Wyles v. Campbell

• Decision Date: 31 March 1948
• Docket Number: Civil Action No. 1014.
• Citation: 77 F. Supp. 343
• Parties: WYLES v. CAMPBELL et al.
• Court: U.S. District Court — District of Delaware

77 F. Supp. 343

WYLES v. CAMPBELL et al.

Civil Action No. 1014.

District Court, D. Delaware.

March 31, 1948.

Arthur G. Logan, of Logan, Duffy & Boggs, all of Wilmington, Del., for plaintiff.

Caleb S. Layton, of Richards, Layton & Finger, all of Wilmington, Del., and Everett I. Willis, of Root, Ballantine, Harlan, Bushby & Palmer, all of New York City, for defendants.

RODNEY, District Judge.

This is a stockholder's derivative suit filed by the plaintiff, a stockholder of The Valspar Corporation, seeking to cancel and invalidate some 26,000 shares of common stock of such corporate defendant issued by it to the individual defendant. Jurisdiction is based upon diversity of citizenship.

The complaint alleges that the plaintiff is the owner of 1213 shares of common stock of Valspar and has been such owner at all times since before the actions of which he complains. Pursuant to Rule 23(b) of the Federal Rules of Civil Procedure, 28 U.S. C.A. following section 723c, the complaint sets forth the reasons for the failure to obtain appropriate action directly by the corporate defendant and the reasons for institution of the derivative suit and complies with the other requirements of such rule.

The stock which is sought to be cancelled was issued by Valspar to Campbell pursuant to a purported option included in an employment agreement dated December 1, 1942. The option appears to have been exercised on December 30, 1946 and the stock then issued for the consideration of $1.00 per share, whereas the market value of such stock at the time was $11.125 per share. While findings of fact and conclusions of law are separately filed, some statement of the facts is deemed here necessary.

While the exercise of the option and the issuance of the shares was had pursuant to the terms of the employment contract of December 1, 1942, yet since that contract in terms related to and purported to continue a former contract, so it would seem proper to follow the relations of the parties in chronological order so that the respective contentions may more clearly appear.

In 1935 Valspar Corporation was in serious financial difficulty. It had lost $4,500,000 in the preceding six years. It had a debt of $2,436,300 and its preferred stock had a liquidating value and arrearage of dividends amounting to $3,473,124. The company had only a tangible net worth of $553,740 over its debt capital. It had pledged its accounts receivable and had little or no credit.

Under these circumstances the management of the Valspar Corporation made an extensive search for a new executive and fixed upon Mr. Campbell, the individual defendant, who was reported to have made an outstanding success in the management of another paint company under somewhat similar conditions. Valspar had been paying its executive $35,000 per year, but Mr. Campbell was unwilling to come to Valspar unless he should have some opportunity to acquire a stock interest in the corporation in case of his success in its operation.

On October 2, 1935, an employment contract was executed by Valspar Corporation and each of its four wholly owned subsidiaries on the one part and Thurlow J. Campbell, the individual defendant, on the other part. The contract called for a two-year period beginning October 9, 1935. It provided for a salary of $30,000 per year and certain details of management. In detailed and explicit terms the contract provided: "As further consideration for his agreement to undertake the employment," Campbell, upon the existence on October 9, 1937, of certain conditions (now immaterial) should have an option at any time within 60 days after October 9, 1937 to purchase 20,000 shares of common stock of Valspar at $1.00 per share. Indeed, the provisions as to the option to purchase stock by Campbell constitute the major part of the physical content of the agreement. The contract provided that if Campbell should continue in the employ of Valspar after October 9, 1937, the option should be extended throughout the period of continued employment and could be exercised at any time during such period, but in no event after or beyond October 9, 1939. The contract provided that if the outstanding common stock of Valspar should, in various detailed ways, be increased or diminished, then the amount of stock represented by the option should correspondingly be increased or diminished, presumably so that the proportion of shares represented by the option be retained. The option of Campbell to purchase the stock was wholly personal to him and not subject to any alienation or assignment of any kind, except that certain provisions governed the eventuality of his death at certain specified times. Pursuant to the terms of the contract of October 2, 1935 Campbell entered into the employ of Valspar and its subsidiaries. On January 8, 1937 and May 19, 1937, certain minor and now immaterial amendments were made to the original contract.

From October 9, 1937, to November 30, 1937, an understanding existed that the relations between the parties would continue on a month-to-month basis and under the terms and conditions of the original agreement of October 2, 1935, except that the salary of Campbell as manager should be at the rate of $35,000 instead of $30,000.

On December 1, 1937 the parties entered into a further written agreement. It expressly provided that the original agreement of October 2, 1935 (as amended) should continue in full force and effect except as therein specifically provided. It extended the term of employment of Campbell to November 30, 1942. It provided for a salary from December 1, 1937, to November 30, 1939, at the rate of $35,000 per year and from December 1, 1939, to November 30, 1942, at the rate of $40,000 per year. It provided for certain additional payments where the consolidated net profits reached certain figures, viz., during the years from December 1, 1937, to November 30, 1939, an amount equal to 5% of the amount by which the consolidated net profit exceeded $300,000; during the period of December 1, 1939, to November 30, 1940, the same percentage after a net profit exceeding $350,000; and from December 1, 1940, to November 30, 1942 where the net profit exceeded $375,000. The agreement of December 1, 1937 provided "as a further consideration for the agreement of the manager to continue his employment as herein provided, the option to the manager set forth in paragraph 5 of the original agreement is hereby extended and may be exercised by the manager at any time during, but only during, the period of his continued employment hereunder." The option here mentioned was the option to purchase stock. Under the terms of the agreement of December 1, 1937, extending the terms of the original agreement, Mr. Campbell continued in the employ of Valspar Corporation and its subsidiaries.

During the year 1938 the capital structure of Valspar was substantially changed. This change is here material because by it the number of outstanding shares of common stock was altered and increased and their value affected, and so this change has an effect upon the option of Campbell to purchase common stock as both hereinbefore and hereinafter considered.

In 1938 the Valspar Corporation had outstanding 30,444 shares of $6 dividend cumulative preferred stock on which, as of February 1, 1938, there were accrued and unpaid dividends of $821,988, and there were outstanding 233,122 shares of common stock. By the reorganization the $6 preferred stock and accumulated and unpaid dividends thereon could be surrendered and each share receive in substitution therefor one share of $4 preferred stock and 5 shares of common stock. The outstanding common stock was thus subject to be increased by 152,220 shares.

At a Directors' meeting on December 16, 1942, the secretary called attention to the fact that the contract of employment of Campbell as president and general manager had expired on November 30, 1942, and a committee was appointed to "negotiate on behalf of the corporation the new contract of employment with Mr. Campbell."

On January 27, 1943, the committee submitted the form of the new contract with Mr. Campbell dated as of December 1, 1942 which was approved by the Board of Directors subject to the advice of counsel and subject to the consultation with the auditors as to the basis of calculation of net profit and two directors were authorized to execute the final draft. It may parenthetically be stated that neither at this meeting or at any meeting with relation to the stock option did Mr. Campbell as a director or officer participate in the voting.

The contract of December 1, 1942, was duly executed. It recited the "original agreement" of October 2, 1935 (as amended), and provided that it be "further amended and the term of employment of the manager and the term for the exercise of the option therein set forth are hereby respectively extended and the number of shares covering said option is increased as follows:"

1. The term of employment is extended to November 30, 1947.

2. The annual salary shall be $40,000 and there shall be a bonus of 5% of the amount by which the consolidated net profit should exceed $375,000.

3. "The option to the manager set forth in paragraph 5 of the original agreement is hereby extended and may be exercised by the manager at any time during, but only during, the period of his continued employment hereunder and the number of shares covered by such option is hereby increased from an aggregate of 20,000 shares to 26,000 shares."

From the testimony it appears that the increase of shares covered by the option from 20,000 to 26,000 was a matter of compromise. It was stated that under the terms of the original agreement the number of shares covered by the option would be increased proportionately as the common stock outstanding was increased and that the increase of common stock by the recapitalization of 1938 would normally result in an increase of shares covered by the...