Wise v. Universal Corporation

• Decision Date: 17 November 1950
• Docket Number: Civ. A. No. 307.
• Citation: 93 F. Supp. 393
• Parties: WISE v. UNIVERSAL CORPORATION et al.
• Court: U.S. District Court — District of Delaware

93 F. Supp. 393

WISE v. UNIVERSAL CORPORATION et al.

Civ. A. No. 307.

United States District Court D. Delaware.

October 13, 1950.

As Amended November 17, 1950.

James R. Morford (of Morford, Bennethum, Marvel & Cooch) and William Prickett, of Wilmington, Del., for plaintiff.

Hugh M. Morris and Edwin D. Steel, Jr. (of Morris, Steel, Nichols & Arsht), of Wilmington, Del., for defendants.

LEAHY, Chief Judge.

This derivative suit was brought for the benefit of Universal Corporation¹ by plaintiff as a holder of certain voting trust certificates representing the common stock of Corporation. Plaintiff seeks cancellation of particular VTCS of Corporation and certain options to purchase other VTCS as against certain of the individual defendants, Standard Capital Company, J. Cheever Cowdin and Charles J. Prutzman. The action involves two distinct transactions. The first revolves about the "Laemmle Option". In March 1936, defendants Capital —a corporate instrument of Cowdin — and Rogers owned an option to buy 90% of the common, and 100% of the second preferred stock of Pictures plus 200 shares of Big U Film Exchange common stock for $5,450,000.00. This option is styled the Laemmle option as Rogers and Capital acquired it from one Carl Laemmle. On March 13, 1936, defendants Rogers, Cowdin and Rank organized Corporation and designated its officers and directors. After the organization of Corporation, Rogers and Capital assigned the Laemmle option to it in return for, among other things, the issuance to Rogers and Capital (Cowdin) of options giving the right to buy a large block of Corporation's VTCS at $10 per share. At the time of this assignment, Pictures was on the verge of insolvency, was borrowing to pay current operating expenses and had operating deficits. Plaintiff first acquired her VTCS of Corporation on November 19, 1936, while the warrants were issued to Capital on April 1, 1936.

Plaintiff attacks the validity of the warrants issued to Capital under the March 1936 contract on the ground they were issued without sufficient consideration. The individual defendants in the matter at bar make alternative arguments: (1) there was sufficient consideration for the option and the complaint itself on its face even alleges their issuance as part of the consideration for the assignment by Capital of its interest in the Laemmle option; (2) plaintiff is estopped to attack the validity of the warrants because she did not acquire her VTCS until after the warrants had been issued. Though plaintiff alleges she was a stockholder at the times of the acts of which she complains, she now admits she did not acquire her VTCS in fact until after the warrants had issued to Capital. She claims to meet this apparent infirmity by contending that Rule 23(b) of the Rules of Federal Procedure, 28 U.S. C.A., does not bar her action because the issuance of the warrants in the specific case before us was part of a continuing conspiracy and, in any event, the warrants had not been exercised by defendant holders at the time she acquired her VTCS.

The second transaction which is sought to be condemned revolves about several employment contracts which also have to do with the issuance of warrants. The particular warrants issued to defendant Prutzman under his contract of March 4, 1941, fall into two categories: (1) Warrants for 6,000 VTCS which were issued to Prutzman in exchange for warrants which were issuable to him under his former 1939 contract with Corporation;² and (2) Warrants which were issued to Prutzman during his employment by Pictures under its contract of March 4, 1941. Under this contract with Corporation, Prutzman was entitled to receive warrants for 3,000 VTCS during each year of his employment by Pictures under its contract of March 4, 1941. By another contract with Corporation of the same date defendant Cowdin was similarly entitled to receive warrants; in his case 5,000 VTCS during each year of his employment by Pictures under its contract of March 4, 1941. It may facilitate clearness to restate these cinema transactions another way. On March 4, 1941, Pictures by contract employed Cowdin and Prutzman for substantial salaries and a share of profits. On the same day, Corporation executed separate contracts with these same defendants whereby a guarantee was made for Pictures' performance of its employment contracts with Prutzman and Cowdin and Corporation agreed to issue options to these same defendants under which they could buy substantial amounts of Corporation's VTCS at $10 per share. Plaintiff asserts Corporation had no legal or corporate power to contract to issue warrants to either Prutzman or Cowdin in connection with their employment by Pictures. Defendants strongly assume the negative of this proposition.

Defendants Capital, Cowdin and Prutzman³ moved for summary judgment⁴ and on the basis of the pleadings, exhibits, affidavits and other writings before me the parties have supported and attacked the motion.

First: the Laemmle Option

1. I conclude the issuance of warrants to Capital and Rogers in exchange for the Laemmle option was supported by sufficient legal consideration. Plaintiff argues at length the warrants should be held invalid because the stock which Corporation was entitled to buy under the Laemmle option was not worth $5,450,000.00 based upon either an earning or asset valuation. Plaintiff urges the option had no value to Corporation and could not, therefore, constitute sufficient consideration for the issuance of the warrants. It is here, I think, plaintiff misconceives the nature of the transaction. Corporation acquired the option not because it thought Pictures at that time was worth $5,450,000.00 but because it thought its stock would be worth that — and more, most likely — in the future. This type transaction is not uncommon in our business world. Purchasers frequently pay substantial amounts for what they denominate as "calls" on stocks. Some call it business opportunities. Yet, this is just what Corporation did here. That its original opinion was supported or vindicated by subsequent events is important only because it indicates that at the time of the purchase Corporation was not acting capriciously or in utter derogation of its legal or corporate rights or to the prejudice of its security holders. Defendants here further demonstrate the fallacy of plaintiff's position by showing that her very argument that value of option is to be determined by criteria existing at the time of purchase of stock applies with equal force to the value of the warrants at the date of issuance. If the warrants are to be valued as of that date it is clear that they had no immediate value. The point is neither acquisition was based on current values. Corporation acquired the option and defendants accepted the warrants primarily because of the belief that if Pictures was properly managed it could be built into a profitable enterprise to the benefit of the interested and contracting parties.

Weighing the true nature of the transaction, it is manifest the issuance of the warrants was supported by sufficient legal consideration. Acquisition of option was the consideration for issuance of the warrants. The relative values of the option and warrants (the relative values of one "legal consideration" over the other) is not even a subject for judicial inquiry. It has been hornbook law for years that the adequacy of the consideration — except obviously where both considerations under review consist of money — is irrelevant on the question of sufficiency.⁵ Affiliated Enterprises v. Waller, 1 Terry, Del., 28, 5 A. 2d 257; 1 Williston Contracts § 115; Anson on Contracts (Patterson Ed.) § 126.⁶ In the case at bar the question is simply whether the bargain made was such to support the issuance of the warrants in exchange for acquisition of the option. Unquestionably under all the tests such a bargain supports consideration on both sides.

Since plaintiff has failed in her attack on the validity of the issuance of the warrants growing out of the Laemmle option transaction, it is unnecessary to consider whether she had the legal right to raise such issue in face of Rule 23(b) and the fact that she first acquired her VTCS of Corporation as late as November 19, 1936. Defendants' motion for summary judgment with respect to this particular matter is granted.

Second: the Employment Contracts

2. The remaining phase of inquiry deals with the warrants issued by Corporation in connection with the summary judgment defendants' employment by Pictures. This constitutes the more difficult portion of the case. Plaintiff avers the execution of the employment contracts by Prutzman and Cowdin with Pictures did not constitute a valid consideration for Corporation's obligation to issue warrants to these individuals. The record before me shows that both Prutzman and Cowdin state categorically they would have been unwilling to enter into the agreement with Pictures unless Corporation had agreed to issue warrants to them. This is not a convenient or supporting afterthought for the contract itself (between Corporation and Cowdin, for example) states the contract is being entered into "as an inducement" for Cowdin to enter into his employment contract with Pictures. It is also the fact Corporation owned all the second preferred and 92% of the common stock of Pictures at the time. Plaintiff, however, suggests by her brief that it is "improbable" the warrant contracts were the inducement for Prutzman and Cowdin to enter into the Pictures contracts and that I should not accept this fact "where the tests of cross-examination and discovery have not yet been available to plaintiff." This particular point of plaintiff's case will be discussed more fully later; but suffice it to say here, at this time, defendants filed their affidavits asserting the facts of the transaction as they say they occurred on May 10, 1948, while plaintiff's answering affidavits...