Skelly v. Dockweiler

• Decision Date: 05 December 1947
• Docket Number: Civ. No. 7740-Y.
• Citation: 75 F. Supp. 11
• Parties: SKELLY v. DOCKWEILER et al.
• Court: U.S. District Court — Southern District of California

75 F. Supp. 11

SKELLY v. DOCKWEILER et al.

Civ. No. 7740-Y.

District Court, S. D. California, Central Division.

December 5, 1947.

Chandler & Wright and Howard W. Wright, all of Los Angeles, Cal., Martin, Logan, Finney & Stanton, Villard Martin, Garrett Logan, Doerner, Rinehart & Stuart, E. J. Doerner, Theodore Rinehart and Harold C. Stuart, all of Tulsa, Okl., for plaintiff.

David S. Hecht, of New York City, Gibson, Dunn & Crutcher, Norman S. Sterry, Henry F. Prince and Frederick H. Sturdy, all of Los Angeles, Cal., for defendants Pacific Western Oil Corporation and J. Paul Getty, individually and as trustee.

Farrand & Farrand, George E. Farrand, Ross C. Fisher, Dockweiler & Dockweiler, Henry I. Dockweiler and Frederick C. Dockweiler, all of Los Angeles, Cal., for defendants George Franklin Getty II, as trustee and Thomas A. J. Dockweiler, as trustee.

Wm. L. Hanaway, of New York City, Oliver O. Clark and Robert A. Smith, both of Los Angeles, Cal., for Sunray Oil Corporation.

George Rosier, of New York City, Loeb & Loeb and Herman Selvin, all of Los Angeles, Cal., for Investment Associates.

Dillon Anderson and John P. Bullington, both of Houston, Tex., and W. A. Caldecott, of Los Angeles, Cal., for John H. Blaffer.

YANKWICH, District Judge.

I. The Pleadings and Issues.

On November 6, 1947, Mission Corporation, a Nevada corporation, not a defendant herein, to be referred to as Mission, through its Board of Directors, issued a notice of a special meeting of stockholders to be held at the principal office of the corporation at Reno, Nevada, on December 6, 1947. The object of the meeting is, as stated in the Notice:

"1. To consider and vote upon an Agreement of Merger dated October 18, 1947, providing for the merger of Mission and Pacific Western Oil Corporation, a Delaware corporation, with and into Sunray Oil Corporation, a Delaware corporation, a copy of which Agreement of Merger is annexed as Exhibit A to the Proxy Statement being mailed to stockholders; and

"2. To transact such other business as may properly come before the meeting, or any adjournment or adjournments thereof."

William G. Skelly is a resident and citizen of Oklahoma. He is the owner of 14,000 shares of common capital stock of Mission of which 2,000 are of record in his name on the books and 12,000 are beneficially owned by him.

Thomas A. J. Dockweiler and George Franklin Getty II are Trustees under a Declaration of Trust dated December 31, 1934, wherein Sarah C. Getty is named as trustor and J. Paul Getty as original trustee. J. Paul Getty is testamentary trustee under the Decree of Partial Distribution of the Estate of Sarah C. Getty, deceased. These will be referred to as the Getty Interests.

Pacific Western Oil Corporation, a Delaware Corporation, to be referred to as Pacific, has issued and outstanding a total of 1,371,730 shares of common stock. Of this amount, the Getty Interests own 1,169,449 shares. Pacific holds 641,808 shares of stock of the Mission Corporation out of a total of 1,374,145 shares, the remainder of the stock being owned by some 30,000 shareholders other than Pacific.

Pacific is licensed to do business in California. It maintains its principal office in the City of Los Angeles and owns oil and gas producing property in this District.

By an amended Complaint, Skelly, on behalf of himself and other minority stockholders seeks to enjoin the defendant from causing the stock of Mission Corporation owned by Pacific to be voted in favor of the merger agreement at the stockholders' meeting, or at any adjournment of it. The objection against the merger is chiefly that the agreement dated October 18, 1947, to merge Pacific Mission and Sunray Oil Corporation, a Delaware corporation, to be referred to as Sunray, is made solely for the benefit of the Getty Interests. This for the reason that they must be paid cash at the rate of $68 per share, while the minority stockholders of Mission, including Skelly, if they approved the merger, would have to accept stock in the surviving corporation, Sunray, at a ratio of six shares of Sunray to one of Mission, to be sold on the open market subject to fluctuation, or, if they resort to their remedy under Nevada statute¹, their only alternative is to ask and receive the cash value of their Mission stock. Many general allegations of the oppressiveness of the contract to stockholders and the inevitability of its approval by Mission because of the stock control of the Getty Interests, are contained in the Complaint. In substance, however, the alleged disparity of treatment is as stated in the summary just given. The merger agreement need not be gone into. It provides for the merger of the Mission-Pacific into Sunray as a surviving corporation, the sale of the stock which Mission owns in Tidewater Associated Oil Company, namely, 1,345,593, at a price of $25 per share, and of 577,854 shares of Tidewater owned by Pacific. The proceeds of the sale are to be applied to payment for the Pacific stock to be purchased by Sunray. Skelly has objected to the merger and was removed as President at the meeting of October 18, 1947, after which the merger was approved by a majority of the Directors.

The Complaint alleges that the matter in controversy exceeds $3,000. But it contains no averment of any actual damage or loss to be suffered by Skelly either through the approval of the merger at the called meeting, or the act of merger, although, at the hearing, losses running into several hundred thousand dollars were referred to, based chiefly upon speculation as to the lessened value of the converted stock after the completion of the merger.

Before me is an application for temporary injunction, a motion to dismiss the Complaint, a petition for intervention by Sunray and by Investment Associates, Inc., which own 600 shares of Mission. Answers have been filed by some of the defendants. The petitioners for intervention have proffered answers and hundreds of pages of affidavits and supporting documents were filed prior to, or introduced at, the hearing.

The defendants have moved to dismiss the Complaint upon three grounds: (1) that the Court has no jurisdiction; (2) that the Complaint does not state a claim, and (3) that this is not the proper forum for the action.

There is pending in the District Court for the District of Nevada, a Complaint brought by the same plaintiff against Mission, which, upon the same grounds, seeks to enjoin the holding of the meeting. In that action, Pacific has sought to intervene. The plaintiff has resisted the motion. In addition to this, he is asking this court to enjoin Sunray from seeking to appear in the Nevada court, — as he is also resisting their motion to appear here.

II. Majority Power and Minority Rights.

The application for temporary injunction and the motion to dismiss must be considered together as they were argued together. Rightly. For the Court's determination whether injunctive process should issue must, of necessity, involve the sufficiency of the Complaint.

The fundamental vice of the Complaint lies in the fact that the acts pleaded do not show either fraud or immediate, irreparable or any damage to the plaintiff.

Jurisdiction of this court is invoked solely because of diversity of citizenship. This being so, the determination of the controversy is governed by California law.² And the courts of California have held consistently, beginning with the first case which arose in 1895³, that identity of directorates or control of corporations by the same individual or group of individuals does not invalidate agreements between them. The Supreme Court of California, in an early case has stated the problem in terse language which so fully answers the contention here made that such control, of necessity, taints the acts of the controlling interests with fraud, that we quote it here in full:⁴ "Where two corporations, through their boards of directors, make a contract with each other, the directors who are common to both are not within the rigid rule of the cases which hold that one who acts in a fiduciary capacity cannot deal with himself in his individual capacity, and that any contract thus made will be declared void, without any examination into its fairness, or the benefits derived from it to the cestui que trust. Two corporations have the right, within the scope of their chartered powers, to deal with each other; and this right is certainlly not destroyed or paralyzed by the fact that some, or a majority, of the directors are common to both. Of course, if such directors should wrongfully and willfully use their powers to the prejudice of one of the corporations, their action, if not acquiesced in, and if contested at the proper time, could be avoided, as in any other case of actual fraud. But such common directors owe the same fidelity to both corporations, and there is no presumption that they will deal unfairly with either. Therefore, their acts as such common directors are not void." (Emphasis added.)

These cases have been followed consistently. And as the law now stands, while courts will scrutinize such agreements, they will not set them aside, unless actual fraud is alleged and proved.⁵

In this respect, the law accords with the decisions of the Supreme Court and of the various Circuits, including our own. And, while the Supreme Court has said that the "dominant or controlling stockholder or group of stockholders" are fiduciaries,⁶ that statement, as applied in actual cases, has not been given any broader scope than the California rule. Through it, they have merely thrown the burden upon controlling stockholders or interlocking directors of proving the fairness of the transaction. But, just as the California courts, they have refused to set them aside unless actual fraud existed.⁷ And the law of Nevada seems to accord with these rulings.⁸

In the light of them, it is difficult to see how the outright acquisition of the stock owned by the...