Opinion
Civil Action No. 17399.
Date Submitted: October 15, 1999.
Date Decided: November 5, 1999.
A. Gilchrist Sparks, III, William M. Lafferty, S. Mark Hurd, and Jeffrey R. Wolters, of MORRIS, NICHOLS, ARSHT TUNNELL, Attorneys for Plaintiff.
Edward M. McNally, of MORRIS, JAMES, HITCHENS WILLIAMS LLP, OF COUNSEL: Joseph T. Baio, Patrick J. Carty, and Scott S. Rose, of WILLKIE FARR GALLAGHER, Attorneys for Defendants.
MEMORANDUM OPINION
Sam J. Frankino, directly and indirectly, controls 55% of National Auto Credit, Inc.'s ("NAC") stock. Through this action brought under 8 Del. C. § 225, Frankino seeks to regain control of NAC's day-to-day operations.
Despite being a 55% shareholder, Frankino found himself at odds with NAC's board of directors. In order to regain corporate control over NAC, Frankino endeavored to expand the size of the board and appoint directors loyal to him. Standing in his path was Article IX of NAC's bylaws, entitled "Miscellaneous."
Article IX purports to require an 80% supermajority vote to amend Article III of the bylaws. Article III generally governs matters concerning NAC's board of directors including, among other things, board size. In light of Article IX's supermajority requirement to amend Article III, Frankino's 55% simple majority ownership seemed insufficient to expand the board's size.
Thinking strategically, Frankino sought and indeed found a chink in the armor: there was no language in Article IX that prevented its amendment or wholesale repeal by a simple majority vote. Frankino proceeded to eliminate Article IX's supermajority provision through majority written consent as there was nothing in the bylaws that seemed to prevent him from doing so. Immediately thereafter, he amended Article III, again by simple majority written consent, and elected his nominees to the newly created board seats. Frankino then filed this § 225 action seeking entry of an order confirming (i) the validity of the amendments to the company's bylaws, and (ii) the election of his nominees to the expanded board.
Defendants contend that such an order would render their amendment to the bylaws nugatory, as the provision requiring a supermajority vote would have been amended by a bare majority. They invite me to examine the "self-evident purpose" of the bylaw's supermajority provision and imply language requiring a supermajority vote to amend Article IX.
Based on the undisputed evidence, most notably an NAC bylaw recognizing that only "express provisions" can create a requirement for a supermajority vote, I conclude that Frankino's amendments by majority written consent are valid. Accordingly, I direct that Frankino's nominees take their rightful places as members of NAC's board.
I.
Frankino founded NAC's predecessor company, Agency Rent-A-Car, in 1969. In 1971, Agency Rent-A-Car was incorporated in Delaware and, in 1983, it was taken public. Frankino was chairman of the board, president, and majority shareholder of Agency Rent-A-Car from the outset of Agency Rent-A-Car's corporate existence. While Frankino ran the daily operations of Agency Rent-A-Car, it adopted bylaws largely identical to NAC's bylaws at issue in this case. On August 15, 1994, Agency Rent-A-Car switched its corporate name to NAC.
Frankino resigned as chairman of NAC's board of directors on March 31, 1998. He, however, still remained the majority shareholder.
Defendants have made much of the facts allegedly behind Frankino's resignation. Namely, they claim that both the SEC and the FBI are currently investigating financial improprieties alleged to have occurred while Frankino headed NAC. The defendants purportedly agreed to assist the federal authorities in these investigations. While possibly shedding light on Frankino's motivations to amend the bylaws and reassert control of NAC, these allegations, even if true, are not relevant to the issues I must resolve.
Perhaps anticipating a challenge from Frankino, defendants made two amendments to the bylaws on June 3, 1998. The first of these was an amendment purporting to prohibit stockholder action by written consent. The second was the amendment to Article IX requiring an 80% supermajority vote to amend portions of Article 111.
As amended by the board on January 14, 1999, Article IX read: "Except as otherwise provided herein, these By-laws may be altered, added to, amended or repealed as follows: (a) at any meeting of the stockholders by affirmative vote of a majority in interest of each class of stock outstanding and entitled to vote there at, provided notice of the proposed alteration, addition, amendment or repeal shall have been given in the notice of such meeting; or (b) by the board of directors, except with respect to any provision of which by law, the Certificate of Incorporation or By-Laws requires action by the stockholders. Any Bylaw adopted by the board of directors may be amended or repealed by the stockholders, as provided in this Section. The provisions contained in Sections 1 through 12 of Article III of these Bylaws shall not be amended, altered or repealed except (a) by the affirmative vote of the holders of at least eighty percent (80%) of each class of stock outstanding and entitled to vote at any meeting of the stockholders, provided notice of the proposed amendment, alteration or repeal shall have been given in the notice of such meeting or (b) by the board of directors, provided a majority of the Continuing Directors, (as defined in Article SIXTH of the Certificate of Incorporation) concur in the amendment, alteration or repeal."
Frankino circumvented Article IX's supermajority vote provision by first deleting, by majority written consent, the amendment requiring written consent. He then deleted, by majority written consent, the sentence in Article IX that required an 80% supermajority vote to amend Article III. Next, again by majority written consent, Frankino amended Article III to expand the board of directors from six to thirteen members, and elected seven individuals to fill the newly created seats. He took all of these actions on August 30, 1999. Frankino then commenced this action under § 225 of the Delaware General Corporation Law, asking me to declare the above-described actions valid.
Defendants deny that Frankino's actions were valid and have asserted, with varying intensity, several affirmative defenses. They claim that Frankino's actions contravene the board's intent and are quite contrary to the evident purpose of the supermajority provision. This is defendants' strongest argument and the one they pursue most vigorously.
Defendants also claim that Frankino is estopped from amending Article IX because Frankino voted to approve the original Article IX two-thirds supermajority provision in December 1995. It should be noted, however, that Frankino had absolutely no involvement in the later amendment changing the required vote to 80%. As an additional defense, defendants allege that Frankino violated his fiduciary duties as a majority stockholder. Finally, defendants half-heartedly argue that Frankino did not have voting control of a majority of the shares, since a percentage of the shares Frankino claims to control actually were held in the name of charitable foundations of which Frankino had only "shared voting power."
While the significance of certain underlying facts in this case is hotly debated, few (if any) of those underlying facts are disputed. Appropriately, cross-motions for summary judgment have been filed on all issues.
II.
I may grant summary judgment in favor of a moving party if that party demonstrates that no genuine issue of material fact exists and the moving party is entitled judgment as a matter of law.
Tanzer v. Int'l Gen. Indus., Del. Ch., 402 A.2d 382 (1979).
III.
A. Is Frankino a majority shareholder?Defendants have themselves acknowledged that Frankino is a majority shareholder. On a form 10-K filed with the SEC in July of this year, defendants twice characterized Frankino as a majority shareholder. Likewise, defendants concede in their answer that Frankino has "majority voting power."
Answer, ¶ 39.
Defendants, nonetheless, now argue that Frankino is not a majority shareholder on the basis that some of the shares Frankino claims he controls are technically held in the name of charitable foundations, with Frankino allegedly having only shared voting power. Defendants' argument does not persuade me, especially given their earlier admissions contradicting their present position. I am satisfied that Frankino controls or owns not only the shares listed in his name but also those shares listed in the names of the charitable foundations at issue.
B. Can NAC shareholders take action by written consent?
On this question I can be very brief, as defendants conceded the answer at oral argument. The bylaw provision purporting to bar shareholders from acting by written consent violates § 228 of the Delaware General Corporate Law. To effectively bar shareholders from acting by written consent the provision so doing must be in the certificate of incorporation.
8 Del. C. § 228 (a) (stating, "[u]nless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. . . . Delaware courts have consistently protected shareholders' right to act by written consent. See, e.g., Plaza Securities v. O'Kelley, Del. Ch., C.A. No. 7932, Brown, C. (Mar. 5, 1985) (stating no restriction can be placed on shareholders right to act by written consent "unless it is accomplished in the certificate of incorporation itself') (slip op. at 6), aff'd, Datapoint Corp. v. Plaza Securities Co., Del. Supr., 496 A.2d 1031, 1035 (1985).
C. Is Frankino estopped from objecting to the 80% supermajority requirement?
Defendants' estoppel defense fails because Frankino had no hand in adopting the 80% supermajority provision. The fact that in the past he caused a 2/3-supermajority vote to be adopted in Article IX is of no import here. Additionally, defendants fail to allege detrimental reliance — necessary element to state a claim for estoppel.
D. Are defendants "fiduciary duty claims within the scope of this section 225 proceeding?
Wilds v. Attix, 4 Del. Ch. 253, 262-63 (1871); Wilson v. American Ins. Co., Del. Supr., 209 A.2d 902, 903-04 (1965).
Section 225 proceedings are necessarily narrow in scope in order to provide clear and quick relief. The Court of Chancery has historically been reluctant to entertain collateral issues that would take a Section 225 proceeding outside the narrow confines contemplated by Delaware law.
Box v. Box, Del. Supr., 697 A.2d 395 (1997).
See Bachman v. Ontell, Del. Ch., C.A. No. 7805, Brown, C. (Nov. 5, 1984) (refusing to entertain affirmative defense asserting plaintiff planned to liquidate company after election, at Section 225 proceeding); Louden v. Archer-Daniels-Midland Co., Del. Ch., C.A. No. 14638, Jacobs, V.C. (Feb. 20, 1996) (dismissing claim a 225 proceeding that alleged material omissions in proxy materials issued in conjunction with a separate uncontested election of directors);, Kahn Bros. Co. v. Fishbach Corp., Del. Ch., C.A. No. 8987, Allen, C. (Nov. 15, 1988) (stating, "the question whether an issue is properly litigable in a Section 225 action turns, in my opinion, upon a determination of whether it is necessary to decide in order to determine the validity of the election."), mem. op. at 12-13 (emphasis added).
The crux of defendants' fiduciary duty claim is their assertion that Frankino is trying to retake operational control of NAC in order to prevent the company from taking action against him that would stem from the on-going federal investigation of financial improprieties allegedly occurring while Frankino was at the helm. Defendants also imply that Frankino, acting in his own self-interest, would oppose cooperation with the investigation despite such cooperation being in the best interests of the company and its shareholders.
Delaware law recognizes that "[s]tockholders in Delaware corporations have a right to control and vote their shares in their own interest." Moreover, defendants' allegations concerning Frankino's motives are mere speculation. Even if convincingly proved, Frankino's motives would be collateral to this § 225 proceeding, as they do not go to the validity of the disputed vote itself.
Bershad v. Curtiss-Wright Corp., Del. Supr., 535 A.2d 840, 845 (1987); see also Ringling Bros.; Barnum Bailey Combined Shows, Inc. v. Ringling, Del. Supr., 53 A.2d 441, 447 (1947) (stating, "a shareholder may exercise wide liberality of judgment in the matter of voting").
IV.
The only issue remaining, therefore, is the more difficult question of whether Frankino's August 30, 1999 deletion of Article IX's supermajority requirement was effective? Frankino asks me to examine the plain language of Article IX noting that nowhere does it state that Article IX itself is covered by the supermajority provision. He then refers me to decisions stating that bylaw provisions that purport to impose supermajority votes must be "positive, explicit, clear and readily understandable." Going a step further, Frankino points out that the directors could have extended the provision to cover Article IX itself, if they so wished, just by adding or deleting a few words.
Standard Power Light Corp. v. Investment Assoc., Inc., Del. Supr., 51 A.2d 572, 576 (1947).
Frankino also argues that the standard principles of contract interpretation apply when construing charter or bylaw provisions. Thus, if no ambiguity is present on the face of the document, I need only look to the clear language of the document.
Hibbert v. Hollywood Park, Inc., Del. Supr., 457 A.2d 339, 342-43 (1983).
In support of his position, Frankino cites Citadel Holding Corp. v. Roven, Del. Supr., 603 A.2d 818, 822 (1992), and City Investing Co. Liquidating Trust v. Continental Casualty Co., Del. Supr., 624 A.2d 1191, 1198 (1993).
If I were to agree with Frankino that all I need to do is to look at the clear language of Article IX, I could resolve this matter quickly, albeit somewhat uneasily. Fortunately, another section of NAC's bylaws supports Frankino' s position.
Article II, Section 8 of NAC's bylaws provides that a simple majority vote is effective to resolve any issue unless a different vote is required by " express provision of the statutes or of the Certificate of Incorporation or . . . these By-laws." In my view, NAC is accountable to the provisions in its very own bylaws. The language of Article II, Section 8 is clear, and the requirement of an "express provision" found in this section — more so than the defendants' general requests for me to examine Article IX on its face — is why I must find Frankino's August 30, 1999 amendments valid. Defendants can not realistically expect me to disregard a rule of interpretation required by NAC's own bylaws. Furthermore, my conclusion is consistent with Delaware's "general policy against disenfranchisement."
(Emphasis added).
Blasius Indus. v. Atlas Corp., Del. Ch., 564 A.2d 651, 669 (1988).
Defendants, nonetheless, argue that allowing Frankino to amend Article IX by a bare majority would render nugatory the sentence requiring a supermajority vote. To support their argument defendants cite Sellers v. Joseph Bancrofi Sons Company. Sellers, however, is factually inapposite to this case. There, the corporation's charter required a 75% vote to amend certain rights of holders of preferred shares (e.g., designations, preferences, voting powers) and a 100% vote to amend other rights (e.g., dividend rate, redemption price, liquidation preference). The company's shareholders attempted to reduce the 75% and 100% requirements to 60% and 65% respectively through a charter amendment at the annual shareholders meeting. The shareholders approved the amendment by a 55% vote of the preferred shares.
Del. Ch., 2 A.2d 108 (1938).
The Sellers Court voided the amendment, finding defendant's argument that a bare majority vote was sufficient to strip the charter of supermajority provisions "quite contrary to the evident purpose of the percentage provisions. If it be permissible, the protection to the preferred stockholders who invested their money on the faith of those percentage safeguards, was utterly illusory. Importantly, Sellers dealt with a "voting powers" provision expressly protected in the charter; not director-only approved bylaw amendments as is the case here.
Id. at 112.
The Sellers' holding was adopted statutorily in 8 Del. C. § 242 (b)(4). Likewise, § 242(b)(4) applies only where the high vote requirement is set forth in the company's charter and does not, on its face, apply to bylaws.
Finally, defendants cite Centaur Partners IV v. National Intergroup, Inc., a case in which shareholders sought to increase the number of directors by amending shareholder-approved Section 16 of the bylaws by bare majority vote despite a provision in that same section that 80% of the shares must vote to amend.
Del. Supr., 582 A.2d 923 (1990).
There was also a provision in Article Eighth of the charter that required an 80% supermajority vote to amend it "or any similar provision." The Delaware Supreme Court deemed Section 16 sufficiently similar to Article Eighth for the charter's supermajority provision to apply to Section 16. The Court upheld the 80% supermajority requirement because to do otherwise would "completely abrogate the intention of the stockholders who adopted these provisions."
Id. at 92 8-29.
Again, the facts of Centaur Partners differ from those now before me. Centaur Partners involved clear, shareholder-approved supermajority requirements in both the charter and bylaws. Here, it is quite the opposite. On its face, Article IX excludes itself from the supermajority requirement. Furthermore, the NAC directors amended Article IX without shareholder involvement.
V.
For all these reasons, I conclude that plaintiffs August 30, 1999, amendments to NAC's bylaws are valid and I grant summary judgment in his favor and against defendants. Counsel shall confer and submit a form of order that implements these conclusions.