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[33 Del.Ch. 214] Stanley L. Kaufman, of Kaufman, Imberman & Taylor, and Joshua Peterfreund, New York City, and William Marvel, of Morford, Bennethum, Marvel & Cooch, Wilmington, for plaintiff.
Albert R. Connelly and Edward C. Perkins, of Cravath, Swaine & Moore, New York City, and Caleb S. Layton and Henry M. Canby, of Richards, Layton & Finger, Wilmington, for defendants.
I am required to determine the validity of defendant corporation's stock option plan.
[33 Del.Ch. 215] Plaintiff, common stockholder, brought this action to enjoin the effectuation of defendant's so-called Restricted Stock Option Plan for Key Employees. Defendant joined issue and this is the decision on final hearing.
A chronological narration of the facts will illume the issues to be resolved.
Defendant  was incorporated on January 28, 1924 although its business history goes back to 1908. It is a corporation of institutional size, having about 19,000 stockholders, resources in excess of $1,250,000,000 and annual earnings before taxes of about $63,000,000. It is a holding company which, through its subsidiaries, sells credit service in a highly competitive field. Thus the corporation's success depends upon the ability of some 400 branch offices throughout the United States and Canada to sell such credit service in connection with the financing of such things as automobiles and industrial equipment. The importance of trained and skilled personnel to defendant's success was clearly demonstrated. Such personnel are by nature of their work in constant contact with opportunities in the same and associated fields.
The passage of Sec. 130A of the Internal Revenue Code in September 1950, 26 U.S.C.A. § 130A, materially changed the tax consequences of certain types of stock options. In the spring of 1951, Edwin C. Vogel, a director, former Vice President, and substantial stockholder, suggested to Mr. Dietz, the President, that defendant consider a stock option plan for its key personnel. Dietz ordered two of the officers to make such a study. A study was made of some 59 corporations listed with the New York Stock Exchange which have adopted a plan since the enactment of Sec. 130A of the I.R.C.
On April 26, 1951 the Board authorized the appointment of a committee to consider and report a plan for granting restricted stock options to employees of defendant and its subsidiaries. A committee of four directors, who were not to be eligible to
On May 24, 1951 the Plan under attack was recommended to the Board. Fifteen of the twenty-four directors were present. Of the fifteen present ten were 'interested' in the sense that they were then potential beneficiaries.
The Board voted to approve the Plan subject to the approval of defendant's common stockholders. After the proxy statement was processed by the S.E.C. it was mailed to the stockholders. The proxy statement contained the Plan in full, a statement of its purpose, tax consequences, the intentions of the Committee with respect to its administration, including its intentions as to the amount of options to be issued in the immediate future and the number of recipients of such options.
At a stockholders' meeting held June 26, 1951 the plan hereafter outlined was approved by 97.7% of the shares represented at the meeting and by 78.8% of the outstanding shares. The defendant had about 3,580,000 common shares outstanding of which 2,821,434 were voted for the Plan.
Since the Plan went into effect, options covering 71,456 shares have been granted to 125 employees. Thus on July 2, 1951 options covering 51,150 shares were granted to 36 individuals while on January 29, 1952 options covering 20,300 shares were granted to 89 individuals. These include one for 10,000 shares to Dietz, President, options aggregating 16,250 shares to eight other directors and options aggregating 45,200 to 116 other key employees who were not directors.
The July 1951 options were at $47.75 per share and the January 1952 options were at $53.00 per share, in each case being in excess of 95% of the market price at the granting date. The closing market value for defendant's stock on August 13, 1952 was $69.20 per share.
Language in the proxy sent in connection with the stockholders'[33 Del.Ch. 217] meeting emphasizes the incentive nature of the Plan and states that 'the Board believes that it will be in the best interests of the Corporation to put into effect a Restricted Stock Option Plan for Key Employees covering a limited number of the authorized but unissued shares of Common Stock of the Corporation'.
The principal features of the Plan are:
(i) It provides for the issuance of options, within a 5-year period, for not more than 150,000 shares of unissued Common Stock of the Corporation (about 4.2% of the outstanding stock). Options may be granted only to regular salaried employees of the Corporation and its subsidiaries. Directors who are not such employees, and employees over 65, are not eligible.
(ii) The option price is to be not less than 95% of the fair market value of the stock at the date of granting the options. The price must be paid in full in cash upon exercise of options. The Corporation and its subsidiaries are forbidden to lend money, directly or indirectly, to assist in acquiring or carrying shares issued upon exercise of options.
(iii) An option is non-transferable, and may be exercised during the lifetime of the employee only by him, and only while he remains an employee or within 3 months after termination of employment. In the event of death, it may be exercised by the employee's executor within one year after his death. In no event can an option be exercised after 5 years from the date of granting.
(iv) The employee must agree to remain in the service of the Corporation or one of its subsidiaries for a period of 2 years from the date of granting of the option at the pleasure of the Board and at such compensation as such Board shall reasonably determine from time to time.
(v) The maximum aggregate number of shares as to which options may be granted to any one individual is 10,000.
(vi) The Plan is administered by a Committee, appointed by the Board, consisting
of directors who are not eligible to receive options. Subject to the express provisions of the Plan, the Committee[33 Del.Ch. 218] has plenary authority to determine the individuals to whom, and the times when options are to be granted and the number of shares to be subject to each option, as well as other terms and provisions of such options. In making such determinations, the Committee is to take into account the services rendered by the respective employees, their present and potential contributions to the Corporation's success and other factors which it deems relevant.
The defendant reported to the Salary Stabilization Board with respect to the grant of the July 1951 options and was advised that such options conformed in all respects with the requirements of the Board's regulations and thus required no special approval.
Plaintiff asserts numerous objections to the Plan. They fall into three categories. First, the directors are charged with bad faith in initiating the plan. Second, it is charged that the Plan was not adequately and fairly disclosed to the stockholders in some nine different respects. Third, it is charged that the Plan and the options issued thereunder do not comply with the Delaware law.
Directors' Alleged Bad Faith in Initiating Plan
Since the Plan was approved by a majority of stockholders who were not, on the record, controlled by the directors, the burden of showing bad faith is on the plaintiff.  Let us consider the evidence in this light. The matter was originally suggested by Mr. Vogel, a director who is not eligible to receive any options but who along with his family owns about 65,000 shares. The plan was studied by a committee of the Board whose members do not ...