[Copyrighted Material Omitted]
[40 Del.Ch. 63] Irving Morris, of Cohen & Morris, Wilmington, and Abraham L. Pomerantz and William E. Haudek, of Pomerantz, Levy & Haudek, New York City, for plaintiff.
Aaron Finger, of Richards, Layton & Finger, Wilmington, and David W. Peck, Alfred Jaretzki, Jr., and Marvin Schwartz, of Sullivan & Cromwell, New York City, for defendants, Thomas D. Anderson, Theodore E. Swigart, Dillon Anderson, John M. Bennett, Jr., John H. Blaffer, Rorick Cravens, Robert K. Hutchings, J. W. Link, Jr., Charles A. Perlitz, Jr., Lawrence S. Reed, Edward Rotan and Frank Strachan.
James M. Tunnell, Jr., of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendants, Ernest T. Skinner, W. T. Carter, III and George R. Bryant.
William S. Potter, of Berl, Potter & Anderson, Wilmington, for defendant, Funds, Inc.
William F. Lynch, II, of Morris, James, Hitchens & Williams, Wilmington, for defendant, Texas Fund, Inc.
This is a stockholder's derivative action brought on behalf of Texas Fund, Inc. ('Fund'), a Delaware corporation, which has a net asset value of about $38,000,000. The complaint deals with the sale of the stock of Fund's investment adviser and principal underwriter, Management Company ('Management'--not a defendant) to one of the defendants, Funds, Inc., which is a Delaware corporation formed for the purpose of acquiring such stock. The other defendants are the stockholders of Management and the three non-affiliated directors of Fund.
[40 Del.Ch. 64] Plaintiff claims that for $1,000,000 in excess of the fair value of the Management stock the selling stockholders undertook to use and in fact used their fiduciary positions with respect to Fund for the benefit of the purchaser. Plaintiff makes no distinction between the various selling shareholder defendants as to the basis of possible liability. Plaintiff also asserts that these defendants diverted presumably either to Management or the selling stockholders a corporate opportunity belonging to Fund. The defendants have denied liability on several grounds which are considered hereafter.
After elaborate discovery defendants other than Fund filed a motion for summary judgment and this is the decision thereon.
Fund is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, 15 U.S.C.A. § 80a-1 et seq., as an open-end diversified investment company. It was organized in 1949 by a group of leading Texas business and professional men for the purpose of investing primarily in promising companies and industries in the southwestern part of the United States. These same men also organized at the same time corporations to act as investment adviser and principal underwriter to Fund. In 1955 they were combined into Management.
Management's stated function was to provide investment research, advice and supervision and make investment recommendations to Fund pursuant to an investment advisory contract last approved by the stockholders of Fund in 1955. Annual approval by the directors of the Fund has been given since that date. Under the advisory contract Management also was required to furnish at its own expense all necessary administrative services, office space, equipment, and personnel for managing the affairs of Fund. It was also to provide compensation for directors and officers of the Fund. Fund has no office or employees.
The underwriting agreement is essentially the same as the advisory contract with the exception that no stockholder approval is needed for its reinstatement.
[40 Del.Ch. 65] The directors or stockholders of the Fund had the power to terminate either contract at any time upon sixty days' notice and upon assignment thereof automatic cessation would result. 'Assignment' was defined to include the transfer of the controlling stock of Management. Upon termination of the advisory contract reinstatement required the approval of the stockholders of Fund owning a majority of the shares.
For reasons I need not explore, certain leading stockholders of Management initiated negotiations in the latter part of 1959 to sell their stock to another group of successful business men in the investment world desirous of obtaining control of Management for investment purposes. The leading men were Dillon Anderson and Thomas D. Anderson, hereafter called the 'defendants' unless otherwise noted.
A letter offer was made on September 21, 1959 by two individuals to buy all of the outstanding common and preferred stock of Management for the price of $1,354,000. There was a provision for the purchase of not less than 70% but it is not important here. The offer was subject, inter alia, to the conditions that the sale be approved by Funds' stockholders and appropriate regulatory authorities. It provided for acceptance by October 1, 1959 and, if accepted, that a full contract was to be worked out fixing future steps to carry out the agreement. The stockholders of Management, by letter dated September 25, 1959, signed by Thomas Anderson, the president and a director of Management, accepted the offer on the conditions that it be approved by stockholders of Fund and the proxy material be approved by the S.E.C. The purchase was later consummated in the name of the defendant, Funds, Inc., as purchaser.
The book value of Management as of August 31, 1959 was $126,486.73. According to plaintiff, its net assets were then worth $123,581.57. Financial statements of Management for the years 1955-59 disclose its net earnings averaged $17,484 per year, ranging from a loss of $10,524.87 in 1955 to a gain of $34,933.37 in 1959.
Two of the stockholders of Management, Thomas D. Anderson and Swigart, were two of the five directors of Fund; Thomas D. Anderson also being Vice President and Treasurer.
[40 Del.Ch. 66] At the acceptance date all of Management's common stock was held by twelve of the fifteen individual defendants. Dillon Anderson owned 18.37% for which he was to receive about $248,000; Thomas D. Anderson owned 10.43% for which he received $141,235, and Theodore E. Swigart owned 1.86% for which he received $25,131.
The other three directors of Fund who recommended approval, George Bryant, W. T. Carter, III and Ernest Skinner, defendants herein, held no stock in Management, nor any office or directorship therein. Carter was also President of Fund but performed no services and served without remuneration. All three did hold small blocks of Fund stock. The selling stockholders of Management held Fund stock worth about $2,500,000 amounting to 7 1/2% of the outstanding shares.
On October 15, 1959 representatives of the selling stockholders and the buyer met and agreed on a slate of personnel for the boards of directors of Fund and Management. They also agreed on most of the personnel of the Fund Management Advisory Committee, which committee made investment decisions for Fund. Plaintiff claims they lacked such power. Skinner and Bryant were to be replaced on Fund's board by Runnells and Taylor, representatives of the purchaser. Defendants would add that such action was dependent upon the willingness of Skinner and Bryant to step aside. Indeed, the resignations of two of the so-called independent directors (Skinner and Bryant) were conditioned upon the reinstatement of the advisory ...