Warehime v. Warehime

• Decision Date: 04 May 2001
• Citation: 777 A.2d 469
• Parties: Michael A. WAREHIME, Appellant, v. John A. WAREHIME, Appellee (Three Cases).
• Court: Pennsylvania Superior Court

777 A.2d 469

Michael A. WAREHIME, Appellant, v. John A. WAREHIME, Appellee (Three Cases).

Superior Court of Pennsylvania.

Argued May 19, 1998.

Filed May 4, 2001.

Alfred W. Putman, Jr., Philadelphia, for appellant.

William C.A. Boyle, York and Matthew J. Siembieda, Philadelphia, for appellee.

Before CAVANAUGH, POPOVICH, and BROSKY, JJ.

CAVANAUGH, J.:

¶ 1 The core issue for resolution on remand from the Supreme Court is whether the directors of a corporation can divest the majority shareholders of their voting control and vest control in themselves. We hold that they cannot.

¶ 2 The facts, as adduced at trial and taken from the trial court opinion, are as follows: Alan Warehime, the father of appellant Michael Warehime and appellee John Warehime, instituted two voting trusts in 1988 to control the majority of voting stock (Class B common stock) in Hanover Foods Corp. (HFC). Alan Warehime established the first trust with his three children¹ and the second with five of his grandchildren.² John Warehime succeeded his father as trustee upon his father's death in 1990. The trusts expired in 1998.

¶ 3 John Warehime was appointed chairman and CEO of HFC in 1989. Since then, there have been a considerable number of disputes among the Warehimes, other shareholders, and the directors.

¶ 4 Food Services East, Inc., a company wholly owned by John Warehime, ran into financial difficulties in late 1992 or early 1993. John Warehime's ailing company owed approximately $4 million to HFC by June of 1993. However, John Warehime did not initially post sufficient collateral to cover the monies owed. In fact, the directors were not made aware of the money John Warehime's company owed to HFC until early 1993. The directors promptly remedied the situation by requiring John Warehime to post sufficient collateral for the loans. Plaintiff's Exhibit 26, Minutes from Directors' Meeting of 6/4/93, at 1.

¶ 5 Another dispute involved the compensation paid to John Warehime. On September 15, 1994, after months of negotiation, the directors of HFC approved a compensation package for John Warehime that he accepted under protest.³ Plaintiff's Exhibit 50, Memo from Michael Warehime to John Warehime of 4/25/94, at 1; Plaintiff's Exhibit 68, Minutes from Directors' Meeting of 9/15/94, at 1-2. John Warehime, unhappy about the size of the compensation package and frustrated with several members of the board including Michael Warehime, stated in his notes on the situation that "[s]omething must be done." Plaintiff's Exhibit 69, John Warehime, Review Notes of My Compensation Employment Package with the Family at 1-5 (Sept. 21, 1994).

¶ 6 Shortly thereafter, a proposal to eliminate cumulative voting was drafted so that with the shares from the trusts, John Warehime could choose all the directors himself. On October 18, 1994, the shareholders voted on this proposal. While only John Warehime supported it, the proposal passed since he was able to vote the shares from the trusts. No longer constrained by cumulative voting, he immediately removed Michael Warehime, Sally Warehime Yelland, and an independent director from the board. The present action was initially filed in response to the loss of cumulative voting.

¶ 7 On June 12, 1995, the directors elected by John Warehime approved a new compensation package for him. Plaintiff's Exhibit 102, Hanover Foods Corp. Form 10-K at 93 (July 3, 1995). Under the new package, he received a $650,000 base salary adjusted for inflation along with significant bonuses.⁴ Id. at 93-94. He was to receive 60% of his compensation for the longer of his life or his wife's life even if he were terminated. Id. at 99. Subsequent to another action initiated against John Warehime and HFC, this time led by the holders of the nonvoting common stock (Class A common stock), Stipulation, 4/25/97, at 15, John Warehime's compensation was reduced, Defendant's Exhibit 10, Amendment No. 1 to Employment Agreement Between Hanover Foods Corporation and John A. Warehime at 1-5 (Feb. 13, 1997).

¶ 8 John Warehime controlled HFC through use of the voting trusts which contained a majority of the voting shares (Class B common stock). However, John Warehime only owned 8,558 voting shares outright and was beneficial owner of 36,172 voting shares in the one trust. Together, these shares only accounted for 10% of the voting shares. Defendant's Exhibit 28, Hanover Foods Corp. Form 10 Q at 3 (Mar. 2, 1997). Since Michael Warehime and other holders of the voting shares vowed to take control of HFC and since the voting trusts that perpetuated John Warehime and the current board's control were due to expire in 1998, there was considerable concern about who would manage the company. In late 1996, an independent directors committee was formed. Frederick Lipman, counsel for the committee, formulated a plan to keep the other holders of the voting shares from gaining control at the expiration of the voting trusts.

¶ 9 The plan formulated by Lipman was that in the event that five members of the Warehime family disagreed,⁵ the owners of a majority of the voting shares (Class B common stock) would be divested of their ability to determine the outcome of any vote. Instead, 10,000 Class C preferred shares that were to be issued into HFC's 401(k) retirement plan were to be given 35 votes each. Three of HFC's directors, persons John Warehime chose to be directors, were to vote the retirement plan shares. Class A shares that normally were nonvoting were to receive 1/10 vote each and Class B shares were to retain one vote each. Plaintiff's Exhibit 111, Amended and Restated Articles of Incorporation of Hanover Foods Corporation at 6. This plan was to continue for five years. The strategic significance of this plan was that John Warehime, his children, and the directors he had chosen would control 50.1% of the vote, thereby enabling perpetual control by the current management even after the expiration of the voting trusts.

¶ 10 Lipman testified that the Class C shares could be outvoted by 80% of the Class B shares and a majority of Class A shares. N.T., 5/30/97, at 24, 37-38, 82. The court below, apparently persuaded by this testimony, found it as fact. Trial Court Opinion, 6/24/97, at 13-14. John Warehime seizes upon this finding. He also represents that "even if the trustees of the 401(k) plan and John A. Warehime vote together, it is still possible for the remaining Class B shareholders to prevail with the support of a majority of Class A shareholders." Throughout his brief, he argues that the Class C shares did not give him or a particular faction control after the expiration of the voting trusts.

¶ 11 Based upon objective calculations it becomes apparent, however, that John Warehime has significantly miscalculated the facts. This disagreement with John Warehime's erroneous conclusion places us at odds with the finding of the trial court mentioned above.

[W]e remain mindful that we are bound by the findings of the trial court which are supported by the record. We are unable to substitute our judgment for that of the trial court and we may reject its conclusions only where they involve an error of law or are unreasonable in light of the sustainable findings of the court.

Myer-Liedtke v. Liedtke, 762 A.2d 1111, 1112 (Pa.Super.2000). In the case at hand, our disagreement is not based on a credibility determination, which is not in our province, but on inconsistent numbers within the trial court's own opinion, mistakes which seem to have arisen from transpositional errors, and mathematical calculation.

¶ 12 At the time that the plan was proposed, 427,131⁶ Class B shares and 292,710⁷ Class A shares were outstanding. 427,131 Class B shares at one vote each comprise 427,131 votes. 292,710 Class A shares at 1/10 vote each is 29,271 votes. 10,000 Class C shares at 35 votes each is 350,000 votes. Thus, there were 806,402 total votes. A majority of Class A shares yield only 14,636 votes and 80% of Class B shares comprise only 341,705 votes. Together, these 356,341 votes are only 44% of the total. Therefore, the assertion of John Warehime and the finding of the trial court that 80% of Class B shares and a majority of Class A shares can determine the outcome during a vote is incorrect. In sum, we find a fact finding error which has resulted in an erroneous conclusion of law.

¶ 13 Likewise, the claim that Class B shares not owned by John Warehime and a majority of the Class A shares can prevail during a vote is incorrect. As mentioned above, John Warehime was beneficial owner of 36,172 Class B shares in one of the trusts and 8,558 Class B shares outright. Since the expiration of the trusts, he now owns all 44,730 outright. Subtracting his shares from the total Class B shares yields 382,401 shares. Therefore, even if all the other Class B shares banded together, that would yield only 382,401 votes. Again, a majority of Class A shares constitute 14,636 votes. Together, these 397,037 votes comprise only 49% of the total votes under the plan.

¶ 14 Most significantly, John Warehime's children control 9,015 Class B shares, which they had owned beneficially through one of the trusts. Adding these votes to the 44,730 votes from John Warehime's own Class B shares and the 350,000 votes of the retirement plan shares totals 403,745 votes. Even without any Class A votes, John Warehime, his children, and the directors he has chosen control 50.1% of the vote. We are thus unpersuaded by Lipman's testimony that the choice as to the number of Class C shares and votes per a share was arbitrary and not designed to foreclose the Class B shareholders' ability to affect the outcome of a vote. The calculations demonstrate that the plan was designed to maintain John Warehime and the present board's control of the company.⁸

¶ 15 On December 20, 1996, after the plan was conceived, the committee retained an investment-banking firm to evaluate HFC. The firm recommended that $30 million be...