Summary
reiterating the pre-removal notice requirement articulated in Loew's
Summary of this case from A&J Capital, Inc. v. Law Office of KrugOpinion
Civil Action No. 8624 (1986).
Submitted: October 25, 1986.
Decided: November 12, 1986.
A. Gilchrist Sparks, III, Esquire, Thomas Reed Hunt, Jr., Esquire, Michael Houghton, Esquire, Edmond D. Johnson, Esquire MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, DE.
Rodman Ward, Jr., Esquire, Thomas J. Allingham, II, Esquire, SKADDEN, ARPS, SLATE, MEAGHER FLOM, Wilmington, DE.
DECISION AFTER TRIAL TO DETERMINE VALIDITY OF ELECTION OF OFFICER AND REMOVAL OF A DIRECTOR
Gentlemen:
The issues in this proceeding, brought pursuant to 8 Del. C. § 225, are whether plaintiff Albert L. Bossier was duly elected as Chairman of the Board, President and Chief Executive Officer of Avondale Industries, Inc. ("Avondale") on September 16, 1986, and whether he was removed as a director for cause the same evening pursuant to a written consent executed by the holder of all the common stock of the corporation.
I find that Mr. Bossier was not elected Chairman of the Board, President and Chief Executive Officer of Avondale because defendant William F. Connell was elected Chairman of the Board, President and Chief Executive Officer for a three-year term in September of 1985 and had not been removed on September 16, 1986. I also find that Mr. Bossier was not removed for cause as a director because the proper procedures for a removal of a director for cause were not followed.
Most of the facts are not in dispute but where they are I find them to be as set forth. Because a suit brought pursuant to 8 Del. C. § 225 is a summary proceeding, I set one day for the hearing; however, plaintiffs' case, primarily because of extensive cross-examination, took almost the entire day and I permitted defendants to complete their case the following day. The use of live witnesses was therefore necessarily limited and much of the record consists of deposition testimony and exhibits.
I
The controversy, which might initially appear to be simple, is complex because of the unusual factual background which led to the formation of Avondale and the unusual events which occurred on September 16, 1986.
A little over a year ago, in September of 1985, Ogden Corporation ("Ogden") spun off eight of its subsidiaries into a new corporation named Avondale Industries, Inc. As part of this transaction, Ogden received stock of Avondale in payment for the assets transferred. It contemporaneously sold the common stock to the Employees Stock Option Plan ("ESOP") created, as part of the transaction, for the benefit of Avondale's employees. Ogden Corporation retained a substantial interest in Avondale because it received approximately $24,500,000 in preferred stock, loaned Avondale $18,500,000 and guaranteed Avondale obligations amounting to more than $80,000,000. On May 15, 1986, Ogden Corporation also agreed to furnish Avondale with a $90,000,000 performance bond in connection with Avondale's bid on a hydroelectric project.
Avondale, in order to finance the purchase of the stock by the ESOP, borrowed $190,000,000 which it then loaned to the ESOP. The ESOP, which already had available to it $92,000,000 in excess pension plan funds, then purchased from Ogden Corporation all of Avondale's outstanding common stock.
Under the terms of the ESOP plan, allocations of the Avondale common stock held by the ESOP are to be made to those employees of Avondale who are eligible ESOP participants, in proportion to their salaries, as Avondale pays down the loans. The obligation to make allocations arises on August 31st of each year commencing on August 31, 1986, and continuing for eight years. Once allocated, a pass through of voting rights occurs to the employee-owners.
It is not disputed that, because of the ESOP involvement, federal law requires that the control of Avondale be separate from Ogden Corporation. The transaction was therefore carefully structured to provide that the Avondale Board of Directors consist of seven members, four elected by the holders of Avondale's common stock, all of which is held by the ESOP, and the other three elected by the holders of Avondale's preferred stock, all of which is held by Ogden Corporation.
The transaction creating Avondale was contingent upon massive financing by banks. The lead bank was Citibank and the entire transaction was reviewed by it and many changes were made to accommodate its demands.
One of the essential elements of the transaction was the providing for management for the new corporate entity which was expected to have $1.2 billion in annual revenues. Defendant William F. Connell who had worked for Ogden for many years was chosen to be the new President, Chairman of the Board and Chief Executive Officer of Avondale. He thereupon left Ogden and undertook to head Avondale after entering into a three year employment contract.
Shortly after Avondale commenced its separate existence in 1985, its' directors discovered that one of the subsidiaries transferred to Avondale by Ogden was grossly over-priced and was saddled with massive hidden losses which could jeopardize the ability of Avondale to continue to exist as a viable business enterprise. This discovery caused the interests of the owner of common stock (the ESOP) and the interests of the owner of the preferred stock (Ogden) to be in direct conflict and led to the filing of a suit in the Federal District Court of Massachusetts in April of this year by Avondale and the ESOP against Ogden. On September 15, 1986, the day before the scheduled Annual Meeting of Avondale, Ogden agreed to settle part of the suit by returning to Avondale preferred stock valued at 58 million dollars. This settled Avondale's claim but the ESOP's claim for 300 million dollars in damages remains.
Needless to say, the question of the control of the ESOP is therefore of some interest to Ogden Corporation. The present holders of record of all the common stock of Avondale are the three trustees of the ESOP who, in turn, are selected by the Board of Avondale. The trustees' right to vote the common stock is subject to the direction of a five-person Administrative Committee.
II
The key protagonists are defendant William F. Connell who, since the formation of Avondale, has served as one of the four directors elected by the ESOP on behalf of the common stockholders and serves as the Chairman of the Board, President and Chief Executive Officer of the corporation. The other is plaintiff Albert L. Bossier, who is also one of the four directors elected by the ESOP and is the head of the shipyard division of Avondale.
On September 16, 1986, the events occurred which led to this lawsuit. Just before the convening of the Annual Meeting of Stockholders, the four ESOP elected directors met to consider a slate of officers they would support at the Annual Meeting of the Directors set to be held immediately following the Annual Meeting of Stockholders. At this meeting Mr. Connell indicated that all the existing officers would be proposed to be re-elected as a slate. It was also agreed, without dissent, that Mr. Bossier would second the nomination of the slate and Mr. Bossier expressed no reservations about the slate.
The Annual Meeting of the Stockholders was then held and all the existing directors were unanimously re-elected as directors without opposition. Mr. Connell then called the seven directors into session. The first item on the agenda was the election of officers. Upon the announcement that the election of officers was before the meeting, Mr. Bossier jumped up and nominated himself to be Chairman of the Board, President and Chief Executive Officer. He also distributed and read a five-page statement which set forth "philosphical reasons" for his disagreement with the way Mr. Connell was managing the corporation. I find that this statement was a sham and was produced merely to hide the clandestine relationship between Mr. Bossier and the Ogden directors. Mr. Krenz, one of the three Ogden elected directors and the new President of Ogden, then seconded the nomination of Mr. Bossier despite the fact that Mr. Bossier was supposed to be a director serving the interests of the ESOP which were in direct conflict with the interests of Ogden.
Mr. Connell and the other two ESOP directors were taken by surprise and were shocked by the turn of events because none of them had any advance indication that Mr. Bossier was dissatisfied with Mr. Connell's management or that he would seek the Presidency, or that he had been secretly negotiating with the Ogden directors for their support. Nor had the Ogden directors ever indicated any disapproval of the performance of Mr. Connell.
Subsequent discovery in this lawsuit revealed that Mr. Bossier over several months had been secretly and deliberately orchestrating his election as President, Chairman of the Board, and Chief Executive Officer.
Although there is some slight disagreement as to what then took place, I find that Mr. Connell, on the advice of the corporation's counsel, Mr. Richards, attempted to postpone the election because it was unclear to him whether the election of Mr. Bossier would constitute a removal of Mr. Connell thus requiring a three-fourths vote under his view of the By-laws or would be a new election which required a mere majority vote and because he desired to have a review of Mr. Bossier's charges. The three Ogden directors and Mr. Bossier objected to any delay and orally expressed their four votes for Mr. Bossier.
After some turmoil and a temporary recess caused by the three Ogden directors and Mr. Bossier voluntarily leaving the room for ten minutes the meeting continued with a discussion of the election issue. After about ten minutes the meeting resumed consideration of the remainder of the agenda. The meeting ended with Mr. Connell claiming that he had deferred the election and Mr. Bossier claiming that he had been elected President, Chairman of the Board and Chief Executive Officer.
III
Later in the evening of September 16th, a five-person Administrative Committee, which directs the ESOP trustees on the manner of the voting of the shares of common stock held by the ESOP, held a telephone conference call at the instigation of Mr. Richards, one of Avondale's legal counsel, and decided to direct the ESOP trustees to execute a stockholder consent removing Mr. Bossier as a director for cause. The vote of the Administrative Committee was three in favor with two abstentions.
The three ESOP trustees shortly thereafter complied with the directive of the Administrative Committee and executed a consent on behalf of the common stockholders removing Mr. Bossier as a director for cause. The only notice of this action given to Mr. Bossier was by a letter sent by Mr. Connell to Mr. Bossier advising him of the removal for cause but without giving any specifics. Mr. Bossier was not given any opportunity to respond to the allegations of his being removed for cause.
Subsequently Mr. Bossier attempted to have the ESOP Trustees removed. On September 23, 1986, the U.S. District Court issued a Temporary Restraining Order restraining Mr. Bossier from interferring with the Avondale ESOP trustees in the conduct of the pending litigation. This was subsequently extended to a Preliminary Injunction by consent.
IV
The first issue to be determined is the length of the term of office of Mr. Connell. If he was elected to a three year term in September of 1985 then his termination would be a removal which, according to the By-laws of Avondale, would have to be by an affirmative vote of three-fourths of the entire Board (or six votes) which did not occur.
Mr. Connell's Employment Contract provides that he shall serve as Chairman and Chief Executive Officer of Avondale through December 31, 1988. This apparently was required by the lead bank which loaned the money used to permit the initial formation of Avondale. Mr. Connell, however, on September 24, 1985, three days before the Employment Contract was executed on September 27, 1985, was selected to head Avondale for a one-year term by a resolution of the Board which stated that it authorized "such other agreements or instruments . . . as shall [be deemed] necessary or desirable for the purpose of effecting the foregoing including the expansion of these resolutions". The Employment Contract as executed on September 27, 1985, was unanimously ratified by the Directors — including Mr. Bossier. Defendants urge that the expansion of Mr. Connell's term until December 31, 1988, by the terms of the September 27, 1986, Employment Contract and its unanimous ratification, was an expansion as contemplated by the original resolution appointing Mr. Connell for a one-year term.
Two provisions of the By-laws relating to the election of officers are in conflict and are therefore ambiguous. Cf.Hibbert v. Hollywood Park, Inc., Del. Supr., 457 A.2d 339 (1983).
Article 4 of the By-laws of Avondale provides in part:
§ 4.1 "Officers; Election.
The Board of Directors, as soon as may be practicable after the election of directors in each year, shall appoint one of their number as Chairman of the Board, Chief Executive Officer and President."
§ 4.2 "Term of office; Resignation; Removal; Vacancies.
Except as otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until the first meeting of the Board after the annual meeting of stockholders next succeeding his or her election, and until his or her successor is elected and qualified . . ." (emphasis added)
Mr. Bossier, along with all the other directors, approved the Employment Contract with the three-year term and Mr. Krenz, as Vice President of Avondale, executed it.
8 Del. C. § 142(b) permits a corporation to elect officers "for such terms as are prescribed by the By-laws or determined by the Board of Directors or other governing body".
The issue, therefore, is whether the unanimous approval and ratification of the Connell Employment Contract was consistent with Avondale's By-laws. While under different circumstances the result might be different, I find from the facts and circumstances present here that it was. See Realty Acceptance Corp. v. Montgomery, 3rd Cir., 51 F.2d 636 (1931); Hernandez v. Banco de las Americas, Ariz. Supr., 570 P.2d 494 (1977); Magnus v. Magnus Organ Corp., N.J. Supr. App. Div., 177 A.2d 55 (1962);Dixie Glass Co. v. Pollak, Tex. Cv. App., 341 S.W.2d 530 (1960), aff'd., 347 S.W.2d 596 (1961).
Although the evidence is not as clear as I might like, I am convinced that it was part of the original transaction creating Avondale that the first President and Chief Executive Officer would serve for a substantial period of time — longer than one year — and that all involved knew it and agreed to it. When all the facts and circumstances and all the resolutions and contracts are considered as part of a package, it is clear that the By-laws authorized the directors by resolution to elect any officer for a period in excess of one-year and that the ratification of the Employment Contract of Mr. Connell was such a resolution.
Despite some ambiguity, I find that the Employment Contract did provide that the term of employment for Mr. Connell was to continue until December 31, 1988, subject to prior termination under certain conditions. There was no showing of any attempt to terminate Mr. Connell. In any event, his termination prior to the end of his term would be a removal which under the By-laws required a three-fourths vote. Mr. Bossier, therefore, could not have been elected President, Chairman of the Board, and Chief Executive Officer of Avondale at the September 16, 1986 meeting because there was no vacancy in view of the fact that Mr. Connell occupied the offices for a term which does not end until December 31, 1988 and no attempt had been made to remove him before the end of the term.
V
The next issue to be resolved is whether Mr. Bossier was removed as a director for cause on September 16, 1986 by a written consent executed by the record holders of all the common stock pursuant to 8 Del. C. § 141(k).
While it is clear that the Administrative Committee had adequate grounds to direct the trustees to remove Mr. Bossier for cause due to his obvious lack of loyalty to the interests of the common stockholders by entering into a secret pact with the preferred stockholders, the procedural mandates of Delaware law were not complied with — undoubtedly because the circumstances of the situation prevented the luxury of formally preferring charges and holding a hearing.
The case of Campbell v. Loews, Inc., Del. Ch., 134 A.2d 852 (1957) compels my holding, notwithstanding that I am somewhat reluctant to follow it. Campbell v. Loews was decided in 1957 before the statutory amendments which now permit the removal of directors by stockholder consents for cause or without cause. The rule set forth in Campbell v. Loews which holds that if there is a removal by the stockholders of a director for cause, there must be the giving of specific charges, adequate notice, and full opportunity of meeting the accusation, has therefore become for the most part moot.
In the present case, however, the requirements imposed byCampbell are not moot because the purported removal of Mr. Bossier was for cause and defendants do not argue otherwise.
I believe that the ruling in Campbell v. Loews is binding on this Court in the present circumstances, and the procedures for removal for cause set forth therein were not followed. I therefore must hold that the purported removal of Mr. Bossier as a director on September 16, 1986 was ineffective and void.
VI
The parties produced a voluminous record and asserted many other claims and arguments, but none of them need to be addressed in view of my holdings herein.
In summary, I find that Mr. Bossier was not elected as President, Chairman of the Board, and Chief Executive Officer of Avondale on September 16, 1986 because no vacancy existed for him to fill, but that he was not removed as a director on that same evening.
IT IS SO ORDERED.
Yours truly,