Irving Morris of Cohen, Morris & Rosenthal, Wilmington, Del., and Leonard I. Schreiber, New York City for plaintiff.
Aaron Finger and Louis Finger of Richards, Layton & Finger, Wilmington, Del., for defendants.
MARVEL, Vice Chancellor:
The complaint herein charges that the individual defendants, who are directors of the corporate defendant, committed a breach of fiduciary duty owed to their corporation in [42 Del.Ch. 2] causing it to enter into a contract for the acquisition of an 85% interest in land located on West 57th Street in the City of New York with knowledge that two members of their board, the defendants Solomon Klausner and David Goodman, were simultaneously acquiring a 15% interest in said property for themselves and others at a veastly disproportionate price.
In brief, the transaction under attack involved the acqauisition of the fee to the property in question from a group headed by one John Guidera and the leasing back of such lands to a corporation controlled by the sellers. Plaintiff charges that while Mr. Klausner and others of his group contributed only 2.85% of the purchase price for the parcel of land in question, it received a 15% interest therein, while on resale of the property to the Guidera group Mr. Klausner and his associates received a 775% return on their investment as opposed to a mere 2.9% return to Basic.
According to plaintiff's theory of her case, which is brought derivatively for the benefit of the corporation, not only are the defendants Klausner and Goodman accountable for the personal profits made by them at the expense of Basic Properties but that the other director defendants must also account for causing their corporation to enter into a transaction so allegedly unfair as to be incapable of authorization by the directors. Plaintiff contends that the overraching complained of was achieved through inside domination and control, allegedly exercised by the defendant Klausner and that the profit made in the transaction complained of by what he terms an insider group (of which Klausner admittedly was a member) equitably belongs to Basic Properties. Plaintiff does not charge that the defendants Klausner and Goodman improperly appropriated a corporate opportunity to themselves but rather that the transaction was so inherently unfair to the corporation that it was not susceptible of being ratified by Basic's board of directors. Klausner at the time was chairman of the board and treasurer of Basic as well as its largest single stockholder. Goodman was also a stockholder. However, the number of shares of Basic held by its other ten directors was nearly three times the combined number of shares held by Klausner and Goodman. Furthermore, [42 Del.Ch. 3] the cash paid for shares of stock by the other directors vastly exceeded that paid in by the latter two directors.
The answering defendants admit that on or about February 2, 1952 the members of the board of directors of Basic Properties (other than the defendants Klausner and Goodman) voted to authorize their corporation to enter into an agreement to purchase from a joint venture in which the defendants Klausner and Goodman were members an 85% interest in a project for the building of a Holiday Inn on West 57th Street in New York. The answer also admits that while Basic agreed to pay $1,942,853 for such 85% interest, the obligation assumed by the joint venture for retention of its 15% interest totalled only $57,143. The answer points out, however, that such investment was not only expressly approved by the non-interested officers and directors of Basic Properties (being all the officers and directors other than Klausner and Goodman) after a full disclosure of the facts, but that such transaction was both acquiesced in by plaintiff and in effect ratified by Basic's stockholders. The answer also sets forth verbatim an article of Basic's corporate charter to the effect that no contract or other transaction between the corporation and any other corporation, shall,
in the absence of fraud, be invalidated by the fact that any of the directors of Basic are pecuniarily or otherwise interested in such other corporation, provided a full disclosure of such interest is made to the board. It is also pointed out by defendants that the by-laws of Basic contain a standard conflict of interest article which recognizes the right of a director, under certain limitations, to deal with his corporation.
The facts adduced at trial disclose that in November 1961, the law firm of Goodman and Mabel, the Mr. Goodman of the firm being a cousin of the defendant Goodman, learned that the site for the proposed Holiday Inn, a project which promised an attractive return of 13%, could possibly be acquired subject to a lease back agreement. The facts about the project were then passed on to a Mr. Reuben Horowitz, a real estate investor, who agreed that the property would be a good buy at a yield of 12%. Mr. Horowitz, who had on several occasions acted as a so-called real estate finder for Mr. Klausner, then consulted the latter and an informal agreement was reached under [42 Del.Ch. 4] the terms of which it was agreed that not only would Klausner pay 50%, Horowitz 25%, and the attorneys, Goodman and Mabel, 25% of the amounts required for the down payment for such property, but that such persons would also assume, on the same percentages, the responsibility for payment of the balances due for acquisition of the property. A formal agreement of purchase was thereafter entered into on January 9, 1962, executed by Mr. Horowitz's attorney on behalf of the purchasers hereinafter referred to as Lillian Realty Associates. Such agreement provided for a purchase price of $2,000,000 and down payments stipulated therein were duly made.
In the meantime, Basic Properties, Inc., which had been incorporated on September 13, 1961, had remained a corporate shell until in January 1962 it was caused to receive cash and several properties (in no way connected with the Holiday Inn project) in exchange for stock and began to stir some interest in Wall Street as an investment possibility. Thereafter, its directors began to look about for more substantial properties and to explore the possibilities of an underwriting. Klausner thereupon indicated that the Holiday Inn property might be a desirable acquisition for Basic Properties and discussed its possible sale to Basic with Mr. Horowitz, who was reluctant to give serious consideration to such a proposition due to the fact that he had not only done preliminary work on a possible disposal of the property through a public offering by Lillian at a 11% return to the syndicate but had also been exploring the possibilities of a private sale, which, if consummated, would net Lillian a $400,000 profit. Ultimately, however, Horowitz agreed to participate in a sale to Basic on the basis of an assured yield of 10 1/2%.
In evaluating the merits of plaintiff's charges, it must be noted, first of all, that the transaction in question was fully disclosed to those directors of Basic Properties present at a meeting of the Executive and Real Estate Committee of such corporation held on February 7, 1962. At such meeting an attorney member, the defendant Bronson, pointed out that he considered the proposal '* * * fair to Basic since (a) the Horowitz Group had negotiated the transaction at a time when the Company was not financially in a position to do so, (b) the Horowitz Group had paid the initial $100,000 under the contract of [42 Del.Ch. 5] sale themselves and had assumed the liability for the balance of the purchase price at a time when they did not know whether the Company would ever be in a position to entertain their proposal, and (c) the proposal would result in a return of approximately 10 1/2% to the Company of its investment, which was favorable in comparison with the other investments of the Company'. And, while the defendants Klausner and Goodman attended such meeting as committee members, they abstained from voting for the proposal which was unanimously approved by the other five directors present.
At a subsequent meeting of the board of directors held on February 21, 1962, a meeting which was not attended by the defendants Klausner and Goodman, the minutes of the meeting of the Executive and Real Estate Committee of February 7 pertaining to the Holiday Inn project were read, questions were asked, and with one director, the defendant Greenstein, abstaining, full ratification ...