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03/03/88 MATTHEW J. GIOIA AND CHARLES H. COPELAND

COURT OF CHANCERY OF DELAWARE, NEW CASTLE


March 3, 1988

MATTHEW J. GIOIA AND CHARLES H. COPELAND, PLAINTIFFS,
v.
TEXAS AIR CORPORATION, A DELAWARE CORPORATION, JET CAPITAL CORPORATION, A DELAWARE CORPORATION, PHILLIP J. BAKES, JR., ROBERT D. SNEDEKER, CARL R. POHLAD, JAMES W. WILSON, JOSEPH B. LEONARD, FRANCISCO A. LORENZO, THOMAS H. BOGGS, JR., LINDSAY E. FOX, WILLIE C. ROBINSON, ARTHUR R. TAYLOR AND THOMAS R. WILLIAMS, DEFENDANTS, AND EASTERN AIR LINES, INC., A DELAWARE CORPORATION, NOMINAL DEFENDANT

Allen, Chancellor;

The opinion of the court was delivered by: Allen

MEMORANDUM OPINION

ALLEN, Chancellor

The pending motion to compel the production of documents raises the question whether a corporate defendant may, in the circumstances presented, legitimately withhold from discovery documents that disclose its corporate plans to deal with a possible future strike of its work force. The pertinent circumstances may be set forth briefly.

I.

Plaintiffs are holders of certain preferred stock of Eastern Airlines, Inc., a Delaware corporation. Defendants are Eastern, Texas Air Corporation, its parent corporation, Jet Capital Corporation, which controls Texas Air and the individual members of Eastern's board of directors, including Francisco A. Lorenzo, who owns a majority stock interest in Jet Capital and, thus, allegedly controls each of the corporate defendants. Texas Air owns all or substantially all of the issued and outstanding common stock of Eastern.

The class of preferred stock owned by plaintiffs *fn1 was issued in 1985 exclusively to Eastern employees. Mr. Gioia is a member, and Mr. Copeland an officer of the Airline Pilots Association ("ALPA"), a labor union that represents the interests of Eastern's pilots in labor-management negotiations. Eastern has, in recent years at any rate, not had placid relations with all of the unions representing its unionized employees. It has for some time been unable to reach an agreement with the machinists' union whose members have apparently been working without a contract for some time. Moreover, ALPA has brought suit against Eastern in the federal district court in the District of Columbia, which suit, while involving labor law, not corporation law questions, arises out of some of the same factual matters giving rise to this lawsuit. It is apparently admitted that ALPA is bearing the considerable expenses involved in this litigation.

The complaint purports to allege several corporation law claims, some of which are said to be derivative in nature and some individual. In summary, it is alleged that "ince acquiring control of Eastern, Texas Air and the individual defendants have embarked upon a scheme to transfer valuable assets of Eastern to Texas Air and its subsidiaries, including Continental , solely for the benefit of Texas Air and without regard to the devastating effect these transfers have had and will have upon Eastern and plaintiffs." Cplt. para. 21. More specifically, it is alleged that defendants have caused a large number of routes previously flown by Eastern to be usurped by Continental for the sole benefit of Texas Air, and that "efendants have determined to shrink Eastern in favor of Continental, a non-union airline favored by defendants." Cplt. para. 25. The transfer of Eastern's computer reservation system from Eastern subsidiaries to a Texas Air subsidiary is claimed to be for "consideration so inadequate as to amount to a waste of assets." Cplt. para. 28. The transfer by Eastern of aircraft and flight gates to Continental at "grossly inadequate prices" (para. 32), the forthcoming sale of Eastern's east coast shuttle operation (para. 31) and the purchase by Eastern of $30 million of 10 % Senior Unsecured Notes of People Express, another Texas Air affiliate, are alleged as further specific examples of a plan to shrink Eastern to the injury of the preferred shareholders.

Finally (I bring it up last only because it is the particular allegation most pointedly involved in the determination of this motion), it is alleged that, as part of this plan to shrink Eastern, Texas Air plans to cause Eastern to transfer to Continental its "extremely valuable" Latin American routes.

These facts are said to constitute actionable wrongs in a number of respects. First, they are said to be self-dealing transactions at an unfair price and thus to constitute a breach of the duty of loyalty that the defendants owe to the corporation and to the preferred shareholders. Second, they are said to constitute waste of Eastern assets. Third, they are, when taken together, said to constitute a sale of all or substantially all of Eastern's assets. Eastern's certificate of incorporation is alleged to give to holders of its preferred stock the right to vote on any proposed sale of all or substantially all of its assets. Thus, the alleged scheme to transfer substantially all of Eastern's assets, piece by piece, so to speak, is said to violate rights of plaintiffs conferred by Eastern's charter. Finally, it is alleged that defendants have "taken the position that plaintiffs may not be able to convert their shares as provided in the Certificate of Incorporation" and that such a denial is a wrong.

The remedy sought is a preliminary and a permanent injunction rescinding the sale of the computer reservation system, ordering that the "Transfer Scheme" be subjected to a vote that includes plaintiffs (it not being suggested in the complaint that a class vote is contemplated by the charter), and requiring Eastern to recognize the exercise by plaintiffs of the right to convert their preferred stock to common.

II.

A hearing on plaintiffs' application for a preliminary injunction has been scheduled and discovery is now in progress on an expedited basis. The current dispute arises from the production of documents by defendants in anticipation of depositions. More specifically, it arises from Eastern's refusal to produce certain documents that it characterizes as "strike planning documents." As to those documents, Eastern claims an interest in confidentiality that cannot in the circumstances, be adequately protected by a confidentiality order and claims in all of the circumstances -- including the other information produced, the nature of the threat to it and the significance of the point to which the documents arguably relate -- that Justice requires (see Ch. Ct. R. 26(c)) that no discovery of documents disclosing its strike plans be ordered. This situation is said to be analogous to those several cases in this jurisdiction, as well as elsewhere, in which courts have recognized a qualified immunity from discovery for so-called "white knight" documents. See, e.g., Computervision Corp. v. Prime Computer, Inc., Del. Ch., C.A. No. 9513, Allen, C. (January 26, 1988).

Plaintiffs assert first that this is a stockholder action claiming a breach of fiduciary duty and there ought to be small room for a claim of confidentiality in such a case, citing Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970) and Valente v. Pepsico, Inc., 68 F.R.D. 361 (D. Del. 1975). The policy of enforcing fiduciary duties is said to be more compelling than the policies protecting business confidences. While this court has a long tradition of sensitive protection of legitimate shareholder interests, it is surely a gross mistake to believe that shareholder interests would uniformly, or even perhaps regularly, be advanced by a rule of discovery that automatically required disclosure of confidential business information or plans to shareholders who assume for themselves the role to speak for others in bringing class or derivative litigation. A more discriminating, particularized inquiry has in fact been followed.

Second, plaintiffs urge that the outstanding confidentiality order limits access to documents claimed to reflect confidential information to use in this litigation by counsel, experts or plaintiff Gioia, and so provides as much protection as Eastern may fairly claim, citing Coca-Cola Bottling Co. v. Coca-Cola Co., 107 F.R.D. 288 (D. Del. 1985), in which the federal district court required disclosure pursuant to a confidentiality order of the closely guarded secret formula for Coke syrup.

Decision of this motion requires a balance be struck between the legitimate interests of both parties in the context of the particular case. It is, in the language of Rule 26(c), an "order which Justice requires" that the court seeks to fashion when resolving disputes of this character. In declining to order production of documents constituting or disclosing Eastern business plans for dealing with a strike of its operators, I am motivated principally by three factors.

First, with respect to the Latin American routes (which present the factual setting for most of the documents in question), Eastern has produced all documents relating to any consideration of plans to transfer those routes to Continental that do not involve strike planning.

Second, the relevance of any plan to transfer the Latin American routes is derived chiefly from plaintiffs' claim that they are being deprived of a vote to which they are entitled if all of the transfers are collapsed and, when considered together, constitute a sale of substantially all of Eastern's assets. *fn2 Proof of such an assertion is largely a matter of showing the financial impact upon the firm -- measured variously -- of the transfers in question and the operating and long-term consequence of such transfers. In that connection, it is material to note that Eastern has been ordered to produce its periodic reports of financial results and balance sheets for each asset or operating group involved (i.e., the Latin American routes, the computer reservation system, and the shuttle service) for a period of five years, if it has such data. The impact of a possible future transfer of the Latin American routes may be fairly assessed without a detailed knowledge concerning to whom they are transferred, on what terms or under what conditions. Thus, I do not regard a refusal to require production of the "strike planning" documents as drastically impairing the prospect for accomplishing the principal task for which discovery of documents relating to any future transfer of the Latin American routes is sought.

Third, I do not regard confidentiality orders as providing absolute protection. If they did, there would be no need to attempt to evaluate competing claims in this setting, for the words written on a page would afford the protection of a guarded vault. We must operate, however, in a world more closely aligned with a reality in which mistakes occur and in which trust is sometimes abused for advantage. Two factors make me particularly sensitive to the threat of disclosure to defendant in this instance. First, it is apparent that this suit is but part of a larger dispute between Eastern and ALPA. That does not mean that plaintiffs' corporation law claims will not be evaluated strictly on their merit, but it does constitute a consideration when defendant raises a legitimate concern that unfair advantage may be achieved through the discovery process. Second, I am persuaded that the strike planning information is genuinely that, and as such, may be critically important to Eastern at this juncture of corporate life.

Accordingly, I conclude that an appropriate balance between the legitimate needs of plaintiffs' discovery of information that may support their factual allegations, and the valid concern of Eastern that its contingency planning not be placed at risk of disclosure to its negotiating adversary, requires, in the particular circumstances presented, that no documents disclosing such planning relating to strikes need be produced.

In so concluding, I recognize that the scope of permissible discovery as set forth in Rule 26(b) is broad and that, in the usual instance, so long as the test of Rule 26(b) is satisfied, it is not appropriate for the court to make judgments concerning whether plaintiffs really (in the court's judgment) need the discovery sought or not. However, where interests deserving of consideration are threatened -- such as the disclosure of trade secrets or of important ongoing business plans -- it is inescapably the duty of the court, reflected in Rule 26(c), to evaluate the competing needs and interests of the parties and to shape the remedy that best promotes the interest of Justice in the particular circumstances presented.


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