Haber v. Bell

• Decision Date: 14 February 1983
• Parties: Majorie M. HABER and Shirley Cherin, Trustees of a Trust for the benefit of Ciezkowski, Plaintiffs, v. W.M. BELL, III, W.L. Ford, J.H. Glasser, A.G. Hays, W.E. Humphrey, C.C. Ingram, J.A. McNeese, F.B. Muhlfeld, Oral Roberts, J.D. Scott, J.E. Tyree, G.R. Williams, M.D., S.L. Young and Oneok, Inc., Defendants. . Submitted:
• Court: Court of Chancery of Delaware

Page 353

465 A.2d 353

Majorie M. HABER and Shirley Cherin, Trustees of a Trust for the benefit of Ciezkowski, Plaintiffs, v. W.M. BELL, III, W.L. Ford, J.H. Glasser, A.G. Hays, W.E Humphrey, C.C. Ingram, J.A. McNeese, F.B. Muhlfeld, Oral Roberts, J.D. Scott, J.E. Tyree, G.R. Williams, M.D., S.L Young and Oneok, Inc., Defendants.

Court of Chancery of Delaware New Castle County.

Submitted: Feb. 14, 1983.

Decided: June 13, 1983.

On defendants' motions to dismiss: GRANTED.

Joseph A. Rosenthal, Morris & Rosenthal, P.A., Wilmington, and Garwin, Bronzaft & Gerstein, New York City, for plaintiffs.

Andrew B. Kirkpatrick, Jr., and Donald F. Parsons, Morris, Nichols, Arsht & Tunnell, Wilmington, and John L. Arrington, Jr., and J. Clarke Kendall, II, Huffman, Arrington, Kihle, Gaberino & Dunn, Tulsa, Okl., for defendants, ONEOK, Inc., Bell, Ford, Glasser, Hays, Humphrey, Ingram, McNeese, Mulhfeld, Roberts, Williams, and Young.

Henry N. Herndon, Jr., and P. Clarkson Collins, Jr., Morris, James, Hitchens & Williams, Wilmington, for defendants, Scott and Tyree.

HARTNETT, Vice Chancellor.

Defendants have moved to dismiss this shareholder's derivative suit pursuant to Chancery Rule 12(b)(6) and Rule 23.1 because of plaintiffs' failure to make a pre-suit demand for redress on the directors of the corporation and the failure of the complaint to state with particularity the futility of making a demand. Defendants' motion to dismiss must be granted.

I

This shareholder's derivative action was brought by two stockholders of ONEOK, Inc., a Delaware corporation, challenging the action taken by the Board of ONEOK, Inc. in 1981 to amend a stock option plan which was originally approved by the shareholders in 1980 ("1980 Plan"). The defendants are ONEOK, Inc. and its 13 individual directors.

The complaint asserts two separate and distinct claims: first, that the Board's modification of the 1980 Stock Option Plan without shareholder approval is invalid because the modifications are contrary to, and not authorized under the terms of the 1980 Plan; and secondly, that the Board failed to provide for any consideration to be received by ONEOK, Inc. in exchange for the amendment of the outstanding options issued pursuant to the 1980 Plan, thereby constituting a gift of corporate assets to the optionees.

As part of the first claim, plaintiffs charge that the Board was without authority to amend a stock option plan which had previously received shareholder approval and which was not a 'qualified plan' under the United States Internal Revenue Code in 1980 when the Plan was created, and that in any event, the majority of the Board was personally interested in the 1981 amendments thereby precluding a valid amendment by the Executive Committee and Board of ONEOK, Inc.

In the complaint plaintiffs demand a nullification of any modifications to the 1980 Plan or of any of the options granted thereunder. Plaintiffs, therefore, argue that it would have been futile for them to have made a demand on the Board of Directors of ONEOK, Inc. before filing suit because all of the directors participated in, and approved of, the 1981 amendments and are personally liable for the wrongs alleged. Moreover, plaintiffs claim that any demand upon the directors to institute an action before filing suit would have been useless because the directors would be required to sue themselves.

II

In its original form, the 1980 Stock Option Plan was approved by ONEOK, Inc.'s stockholders at the December 9, 1980, annual meeting. In a proxy statement issued in connection with the 1980 annual meeting, the Board proposed approval of the Plan and explained the purpose of the Plan, as follows:

"The purpose of the Plan is to provide an additional incentive to key employees of the Company whose duties and responsibilities are particularly vital to the Company's continued success. This is accomplished by granting stock options to such employees, which options require that the employee agrees to remain in the Company's employ for at least two years after receipt of the option or until retirement, if earlier. The Board of Directors and management of the Company believe that ownership in the Company by such employees resulting from the Plan will give added incentive for their efforts on the Company's behalf. This will, in turn, enhance the Company's ability to serve its customers while securing for its stockholders a fair return on their investment."

The proxy statement further sets forth that the 1980 Plan provided for the issuance of "nonqualified stock options" which offered special tax treatment under the provisions of the United States Internal Revenue Code. Under the then existing Internal Revenue Code the holder of a nonqualified stock option, upon exercise of it, would realize ordinary income to the extent of the difference between the option price and the fair market value of the stock when exercised, and consequently the company could deduct the same amount, as an expense, for federal income tax purposes.

The 1980 Plan, however, embodied provisions for the amendment or termination of the Plan as follows:

"The Board of Directors of the Company may at any time terminate the Plan, or make such modifications of the Plan as it shall deem advisable; provided, however, that the Board of Directors may not, without further approval by the stockholders of the Company, (1) except as provided in paragraph 12 hereof increase the maximum number of shares for which options may be granted under this Plan, either in the aggregate or to any individual employee, or change the minimum option price; (2) extend the period during which options may be granted or exercised; (3) withdraw the authority to administer the Plan from a committee consisting of directors of the Company not eligible to receive options granted under the Plan; or (4) change the classification of Employees eligible to receive options hereunder."

After shareholder approval was obtained, options were granted under the 1980 Plan on January 15, 1981, and on July 16, 1981. The complaint alleges that Messrs. Scott and Tyree, both directors of ONEOK, Inc., were beneficiaries under this Plan. There is no allegation that any of the remaining 11 directors of ONEOK, Inc. had any personal financial interest in the Stock Option Plan. Furthermore, the complaint does not challenge the circumstances surrounding the adoption and approval of the 1980 Plan.

Following the enactment of the Economic Recovery Tax Act of 1981, Pub.L. No. 97-34, 95 Stat. 256 (1981), ("ERTA"), the ONEOK, Inc. Board voted on September 17, 1981, to amend the 1980 Plan so as to provide that options previously granted ("nonqualified") on July 16, 1981, and outstanding options granted thereafter, would be "qualified" as incentive stock options. ERTA was enacted on August 13, 1981, with the incentive stock option provisions having an effective date of January 1, 1981, and having retroactive application to outstanding options granted on or after January 1, 1976, subject to certain conditions.

The modifications made in response to the change in the tax law were proposed by the Executive Committee which consisted of 3 members who were not beneficiaries under the 1980 Plan, and approved by the Board which consisted of 13 members--two of whom were beneficiaries under the 1980 Plan.

A proxy statement dated November 6, 1981, issued in connection with the 1981 annual meeting of ONEOK, Inc. set forth the adopted amendments and the restrictions thereon. The proxy statement also informed the shareholders that "The corporate tax deduction previously allowed (to the corporation) upon the exercise of a nonqualified stock option will not be allowed in the case of the exercise of Incentive Stock Options."

In essence, this loss of a potential tax deduction to ONEOK, Inc. of an unknown amount, which would result from the converting of the nonqualified option into a qualified option, is the harm for which plaintiffs seek relief in this suit.

III

In considering a motion to dismiss, only those matters referred to in the pleadings are to be considered by the Court. All well plead facts will be assumed to be true and all inferences will be viewed in a light most favorable to the plaintiff. Del. State Troopers Lodge, Etc. v. O'Rourke, Del. Ch., 403 A.2d 1109 (1979). Conclusions of law or fact, however, will not be assumed to be true without specific allegations of fact which support the conclusion. Bergstein v. Texas Intern. Co., Del. Ch., 453 A.2d 467 (1982), and cases cited therein.

Chancery Court Rule 23.1, which is virtually identical to Fed.R.Civ.P. 23.1, provides in relevant part:

"In a derivative action brought by one or more shareholders or members to enforce a right of a corporation ... [t]he complaint shall ... allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort."

This rule is one of substantive right--not simply a technical rule of pleading. It is designed to give a corporation, on whose behalf a derivative suit is brought, the opportunity to rectify the alleged wrong without suit or to control any litigation brought for its benefit. A plaintiff, therefore, who chooses not to make a demand prior to suit is faced with the responsibility of demonstrating with particularity why his demand on the Board of Directors would have been futile. If the plaintiff fails in meeting this burden he will find that his suit will be dismissed, in response to a motion to dismiss, even if he has an otherwise meritorious claim. Mayer v. Adams, Del.Supr., 174 A.2d 313 (1961). Also see Bergstein v. Texas Intern. Co., supra. The test for determining whether a demand for redress before suit would have been futile is whether the Board, at the time of the filing of the suit, could have impartially considered and acted...