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Propp v. Sadacca

Court of Chancery of Delaware, New Castle County

November 11, 1961

Seymour PROPP, Plaintiff,
Henri SADACCA, Thomas F. Bennett, Albert Greenberg, William R. Hamilton, David L. Kaltman, William V. Lurie, Louis Szel, Joseph H. Ward, Abraham Wolf and Noma Lites, Inc., Defendants.

[40 Del.Ch. 114] William E. Taylor, Jr., Wilmington, and Abraham L. Pomerantz, of Pomerantz, Levy & Haudek, New York City, for plaintiff.

Louis J. Finger of Richards, Layton & Finger, Wilmington, and Milton Kunen and Melvin A. Eisenberg of Kaye, Scholer, Fierman, Hays and Handler, New York City, for defendants.

Max S. Bell, Jr., and Kouis J. Finger, Wilmington, and Milton Rosenkranz of Walscheid & Rosenkranz, Jersey City, N. J., for defendant, David L. Kaltman.

MARVEL, Vice Chancellor.

Plaintiff, a holder of 4,860 shares of the common stock of Noma Lites, Inc., claims that the defendant Henri Sadacca, who at the time of the transaction complained of was allegedly the owner of approximately eleven percent of the common stock of Noma Lites, Inc., had prior to such transaction gained effective control over the board of directors and officers of that corporation by means of his substantial stock holdings and the use made by him of his position of chairman of the board of directors. It is also contended, apparently as a result of such domination and control,

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that at the time of the filing of the complaint late in 1958 a large number of Mr. Sadacca's relatives and personal friends were employed by the corporation and that the compensation paid to such persons and to Sadacca was out of proportion to the value of such persons' services. Plaintiff goes on to allege that in the late summer of 1958, Textron, Inc., a large corporation with diversified interests, had decided on a plan to acquire the assets of American Screw Company, twenty percent of the stock of which was owned by a wholly owned Canadian subsidiary of Noma's. However moves directed towards the taking over of the assets of American Screw Company by Textron were effectively blocked by Noma, which had by November 26, 1958 purchased 51% of the stock of American Screw Company through its Canadian subsidiary. Textron, having several days earlier conceded defeat in this initial effort, meanwhile had set out to acquire a controlling interest in the stock of Noma and thereby accomplish indirectly what it had failed to do directly.

[40 Del.Ch. 115] The complaint alleges that the directors of Noma reacted to Textron's plan [1] to purchase Noma stock by improvidently causing their corporation to borrow $3,000,000 at an exorbitant rate of interest, which funds were thereafter used for the purchase of 250,000 of its own shares in the open market. It is claimed that such frantic buying, surreptitiously carried on on two trading days late in November 1958, drove the price of Noma's stock from $9 up to about $13 per share and that such wasteful act was carried out for no proper corporate purpose, having been resorted to at great corporate expense solely in order to perpetuate Henri Sadacca's control of the affairs of Noma and to keep other persons subservient to him in office. Plaintiff concludes by alleging that the acts complained of, namely the improper and costly acquisition of allegedly unneeded Noma stock at a time when the corporation was already in financial difficulties, constitute a waste of corporate assets. He submits that such acts, not being subject to stockholder ratification, are actionable and prays for an order directing the individual defendants to account to their corporation for the injury thereby caused it.

The individual defendants, other than David L. Kaltman, concede in their answer that their corporation has generally lost money during the first six months of its fiscal year inasmuch as its business of manufacturing Christmas tree lighting normally prospers at year end. They deny, however, being parties to any wrongdoing in causing borrowed funds to be used by the corporation for the purchase of its own stock in November 1958. They admit that during the summer and autumn of 1958 Textron, Inc. had made various public offers to buy the stock of American Screw Company, a business in which Noma was vitally interested. They further contend that prior to Noma's purchase of its own shares as alleged in the [40 Del.Ch. 116] complaint '* * * Noma had reason to believe that Textron, for its own purposes and in derogation of the rights of Noma and its stockholders, was threatening to accomplish its purpose with respect to American Screw and/or the acquisition of its assets indirectly by obtaining control of Noma through purchases of Noma stock * * *' The defendant Kaltman by separate answer takes the position that in any event he should be absolved of liability for the alleged corporate injuries complained of because he 'neither authorized, approved, ratified nor participated

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in any of the alleged actions by defendant Noma, by any of its officers, or by its board of directors which actions are the subject matter of the complaint.'

Defendants' motion for summary judgment having been denied, the matters in dispute were thereafter tried and this is the opinion of the Court after final hearing.

Plaintiff takes the position that the holding of this Court in Kors v. Carey (Del.Ch.) 158 A.2d 136, rather than supporting defendants' case, refutes it. He argues that while normally in the absence of fraud § 160 of Title 8 Del.C. permits a corporation to purchase its own stock unless so to do would impair the capital of the corporation, none of the factors which in that case satisfied the Court that the directors had properly caused a purchase by their corporation of a substantial number of its own shares exists in the case at bar. In Kors, it was found inter alia that the directors of Lehn & Fink, after due deliberation, had in a reasonable exercise of their business judgment applied corporate funds to the purchase of a large block of stock of their corporation for a proper purpose, namely to repel a clearly defined threat of injury to their corporation. Plaintiff contends that in the case at bar on the other hand there has been no showing that Textron posed a real threat to the welfare of Noma Lites and its stockholders but rather that Henri Sadacca in concert with a supine board manipulated the corporate machinery of Noma Lites in a wasteful manner for the improper purpose of retaining corporate control, thereby making not only himself but the entire board of Noma Lites liable for the corporate injury thus caused. Compare Kingston v. Home Life Insurance Co., 11 Del.Ch. 258, 101 A. 898 and Yasik v. Wachtel, 25 Del.Ch. 247, 17 A.2d 309.

[40 Del.Ch. 117] On receipt of Mr. Little's letter, Mr. Sadacca did not reply to it nor did he await Mr. Little's next overture which might conceivably have been an action of mandamus for the purpose of gaining access to the stockholder list he wanted, the purchase of Noma stock in the market, or some other action. Instead on Monday, he went into the market for Noma shares. In the course of two trading days, namely Monday, November 24, and Wednesday, November 26, Mr. Sadacca purchased 199,100 shares of Noma at an average price of $11.67 per share. The precise details of these purchases are difficult to unravel because not only did the state of Mr. Sadacca's health cause his absence at trial but his lack of fluency in the English language prevented him from expressing himself clearly during his pre-trial examination. It appears, however, that Mr. Sadacca probably did not make the purchases under attack in the name of Noma because of the obvious effect such disclosure would have on the market. Moreover, despite Mr. Sadacca's ambiguous testimony on deposition as to his instructions concerning the original purchase slips for the stock it does not appear that either broker through whom the purchases were made believed that Mr. Sadacca himself was the actual buyer. It is quite clear, however, that the extraordinary transactions complained of were carried out not only without board authorization but without the knowledge of the corporation's president or that of any other member of the board, at least until Wednesday, November 26.

Early Tuesday morning, November 25, Mr. Sadacca met Mr. Little and the treasurer of Textron at breakfast, and after a brief and superficial advancement of a proposal that Mr. Sadacca sell out to Mr. Little's interests at a price of twenty dollars per share, a proposition in which Mr. Little evidenced no interest, it appears that Mr. Sadacca disclosed that on the previous day he had caused over 100,000 shares of Noma to be purchased and that he intended to continue to purchase more stock 'to protect our company'. The meeting evidently quickly broke up, and on the following day Mr. Sadacca brought his purchases of Noma stock up to 199,100 shares.

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At the conclusion of this busy week in the affairs of Noma Lites, Inc., a week which included final consummation of the purchase by [40 Del.Ch. 118] Noma's subsidiary of a 51% interest in American Screw Company, a special meeting of the board of directors of Noma Lites, Inc. was called for Saturday morning, November 29, at 10:45 A.M. All of the individual defendants other than Mr. Lurie [2] attended such meeting along with several non-board officers and counsel. The facts concerning the defeat of Textron's efforts to acquire the assets of American Screw Company having been reviewed, the actual events of the past week concerning trading activity in Noma stock were disclosed by Mr. Sadacca who thereupon reported '* * * that in order to protect Noma against this new threat to itself and its investment in American Screw he had caused the corporation to purchase, on November 24th and November 26th on the American Stock Exchange, a total of 199,100 shares of the corporation's own common stock at a total cost of ...

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