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Carey v. Pennsylvania Enterprises Inc.

argued: April 27, 1989.


On Appeal from the United States District Court for the Middle District of Pennsylvania, District Court Civil No. 88-1777.

Seitz, Sloviter and Greenberg, Circuit Judges.

Author: Greenberg


GREENBERG, Circuit Judge

This is a diversity case involving a dispute between a Pennsylvania corporation, Pennsylvania Enterprises, Inc. (PEI), and one of its shareholders, the resolution of which is governed by Pennsylvania law. The shareholder, Edward Carey, challenged the validity of a corporate election in which his position opposing the split of PEI's stock as proposed by management lost by a narrow margin. Thus, he commenced this action on October 31, 1988, in the district court to enjoin implementation of the result of the election. After a trial, the district court in a memorandum opinion upheld the management's position and on December 8, 1988, entered a final judgment denying Carey an injunction. Carey appeals from that order.

Carey presents several arguments to demonstrate that some of the votes counted in favor of the PEI management should have been disallowed, and other arguments that additional votes in his favor should have been counted. We conclude that Carey is correct in his assertion that the Dividend Reinvestment Plan (DRIP) votes, i.e., the votes of additional shares acquired by PEI shareholders by reinvestment of cash dividends, without which there was insufficient support to approve the stock split, were improperly counted. Thus, we will reverse the judgment of the district court without addressing any of Carey's other contentions, since their disposition could not change our result.*fn1


Carey, a citizen of New York, owns or owned approximately 109,000 shares of PEI, a publicly held Pennsylvania corporation with its principal place of business in Wilkes-Barre, Pennsylvania. In 1987 and 1988 Carey, through a corporation he controlled, made several unsuccessful offers to buy PEI. Thereafter, as the district court found:

[on] or about September 9, 1988, PEI announced to its shareholders that it intended to convene a special meeting of shareholders to be held on October 12, 1988 [in Wilkes-Barre] to vote upon a proposal to amend the Articles of Incorporation of PEI by authorizing an increase in the number of authorized shares of common stock from 5 million to 10 million shares; to reduce the stated value of said shares from $10 per share to $5 per share; and to authorize a split in the common stock on a 2 shares for 1 share basis.

Carey v. Pennsylvania Enterprises, Inc., No. 88-1117, slip op. at 5-6 (M.D.Pa. Dec. 8, 1988). Carey opposed this proposal, as he apparently considered that it would result in a wider distribution of PEI stock, making it more difficult for him to acquire the company.

Adoption of the amendment required the approval of the voters representing a majority of PEI's outstanding shares of stock, since there was no provision in PEI's articles of incorporation requiring a super-majority. See Pa.Stat.Ann. tit. 15, 1805 (Purdon 1988 Supp.). Thus, votes representing 1,350,171 of the 2,700,341 outstanding shares were required for the proposal to succeed.

The board of directors of PEI fixed September 2, 1988, as the record date for the meeting; thus the owner of each share as recorded on PEI's books at the close of business on that date was entitled to vote on the proposal at the October 12, 1988, meeting. See Pa.Stat.Ann. tit. 15, 1509 (Purdon 1967). The parties do not dispute the district court's finding that:

[as] of the record date, 79,118 shares of the Defendant's stock were issued and outstanding under the Dividend Re investment Plan (DRIP). Manufacturer's Hanover Trust was the administrator of this plan and the shares were held by Loriot & Co. and Cede & Co., as nominees of the administrator. Loriot & Co. and Cede & Co. were listed on Defendant PEI's documents as the record holders of these shares. Carey, slip op. at 13.

Nor do the parties dispute that one of the provisions of the DRIP plan addressed who would be entitled to vote the shares in the plan as follows:

21. Will a participant be able to vote the shares held in his account under the Plan?

Yes, all of the participant's full shares -- those registered in the name and those credited to the account of the participant under the Plan -- will be included on one proxy mailed to the participant in the regular manner.

App. at 796 (emphasis in original).

Solicitation of proxies by PEI in support of the amendment began on or about September 9, 1988. As explained by PEI, "PEI's proxy form . . . included both the record and DRIP shares held by each shareholder." Brief of Appellee at 20.*fn2 Inasmuch as in almost every instance the owner of DRIP shares was also a record owner of other shares, a proxy distribution to the record owners covered the majority of the DRIP shares. After requesting a shareholder list from PEI on September 14, 1988, and receiving it approximately one week later, Carey on or about October 3, 1988, also began soliciting proxies in opposition to the management proposal from PEI shareholders. It is undisputed that since the shareholders' list showed Loriot and Cede as the record owners of the DRIP shares Carey was aware that they were the owners.*fn3 It is also not disputed, as found by the district court, that "[proxies] for [the DRIP] shares . . . were issued directly to the beneficial holders," Carey, slip op. at 13, rather than to Cede and Loriot and thus to the extent that the DRIP owners were record owners Carey's ...

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