscal year ending October 31, 1945, the Corporation's common stock rose to more than $ 11.00 per share, and it is alleged that even at the current recession of prices (September, 1946, when the original complaint was filed) the stock was selling at $ 9.00 per share. At the time the option was granted, the common stock had a "value" in excess of the option price.

At the time the resolution granting the option was passed, Burry agreed to take steps to have the Corporation engage the Carlton M. Higbie Corporation, of which Carlton M. Higbie ^[3] was an officer, director and the principal controlling stockholder, to act as an underwriter on highly advantageous terms in connection with the sale of securities to raise new capital. After the passage of the resolution granting the option to Burry (I infer that Higbie voted therefor), the Higbie Corporation was made an underwriter and syndicate manager in connection with the issuance of the Corporation's preferred stock. The Higbie Corporation received substantial commissions and warrants to purchase the Corporation's common stock for these services. The warrants were so advantageous that the SEC required the Corporation to indicate in its proxy statement the effect of their issuance.

At a meeting of the Corporation's stockholders held on February 8, 1946, Burry and two of his nominees acting as proxies for stockholders whose proxies were solicited by the management voted in favor of a resolution ratifying the granting of the option to Burry. Plaintiff objected by letter to the proposed action.

Plaintiff then sets forth the reasons why the derivative action is necessary.

Plaintiff prays that the Corporation be enjoined from recognizing the option or issuing stock thereunder, and that the court declare the option is and at all times has been null and void.

The foregoing factual recital contains the substance of the amended complaint. Also, the parties have stipulated that the Corporation has the usual bylaw providing that it is entitled to treat the record stockholder as the holder in fact, and is not bound to recognize any equitable claim to the stock save as provided by Delaware law.

Defendantsfirst move to dismiss the amended complaint for failure to state a cause of action.

The defendants contend initially that the allegations of the amended complaint fail to comply with the requirements of Chancery Court Rule 9 (b) which, insofar as here pertinent, provides:

"In all averments of fraud * * * the circumstances constituting fraud * * * shall be stated with particularity."

Defendants say that the plaintiff is merely alleging a legal conclusion when he alleges that the option was granted without consideration. They say that the quoted rule requires him to set forth facts from which such an inference can be drawn. Certainly the complaint sets forth with reasonable particularity the facts surrounding the passage of the resolution granting the option. Under the allegations of the complaint setting forth the terms of the option itself, there is nothing to show that Burry is under any obligation to purchase the stock, or that he is under any obligation to continue working for the Corporation, or that the granting of the option is otherwise connected with the proper exercise of business judgment. Under the circumstances, it is difficult to see just how the plaintiff could allege more than that the granting of the option was a gift; the granting of a valuable right without consideration. The allegation as here employed necessarily possesses both a legal and a factual aspect; legal in that it is an allegation of the very point for decision, but factual in the sense that it negatives the receipt of anything constituting legal consideration.

I feel that the plaintiff has set forth the circumstances constituting the alleged fraud with the required particularity and...