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Elster v. American Airlines, Inc.

Court of Chancery of Delaware, New Castle County

June 14, 1954

ELSTER
v.
AMERICAN AIRLINES, Inc.

Stockholder's action to enjoin corporation from carrying out a stock option plan on ground that stock options were granted without consideration. Defendant moved to dismiss and for summary judgment. The Court of Chancery, Bramhall, Vice-Chancellor, held that the stock optionees were indispensable parties to the suit and that motion to dismiss should be granted, but that plaintiff would be given an opportunity to bring in some or all of the optionees as parties defendant.

Order in accordance with opinion.

[34 Del.Ch. 501] Stockholder's action to enjoin defendant, a Delaware corporation, from carrying out a stock option plan on the ground that the stock options were granted without consideration. Motions of defendant to dismiss and for summary judgment.

Robert C. Barab, Wilmington, and William E. Haudek (of Pomerantz, Levy & Haudek), New York City, for plaintiff.

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

BRAMHALL, Vice-Chancellor.

The facts of this case are more fully set forth in a former opinion dated October 14, 1953, to be found in 100 A.2d 219. It is sufficient to say here that the amended complaint attacks certain stock options issued by defendant to its executive and supervisory employees on or about May 21, 1952, upon the sole ground that such options constitute gifts of defendant's assets

Page 203

for the reason that the optionees gave no valid or sufficient consideration in exchange therefor. The motion of defendant to dismiss is based upon its contention that the optionees are indispensable parties defendant. The motion for summary judgment is based upon its contention that the stock options are valid as a result of a resolution of the board of directors of defendant subsequent to an amendment to Sec. 157 of the General Corporation Law, 8 Del.C. § 157.

Defendant contends that since this is a derivative action plaintiff's claim is predicated solely upon the right of defendant; that while defendant is named as a party defendant it is actually the real party plaintiff; and that this action therefore constitutes a suit by defendant against itself as the named party defendant.

[34 Del.Ch. 502] In my previous opinion I held that this was an action for a wrong to the corporation and not to the stockholders personally or individually and that therefore the action was a derivative one by the stockholder on behalf and for the benefit of the corporation. However, I did not consider in that opinion the question of whether or not the corporation is a real party defendant as well as a party plaintiff.

Is defendant a real party defendant? I think it is. While it is true that options issued without consideration constitute a gift of corporate assets and that any action by reason thereof would inure to the benefit of the corporation and not to the stockholders individually, plaintiff's right is also a right against the corporation itself. Plaintiff has two causes of action for which he might be entitled to equitable relief: (1) an action against defendant to compel it to cancel the options; (2) an action against the party or parties liable to the corporation. Cantor v. Sachs, 18 Del.Ch. 359, 162 A. 73. If plaintiff should be successful in his suit, he would be entitled to an injunction against defendant to prevent it from proceeding with the issuance of stock by reason of the options. There is therefore a real action against the defendant as well as an action on its behalf.

I conclude that defendant is a proper and necessary party and that there is an adverse action against it.

Are the optionees of the stock indispensable parties to this action? Although plaintiff prays this court to restrain defendant from honoring the exercise of the stock options by the optionees, he did not join them as parties defendant. Defendant contends that they are indispensable parties to the action on the ground that any decree which might be made by this court in their absence would have an injurious effect upon their interests and that any final determination of their rights would not be consistent with equity and good conscience. Plaintiff asserts that there is no necessity for joining the optionees as parties defendant because, says plaintiff, the options are void and the optionees have no rights to protect.

There can be no question that the optionees would be proper parties to this action. The question for determination is whether or not they are so indispensable as parties defendant that this court [34 Del.Ch. 503] could not adjudicate any differences ...


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