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finding no forbidden vote buying because defendants had persuaded the court that an inducement, as a factual matter, had not influenced the votes
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Civil Action No. 9432.
Submitted: June 20, 1988.
Decided: April 24, 1989.
Edward P. Welch, Esquire, Andrew J. Turezyn, Esquire and Kevin F. Brady, Esquire, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, Wilmington, Delaware, and Richard S. Simon, Esquire, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, New York, New York, Attorneys for Plaintiffs.
Lewis H. Lazarus, Esquire, of MORRIS, JAMES, HITCHENS WILLIAMS, Wilmington, Delaware, Attorneys for Defendant Mark W. Yonge.
John H. Benge, Jr., Esquire, of ALLMOND, EASTBURN BENGE, Wilmington, Delaware, and David M. Sheehan, Esquire, of BLUM, YUMKAS, MAILMAN, GUTMAN DENICK, P.A., Baltimore, Maryland, Attorneys for Defendants and Third Party Plaintiffs Theodore A. DeWitt and John R. Cullen.
Robert J. Katzenstein, Esquire, of LASSEN, SMITH, KATZENSTEIN FURLOW, Wilmington, Delaware, Attorneys for Intervenor and Third Party Defendant HTI Ships, Inc.
MEMORANDUM OPINION
This is the decision after a five-day trial of a Section 225 action to determine the composition of the board of directors of Rainbow Navigation, Inc., a closely-held Delaware corporation, engaged primarily in the business of transporting supplies by sea to American forces stationed in Iceland. At issue is whether sufficient consents were given on November 21, 1987 to render valid under Sections 228 and 141(k) of our corporation law the purported removal of the incumbent members of the board of Rainbow and the designation of successors.
In the lengthy interval between filing of this action and the decision, the Company has been managed by plaintiffs pursuant to a stipulation between the parties permitting the ordinary business of the firm to go forward.
This action has been brought by Pan Ocean Navigation, Inc., a Nevada corporation and a stockholder of Rainbow; by J. Kevin Murphy and Henry A. Downing, two individuals claiming to constitute the board of directors of Rainbow by reason of the purported consent action; and, purportedly, by Rainbow itself.
Section 225 does not identify the Company itself as a proper party plaintiff in an action to enforce the rights it creates. I need not, however, address the question whether the corporation itself may nevertheless institute such a proceeding. It has not been briefed, is not material here and, indeed, it is hard to imagine under what circumstances it would ever be a critical question.
During the pertinent period, Rainbow's stock was closely held among three interests. First, Pan Ocean Navigation, Inc. owned 30% of the Company's common stock. See Pan Ocean Navigation, Inc. v. Rainbow Navigation, Del. Ch., C.A. No. 8674, Allen, C. (July 7, 1987), aff'd, 535 A.2d 1357 (1987). Second, HTI Ships, Inc., a corporation owned directly and indirectly by defendants Yonge, DeWitt and Cullen, owned 45% of Rainbow's stock and, lastly, Mr. Nickel Van Reesema, at the relevant times a Dutch national, owned 25% of Rainbow's common stock. On November 21, 1987, Mr. Van Reesema apparently switched his loyalties from the HTI faction (Messrs. Yonge and DeWitt) to the Pan Ocean faction, by joining with Pan Ocean in the consent action, the effectiveness of which is here in issue. That action purported to remove the individual defendants as directors, amend the Company's bylaws and appoint the individual plaintiffs as directors.
After the events here in issue, Pan Ocean bought the 25% stock interest owned by Mr. Van Reesema. The complex terms of that sale have a tangential relevance and are touched upon below at p. 16.
This action was commenced by J. Kevin Murphy, an officer of Pan Ocean, who claims now to be president and a director of Rainbow, and by Henry Downing, who also claims to be a director pursuant to the November, 1987 consent. It seeks a declaratory judgment that they constitute the duly elected board of Rainbow. Defendants include Mark Yonge, Theodore DeWitt and John Cullen, who claim to continue in office as directors of Rainbow. HTI Ships was granted a right to intervene as a party defendant. Those individuals have counter-claimed for a declaratory judgment that they remain directors.
There is no dispute that the holders of 55% of the issued and outstanding stock of Rainbow complied with the provisions of Section 228 of the corporation statute in purporting to take shareholder action on November 21, 1987. Two fundamental challenges to the effectiveness of that action are raised, however. First, it is said that a March, 1985 Shareholders Agreement required unanimity for the removal of any director designated in that Agreement. It is argued that a shareholders agreement, signed by all shareholders, is as effective as a provision in a certificate of incorporation to require the removal of directors by a supermajority (or unanimous) vote. Accordingly, it is said that the consent action purportedly taken in this instance was not taken "by the holders of outstanding stock having . . . 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 presented and voted . . .," as required by Section 228.
This first issue thus involves the question, "what is the legal meaning and effect of the Shareholders Agreement?" Testimony was admitted at trial to give context to this contract. See Klair v. Reese, Del. Supr., 531 A.2d 219 (1987).
Should the court agree with the position urged by defendants that the Shareholders Agreement requires that power under Section 228 be exercised unanimously, it would be necessary to take up a number of subsidiary issues relating to plaintiffs' contention that the defendants have, in a number of instances, materially breached their Agreement and cannot now be heard to assert rights under it. As I conclude that the Agreement does not so restrict the power conferred by Section 228, these subsidiary issues need not be addressed. See pp. 5-12, infra.
The second major line of defense against the effectiveness of the consent action is that it constitutes an illegal vote buying transaction in which Mr. Van Reesema's consent was procured for pay. For the reasons set forth below (see pp. 23-23), I conclude that defendants have not established the factual premise for this claim.
The last major element of the case is an interpleader action brought by Messrs. DeWitt and Cullen. It concerns certain funds held by a Bermuda firm, Medway, controlled by HTI. Medway was paid these funds by Rainbow assertedly as compensation for services rendered. That matter is treated separately, at pp. 24-27 below.
I.
The first of the three principal issues presented by this case is whether the March, 1985 Shareholders Agreement signed by all of the stockholders of Rainbow requires unanimity in removing directors from office. Since the Agreement itself is explicit that vacancies "shall be filled by a majority of the shareholders," there is no basis to contend that that Agreement requires unanimity with respect to the election of directors.
In answering this question, one must start with an elementary observation that has pertinence. It is this. Unless the context in which the negotiation and contracting occurs otherwise requires, the words of a contract are to be accorded their ordinary meaning and that if, when so read, the contract as a whole supplies an answer to a disputed question, that is the answer. In other words, under the prevailing "objective" theory of contracts (see Western Natural Gas Co. v. Cities Service Gas Co., Del. Supr., 223 A.2d 379, 382-83 (1966), cert. denied, 386 U.S. 964 (1967); Leeds v. First Allied, Del. Ch., 521 A.2d 1095 (1986)), it is the "objective" meaning of the words used and not a subjective understanding that, absent ambiguity, is controlling. See, e.g., Minmar Builders, Inc. v. Beltway Excavators, Inc., D.C. App., 246 A.2d 784 (1968).
While parol evidence may be admissible to show how a reasonable person would interpret the words used in light of the known commercial practices and usages in the relevant field, the attempt to define the legal meaning and effect of a contractual document must start in each instance with the language used in the contract itself. Here, two paragraphs of the Shareholders Agreement are principally relevant. Paragraph 3 provides as follows:
The Shareholders agree that RAINBOW shall be governed by a Board of Directors consisting of four members (of which 3 shall be required for a quorum) and that, as of the date of this Agreement, the Directors shall be:
THEODORE A. DEWITT ANDREW A. LEVY One designee (U.S. citizen of VAN REESEMA) MARK YONGE
In the event that there are vacancies on said Board of Directors, it is agreed that such vacancies shall be filled by a majority of the Shareholders.
Paragraph 9 provides:
This Agreement shall be effective for one year commencing January 1, 1985 and continue in full force and effect unless and until terminated by the unanimous consent of the Shareholders.
(PX 13, ¶¶ 3, 9).
The argument of defendants is that the Agreement must be interpreted to mean that "unless and until terminated by unanimous consent, the individuals designated in paragraph 3 will continue as directors." I cannot read the language of the Agreement to so provide, however. Moreover, there is no sufficient basis in the background of the development of this Agreement (PX 13) to justify the conclusion that that was the intention of its signatories.
More specifically, from the outset, any two of the three shareholders of Rainbow unquestionably had the right under this Agreement to elect whomever they might agree upon to fill a vacancy created by death or resignation of the "representative director" of the third shareholder. Indeed, the Agreement does not even create a continuing express right for each shareholder to designate one (or more) representative directors and any claim that such a right can be found by implication is inconsistent with the express provision to fill vacancies by majority vote.
How then can it be said that this Agreement, which provides no right to designate directors (excepting Van Reesema's right "as of the date of this Agreement"), would restrict the power of a majority of the stock from electing all of the members of the board at the annual meeting? And if a majority of the stock could do that, what would preclude such a majority of the corporation's voting power from exercising its statutory right under Section 228 to act without a meeting? The only language in the contract itself that arguably might have that effect is paragraph 3's designation of particular individual directors "as of the time of this Agreement." But that paragraph, particularly with that phrase in mind, is far too frail a support for a conclusion that the Agreement has the legal effect of restricting the voting power of a majority of the stock indefinitely.
First, paragraph 3, in designating the directors, does not state that "the directors of the corporation are and shall remain while this Agreement remains in effect," or even "the directors of the corporation are:. . . ." Rather, it inserts the phrase "as of the date of this Agreement" and it is a rudimentary rule of interpretation that that phrase must be accorded some meaning and given some effect. The phrase plainly implies that, as of some later date, the directors may be persons other than those identified.
Moreover, the phrase "as of the date of this Agreement" is used elsewhere in the Agreement, and its context there is somewhat parallel to its use in paragraph 3. In paragraph 1, the stockholdings of the interested parties are set out "as of the date of this Agreement." It cannot be contended that paragraph 9 means that those holdings may not thereafter be modified in all the ways typically available because the Agreement itself provides a mechanism for such transfers. Rather, the plain purpose of paragraph 1 is to set forth a clarifying benchmark "as of the date of this Agreement" of just who did own the Company's stock and in what proportion. Similarly, the purpose of paragraph 3, to my mind, clearly is to set forth a clarifying designation that, as of that date, the directors were as indicated. The testimony shows that there had been discussion as to whom should serve as the necessary fourth director and this document was used, in part, as a surrogate board resolution to designate who were to serve "as of the time of the Agreement." Thus, I can find no express contractual right of a director designated in that Agreement to stay in office despite a vote of a majority of shares to exercise their Section 141 power to remove such a director from office.
Nor can I find by implication such a right, although I acknowledge that the obligation of good faith and fair dealing might well be thought to create such a right for a period immediately following execution of the Agreement. But to say that impliedly the parties must have all intended the designation of directors "as of the date of this Agreement" to include a promise not to immediately undo the board designations is not to say that the signatories must impliedly be understood to have intended the individuals designated to have the right to indefinite tenure unless it was unanimously otherwise agreed. See Katz v. Oak Industries, Inc., Del. Ch., 508 A.2d 873 (1986) (applying a test for the "discovery" of implied obligations of "good faith" in contracts).
A shareholders agreement that is said to have the effect of depriving a majority of shareholders of power to elect directors at an annual meeting, or preventing such shareholders from exercising the power conferred by Section 228 to act in lieu of a meeting, is an unusual and potent document. I need not now express an opinion as to whether a shareholders agreement may have such an effect when it is signed by all shareholders and the rights of no new shareholders without notice of it intervene. It is enough to note that an agreement, if it is to be given such an effect, must quite clearly intend to have it. A court ought not to resolve doubts in favor of disenfranchisement. See, e.g.,Williams v. Sterling Oil of Oklahoma, Inc., Del. Supr., 273 A.2d 264 (1971); Gow v. Consolidated Coppermines Corp., Del. Ch., 165 A. 136 (1933); Investment Associates v. Standard Power Light Corp., Del. Ch., 48 A.2d 501 (1948), aff'd, Del. Supr., 51 A.2d 572 (1947); Schott v. Climax Molybdenum Company, Del. Ch., 154 A.2d 224 (1959); Blasjus v. Atlas Corporation, Del. Ch., C.A. No. 9720, Allen, C. (July 25, 1988), slip op. at 52.
Delaware corporation law permits great flexibility in the construction of corporate governance mechanisms thought useful by private persons in the business situations they face. It is surely possible, by an appropriate technique, to confer upon a minority of the shares an effective veto power over the majority of the shares with respect to particular types of transactions (conventional supermajority provisions do precisely that). Unanimity, such as it is here contended is required, is an extreme example. Such a requirement constitutes a deep intrusion into the ordinary prerogative of a majority. It is commonsensical to observe that contractual obligations of the level of importance involved in this case ought to be defined in a writing and with clarity. This is especially true when a contractual obligation purports to limit or affect the ordinary prerogatives of a majority of a corporation's shareholders. The need for clarity becomes even more pressing, however, when a negotiated provision would impose a requirement of unanimity upon shareholders to take action. Such a provision approaches a form of disenfranchisement of a majority. It is appropriate to require that an agreement having that import be unambiguous. Here, the Agreement not only is not clear that it intends to disenfranchise a majority, but rather the most plausible interpretation of the language used is that it intended no such effect.
I cannot say what the subjective expectations of the signatories were when they signed this Agreement. In construing a contract, a court need not do so. It is the most reasonable meaning of the words used, when interpreted in the particular setting, including the course of negotiation and relevant commercial practices, to which courts look in order to define contractual rights and duties. If one or more of the signatories subjectively thought that this Agreement created a continuing right in the hands of particular shareholders to keep the board designated in that Agreement in place despite the vote of a majority of the stock to remove them, they were, in my opinion, mistaken. Such an agreement would be easy to draw, but was not drawn in this instance.
So concluding, I need not consider the mass of evidence admitted in an attempt to prove (or to refute) the contention that this Agreement was breached by both sides to this litigation and, in law, is unenforceable in all events.
II.
I turn then to the second reason advanced by defendants for the invalidity of the act purporting to remove them from office. The contention is that Pen Ocean "bribed" Mr. Van Reesema to grant the consent by offering him various forms of consideration and that its conduct amounts to the purchase of votes which has been and should here be held to violate public policy. Thus, defendants ask that such purchased consents be declared ineffective. The result would be that the action sought to be taken would fail for want of a majority.
For the reasons that follow, I conclude that defendants have failed to establish by a preponderance of the credible evidence the factual predicate for their legal position.
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The history of Rainbow from its formation in 1983 until the purported removal of two of its directors in November, 1987, entails a number of continuing disputes among its three shareholders. These disagreements have led to litigation in this court between Pan Ocean and the other Rainbow shareholders. See Pan Ocean Navigation, Inc. v. Rainbow Navigation, Inc., Del. Ch., C.A. No. 8674, Allen, C. (February 18, 1987). aff'd, 524 A.2d 679 (1987); Pan Ocean Navigation, Inc. v. Rainbow Navigation, Inc., Del. Ch., C.A. No. 8676 (July 8, 1987).aff'd, 535 A.2d 1357 (1987). In an effort to settle and resolve all issues among the shareholders, including but by no means limited to those in the earlier lawsuit, the parties had a series of meetings in November, 1987. Those discussions were unsuccessful and culminated in the
Ven Reesema had for some time felt aggrieved by Yonge and Dewitt, in part because, in his view, they had taken an idea that he had had for a shipping route to Guam and had exploited it through another entity (Island Shipping Lines) in which he had no interest. He was also concerned that he might be named as a defendant in a Pan Ocean initiated derivative suit.
The central factual contention of the defendants' second theory is the assertion that Mr. Van Reesema gave his consent on November 21, 1987 in exchange for consideration: the promise of a consulting agreement with Rainbow, which would provide a technique to justify a substantial cash payment to him, and the promise of a release of claims by Rainbow, among other things. Defendants' legal argument then is erected upon this foundation. It is that a consent, like a vote, is invalid if "purchased" (see Macht v. Merchants Mortgage Credit Co., Del. Ch., 194 A. 19 (1937); Hall v. Isaacs, Del. Ch., 163 A.2d 288 (1960);Chew v. Inverness Management Corp., Del. Ch., 352 A.2d 426 (1976)) or, in all events, invalid if the "sale" of a vote results in "fraud or disenfranchisement" of the remaining shareholders (Schreiber v. Carney, Del. Ch., 447 A.2d 17 (1982)) as defendants assert is the case here.
The parties disagree actively on the truth of the foundational fact. Plaintiffs, supported by Van Reesema, assert that there was no promised consideration for the granting of the consent on the 21st of November; that a later December 10 "sale" of Van Reesema's stock to Pan Ocean at a price of $250,000 with the retention of a buy-back rights, was not a transaction that was expressly or impliedly promised as payment for the consent; and that there was no consulting agreement promised, although one was discussed, and none ever given.
To defendants, the evidence establishes that Van Reesema granted his consent only after he was assured he would be paid $250,000 and would be released from potential liability. That payment then came in the form of a sham sale of stock transaction because plaintiffs realized that the "consulting agreement" might be attacked as a breach of fiduciary duty. Because the price of the stock in the "sale" was only $250,000 (when Van Reesema had been asking $800,000), because Van Reesema had a right to buy the stock back at the same price plus interest, and because there were provisions permitting him to maintain his proportional ownership in the event he exercised his option after Pan Ocean acquired any of HTI's stock in Rainbow, this December 10 sale is claimed to be no different than a secured loan (which seems largely true) and in fact to be simply an accoundation to van Reesema in order to make good on the undertaking that elicited the consent earlier (which is a different matter).
Having heard the testimony, and having evaluated the credibility of the witnesses, I conclude that neither such prospect as there was on November 21 for Van Reesema to reach en enforceable agreement with Pan Ocean concerning his claim to entitlement to $250,000 from Rainbow, nor his hope of securing a release from potential liability, nor other matters, was the principal or even a substantial motivation for his granting of the consent. Rather, for the reasons set forth below, I conclude that by the end of the day on November 18, Mr. Van Reesema had become so thoroughly disenchanted with the management of Rainbow by Messrs. Yonge and Dewitt that he thought he would be better off individually if he threw his lot in with the other shareholder. The alliance that had up until that time evolved between HTI (or more accurately, its principals. Yonge and Dewitt) and Van Reesema, which had come to exclude the third shareholder, was not ordained by God or commanded by positive law or contract. Van Reesema maintained the freedom to alter his allegiance. There was a long history of his feeling put upon by Messrs. Yonge and Dewitt. I am in no position to, nor happily do I need to, evaluate whether those feelings were justified. I am convinced they existed. The list of perceived grievances is long. The major items would include (see generally, e.g., Tr., Vol. II, pp. 25-35).
(1) The fact that he had felt himself maneuvered out of a majority interest in Rainbow which was built upon his idea;
(2) The fact that he felt himself denied access to information and, indeed, on two occasions sought legal help to get access to corporation books and records without satisfaction (Tr., Vol. II, p. 64);
(3) The fact that he could not get support for his wish to be named president of Rainbow in 1989 (Tr., vol. II, p. 31);
(4) The fact that he felt that he was not treated fairly with respect to money taken out of the enterprise. For example, he was unsatisfied with his share of an $800,000 distribution agreed to in 1984 at the meeting on board the Fin Fisher. (See Tr., Vol. II, p. 38). Further, he thought Mr. Yonge was getting too much money from Rainbow. (See Tr., vol. II, p. 187). Most importantly in this connection, he felt that a $400,000 "loan" to HTI was unauthorized and constituted a disguised dividend and he should, by reason of his proportional interest, have been paid $250,000 at the same time. (Tr., vol. II, p. 60);
(5) He keenly felt that he had been badly treated by Yonge and Dewitt concerning a proposal to initiate a shipping venture between the U.S. and Guam to carry military cargoes. This project ultimately was attempted through an HTI affiliats in which neither Van Reesema. Pan Ocean not Rainbow had an interest. He was not persuaded of the necessity or fairness of this course. (Tr., Vol. II, pp. 25-35); and
(6) By the November 18 meeting he feared that another prospective venture — a shipping business to the Azores — would similarly by maneuvered to an entity in which he would have no interest. (Tr., Vol. II, p. 81).
The critical day with respect to the consent was November 18. That was the last meeting before Mr. Van Reesema came, on November 21, to the offices of Skadden Arps, the lawyers for Murphy and Pan Ocean, prepared to sign a consent. Affidavits and other documents had been prepared by the 21st. I am persuaded that by the end of the day on the 18th. Van Reesema had decided to throw his support to Morphy and to grant a consent or take whatever legal action he was told was the proper and necessary action to put Murphy in charge of Rainbow's affairs, if Murphy asked him to do so (which was done by telephone somewhat later). The testimony on this point, when evaluated in light of the many grievances that Mr. Van Reesema imagined himself to have, is utterly convincing:
THE COURT: So that I may understand it a little better, and it hasn't come out very clearly in the testimony yet, what was the substantive state of affairs with respect to a proposed settlement at the conclusion of that meeting? [the meeting among all parties on the 18th]. I understand there was a document, I'm not sure exactly what it provided, but that it was gone over in some detail. was there a general impression at the and of that meeting that has been called the third meeting as to where things stood?
THE WITNESS: Well, no, Your Honor, because at the end of the third meeting the conversation got quite heated between me and Mr. Yonge and Mr. DeWitt regarding — primarily regarding the Azores project.
They would not confirm to me that they themselves or any of their companies would not pursue that Azores project. Just like the Guam situation.
I did make that comparison. And since they would not guarantee that they would not pursue it by themselves, the conversation got quite heated. And also Mr. Yonge at the end of that meeting, or during that third meeting was insisting on a seven year employment contract which we felt is not on at all. He started making statements, well — Up to the beginning of that third meeting I think we still would have been prepared to settle, but —
THE COURT: When you say "we" —
THE WITNESS: Well I should speak for myself. Your Honor. I was certainly prepared to settle, and I think Mr. Murphy gave that impression as well. But then —
THE COURT: With essentially buying the — the essential settlement being a buy-out of Pan Ocean's interest?
THE WITNESS: Not buying out Pan Ocean. Pan Ocean would be a shareholder, but to put all the differences behind us, make — exchange general releases, make payments to and from each other, and that everything was —
That was during the beginning of the third meeting my impression of the state of affairs. Then it got all so heated. and at the end of the third meeting I for one didn't want to have anything to do with them any more businesswise. Privately, socially I didn't have anything to do with them anyway, but that was — My conclusion at the end of that meeting was look, I don't want to have anything to do with them any more.
(Tr., vol. II, pp. 80-82).
For Mr. Murphy's part, I accept his testimony that he decided to try to replace the board on the 19th, after learning for the first time at some time on the 18th that Rainbow had taken title to the MV Rainbow Hope, despite his understanding that things would remain in status quo. while the stockholders tried to resolve all questions concerning the past and the future management of Rainbow:
We actually — the intent to meet [on the 21st] was really related to signing the shareholders consent agreements to remove the directors of Rainbow because they had taken title to the vessel which we had discovered by accident, but which we did not know until late the night of November 18th. We discovered that, and confirmed it the next day on November 19th.
That's why the meeting took place on the 21st, because we discovered that Rainbow had taken title to the Rainbow Hope from NARAD notwithstanding the objection that had been filed by pan Ocean until such time as proper controls over the vessal could be established.
So we learned that, that's when van Reesema and I communicated by phone. I called him and told him did he know this, and my recollection was he expressed surprise, and he was equally concerned that something might happen to the vessel. And we both agreed we should meet and remove the directors of the company, and arranged the meeting on the 21st at Skadden Arps.
Tr., Vol, I, at 154-55.
At the point that Van Reesema decided to cut his support of yonge and DeWitt, whether it occurred at the end of the day on the 18th or during a telephone conversation with Murphy later, he was interested in trying to maximize his personal interests. That was his stance at all pertinent times. Such a motive, however, is not suspect; it is why people engage in business in the first place. How that might be accomplished in any situation is, of course, a question that does entail the observation of legal, and sometimes fiduciary, rules.
In this instance, it was left unresolved in conversation with Murphy at the end of that day on the 18th whether Pan Ocean would agree to a consulting contract or would explore some other way to cause some payment to be made to van Reesema to allow him to feel he had been treated pro rata with HTI (who had gotten the $400,000 "loan"). But I cannot regard the prospect of any such payment to have been a substantial motivating factor for the granting of the consent on the 21st. Rather, I conclude that Van Reesema thought that he was unlikely ever to be treated fairly by Yonge and DeWitt and would, in all events, take his chances with Murphy. Thus, WhileI think Van Reesema had, when he granted the consent, the hope of even the expectation that a Pan Ocean regime would be better for him personally. I do not find that any such expectation was legally enforceable at that time (or later). Nor, more importantly, do I conclude that any hope for a specific benefit from a change in control (the hope for a $250,000 payment in some form, or a consulting agreement, or other specific benefit) was the principal motivating force for the granting of the consent.
This conclusion is inconsistent with the factual premise for defendants' "sale" of vote theory and thus I need not go further and analyze whether, if Murphy had made promises of special treatment that elicited a consent that would not otherwise have been granted, that fact constituted a fraud upon or disenfranchisement of the other stockholder in these circumstances.
III.
Lastly, I turn to the interpleader action. $65,692.31 has been deposited with this court's Register by Mr. DeWitt. That amount represents the remainder of a $100,690.31 fund accumulated by Medway Brokerage Insurance Co., a Bermuda company and a wholly owned subsidiary of Transamerican Steam-ship Corporation, an entity controlled by Mr. DeWitt. That fund was created by payments from Rainbow calculated at 5% of purchase price of shipping fear acquired from time to time by Rainbow for its vessel, purportedly with the assistance particularly the furnishing of credit of Medway.
The claim of plaintiffs is that the funds belong to Rainbow. That the payments were not for value received but represented a siphoning off of Rainbow's cash flow.
Defendants contend that they have proven that the arrangement by which Medway accumulated these funds was (1) necessary for and beneficial to Rainbow — a start-up company with no credit history; (2) was conventional in the shipping business (plaintiff Downing's own company having pursued a similar arrangement on a wholly arm's-length basis); and (3) was on terms that were completely consistent with an arm's length transaction.
Allocation of burdens in an interpleader action say sometimes be problematic since at least in some instances neither claimant may fairly be said to be in the position of a plaintiff yet both assert claims. Here, however, it seems to me that our corporation law provides both an allocation of the burden and a definition of the burden assumed. That is, I regard the Medway transaction as a self-dealing transaction that, at the instance of the corporation, must be shown to have been on terms that were entirely fair to it. In so concluding, I note that Medway is a subsidiary of Transamerican streamship corp. which in turn is controlled by Mr. DeWitt, a director of Rainbow; that while there is record support for the assertion that the arrangement was approved by the individuals who constituted the board at the time, there is insufficient evidence to permit the finding that they were fully informed and acting in the good faith pursuit of corporate interests when they so acted, if they did. (See 8 Del. C. § 144(a)(1)). Thus, the burden must be borne by those who would affirm the transaction to establish its fairness. Marciano v. Nakash, Del. Supr., 535 A.2d 400 (1987).
This they have not done. The record may be said to establish that a commercial service that provides brokerage and credit services is not unheard of. See Tr., Vol. IV. pp. 186, 191; Downing Dep. at 97. But the terms of this arrangement do not seen established as entirely fair. I am content that Mr. Hamilton, a Transamerican employee, performed valuable services for Rainbow. But those services were performed for the early voyages (for which no Medway charge was made) as well as for later ones. The independent bill sent to Rainbow for Mr. Dewitt's services contemplated the services of Mr. Hamilton (see Tr., Vol. V. pp. 51-52; Defendants' Opening Post-Trial Brief, p. 33). Thus, as the testimony indicates, the additional services of Medway were only for the provision of credit, and not for Hamilton's services.
With respect to its provision of credit, I note that Medway never had to advance funds on Rainbow's account. Rather, it gave a guarantee. Rainbow itself paid the invoices for fuel that Hamilton had arranged. The fee paid Medway was 5%. It was testified that Medway charged others that amount for credit backup but those others were also companies in which Dewitt or Transamerican had an interest and thus have not been shown to be arm's-length. A fee of 5% per transaction (when the payment terms contemplate payment in 30 days) may be viewed as a 60% annual charge. And that high fee is not for the extension of credit but for the availability of credit. It is comparable to a bank's commitment fee for a revolving line of credit (rather than its interest charge) or, more closely, to the fee that a bank might charge for the issuance of a letter of credit. Moreover, the record shows that while Rainbow was a start-up company — from almost the beginning it had a substantial positive cash flow and net profits — it would be difficult to conclude that Rainbow would have been unable to arrange an alternative source of payment guarantee at a cheaper price. I therefore cannot conclude that the fee paid to Medway for the provision of a payment guarantee was entirely fair to Rainbow. I therefore conclude, based upon this record, that that transaction may be voided by Rainbow. Since I conclude that plaintiffs do have authority to speak for Rainbow I necessarily conclude that Rainbow has now disaffirmed the transaction. As the case is an interpleader action, I need not be concerned with questions that might arise in a restitution case concerning placing defendants in their original positions (such concern would probably not be problematic on these facts in any case). Rather, it is sufficient for the court to direct the Register to pay over the amount held to Rainbow.
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An order in conformance with the foregoing may be submitted by plaintiffs on notice to all other parties.