Skoglund v. Ormand Industries, Inc.

• Decision Date: 03 December 1976
• Citation: 372 A.2d 204
• Parties: H. P. SKOGLUND and Barry Ackerley, Plaintiffs, v. ORMAND INDUSTRIES, INC., Defendant.
• Court: Court of Chancery of Delaware

Page 204

372 A.2d 204

H. P. SKOGLUND and Barry Ackerley, Plaintiffs, v. ORMAND INDUSTRIES, INC., Defendant.

Court of Chancery of Delaware, New Castle County.

Submitted Oct. 15, 1976.

Decided Dec. 3, 1976.

Bruce M. Stargatt and Edward B. Maxwell, 2nd, of Young, Conaway, Stargatt & Taylor, Wilmington, and William P. Frank, Douglas M. Kraus and Robert E. Zimet, of Skadden, Arps, Slate, Meagher & Flom, New York City, for plaintiffs.

Louis J. Finger and Stephen E. Herrmann, of Richards, Layton & Finger, Wilmington, and Sheldon D. Camhy, of Shea, Gould, Climenko, Kramer & Casey, New York City, for defendant.

BROWN, Vice Chancellor.

At all times pertinent to this action the plaintiff H. P. Skoglund was and is now the record and beneficial owner of 79,600 shares of the common stock of the defendant Ormand Industries, Inc., a Delaware corporation. Likewise, the plaintiff Ackerley was and is now the record and beneficial owner of 11,000 shares of such stock. On August 4, 1976, plaintiffs made a written demand upon the defendant corporation pursuant to 8 Del.C. § 220 for examination, inspection and copying of a list of its common stockholders as well as certain books and records of the corporation. The corporation rejected the demand and plaintiffs promptly brought this suit to compel inspection. This is a decision after trial.

The statute makes it clear in all such cases that the right of a stockholder to inspect the stock list and books and records of his corporation is measured by thed propriety of his purpose. The test for a 'proper purpose' is that it be 'reasonably related to such person's interest as a stockholder.' 8 Del.C. § 220(b). Where the stockholder seeks to inspect the corporation's books and records, other than its stock ledger or list of stockholders, he must first establish to the satisfaction of the Court that he seeks the inspection for such a proper purpose. Where he seeks inspection of the stock ledger or list of stockholders the burden of proof is placed upon the corporation to establish that such inspection is sought for an improper purpose. 8 Del.C. § 220(c). If a proper purpose is established, it is no defense of itself that the stockholder may also have another, or secondary purpose which may be improper. Western Air Lines, Inc. v. Kerkorian, Del.Supr., 254 A.2d 240 (1969); General Time Corporation v. Talley Industries, Inc., Del.Supr., 43 Del.Ch. 531, 240 A.2d 755 (1968); Mite Corporation v. HeliCoil Corporation, Del.Ch., 256 A.2d 855 (1969). However, even though the purpose may be proper in the sense that it is reasonably related to the person's interest as a stockholder, it must also not be adverse to the interests of the corporation. To this extent a stockholder's right of inspection is a qualified right depending upon the facts of the particular case. State v. Loft, Inc., Del.Super., 4 W.W.Harr. 538, 156 A. 170 (1931); State v. Gulf Sulphur Corporation, Del.Super., 233 A.2d 457 (1967). In this case the defendant corporation charges that the plaintiffs' motivation in seeking inspection is improper for several reasons. Consequently, it is within the framework of the above principles that the evidence must be evaluated.

To begin with, it is no secret that the plaintiffs, along with several other interested persons, seek to gain control of the defendant corporation (hereafter 'Ormand') and to oust its present management. Plaintiffs' group has filed a 13D statement to this effect with the Securities and Exchange Commission.

Ormand operates in California and has three separate facets of business. One is in the field of communications, or outdoor advertising, which it conducts primarily in the Los Angeles and northern California areas. The advertising business is conducted through a 93 per cent owned subsidiary, Ormand Communications, Inc., which in turn operates through its subsidiary corporations, Ryan Outdoor Advertising, Inc. and Kennedy Outdoor Advertising. In addition Ormand has a packaging division engaged in the manufacture and distribution of metal containers through several other subsidiary corporations. A third division is involved in oil field service operations.

Ormand has some 1,900,000 shares of common stock outstanding. The corporation is controlled by Jarrell D. Ormand who, along with members of his family, owns or controls approximately 20 per cent of Ormand's common shares, exclusive of unexercised options to purchase. In all, the Ormand family and the present directors own 35 per cent of the stock entitled to vote for the election of management. Jarrell D. Ormand is also chairman of the board and chief executive officer of the corporation.

Plaintiff Skoglund is an eminently successful businessman who first became a stockholder of Ormand in July 1972. Plaintiff Ackerley is a business associate of Skoglund who first acquired his Ormand shares in May 1975. In the past Skoglund has bought and sold several communications corporations engaged in the outdoor advertising business. Ackerley also has knowledge and experience in the communications business and presently heads Ackerley Communications, Inc., a closely held Seattle outdoor advertising company in which Skoglund is a major shareholder. Having followed the progress of Ormand somewhat closely since becoming shareholders plaintiffs rely on three distinct factors as justification for their inspection demand.

First, based upon their personal knowledge and expertise in the outdoor advertising business, coupled with an examination of the financial information contained in Ormand's annual reports, plaintiffs contend that Ormand's outdoor advertising subsidiary, which forms a significant part of Ormand's operation, is being mismanaged at best and, in all likelihood, is being looted. According to Ackerley, Ormand's net income of $35,000 on $6.25 million of outdoor advertising sales, as reflected in the 1975 annual report, is unbelievable and indicates that something is terribly wrong. Ackerley also finds the lease cost of advertising space of 17 per cent to 18 per cent, again as computed from the annual report figures, to be far out of line with industry standards. Plaintiffs say that unless they are permitted an examination of the corporate books and financial records, there is no way they can ascertain where the money is going and for what.

Second, plaintiffs rely on various public disclosures by Ormand which, to them, indicate questionable, if not improper, transactions. For one thing, in July 1971, Jarrell Ormand personally purchased a business named Ana Maria Cosmetics and at the same time granted Ormand an option to purchase the company from him at his original cost. Several months later Ormand exercised this option, thus taking Jarrell Ormand out of his investment at his original cost. Some months after that Ormand sold Ana Maria Cosmetics. According to the 1973 annual report Ormand suffered a combined loss on the operation and sale of Ana Maria and another subsidiary of over $500,000. Plaintiffs are also concerned by proxy statement information initially indicating a proposed issuance of 17,142 shares of stock to Jarrell Ormand for a consideration of $45,000, but which he ultimately acquired at the rate of $1.00 per share. Another disclosure in the 1976 proxy statement troubles plaintiffs with regard to the issuance of convertible debentures by the corporation to Jarrell Ormand.

The third and significant factor which plaintiffs say has prompted them to act stems from a meeting by Ackerley with one Robert M. Brunson, former president of Ormand's communications subsidiary. Brunson had resigned his position ostensibly because of improper manipulations of corporate finances by Jarrell Ormand which he could not ignore. Brunson produced a list of alleged improprieties including the use of Ormand funds for numerous of Jarrell Ormand's personal expenses, including some $50,000 to $75,000 for work on his private residence. An Ormand employee charged to the company's payroll is said to have actually worked at Jarrell Ormand's home. Corporate credit with advertising customers was allegedly used for the personal benefit of Jarrell Ormand, his family members and certain of his personal friends. And at least seven members of Jarrell Ormand's family are said to be on the corporate payroll, with plaintiffs having doubt as to the value of services rendered by some of them. While plaintiffs acknowledge that the $100,000 or so involved in the matters revealed by Brunson may be a mere drop in the bucket concerning the overall mismanagement they fear, they nonetheless feel that as shareholders they have a right to examine the corporate records to ascertain the accuracy of the charges and to contact other shareholders concerning their findings.

Plaintiffs' letter demanding inspection, which was rejected by Ormand, set forth some twenty different categories of documents which plaintiffs desired to see. Basically all but three of these deal with specific events or items which plaintiffs either culled from public corporate disclosures or which brought to their attention by Brunson. A sampling of these has been referred to previously herein. The other three constitute a general demand to inspect all minute books concerning directors' meetings and committees thereof of Ormand and all its subsidiaries, together with all internal corporate financial records not on file with the Securities and Exchange Commission, from the period of January 1, 1973, to the present. As the trial commenced, counsel for Ormand announced that the corporation was amending its answer in open court so as to permit the inspection of thirteen of the categories. In essence, it was acknowledged that subject to certain restrictions, inspection would be permitted as to any category of the demand dealing with or relating to personal transactions involving the Ormand family. The balance of the demand, however, was resisted for the following reasons.

To begin with,...