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Elster v. American Airlines, Inc.

Court of Chancery of Delaware, New Castle County

October 14, 1953

ELSTER et al.
v.
AMERICAN AIRLINES, Inc.

Action by stockholders against corporation seeking to enjoin corporation from honoring exercise of option rights to purchase shares of common stock and seeking relief relative to stock issued pursuant to option plans, wherein corporation moved to dismiss and for summary judgment. The Court of Chancery, Bramhall, V. C., held that where all facts pertinent to option plan had been placed in public records of New York Stock Exchange and had been forwarded to every stockholder of record, stockholder, whose stock had been voted in favor of option plans, had ample notice and, therefore, had no standing to attack options.

Order in accordance with opinion.

Page 220

[34 Del.Ch. 95] Complaint by plaintiffs William Elster and Anna F. Cohen against American Airlines, Inc., a corporation of the State of Delaware, in which plaintiffs seek to enjoin defendant from honoring the exercise of certain option rights to purchase shares of its common stock and also seek relief relative to common stock issued pursuant to these options. Motions to dismiss and for summary judgment.

Robert C. Barab, of Wilmington, for plaintiffs.

Richard F. Corroon, of the firm of Berl, Potter & Anderson, of Wilmington, and Malcolm A. MacIntyre and Harold M. Childers, of the firm of Debevoise, Plimpton & McLean, of New York City, for defendant.

BRAMHALL, Vice-Chancellor.

The amended complaint filed by plaintiffs alleges that plaintiff William Elster was the owner and holder of shares of common stock of defendant since June of 1951, and that plaintiff Anna F. Cohen was the holder of shares of defendant since February of 1950. It is further averred in the complaint that on or about September 12, 1950, defendant granted options to 30 of its executive employees to purchase a total of 143,000 shares of its common stock at a price of $11.70 per share, and that on or about May 21, 1952, the defendant granted further options to 289 of its executive and supervisory employees to purchase a total of 105,000 shares of its common stock at a price of $12.50 per share.

According to the complaint, plaintiffs' action is based upon the following facts: All of said options are exercisable immediately upon their issuance, with no requirement that the respective optionees remain in the employ of defendant for any specified time. The option plans and the issuance of the options, as adopted by the board of directors of defendant, were in each instance made subject to the approval of the stockholders. At the meeting of the stockholders at which the option plans were presented for approval a substantial minority thereof voted against the plan, the stock of plaintiffs not being voted in favor thereof.

It is also alleged in the complaint that the granting of these options constitutes a gift of valuable corporate assets in that the corporation did not receive from the respective optionees any valid or sufficient consideration in exchange therefor; that the market price of defendant's common stock at the time of the exercise of portions of these options substantially exceeded the option price; and, that no demand has been made upon the managing directors of defendant to rescind the outstanding options because such demand would have been futile, inasmuch as some of the options were issued to directors of defendant and said directors would not take action which might result in a declaration that their own earlier acts

Page 221

were illegal. It is also averred in the complaint that failure to enjoin defendant will result in irreparable injury to defendant and its stockholders.

This court is asked to enjoin defendant from honoring the exercise of the option rights, to direct defendant to take appropriate steps [34 Del.Ch. 97] or institute appropriate proceedings to cancel or reacquire such shares of stock as have been issued pursuant to said options or to recover for defendant such profits as may have been made by any resale of stock acquired by the exercise of said options.

Defendant prays for an order, pursuant to Rules of Court of Chancery, Rule 56, Del.C.Ann., directing this court to order the dismissal of the complaint with respect to plaintiff Anna F. Cohen, on the ground that she has ratified the granting of the options of which she complains. Defendant further prays for an order pursuant to Rule 56 for summary judgment, determining that the options, even if granted without consideration, are valid and binding as between the defendant and the optionees under the laws of the State of New York, which defendant contends, are applicable to the enforcibility and validity of stock options as between defendant and the optionees.

Defendant under Rule 12(b)(6) of this court has moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted upon the ground that the prayer of the complaint is solely for injunctive relief, whereas, any injury resulting from the exercise of these options can properly be the subject only of a claim for monetary damages from the directors authorizing the issuance of the options or from the optionees. Defendant further prays for an order pursuant to Rule 23(b), dismissing so much of the complaint on the part of the plaintiff William Elster as concerns the alleged grant of options by defendant on September 12, 1950, prior to the time plaintiff Elster became a stockholder.

I shall first consider the motion for summary judgment as to plaintiff Anna F. Cohen. It is now conceded by both plaintiffs that the stock of Anna F. Cohen was voted in favor of the option plans which she now seeks to attack.

It is well established that a stockholder cannot complain of corporate action in which, with full knowledge of all the facts, he or she has concurred. Finch v. Warrior Cement Corporation,16 Del.Ch. 44, 141 A. 54. There is no averment in the complaint of any failure on the part of defendant, or of any of those charged with its management, to make full disclosure of all the facts relating to the [34 Del.Ch. 98] option plans sought to be attacked. According to the affidavit offered by defendant, which is not disputed, all facts pertinent to the option plans had been placed upon the public records of the New York Stock Exchange and had been forwarded to every stockholder of record of defendant, as required by the regulations of the Securities and Exchange Commission. She therefore had ...


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