Skouras v. Admiralty Enterprises, Inc.

• Decision Date: 03 April 1978
• Citation: 386 A.2d 674
• Parties: Plato A. SKOURAS, Plaintiff, v. ADMIRALTY ENTERPRISES, INC., a Delaware Corporation, Defendant.
• Court: Court of Chancery of Delaware

Page 674

386 A.2d 674

Plato A. SKOURAS, Plaintiff, v. ADMIRALTY ENTERPRISES, INC., a Delaware Corporation, Defendant.

Court of Chancery of Delaware,New Castle County.

Submitted Jan. 4, 1978.

Decided April 3, 1978.

David A. Drexler and A. Gilchrist Sparks, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, for plaintiff.

Rodman Ward, Jr., of Prickett, Ward, Burt & Sanders, Wilmington, and David Simon, of Barrett, Smith, Schapiro, Simon & Armstrong, New York City, for defendant.

MARVEL, Chancellor:

Plaintiff Plato A. Skouras, the holder of 2,871 shares of stock of the defendant Admiralty Enterprises, Inc., representing an interest of between four and five percent in said corporation's common stock, ¹ seeks an order of this Court granting him the right to inspect certain books and records of Admiralty as well as the books of such corporation's affiliates pursuant to the provisions of 8 Del.C. Section 220.

The stated purpose of the desired inspection, as set forth in plaintiff's notice of demand, is to enable plaintiff to seek to substantiate his fears of the existence of mismanagement of the affairs of Admiralty, including the suspected use by corporate officers and directors of the assets of Admiralty and its subsidiaries for their personal advantage. Admiralty is a closely held family corporation engaged in the shipping business, having been organized in the mid-1950's by plaintiff's late father and uncle, by his brother, as well as by plaintiff himself, plaintiff having been a member of Admiralty's board of directors from 1963 to 1967.

Admiralty owns 100% of the common stock, 100% of the preferred stock and 67 1/2% of the Class A (voting) stock of PSS Steamship Company, Inc., while PSS owns 100% of Prudential Lines, Inc. Admiralty also owns 100% of the stock of World Wide Tankers. In turn, Skouras Maritime Corporation, which was created to hold the controlling interest in Admiralty held by the late Spryos P. Skouras, by his son, Spryos S. Skouras, and the latter's wife, Barbara F. Skouras, is the registered owner of approximately 69% of the stock of Admiralty and 32 1/2% of the PSS Class A stock. Plaintiff owns no stock in SMC, World Wide Tankers, PSS, or in Prudential.

The areas of Admiralty's business affairs as to which plaintiff has expressed concern and as to which he seeks production of books and records encompass a wide range of alleged corporate wrongdoings, including suspected improper payments to corporate officers and directors as well as to stockholders and others, including members of the Skouras family; improper payments for numerous club memberships for the use of corporate officers and directors; overpayments to Barbara F. Skouras for the unnecessarily lavish decoration and furnishing of the offices and homes of corporate officers and directors as well as the over-decoration of corporate ships by the same person; excessive expenses in connection with ceremonial matters such as keel-layings and launchings, including those of guests on so-called shake-down voyages; improper application of moneys recovered in connection with advancements to Admiralty under the federal maritime subsidy program, as well as the whole spectrum of Admiralty's complex financial dealings both as to borrowings and the sales of securities, as well as bank loans to non-employees and non-stockholders. The recital of the specific transactions above alluded to is not exclusive, there being other areas sought to be looked into having to do with Admiralty's entire financial picture, the books and records of which plaintiff wishes to inspect.

Admiralty contends that plaintiff's present efforts are not directed towards a proper purpose but are rather designed to harass Admiralty and other members of the Skouras family in the hope of eliciting from Admiralty an offer to purchase his Admiralty stock at a premium.

A preliminary question raised by defendant in its briefs but not by way of answer or at trial, ² is whether or not plaintiff's demand for inspection is fatally defective in failing strictly to comply with the provisions of 8 Del.C. Section 220(b) which require that a stockholder's demand be " * * * under oath stating the purpose thereof." Testimony at trial as well as the notice of demand itself disclose that the only part of plaintiff's demand of March 21, 1977 addressed to Admiralty, which was under oath, is as follows:

"PLATO A. SKOURAS, of lawful age, being first duly sworn, upon oath, deposes and says that he is a stockholder of Admiralty Enterprises, Inc., a Delaware corporation, that he desires to inspect, in person or through his agents, the books and records of Admiralty Enterprises, Inc. for the purpose of investigating the likelihood of general corporate mismanagement and improper transactions, and demands the right during the usual hours for business to inspect the corporation's books and records and to make copies or extracts therefrom.

Further affiant saith not."

The rest of the demand including references to the specific areas of inquiry sought to be examined as well as a more detailed statement of plaintiff's purpose is found in a letter dated March 23, 1977, signed by plaintiff but which was not under oath. Defendant contends that in ruling on plaintiff's demand the Court should adopt a strict construction of 8 Del.C. Section 220 and that the application of such test to plaintiff's demand must lead to its rejection although the record discloses that objection to the nature of plaintiff's demand was not explicitly made until after the parties had expended substantial time, effort and money in preparation for trial.

In Monogram Industries, Inc. v. Royal Industries, Inc., Del.Supr., 372 A.2d 171 (1977), the Supreme Court of Delaware in a tender offer case concerned with the construction of 8 Del.C. Section 203 which had to do with a statutory requirement governing the making of an offer for tenders of stock, namely the stating of " * * * the date on which the offeror may first purchase tendered securities * * * " ruled in response to reliance on precedents in support of strict statutory construction of the corporation law of Delaware as follows:

"We find Royal's position to be hypertechnical and without reasonable basis. Strict compliance with the statutory requirement, without the protective phrase, should have been possible and would have been preferable; but no valid reason was brought to our attention for holding that the language adopted by Monogram was unduly prejudicial to Royal or its stockholders or violative of the policy of the Statute. This objection seems based more upon target-company defense tactics than sound principles of statutory construction."

Similarly, in the case at bar, defendant has long been fully aware of the reasons behind plaintiff's demand, and defendant's reliance on a technical defect in plaintiff's demand may not be permitted to defeat his claim under the facts and circumstances adduced at trial. Compare Singer v. Magnavox Company, Del.Supr., 380 A.2d 969 (1977), in which the Supreme Court of Delaware held that strict compliance with Delaware's merger statute on the part of the resulting corporation in a merger case does not make such transaction immune from judicial review of its overall fairness.

A proper purpose is defined in 8 Del.C. Section 220 as one which is " * * * reasonably related to such person's interest as a stockholder * * * ", and it is clearly proper for a stockholder to ask leave to examine corporate books and records to follow up his suspicions of corporate mismanagement, thereby acting not only on his own behalf but on that of the corporation and its other stockholders, a purpose which plaintiff asserts in this action, and one which finds support in Delaware decisional law, Nodana Petroleum Corporation v. State, Del.Supr., 123 A.2d 243 (1956), Sack v. Cadence Industries Corporation, Del.Ch., C.A. 4765 (April 7, 1975), and Henshaw v. American Cement Corporation, Del.Ch., 252 A.2d 125 (1969). Moreover, although plaintiff did not completely comply with the strict requirements of 8 Del.C. Section 220, I am nonetheless satisfied that notwithstanding the fact that plaintiff's letter of March 23 may not be deemed to have been incorporated by reference into his sworn demand, ³ that nonetheless delivery of both the letter and demand under oath served fully to inform defendant of the specific nature of plaintiff's purpose, thereby causing such demand to be given an "expanded reading," Weisman v. Western Pacific Industries, Inc., Del.Ch., 344 A.2d 267, 269 (1975). Thus, I am satisfied that plaintiff's statement of demand effectively informed management as to what plaintiff is seeking. Next, under the provisions of 8 Del.C. Section 220(c) the burden of proving a proper purpose is on the stockholder, where, as here, the demand is for inspection of books and records rather than for a stock list. ⁴ Furthermore, more than a general statement is required in order for the Court to determine the propriety of a demand, Floto v. Industrial Energy Corporation, Del.Ch., C.A. 4541 (August 7, 1974), and State ex rel. Miller v. Loft, Inc., Del.Super., 156 A. 170 (1931). In addition, although the Court cannot, of course, read the thoughts of a stockholder, it must be satisfied that a plaintiff has successfully carried the burden of proving that the purpose behind his demand is proper. Once a proper purpose is established, it becomes irrelevant that the stockholder may have a secondary and perhaps questionable ulterior purpose behind his primary purpose, Western Air Lines, Inc. v. Kekorian, Del.Supr., 254 A.2d 240 (1969), General Time Corporation v. Talley Industries, Inc., Del.Supr., 240 A.2d 755 (1968), and Skoglund v. Ormand Industries, Inc., Del.Ch., 372 A.2d 204 (1976).

A further qualification as to the right of inspection of books and records is that even if a proper purpose for a demand is demonstrated and such demand is shown to be reasonably related...