MARTIN et al.
AMERICAN POTASH & CHEMICAL CORP.
[33 Del.Ch. 235] SOUTHERLAND, C. J., and WOLCOTT and TUNNELL, JJ., sitting.
Appeal from an order of the Court of Chancery of New Castle County denying plaintiffs' motion for a restraining order enjoining the defendant from consummating a proposed purchase for retirement of shares of its own stock.
Daniel O. Hastings and Ayres J. Stockly (of Hastings, Stockly & Walz), of Wilmington (William Gellin, of New York City, on the brief), for plaintiffs below, appellants.
[33 Del.Ch. 236] Edwin D. Steel, Jr., and William S. Megonigal, Jr. (of Morris, Steel, Nichols & Arsht), of Wilmington (Oliver & Donnally, of New York City, on the brief), for defendant below, appellee.
SOUTHERLAND, Chief Justice.
The essential question presented is whether a purchase by a Delaware corporation of its own shares at private sale for retirement may be lawfully made without a pro rata offering to all holders of the class or classes of stock purchased.
The facts are these:
American Potash & Chemical Corporation (herein 'defendant') is and for many years has been engaged in the manufacture and sale of potash and other industrial and agricultural chemicals, with properties situated on the edge of Searles Lake, a 'dry' lake at or near Trona, California. As of the time of the transaction here reviewed it had outstanding, in addition to an issue of preferred stock, 48,664 shares of Class A common stock and 479,726 shares of Class B common stock. Of the common stock 2,575 shares of Class A and 134,650 shares of Class B were owned by Mathieson Chemical Corporation (herein 'Mathieson'), a company engaged in a
In the interim between the lapsing of negotiations in the fall of 1951 and the final proposal in 1952, Mathieson had indicated its intention to dispose of its holdings in defendant if no merger could be effected and had taken preliminary steps to that end before the Securities and Exchange Commission. During this time [33 Del.Ch. 237] the relations between the two companies were not harmonious. Five of the twelve members of defendant's board were nominees of Mathieson, and apparently did not share the views of the majority on certain questions of corporate policy. In the spring of 1952 the defendant's management concluded that it was to the interest of the company to eliminate the block of shares held by Mathieson. Believing that a public distribution of the shares was not feasible, it determined to make an offer to purchase the shares for retirement. This offer resulted in an agreement dated June 5, 1952, providing for the purchase by defendant from Mathieson of 2,575 shares of Class A stock and 117,425 shares of Class B stock at the price of $40 a share. The shares were to be purchased for retirement under Section 28 of the General Corporation Law, and the purchase was subject to approval of defendant's stockholders at a special meeting of the holders of the A and B stock to be held on July 10, 1952. Concurrently with this contract, and dependent on the consummation thereof, the firm of Lehman Brothers, of New York, agreed to buy for its own account and for the account of others the remaining Class B shares of defendant owned by Mathieson. On June 9 notice was given of the stockholders' meeting, at which the stockholders were to vote upon the terms of the proposed purchase, the retirement of the stock, and the consequent reduction of capital; and on June 24 plaintiffs filed their complaint below, seeking to enjoin the meeting or, alternatively, to enjoin the consummation of the contract.
Plaintiffs' application for a restraining order was heard by the Vice Chancellor on July 2 upon the verified complaint and answer and affidavits filed by defendant. On July 10 he entered an order denying the application. Thereafter on the same day the stockholders of defendant met and approved the purchase. Of the shares voted (excluding the Mathieson shares) less than three percent were voted in opposition. No stay at that time having been sought or granted, the transaction was fully consummated on the same day and the required certificate of reduction was filed and recorded. On July 11, 1952, plaintiffs appealed to this Court.
In substance two contentions are made: first, that the proposed purchase at private sale is illegal under Section 28 of the General [33 Del.Ch. 238] Corporation Law, Rev.Code 1935, § 2060; and second, that even if power to make the purchase exists it has been inequitably exercised in this case.
Before the merits are reached, however, a preliminary motion requires consideration. Defendant has moved to dismiss the appeal, urging (a) that the interlocutory order of the Vice Chancellor is not an appealable one under Art. IV, Sec. 11(4) of our Constitution, and (b) that because of the consummation of the transaction the appeal from the refusal of the restraining order is now moot.
It is settled Delaware law that the interlocutory orders in Chancery which are by the Constitution made appealable are those, and only those, which determine substantial issues and establish legal rights. Du Pont v. Du Pont, Del., 82 A.2d 376; Electrical Research Products, Inc. v. Vitaphone
Corporation, 20 Del.Ch. 417
, 171 A. 738
. No appeal lies from an order in Chancery which is discretionary and preliminary, intended merely to preserve the status quo, and not determinative of substantive rights. Consolidated Film Industries v. Johnson, 21 Del. Ch. 417, 192 A. 603
Defendant says that the order here appealed from falls within the latter category. We think not. It is an order refusing injunctive relief--not one granting such relief to preserve the status quo, as in the Consolidated Film case, supra. Moreover, its necessary import is a determination by the court below of the important question of law presented to it, viz., whether a purchase of shares under the facts presented is within the power granted by Section 28. This is so because if such power was lacking the court was bound to issue the restraining order. Hence the order was not of that type of discretionary order mentioned in the Consolidated Film case. We think that the denial of relief in these circumstances 'has determined initially a substantial legal issue of the cause'. Du Pont v. Du Pont, supra [82 A.2d 379.] We do not say that all orders refusing preliminary injuntive relief are appealable; but we hold that the order in this case, which necessarily determined the main question of law against the plaintiffs, is an appealable order.
[33 Del.Ch. 239] Of no substance, we think, is the argument that the plaintiffs' status as stockholders qualified to maintain the suit was put in issue and that until the determination of that issue no legal principle could be decided. The remarks of Judge Harrington upon this point in the Consolidated Film case, supra, must be read in the light of the order that he was reviewing which was, as above noted, an order granting a preliminary injunction to preserve the status quo.
Nor do we think that the appeal presents a moot question. Defendant's argument is that the consummation of the purchase has rendered equitable relief impossible because the transaction cannot be rescinded. Even if this be true, it does not follow that plaintiffs might not be entitled to monetary relief if the transaction were unlawful. It is not necessary to pass on this question; we merely say that it does not plainly appear that the 'controversy has come to an end.' Cf. Southern Production Co. v. Sabath, Del.Ch., 87 A.2d 128; State ex rel. Traub v. Brown, 9 W.W.Harr. 187, 39 Del. 187, 197 A. 478. Defendant replies that even if the cause below is not moot, the appeal before us is so, since the propriety of granting injunctive relief is the sole question raised by this appeal. We think the distinction too shadowy to justify the argument. To accept it would be to require another appeal, after final hearing, in order to pass upon the essential question of law--a course which defendant's counsel frankly concedes to be undesirable. Moreover, as the record now stands, defendant is in a position to assert, in any action which plaintiffs might bring against the directors in a foreign jurisdiction, that the Court of Chancery of this state has implicitly placed upon Section 28 of the General Corporation Law a construction which, though not embodied in a final judgment and hence not res judicata, might effectively bar the action. Cf. North Laramie Land Co. v. Hoffman, 28 Wyo. 183, 201 P. 1022; Green v. Okanogan County, 60 Wash. 309, 111 P. 226, 114 P. 457. If the question of law has been erroneously decided, plaintiffs' rights have been prejudiced. The appeal is not moot.
The motion to dismiss is denied; and we turn to the merits.
I. Was the transaction ultra vires?
[33 Del.Ch. 240] Section 28 of the General Corporation Law, 1935 Rev.Code, Par. 2060, as amended, confers upon a corporation power to reduce its capital and affords a choice of numerous methods to accomplish the reduction. Some methods permit the directors and the majority stockholders to effect a reduction against the will of a dissentient, e. g., 'by drawing the necessary number of outstanding shares of any class by lot for retirement'. Other methods contemplate a ...