Frances B. GREENE and Myron L. Greene, executors under the Last Will and Testament of Louis A. Greene, deceased, Plaintiffs,
George E. ALLEN, Eastman Birkett, Oswald L. Johnston, Floyd B. Odlum, W. C. Rockefeller, and Airfleets, Inc., a Delaware corporation, Defendants.
Stockholder brought derivative action against corporation, its president, who dominated and controlled its board of directors, and certain directors for an accounting by president of profits, realized by president in his purchase of patents after opportunity was rejected by board of directors of corporation. The Court of Chancery, Seitz, Chancellor, held that evidence established that opportunity to purchase the patents was an opportunity which belonged to corporation, and that evidence was insufficient to sustain burden on president of showing a good faith rejection by corporation of offer to purchase the patents as a defense, and that where an opportunity comes to a corporation, and its acceptance or rejection calls for exercise of business judgment, individual controlling the corporation is disqualified from taking the opportunity for himself.
Judgment in accordance with opinion.
See, also, Del.Ch., 96 A.2d 349.
Robert C. Barab, Wilmington and Milton Paulson and Paul Roberts, New York City, for plaintiffs.
Henry M. Canby and Louis J. Finger (of Richards, Layton & Finger), Wilmington and Cyrus R. Vance, New York City, for defendants.
[35 Del.Ch. 243] SEITZ, Chancellor.
Plaintiffs are executors of the estate of a stockholder who brought this derivative action claiming that Floyd B. Odlum, corporate president and director, with the collaboration of other directors, appropriated a valuable opportunity which should have been acquired for the corporate defendant. This is the decision after final hearing on plaintiffs' right to an accounting.
The corporate defendant Airfleets, Inc. (‘ Airfleets') was organized in 1948. In February 1952, when the transaction here complained of occurred, Atlas Corporation was its largest single shareholder. This
corporation, which is a large investment trust, owned about 18% of Airfleets' stock. Defendant Odlum was president, director and a substantial stockholder of Atlas. At the time he also owned about 6% of Airfleets' outstanding stock and controlled an additional 5% through a controlled corporation.
Since Airfleets was organized Odlum has been its president and a member of its board. The defendant Oswald L. Johnston is a director and vice president and is a partner in the New York law firm of Simpson, Thatcher and Bartlett. This law firm is attorney for Atlas Corporation, Airfleets and Odlum and receives substantial fees from these sources. The defendant Eastman Birkett, the assistant secretary and one of the directors, is associated with the same law firm. Indeed, he was added to the board to facilitate a quorum when necessary and to attend to ministerial matters. The defendant, W. C. Rockefeller, a vice president and director, was formerly Odlum's assistant and was more recently hired as a salaried employee of Atlas Corporation. The defendant, George E. Allen, became a director of Airfleets at Odlum's invitation.
All the individual defendants are non-residents of Delaware and only Odlum and Johnston have appeared in this action. See Greene v. Johnston, Del., 99 A.2d 627.
By February 1952, Airfleets had disposed of most of the aircraft and other equipment previously acquired and was admittedly in a very liquid position. In fact, the management of Airfleets and Odlum in particular, was looking for appropriate investment opportunities.
[35 Del.Ch. 244] The ‘opportunity’ which gave rise to this action involved the purchase by Odlum in early 1952 of certain patents and patent applications owned by Lester E. Hutson. These patents covered a variety of self-locking nuts used primarily in the aircraft industry. In 1950, Hutson had entered into an exclusive patent license agreement with a corporation known as Nutt Shel Company (‘ Nutt Shel’ ). All of its stock was owned by Hutson. Under the license agreement, Nutt Shel was authorized to manufacture and sell the patented items in consideration of the payment by Nutt Shel to Hutson of a 5% royalty based on its net sales.
In the fall of 1950, Hutson decided to sell the patents. He testified he wanted to sell in order to realize a capital gain and to increase the liquidity of his estate. He retained an individual to find a purchaser. In the summer of 1951, two interested persons were found. After negotiations it turned out that the prospective purchasers wanted to buy both the patents and stock. The price finally agreed upon for the stock and patents was $5 per share for 20% of the stock with an option to buy the balance at the same price, plus $350,000 for the patents. Also, an exclusive patent license agreement was worked out between the parties. These were arms-length negotiations.
Hutson was unhappy about closing this deal because he wanted all cash. His negotiator then suggested to Hutson that the deal be presented to Odlum. Hutson agreed. The testimony was that the negotiator approached Odlum in his ‘ individual capacity’ as a friend and financier. Neither Hutson nor the negotiator had heard of Airfleets. By this time Hutson was willing to sell the patent and rights under the license agreement only if a purchaser could also be found for all or part of the stock. However, he did not care whether the patents and stock were sold to the same or different purchasers. Also, at this time he was concerned with the total purchase price and not with its apportionment between the stock and the patents.
Odlum testified that he was informed by Hutson that it would be inadvisable for a single purchaser to buy both the stock and the patents because much of Nutt Shel's business was subject to renegotiation [35 Del.Ch. 245] and the Government might disallow royalty payments from a subsidiary to a parent. Defendants point out that if Airfleets acquired the patents and there was a resulting disallowance of the ...