Daniel O. Hastings and Russell J. Willard, Jr., of Hastings, Lynch & Taylor, Wilmington, for plaintiffs.
[40 Del.Ch. 37] Henry M. Canby and E. Norman Veasey of Richards, Layton & Finger, Wilmington, for corporate defendants.
MARVEL, Vice Chancellor.
Aida Abelow and Helen G. Hamburg as stockholders of Midstates Oil Corporation instituted this suit on December 29, 1958 for the purpose of enjoining a proposed sale of all of the assets of such corporation to its parent corporation, Middle States Petroleum Corporation, pursuant to a contract which by its terms was to be consummated on or before January 1, 1959. While a motion for an order restraining the consummation of such proposed sale was denied on December 29, 1958, a hortatory rule simultaneously issued directing Midstates to show cause why consummation of the proposed sale should not be enjoined. However, the interested parties defendant proceeded as planned, and after the sale was carried through the net assets of Midstates
reduced to cash were speedily made available to its stockholders including plaintiffs.
Thereafter the case was dismissed inasmuch as the sole relief originally sought by plaintiffs had been the enjoining of a transaction which had since been consummated. Leave to amend having been reasonably sought, plaintiffs were granted a limited time for taking appropriate action under Rule 15, Del.C.Ann. and thereafter prepared and filed several motions to which were attached proposed amendatory and supplemental pleadings in which additional parties plaintiff were named. Plaintiffs' case as redesigned in their revised pleadings was no longer conceived of as a derivative suit brought for the benefit of their corporation but rather as an action of individual stockholders to recover personal money judgments for themselves and other members of their class, Lebold v. Inland Steel Co., 7 Cir., 125 F.2d 369. Their motions were granted after argument, and in conformity with the Court's opinion of November 25, 1959, Del.Ch., 156 A.2d 416, an order was entered on January 13, 1960 granting leave to plaintiffs to file their proposed amendments and supplements to the original complaint.
Midstates and Tennessee Gas Transmission Company thereupon filed their answers. Midstates denied plaintiffs' broad allegation that the boards of Midstates and Middle States were made up [40 Del.Ch. 38] of the same or interlocking directors at any time from 1930 until Midstates' dissolution but conceded that one, and at times, two directors served on both boards. It also admitted that at the time of Midstates' dissolution there were outstanding 22,175.6525 shares of its common stock of which 21,270.685 shares or approximately 95.93% were owned by Middle States, leaving outstanding in the hands of others 904.9675 shares or approximately 4.07% of its shares outstanding. Midstates also admitted that Middle States had on December 5, 1958 offered to buy the assets and properties of Midstates and that on June 20, 1958, Tennessee Gas had offered to exchange 1,084,054 shares of its own stock for the then outstanding shares of Middle States, said stock having at that time a market value of $30,859,539. It was further admitted that as a result of this latter proposal Tennessee Gas stock was exchanged for approximately 93% of the outstanding shares of Middle States, a percentage which by August 8, 1958 had resulted in 95.75% of the stock of Middle States being deposited with Tennessee Gas. These allegations were also set forth in the answer of the latter corporation filed the same date, and the case moved into the pre-trial discovery stage.
On August 18, 1960, plaintiffs moved for summary judgment, supporting such motion with an affidavit of one of their counsel, Daniel O. Hastings, to which were attached numerous exhibits. Countering such motion, the corporate defendants also moved for summary judgment, a motion which they in turn supported with a number of counter affidavits. Briefs having been thereafter filed and argument had, such opposing motions for summary judgment are now before the court for decision.
While plaintiffs concede that § 271, Title 8 Del.C. permits a Delaware corporation to sell its assets in a proper case, they contend that in the transaction here under attack they and others of their class have not received an adequate sum of money for their shares in liquidation, having suffered such injury as a result of actionable breaches of fiduciary duty on the part of directors common to the boards of Middle States and Midstates as well as on the part of the stockholder in control of Midstates, namely Middle States, which at the time of the sale owned 95.93% of the corporate stock of Midstates. [40 Del.Ch. 39] Plaintiffs argue that the directors of each such corporation, who though named as parties to this suit have not appeared, as well as Middle States as the controlling stockholder of Midstates owed a high degree of fiduciary duty to plaintiffs and their class not to profit at the expense of plaintiffs and other minority stockholders of Midstates in the transaction
under attack, and accordingly the Court must scrutinize such transactions with great care. Plaintiffs insist that as a result of the disregard of the rights of the minority stockholders of Midstates by those in control of the transactions under attack the assets of such corporation were unfairly acquired by Middle States for the benefit of Tennessee Gas. They claim that the record discloses that plaintiffs and others of their class have not received what they are clearly entitled to, namely amounts in liquidation equivalent to what the stockholders of Middle States received in the overall transaction which culminated in the merger of Middle States into Tennessee Gas Transmission Company. Plaintiffs claim this deficiency in payment to be the sum of $733.36 per share, pointing out that the unfairness of the treatment accorded them and their class is demonstrated by a cursory consideration of the price indirectly placed by Tennessee Gas Transmission Company on the assets of Midstates at the time a purchaser for such assets was being sought in the summer of 1958. In conclusion, plaintiffs contend that in the final analysis Tennessee Gas through its subsidiary, Middle States, owed the same type of fiduciary duty to plaintiffs and members of their class as was owed to them by Middle States.
The appearing defendants reply that while the price for the Middle States shares set in the exchange transaction is irrelevant to plaintiffs' claims, the same ratio applied to a hypothetical contemporaneous exchange of the shares of Tennessee Gas and Midstates would have netted the stockholders of Midstates less than they actually received on their corporation's liquidation. They further contend that the only way in which Tennessee Gas could be successfully charged with having improperly benefited itself through its instrumentality, Middle States, would have been to have caused such corporation to pay less for the assets of Midstates than they were worth, a result which such defendants contend [40 Del.Ch. 40] was carefully avoided. They submit that the data introduced by them in affidavit from discloses that on December 9, 1958, the date of the actual contract governing the basic transaction under attack, the book value of plaintiffs' stock was $802 per share, that the going concern value per share was then $913 per share, the market value per share was $1,065.00 and the asset value per share based on the Harrison appraisal was $1,123.76. According to the corporate defendants, plaintiffs have offered no probative data to the contrary, allegedly resting their case on epithets and the unfounded accertion that they are entitled to an amount computed on the theory that the offer to exchange stock of Tennessee for that of Middle States must be considered to be the equivalent of a firm bid for the assets of Midstates. It is argued that the two separate transactions which preceded the dissolution of Midstates can't be equated, stock valuation being essentially foreign to asset valuation or going concern valuation and that even if the values involved in the two transactions could be fairly equated, Middle States had property other than the stock of its subsidiary which Tennessee wished to acquire. It is also pointed out that the arrangement whereby the stock of Tennessee Gas and Middle States was exchanged avoided the expenses of an underwriting and the market hazards which would have been faced had the device of a stock issue been employed rather than that of an exchange. It is finally urged that the Middle States offer for the assets of Midstates was based on values fixed in the so-called independent Harrison appraisal, hereinafter referred to, which allegedly corrected overestimates of reserves found in the earlier Kravis report which had been made at the request of Midstates. The appearing defendants conclude that plaintiffs merely differ with the judgment of the individuals responsible for the steps which resulted in the dissolution of their corporation and that absent fraud or a showing that the amount received for their corporation's assets was grossly disproportionate to their value, plaintiffs have
no standing under Delaware law to demand that they be paid more than the amounts already paid to them following the liquidation of Midstates.
Turning now to the complicated corporate changes here involved, it is alleged by the corporate defendants that they had their genesis [40 Del.Ch. 41] in discussions designed to arrive at a plan for counteracting a declining profit trend in the business of Middle States. The directors of Middle States preliminarily decided in 1957 to dispose of certain assets of Midstates in order to raise needed cash. This having been accomplished, a more critical remedial step was decided on in the spring of 1958, namely a plan either to sell the assets of Middle States or to cause such corporation to enter into a merger agreement. The services of Dillon, Read & Co., Inc., were engaged to seek out appropriate opportunities and to make recommendations and a number of offers were received, the most attractive in the opinion of the Middle States directors being that of Tennessee Gas to trade its stock for that of Middle States on the basis of .45 to 1. A tender ensued, and by July 30, 1958 Tennessee Gas had acquired 93% of the stock of ...