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Smith v. Biggs Boiler Works Co.

Court of Chancery of Delaware

September 3, 1952

SMITH
v.
BIGGS BOILER WORKS CO. et al.

Page 194

David Snellenberg, II, and John Van Brunt, Jr., of the firm of Killoran & Van Brunt, Wilmington, for plaintiff.

William E. Taylor, Jr., Wilmington, for defendants.

BRAMHALL, Vice-Chancellor.

Plaintiff and defendant Krizanek were each the holder of 50% of the outstanding common stock of The Biggs Boiler Works Company, a Delaware corporation. Subsequently Krizanek transferred a one-sixth interest to a third party. Plaintiff is a resident of the State of Connecticut; the individual defendants are residents of the State of Ohio. On December 6, 1950, at Cleveland, Ohio, plaintiff and defendant Krizanek executed an agreement, purporting to be a voting trust agreement, and naming the plaintiff and the individual defendants as the voting trustees for this stock. The agreement provided that any two of the three named trustees would have the power to vote all the stock. At the time of the execution of the agreement the certificates for all of said stock were on deposit with The First National Bank of Akron, Ohio, under a refunding agreement between plaintiff and defendant Krizanek and the former owners of the stock. There was also outstanding an option agreement for the sale of one-third of all the common stock. The agreement provided that the certificates should not be deposited with the trustees, but should remain in escrow with the bank at Akron, Ohio, until September 30, 1951, the time on which the refunding agreement expired. Under certain conditions the stock would not be delivered to the trustees at all, in which event the agreement to create a voting trust would be terminated. Until the deposit with the said trustees of the certificates of stock which were the subject of the agreement the stock was not to be registered in the names of the voting trustees on the books of the corporation. The agreement also provided that the [33 Del.Ch. 186] certificates should be considered for the purposes of the trust as if they had been actually deposited with the voting trustees and as if new certificates

Page 195

In the amended complaint, designated as an amended and supplemental complaint, filed on April 25, 1952, in addition to the facts set forth in the original complaint, plaintiff complained of certain actions of the defendants occurring after the filing of the original complaint and by reason thereof included in the amended and supplemental complaint a prayer for the removal of the defendant Steadman as a voting trustee.

The corporation was summoned by service on its resident agent and the defendant trustees were served by publication pursuant to paragraph 4374, Revised Code 1935. Counsel appeared specially for the individual defendants to move for the vacation of the order for service by publication and to dismiss for want of jurisdiction. Both motions were denied. The amended complaint was served on the attorney who had appeared for defendants to make the motions aforesaid.

The defendants have filed a number of motions relative to the amended and supplemental complaint, which, in effect, raise the following questions:

[33 Del.Ch. 187] (1) Must the defendant Krizanek be joined as a party defendant in his capacity as a stockholder?

(2) Does this court have jurisdiction over the defendants upon the amended complaint?

(3) Is the voting trust agreement valid?

(4) Should the defendant Steadman be removed as a voting trustee?

(1) Must the defendant Krizanek be joined as a party defendant in his capacity as a stockholder?

Defendants contend that Krizanek as a stockholder in the company is a necessary and indispensable party and must be joined as a defendant.

I see no merit in this contention. The action against Krizanek is against him only in his capacity as a voting trustee and not as a stockholder. While a stockholder may be joined as a necessary party and if he is not he will not be bound in that capacity by any judgment which may be rendered in the suit, the motion to amend will not be denied on that ground. See West v. Sirian Lamp Co., 28 Del.Ch. 328, 42 A.2d 883. This court has jurisdiction of voting trustees involving shares of stock in Delaware corporations. Perrine v. Pennroad Corporation, 19 Del.Ch. 368, 168 A. 196. This authority includes the power of removal for cause. It is ancillary to the duty of the court to see that the trust is properly administered. Broeker v. Ware, 27 Del.Ch. 8, 29 A.2d 591; In re Catell's Estate, 28 Del.Ch. 115, 38 A.2d 466. In this action Krizanek as a stockholder is therefore not an indispensable party.

(2) Does this court have jurisdiction over the defendants upon the amended complaint?

Defendants have moved to strike the amended and supplemental complaint of the plaintiff on the grounds: (1) that the amended and supplemental complaint sets forth a new cause of action and that therefore service thereof must be made in the same manner as service of an original complaint; (2) that defendants are in court only by reason of a special appearance and that therefore proper service may be made only upon them and not upon counsel.

Generally a supplemental complaint may be filed for the purpose of setting forth facts which have occurred since the filing of the original bill. If these supplemental facts should warrant, additional relief may be prayed for. The practice in the federal courts with respect to supplemental complaints (the rule in this court is similar) is set forth in Moore's Federal Practice, Vol. 3, p. 859, (2 Ed.), as follows:

[33 Del.Ch. 188] 'While a matter stated in a supplemental complaint should have some relation to the cause of action set forth in the original pleading the fact that the

Page 196

supplemental pleading technically states a new cause of action should not be a bar to its allowance but only a factor can be considered by the court in the exercise of its discretion; and, of course, a broad definition of 'cause of action' should be applied here as elsewhere.'

See Miller v. Cook, 135 Ill. 190, 25 N.E. 756, 10 L.R.A. 292; Story's Equity Pleading (8th Ed.) Sec. 336.

In the original complaint plaintiff asserted the invalidity of the agreement as a voting trust agreement. According to plaintiff's allegations in the amended and supplemental complaint, the defendant trustees at a purported special meeting of the corporation stockholders on April 16, 1951, acting as voting trustees under said voting trust agreement, voted the stock purported to be assigned under said agreement to remove the plaintiff as a director of the corporation and a successor was elected in his place. On April 17, 1951, as alleged by plaintiff, at a purported special meeting of the directors of the corporation, plaintiff was removed as president and secretary, at which time, or shortly thereafter, every connection which plaintiff had with the corporation was severed. On May 7, 1951, concurrently with the filing of this action, plaintiff filed suit in this court, asking for a decree invalidating said special meeting of stockholders and the action taken thereat. This court declared the alleged voting trust agreement to be invalid, held said meeting illegal and ordered plaintiff reinstated as a director and officer of the corporation. The amended and supplemental complaint, in addition to the allegations above referred to, also included an additional prayer that Steadman be removed as a voting trustee.

The supplemental complaint is therefore an adjunct to the original complaint. It merely sets forth facts occurring subsequent to the filing of the original bill and, as a result of those facts, adds an additional prayer for relief.

Where there is a good cause of action stated in the original complaint, a supplemental complaint setting forth facts subsequently occurring which justify other and further relief is proper. City of Texarkana v. Arkansas, Louisiana Gas Co., 306 U.S. 188, [33 Del.Ch. 189] 620, 59 S.Ct. 448, 455, 83 L.Ed. 598. See also Freeman v. Bee Machine Co., 319 U.S. 448, 63 S.Ct. 1146, 87 L.Ed. 1509; Bartlett v. New York, N. H. & H. R. Co., 226 Mass. 467, 471, 115 N.E. 976; Shaw v. Bill, 95 U.S. 10, 24 L.Ed. 333. Those defendants who are already in court are bound to take notice of the filing of a supplemental complaint to the same extent that they are bound to take notice of other proceedings in the cause. French v. Hay, 22 Wall. 238, 22 L.Ed. 854.

This court has already decided, and its opinion in this respect has been affirmed by the supreme court, that the present action is an action in rem and that an order for substituted service under the provisions of 4374 of the Revised Code of 1935 will lie against the individual defendants as trustees. They are therefore now in court and are bound to take notice of the filing of an amended complaint to the same extent that they are bound to take notice of any other proper proceeding in the cause. French v. Hay, supra. There is therefore no occasion for a subpoena. The fact that the defendants have not seen fit personally to accept copies of the amended and supplemental complaint does not affect the plaintiff's action. That defendants had actual notice of the filing of the supplemental bill is apparent from the motions which have been made on their behalf. Perrine v. Pennroad Corporation, supra. Further notice to the defendants of the amended and supplemental complaint was not necessary.

(3) Is the voting trust agreement valid?

In a companion action hereinbefore referred to, instituted at the time the present action was begun, plaintiff prayed that the action of the stockholders of the corporation in removing plaintiff as a director be set aside and the plaintiff reinstated as a director and officer of the corporation on the ground that the voting trust agreement was illegal. At that time the stock which was to be assigned to the voting trustees was still subject to both the refunding and option agreements and could not have been deposited with the trustees. This court in

Page 197

[33 Del.Ch. 190] A voting trust as commonly understood is a device whereby persons owning stock with voting powers divorce the voting rights thereof from the ownership but retain to all intents and purposes the latter in themselves and transfer the former to trustees in whom the voting rights of all depositors in the trust are pooled. Peyton v. William C. Peyton Corporation,22 Del.Ch. 187, 194 A. 106, 110. It is a trust in the accepted equitable sense and is subject to the principles which regulate the administration of trusts. Chandler v. Bellanca Aircraft Corporation,19 Del.Ch. 57, 162 A. 63; H. M. Byllesby & Co. v. Doriot,25 Del.Ch. 46, 12 A.2d 603. Under a voting trust agreement the voting power of the stock is separated from the beneficial interest, the trustee or trustees holding such legal title as is necessary to separate the interest. See In re Morse,247 N.Y. 290, 160 N.E. 374.

Even in the absence of a statute prescribing the method for the creation of a voting trust it would be necessary that some act be performed which would be construed as giving to the voting trustee or trustees the authority to vote the certificates. In the case of Cliffs Corporation v. United States,308 U.S. 575, 60 S.Ct. 91, 84 L.Ed. 482, the court in construing the Ohio statute held that the execution of the two voting trust agreements passed title and all indicia of ownership to the trustees, without endorsement on the certificates or transfer on the corporate records. The court stated that the owner may dispose of his shares in such manner as would be sufficient to pass title to any chose in action or intangible 'unless a particular mode of transfer is prescribed by statute or in the corporate charter or by-laws'. 103 F.2d 77, 80.

Whatever may have been the rule under the common law relative to the validity of voting trust agreements, it is now clear, under Sec. 18 of the General Corporation Law, that their very existence now depends upon that statute. No voting trust may now be created in this state unless it complies with that statute. Perry v. Missouri-Kansas Pipe Line Co.,22 Del.Ch. 33, 191 A. 823; In re Chilson,19 Del.Ch. 398, 168 A. 82. When the legislature passed the statute setting up the terms and conditions under which a voting trust would be valid, it occupied the whole field. Perry v. Missouri-Kansas Pipe Line Co., supra.

[33 Del.Ch. 191] Sec. 18 provides: (1) that the stock must be deposited with the voting trustee or trustees; (2) that the trustee or trustees may vote said stock for a period not exceeding ten years; (3) that a copy of the agreement shall be filed in the principal office of the corporation in the State of Delaware; (4) that certificates of stock shall be issued to the voting trustees to represent any stock so deposited with them; (5) that in the certificates so issued it shall appear that they are issued pursuant to the voting trust agreement; and, (6) that in the entry of such voting trustees as owners of such stock in the proper books of the issuing corporation that fact shall be noted.

In the language of this section the legislature indicated clearly that it intended these provisions to be mandatory. It has been so held by the courts of this state. Perry v. Missouri-Kansas Pipe Line Co., supra; In re Chilson, supra. As stated in Perry v. Missouri-Kansas Pipe Line Co., supra, in the absence of a statute voting trusts were not looked upon favorably by courts in many jurisdictions and in many states where their validity was recognized they were circumscribed by many limitations. In passing upon a statute permitting voting trusts under conditions prescribed in the statute, where prior thereto voting trusts were looked upon at least with some disfavor, the legislature must have intended that there be a strict compliance with the statute; otherwise, the voting trust would be illegal. See In re Chilson, supra; Perry v. Missouri-Kansas Pipe Line Co., supra.

In the present case there is an attempt to set up a voting trust, in which it is expressly agreed that the certificates shall be subject to two outstanding agreements: (1) a refunding agreement, and, (2) an option to purchase. Under certain

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