Opinion
August 7, 1940.
LAYTON, C.J., RODNEY and SPEAKMAN, J.J., sitting.
Stewart Lynch for relator.
Marvel and Morford for respondent.
Superior Court for New Castle County, May Term, 1940.
Mandamus to compel inspection of corporate records.
All of the stock of the respondent corporation was held by voting trustees. The relator was the registered holder of a voting trust certificate.
The petition averred that in December, 1928, North American Aviation Incorporated was organized under Delaware law for the purpose of dealing in, inter alia, securities of aviation companies. In the early part of 1933, among its directorate were Armsby, Cowdin and Hopkins. Among the assets of the corporation were securities of Intercontinent Corporation and securities of Curtiss-Wright Corporation. In April, 1933, the corporation was reorganized. The respondent corporation was formed, and all of the securities were transferred to the respondent in exchange for 1,949,111 shares of its capital stock. The shares were deposited with Armsby, Cowdin, Morgan, Pierce and Hopkins, formerly directors of the reorganized corporation, as voting trustees, under a voting trust agreement. The stock of the respondent corporation was distributed to the stockholders of the reorganized corporation in the form of voting trust certificates, share for share, and the petitioner acquired his voting trust certificates as a result of the reorganization. The reorganized corporation had the controlling interest in Intercontinent Corporation, which latter corporation owned certain bonds of a development company. Hopkins died in 1937, and was succeeded by Fisher as a member of the voting trust committee. The voting trustees were also members of the Board of Directors of the respondent. In 1933 Hopkins negotiated on his own behalf with the remaining directors of the respondent for the purchase of the development company bonds, acquired them for less than their true value, and dealt with them with profit to himself and to the detriment of the respondent and its beneficial shareholders. During 1933 and 1936 the directors of the respondent corporation caused the securities of the Curtiss-Wright Corporation to be sold for less than their true value and to the detriment of the respondent and its beneficial shareholders. The securities were dealt with on behalf of the respondent through a stock exchange member who shared the earnings and commissions with a corporation owned and controlled by Cowdin and Armsby. Upon learning of these transactions demand was made on the directors and voting trustees for permission to examine the records of the respondent corporation including the voting trust agreement for the purpose of ascertaining the facts. The demand was refused. The purpose of the inspection was stated to be to ascertain whether, in fact, the respondent corporation and its beneficial stockholders were injured or damaged by the recited transactions, and, if the facts should warrant, to take appropriate action for the protection of the interests of the petitioner and other beneficial stockholders for whom the petitioner purported to act, and to advise and confer with other beneficial stockholders in regard to the corporation's management. The prayer of the petition was for a rule on the respondent to show cause why the petitioner, his agents and attorneys should not be allowed to inspect the corporate books and records and to make and take extracts therefrom for the purpose of ascertaining the facts surrounding the sale of the securities of the development company and of the Curtiss-Wright Corporation; and to inspect the records of the corporation pertaining to the setting up of the voting trust.
Briefly, the answer, admitting that members of the Board of Directors composed the voting trust committee, denied that the development company bonds became a part of the assets of the respondent corporation, and asserted that the transaction with respect to the bonds was fair and proper and the consideration full and adequate. Certain provisions of the certificate of incorporation of Intercontinent Aviation Inc., which succeeded Intercontinent Corporation, and of the certificate of incorporation of the respondent corporation, were recited under which transactions between corporations having common directors were allowed upon disclosure of interest and approval by a vote of disinterested directors. With respect to the transaction involving the securities of the Curtiss-Wright Corporation, it was alleged that when the respondent company discovered the participation of profits and commissions by the corporation in which Cowdin and Armsby were interested, protest was made, and a compromise and settlement of the dispute was approved by a former member of the Supreme Court of the State of New York to whom the matter had been submitted. Further, that one Piccard, an owner of a voting trust certificate, brought an action against the respondent and other defendants in the Supreme Court of New York, which action was transferred to the Federal District Court for the Southern District of New York, to compel an accounting for all moneys wasted, appropriated or squandered as a result of the sale of the Curtiss-Wright Securities; that on November 15, 1939 the voting trust certificate holders were ruled to show cause why a proposed settlement should not be approved, and the holders of the certificates were ordered to present their objections on December 12, 1939. It was alleged that the determination of the Piccard action would finally settle the rights of all the parties in connection with the transaction, and that there was no necessity for an inspection of the records with respect thereto.
It was also specifically denied that any demand to inspect the records of the respondent or the voting trust agreement had been made by or on behalf of the petitioner.
As a separate and complete defense it was alleged that the petitioner was not the owner of a voting trust certificate registered in his name, and that the proceeding was not brought in the name of the real party in interest.
As a second separate and complete defense, provisions of the voting trust agreement were recited. From these provisions it appeared that the title to the shares of stock of the respondent was vested in the voting trustees, who possessed and were entitled to exercise all the powers and rights of absolute owners, of every nature, including, but not in limitation, the right to vote, and to take part in or consent to any corporate or stockholders' action. The voting trust certificate provided that the holder was entitled to receive on April 26, 1943, or on the prior termination of the agreement, a certificate for the stated number of shares of the common stock of the respondent corporation, and in the meantime to receive payments equal to the dividends, other than stock dividends, if any, collected by the voting trustees, and until the actual delivery of the stock certificates the voting trustees possessed and were entitled in their discretion to exercise all the rights of stockholders of every name and nature including the right to vote and consent for every purpose subject to the terms of the agreement. It was further alleged that the voting trust agreement was entered into by North American Aviation Inc. at a time when it was the owner of all of the capital stock of the respondent corporation, and that the petitioner was bound by the terms and conditions of the agreement.
The petitioner moved to strike from the answer that part relating to the sale of the securities of the Curtiss-Wright Corporation and the litigation thereover, that part charging that the petitioner was not the real owner of the certificate registered in his name, and the provisions of the voting trust agreement declaring the rights of the voting trustees with respect to the shares deposited with them, for the reason that the facts constituted no defense to the relator's application.
This proceeding was brought to the September Term, 1939. Obviously the time element was not deemed important, for it was at the March Term, that counsel for the parties agreed to submit on briefs the questions raised. The relator's brief was not received until the sixth day of May, nor the respondent's brief until the latter part of June.
In the meantime, the important question raised by the motion to expunge was decided by this Court in an opinion released on March 26, 1940, in the case of State ex rel. Healy v. Superior Oil Corporation, 1 Terry (40 Del.) 460, 13 A. 2d 453, 454. In that case, the relator sought by mandamus to enforce his right as a registered stockholder to inspect the respondent corporation's stock ledger and to take therefrom a list of the stockholders. The respondent's answer admitting that the relator was a registered stockholder, asserted that she was not the owner of the stock, but merely a nominee. It was also urged that the purpose of the inspection was an improper one.
One of the questions posed by the Court was, "Can the petition for a Writ of Mandamus be maintained by a registered stockholder who is not the beneficial owner of the shares?" The answer to the question compelled an examination of the pertinent provision of the General Corporation Law, and the authorities generally. Section 29 of the General Law, Rev. Code 1935, § 2061, provides, inter alia, that "the original or duplicate stock ledger shall be the only evidence as to whom [ sic] are stockholders entitled to examine such list or the books of the corporation * * *". It was contended that the provision had relation only to corporate elections; but we pointed out that the list of stockholders was not only the list of those having the right to vote at meetings of stockholders, but also was a list of stockholders entitled to examine the books of the corporation; that the right to examine corporate records was not a right ordinarily to be exercised at a corporate election; and that the list of stockholders was a continuing list for all proper purposes. Conceding the purpose of the examination to be a proper one, we held that the question whether a person was entitled to examine corporate books and records was to be determined from the stock ledger of the corporation.
Here the petitioner, concededly, is not a registered holder of stock of the respondent corporation. As a holder of a voting trust certificate establishing his right to a certificate of stock at a future time but expressly conferring on voting trustees "all the rights of stockholders of every name or nature," he is the equitable or beneficial owner of shares.
The positive terms of the statute, ignoring equitable considerations, deny the right of inspection of corporate books and records to all persons except registered stockholders. But apart from the statute, a question here is whether one having a right purely equitable may enforce it by an action strictly legal. It is elementary that the interest sought to be secured or enforced by writ of mandamus must amount to a clear legal right existing in the relator at the time of the application. State v. Simmons, 3 Penn. 291, 50 A. 213. The writ is a legal remedy for a legal right. Union Church v. Sanders, 1 Houst. 100, 63 Am. Dec. 187; State ex rel. Cooke v. New York-Mexican Oil Co., 2 W.W. Harr. (32 Del.) 244, 122 A. 55. In the circumstances disclosed a writ of mandamus is not an available remedy.
The relator adverts to Cooney Co. v. Arlington Hotel Co., 11 Del. Ch. 286, 101 A. 879, holding that holders of voting trust certificates as beneficial owners of stock were liable to corporate creditors for the amount unpaid thereon, even though the legal title was in trustees; but this is no answer to the question. Attention, again, is called to Gow v. Consolidated Coppermines Corp., 19 Del. Ch. 172, 165 A. 136, where it was held that Section 29 of the General Law must be read in connection with Section 18 by which pledgors and fiduciaries may vote at a stockholder's election even though they are not stockholders of record. Obviously, the exception created by Section 18 does not relate to the right of inspection of corporate books and records and it is to be taken as more positively confining the right of inspection to stockholders of record.
Chandler v. Bellanca Aircraft Corporation, 19 Del. Ch. 57, 162 A. 63, 66, affirmed on appeal without opinion is strongly relied on. There it was held that the holder of a voting trust certificate under a trust agreement which vested in the voting trustees all rights and powers as absolute owners of all shares of stock deposited thereunder, was entitled to ask for a review of an election of directors under Section 31 of the General Law providing that on the "application by any stockholder" a review may be had of an election. What the Chancellor said was that "considering the equities of the situation of a holder of voting trust certificates, it would be an unjustifiably invidious distinction that would remove him [the complainant] from the category of 'stockholder' * * * when all that he seeks to do is to ascertain whether or not one of the important purposes of the trust to which he is a party * * * had been faithfully served." The principle that a court of equity was the tribunal for the protection of equitable rights was recognized and confirmed. The decision does not support the position taken by the relator. On the contrary, it suggests, perhaps, that the relator has mistaken his forum.
But, the relator insists that, if there is no remedy by writ of mandamus, he is without remedy, for the reason that in Parrish v. Commonwealth Trust Co., 21 Del. Ch. 121, 181 A. 658, 659, the holder of a voting trust certificate was held not entitled to an order of inspection of corporate books. The decision, however, does not justify the conclusion that the Court of Chancery will, in no circumstances, afford to a holder of a voting trust certificate the relief of an order of inspection. The Chancellor held, as it seems correctly, that the Court of Chancery had no jurisdiction to order an inspection of corporate books and records as a matter of primary and independent relief, mandamus at law being the appropriate remedy. The order of inspection was refused, not because the Court of Chancery may not, in a proper case grant the relief prayed for, but on the ground that the reasons assigned by the complainant for desiring the information contained in the corporate books and records would be of no relevant assistance in support of any allegation of the bill of complaint.
Apart from limitations imposed by statute or public policy, parties to trust agreements are at liberty to adopt any provisions either as to substance or mechanics as they may elect. Chandler v. Bellanca Aircraft Corporation, supra. The relator's right under the trust agreement and certificate is to receive, at a future time, a certificate of stock, and, meanwhile, to receive the equivalent of dividends, if any, other than stock dividends. The voting trustees, by language, precise and comprehensive, are possessed of and are entitled to exercise all the powers and rights of absolute ownership of every name and nature. Legal remedy suggests a legal right. In law, the relator is a stranger to the corporation. His right is not governed by the common law rules applicable to stockholders, nor by the statute which affords to a stockholder the absolute right of inspection of corporate books and records unless it be shown that the purpose is improper. His rights arise from contract and are limited by its terms. Babcock et al. v. Chicago Rys. Co., 325 Ill. 16 , 155 N.E. 773. One who, for reasons and purposes deemed sufficient, has seen fit to divest himself of all the rights of ownership, except those enumerated, is in no position to assert that he is possessed of a clear legal right enforceable by writ of mandamus. Whether in aid of the allegations of the petition a court of equity would order an inspection of corporate books and records is not for this Court to consider.
The petition for a writ of mandamus, in form, is most unusual. It is suggestive of a bill in equity. Passing by the question of relevancy, it may be assumed that the averments of the petition occasioned those of the answer. A motion to strike from a pleading allegations foreign to the issues is not the only remedy available to the objector. Objection to the testimony may be made as it is offered. 21 R.C.L. 595. Whether the other allegations sought to be expunged from the answer have pertinency is a question which the trial Court will decide if the cause shall proceed to a hearing.
The motion to strike is denied.