Stroud v. Milliken Enterprises, Inc.
| Decision Date | 04 November 1987 |
| Docket Number | No. 8969,8969 |
| Parties | W.B. Dixon STROUD, Jr., Morris W. Stroud, Agnes S. Peelle, and Anne S. Bradford, Plaintiffs, v. MILLIKEN ENTERPRISES, INC., Dr. George C. Dacey, Dr. T.J. Malone, Roger Milliken, H.W. Jockers, Dr. H. Keith Brodie, Minot K. Milliken, F.G. Rogers, J. Peter Grace, Rene C. McPherson, and Gerrish H. Milliken, Defendants. Civ. A. . Submitted: |
| Court | Court of Chancery of Delaware |
On Defendants' Motion to Dismiss: Granted in Part; Denied in Part.
William Prickett, Michael Hanrahan, and Philip B. Obbard, Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, for plaintiffs.
Andrew B. Kirkpatrick, Jr., William H. Sudell, Jr., Andrew M. Johnston, and Mary B. Graham, Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant-Milliken Enterprises, Inc.
Clark W. Furlow, and David A. Jenkins, Lassen, Smith, Katzenstein & Furlow, Wilmington, for individual director defendants.
HARTNETT, Vice Chancellor.
This suit is brought individually by the plaintiffs, on behalf of themselves, and derivatively on behalf of the other stockholders of defendant Milliken Enterprises, Inc., a Delaware corporation ("Milliken"). In the complaint, as now revised and amended, it is alleged that proposed amendments to Milliken's Certificate of Incorporation and By-laws are invalid as a matter of law and are also part of an illegal entrenchment scheme; that the proposed amendments, as revised after suit was filed, require a supermajority affirmative vote which is being concealed from the stockholders; that a revised notice of a proposed stockholder meeting fails to fully disclose all relevant facts; that the proxy attached to an earlier notice of the stockholders meeting was misleading; and that defendants' proposed revised amendments violate a temporary restraining order issued by this Court on April 23, 1987.
Pursuant to Chancery Rule 12(b)(6), the defendants, Milliken and its individual directors, moved to dismiss all of plaintiffs' claims. In support of dismissal, the defendants urge that the stockholder derivative claims must be dismissed because plaintiffs did not make a pre-suit demand on the directors of Milliken for relief and the complaint fails to allege, with particularity, the futility of a pre-suit demand. As to the individual claims, defendants argue that the proposed amendments to the Certificate of Incorporation and amendments to the By-laws adopted by the board are lawful under Delaware law; that the proposed notice to the stockholders complies with Delaware law; and that plaintiffs' other claims have been mooted.
I find that defendants' motion to dismiss as to the stockholder derivative claims must be granted because of the failure of plaintiffs to have made a pre-suit demand for relief upon the board of Milliken or to have shown that a pre-suit demand would have been futile. I further find that most of plaintiffs' individual claims must be dismissed because they are moot or are without merit but plaintiffs' claim that there are improper statements in the notice of the stockholder meeting cannot be dismissed because there are material defects in the notice. A motion for summary judgment filed by plaintiffs will not be considered because it is not now before the Court for consideration.
* * * [The following represents only a portion of the Court's opinion, which portion is published pursuant to Del.Sup.Ct.R. 93(b) ]
VIII
The defendants also seek to have dismissed those individual claims of the plaintiffs' which allege that the revised amendments violate Delaware law.
Plaintiffs first argue that the proposed amended Article of Incorporation No. 11 provides invalid and unreasonable qualifications for directors. Proposed Article 11(a) provides that the Board of Directors shall consist of 9 to 13 members, to be fixed by a majority vote of directors. Unquestionably, Delaware law allows the Board to fix the number of directors within the restrictions imposed by the Certificate of Incorporation. 8 Del. C. § 141(k); Ellin v. Consolidated Caribou Silver Mines, Inc., Del.Ch., 67 A.2d 416 (1949).
Proposed Article 11(b) provides that the directors are to be divided into three classes, with each director serving a three-year term. This is lawful under Delaware law. 8 Del.C. § 141(d).
Plaintiffs have focused most of their objections on proposed Article of Incorporation No. 11(c). This proposal creates three categories for directors. Category 1 requires that directors in that category will be individuals who have held line positions in other businesses or institutions and who are not officers, employees or stockholders of Milliken. A majority of the Directors must be from Category 1. At least three directors must be from Category 2 which requires that directors in that category be individuals who are beneficial stockholders of Milliken. Lastly, no more than 2 directors can be from Category 3, which will be chosen from the Chairman of the Board, the Chairman of the Executive Committee and the President of Milliken. If an individual is qualified to be a director under both Category 2 and 3, he or she will be deemed to be qualified only under Category 2. Proposed Article of Incorporation No. 11(c) further provides that if a director fails to remain qualified pursuant to requirements of the category from which he was elected, he shall automatically cease to be a director.
Plaintiffs claim that proposed Article of Incorporation No. 11(c): (1) illegally requires qualifications for directors; (2) is impermissibly vague; (3) permits the incumbent Board to decide whether an individual is qualified under one of the three categories; (4) excludes shareholders from being directors unless they fit within one of the categories; (5) is contradictory in that it allows a Chairman of the Board to be nominated to the Board; and (6) automatically causes director removal.
The majority of plaintiffs' objections to Proposed Article of Incorporation No. 11(c) are concerned with the alleged arbitrary qualifications set for directors. The Delaware General Corporation Law, however, expressly authorizes qualifications for directors:
8 Del.C. § 141(b) (emphasis added)
Contrary to plaintiffs' assertions, therefore, the Certificate of Incorporation can provide for reasonable director qualifications. McWhirter v. Washington Royalties Co., Del.Ch., 152 A. 220, 224 (1930); In re Gulla, Del.Ch., 115 A. 317, 318 (1921).
The requirement that Category 1 directors be from "line", as opposed to "staff", positions is sufficiently clear. The distinction between those in "line" positions and "staff" positions is generally recognized in the most elementary of businesses, as the plaintiffs...
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Stroud v. Grace
...moved for summary judgment. The trial court granted the defendants' motion in part and denied it in part. Stroud v. Milliken Enterprises, Inc., Del.Ch., 585 A.2d 1306 (1988). An appeal to this Court was dismissed. See Stroud I, 552 A.2d at The board subsequently withdrew the 1987 amendments......
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...This Court has upheld a limited example of such a provision that appeared in the certificate of incorporation. Stroud v. Milliken Enters., 585 A.2d 1306, 1308 (Del.Ch.1988), appeal dismissed, 552 A.2d 476 (Del.1989). In light of the three procedural means for ending a director's term in Sec......
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...in which case a change in the number of directors shall be made only by amendment of the certificate."); Stroud v. Milliken Enters., Inc. , 585 A.2d 1306, 1308 (Del. Ch. 1988) ("Proposed Article 11(a) provides that the Board of Directors shall consist of 9 to 13 members, to be fixed by a ma......
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...then the director is no longer qualified and ceases to be a director in a manner "akin to a resignation." See Stroud v. Milliken Enters., 585 A.2d 1306, 1309 (Del. Ch. 1988), appeal dismissed, 552 A.2d 476 (Del. 1989). Under Stroud, if the CEO Director seat appeared in the Charter, then Kla......