Opinion
Civil Action No. 8417.
Date Submitted: July 2, 1987.
Date Decided: February 3, 1988.
Henry A. Heiman, Esquire of HEIMAN ABER, Wilmington, Delaware and Charles J. Hecht, Esquire of CHARLES J. HECHT, P.C., New York, Attorneys for Plaintiff.
Richard G. Elliott, Jr., Esquire and Robert J. Shaughnessy, Esquire of RICHARDS, LAYTON FINGER, Wilmington, Delaware and TOWNLEY UPDIKE, New York, New York, of Counsel, Attorneys for Defendant.
MEMORANDUM OPINION
This is the decision after trial in an action brought by Harris Landgarten ("Landgarten") against York Research Corporation ("York") seeking a determination that Landgarten is a director of York and that, either as a director or stockholder, he is entitled to inspect certain books and records of York and its subsidiary, Techland Systems, Inc. ("Techland"). For the reasons discussed hereafter, I conclude that Landgarten is not a director of York but that he is entitled to inspection of various books and records pursuant to 8 Del. C. § 220.
I.
York is a Delaware corporation engaged in the business of performing a variety of technical consulting and research services for industry, public utilities and government agencies. Its stock is traded on the over-the-counter market and in the spring of 1985 it had approximately one million shares of common stock outstanding. Techland is a New York corporation engaged in the sale of communications, software and hardware. The company was incorporated in 1982 and its stock is privately held. Landgarten, one of Techland's founders, was a substantial stockholder, a director and chief executive officer of the company. Richard Clowes ("Clowes") also was a substantial stockholder, director and officer. Both Landgarten and Clowes personally guaranteed a Techland loan from the Barclays Bank of New York in the amount of $2.15 million.
The transaction that forms the basis of Landgarten's claim to be a director of York is a Stock Purchase Agreement dated July 1, 1985 (the "Agreement"). Pursuant to the Agreement, York purchased 80% of the stock of Techland from all of Techland's stockholders. The evidence establishes that two of Landgarten's concerns during the negotiations over the stock sale were (1) that Landgarten become a director of York; and (2) that York relieve Landgarten and Clowes of their personal obligations on the Barclays Bank loan. However, the Agreement did not relieve Landgarten and Clowes of their personal guarantees and contained the following provision concerning Landgarten's interest in becoming a director:
The parties devoted a fair amount of time to the "issue" of whether the Agreement was executed on July 1, 1985 or on June 26, 1985. I find this dispute to be irrelevant to the claims presented. Accordingly, I will not evaluate the evidence as to the execution date.
8. Conditions Precedent to the Obligations of the Sellers
The obligations of the Sellers to deliver the Techland Shares shall be subject to the satisfaction and fulfillment of all the following conditions (each of which may be waived by the Sellers at their sole discretion):
* * *
D. Harris Landgarten shall have been elected as a Class B member of the board of directors of York.
In support of his claim that he is a director of York, Landgarten relies upon the above-quoted language in the Agreement and testimony as to statements purportedly made at the closing. Landgarten testified that at the closing, after the Agreement was signed, Robert Beningson ("Beningson"), the president and chairman of the board of York, announced to everyone present that Landgarten was now a director of York. Thomas H. Hesse ("Hesse"), a Techland employee who later became its chief operating officer, was one of those present at the closing and confirmed that Beningson made the statement that Landgarten would be president of Techland and a director of York. Clowes, likewise, confirmed Landgarten's recollection.
Beningson, York's attorney, Philip B. Olick ("Olick"), and most significantly, Techland's attorney, Sandor Schweiger ("Schweiger"), testified that an entirely different sequence of events took place at the closing. Beningson testified that he told Landgarten that Landgarten had not been made a director and that Olick told Schweiger the same thing. Olick testified that Schweiger asked him whether the condition precedent concerning Landgarten's election had been satisfied. Olick responded that it had not. Schweiger then held a brief conference with his clients (including Landgarten) and returned from the conference saying that his clients were ready to proceed with the closing. Schweiger confirmed this testimony. He stated that he asked either Olick or Beningson whether the condition precedent had been satisfied and for a certificate evidencing Landgarten's position as a director. Schweiger was told that the condition had not been met and testified that Landgarten asked why he had not been elected a director. According to Schweiger, Beningson replied that it would be inappropriate to elect someone a director of a public corporation prior to the consummation of the transaction. Schweiger also testified that he "huddled" with Landgarten after being advised that Landgarten had not been elected a director. However, on the ground of attorney/client privilege, Schweiger gave no testimony as to the subjects discussed during the "huddle."
As between the two sets of witnesses, I find the testimony of defendant's witnesses to be more credible. First, defendant's testimony included the statements of the attorneys for both sides in this transaction. Landgarten tried to impeach the testimony of his attorney by suggesting that Schweiger is beholden to York for the payment of his outstanding legal fees. However, I am not prepared to conclude that an attorney would lie under oath, thereby jeopardizing his entire career, solely to recover attorney's fees in the amount $45,000. Moreover, Landgarten went to great lengths to establish that, during the negotiations, his election to the York board was an important requirement. Yet, according to his testimony about the closing, it was not until after the Agreement had been executed that he was told that he was a York director. I find it difficult to believe that Landgarten did not discuss this issue either with his own attorney or the representatives of York before signing the Agreement.
Other facts cast doubt on Landgarten's testimony. First, although he claims that he was made a director of York on or before July 1, 1985, for six months thereafter Landgarten never received any notices of board meetings and never inquired of Beningson as to whether Landgarten was, in fact, a director. Second, at the closing Landgarten reviewed for about fifteen minutes a private placement memorandum that included the proxy statement for the June 14, 1985 York stockholders' meeting. Landgarten understood that the York stockholders were electing directors at that meeting and thought that his name would be included as a nominee. The proxy statement identifies the three people standing for election and Landgarten is not one of them. When questioned about this, Landgarten's only response was that he was unsure what process was involved in becoming a director.
As noted earlier, the Agreement specifies, as a condition precedent, that Landgarten "shall have been elected" to a position on the York board. Landgarten claims that this contract provision creates an affirmative obligation on the part of York to make him one of its directors. The Agreement states that it is governed by and should be construed in accordance with the laws of the State of New York. Landgarten contends that, even if defendant's version of the relevant facts were accepted, he would still prevail on his claim that he is a director of York.
Paragraph 13 I of the Agreement provides that it is the entire agreement between the parties and may only be amended or supplemented by a writing signed by all of the parties. After characterizing the events that occurred at the closing as an oral modification of the Agreement, Landgarten argues that the modification was ineffective because Paragraph 13 I precludes the use of parol evidence to vary any of the contract terms. In addition, Landgarten claims that the oral modification fails for lack of consideration. Finally, he argues that York has not sustained its burden of proving, by clear and convincing evidence, that Landgarten waived the condition precedent.
The cases and statutes on which Landgarten relies, however, do not support his claim. See New York General Obligations Law § 15-301; Kapplow v. Abelard Schuman Ltd., N.Y. Supr., 193 N.Y.S.2d 931 (1959); Rose v. Spa Realty Associates, N.Y. Ct. App., 366 N.E.2d 1279 (1977); Elmsford Sheet Metal Workers, Inc. v. Shasta, N.Y. Supr., 477 N.Y.S.2d 391 (1984). Section 15-301 of the General Obligations Law prohibits the modification of written agreements by executory oral modifications, not oral modifications that have been acted upon. Moreover, the parties are free to waive a contractual prohibition against oral modifications. Rose v. Spa Realty Associates, 366 N.E.2d at 1283. See also Elmsford Sheet Metal Workers, Inc. v. Shasta, 477 N.Y.S.2d at 392 (A provision in an agreement requiring all modifications to be in writing is enforceable "absent an executed modification, waiver or estoppel. . . .")
A waiver, by contrast to a contract modification, does not require either a new contract or new consideration. It is the intentional and voluntary relinquishment of known rights.Kapplow v. Abelard Schuman Ltd., 193 N.Y.S.2d at 933; see also Klein v. American Luggage Works, Inc., Del. Supr., 158 A.2d 814 (1960). The party claiming a waiver has the burden of proof on that issue. "The evidence must have probative force sufficient to prove that there was in fact an intention to waive the right or benefit — a voluntary choice not to claim it."Ibid, quoting Alsens American Portland Cement Works v. Degnon Contracting Co., N.Y. Ct. App., 118 N.E. 210, 211 (1917).
Based upon the foregoing, I conclude that, as a matter of New York law, Landgarten's claim must fail if York succeeded in establishing, by a preponderance of the evidence, that Landgarten knowingly and voluntarily relinquished the condition precedent before executing the Agreement. For the reasons discussed above, I find that Landgarten knew that he had not been made a York director, but decided to proceed nonetheless. He and his attorney had a private discussion after learning that the condition had not been satisfied and then went forward with the closing. Landgarten could have refused to sign the Agreement. Therefore, his decision was voluntary. Since I am satisfied that York established that Landgarten waived the condition precedent, I conclude that Landgarten is not a director of York and has no enforceable right to be made a director.
II.
Although I have now held that Landgarten is not a director of York, he remains a stockholder and, as such, may inspect the stocklist and books and records of York upon a proper showing. The statute requires that the stockholder make written demand under oath stating a proper purpose for the inspection of the requested corporate documents. 8 Del. C. § 220(b). In the case of a demand to inspect a stocklist, the burden is on the corporation to establish that the stockholder seeks the stocklist for an improper purpose. Where the demand is for other corporate books and records, the stockholder has the burden of establishing a proper purpose, i.e., a purpose reasonably related to his interest as a stockholder. 8 Del. C. § 220(d) and (b).
If a stockholder establishes a proper purpose for the inspection of books and records, any secondary purpose or ulterior motive he may have is irrelevant. Skouras v. Admirality Enterprises, Inc., Del. Ch., 386 A.2d 674, 678 (1978). However, the court will consider any secondary motive and the need to protect the company's legitimate interest in fashioning relief.C M M Group, Inc. v. Carroll, Del. Supr., 453 A.2d 788 (1982). Finally, inspection will be granted only with respect to those books and records that are "essential and sufficient" to the stockholder's proper purpose. Helmsman Management Serv. v. A S Consultants, Inc., Del. Ch. 525 A.2d 160 (1987).
Landgarten's amended demand seeks twenty-one categories of documents, primarily relating to Techland's operations, and York's current stock ledger. The stated purpose for the stocklist is to communicate with other stockholders to solicit proxies for the election of directors and, if appropriate, to advise stockholders of corporate mismanagement and improprieties. The purpose for the books and records is to investigate the likelihood of corporate mismanagement. Landgarten devotes seven pages of his demand to an explanation of the basis for his concern about improper transactions. Among other things, he asserts that Techland has not been paying employee withholding taxes to the appropriate taxing authorities; York artificially inflated its earnings and deflated Techland's earnings during 1985 by the transfer of certain Avatar communications boards to Techland; and York issued large blocks of stocks and warrants to Beningson without receiving any payment.
York raises a variety of defenses to Landgarten's § 220 claim. First, it argues that Landgarten has not established that his demand complies with the formal requirements of § 220. Specifically, York argues that Landgarten is seeking Techland documents without having made a demand on Techland, a New York corporation. York is correct that no demand was made on Techland. The question is whether Landgarten, as a York stockholder, may obtain documents from York's subsidiary.
Normally, the separate corporate existence of a subsidiary will not be disregarded. Neither total stock ownership nor the existence of common management, without more, is sufficient to pierce the corporate veil. Skouras v. Admirality Enterprises, Inc., supra. Rather, there must be a showing of fraud or that the subsidiary is the "alter ego" of the parent. Pauley Petroleum, Inc. v. Continental Oil Co., Del. Ch., 231 A.2d 450 (1967), aff'd, Del. Supr., 239 A.2d 629 (1968). Thus, inMartin v. D.B. Martin Co., Del. Ch., 88 A. 612 (1913), where the court found that the subsidiaries had been formed for fraudulent purposes, stockholders of the parent corporation were granted access to the subsidiaries' books and records. InSkouras v. Admirality Enterprises, Inc., supra, by contrast, plaintiff was denied inspection of the subsidiaries' records where the companies maintained separate books and records, had separate boards of directors and, apparently, the court was not satisfied that plaintiff had made a showing of possible fraud.
Here, as in Skouras, the evidence indicates that Techland maintains separate books and records and has its own board of directors. In addition, it is undisputed that Techland has been in precarious financial condition for several years. Thus, Landgarten's evidence that Techland has been delinquent in paying its creditors and generally cut back its operations does not suggest wrongdoing. Accordingly, as a general matter, I find that Landgarten has not presented evidence that would support the inspection of Techland's documents. However, there are two matters as to which evidence was presented suggesting the possibility of fraud. First, it appears possible that certain Avatar communication boards were transferred from York to Techland at an artificially inflated price in order to justify the payment of a $200,000 negotiating fee to Beningson. Second, there was testimony that funds withdrawn from Techland for the purpose of paying executive payroll exceeded the amount of that payroll. As to these matters, I find that Landgarten may inspect Techland's books and records.
York next argues that Landgarten's stated purpose is not his true purpose. According to York, Landgarten's sole motivation is to harass the company into releasing him from his $2.15 million personal guarantee on the Barclays loan and other potential liabilities relating to the sale of his Techland stock in 1985. It is clear from the testimony that Landgarten is concerned about his continuing exposure under the personal guarantee and that he is extremely dissatisfied with the Techland/York business combination. However, I am satisfied that Landgarten's primary purpose is the proper purpose stated in his demand.
Finally, York raises the defense of unclean hands, arguing that Landgarten and his witnesses lied at trial. It is not at all clear that such a defense may be raised in a § 220 proceeding.See DPF, Inc. v. Interstate Brands Corp., Del. Ch., Civil Action No. 4856, Quillen, C. (October 2, 1975). However, even if the doctrine were applicable, the facts here would not warrant its invocation. As the Court noted in Skoglund, the defense of unclean hands is a rule of public policy. Skoglund v. Ormand Industries, Inc., Del. Ch., 372 A.2d 204, 213 (1976). To prohibit Landgarten from obtaining documents that may establish mismanagement and wrongful self-dealing on the basis of Landgarten's trial testimony would not serve public policy.
The remaining matter to be decided is which categories of documents Landgarten will be permitted to inspect. Although the desire to investigate possible mismanagement is a proper purpose, Landgarten must present some evidence to justify his concerns. I find that he has done so with respect to certain of the following categories of documents, as limited in the discussion of each category:
Demand No. 1. York Bylaws. York has already produced a copy of its bylaws to Landgarten, but there remains some question as to whether the copy he was given is both current and complete. Since York has recognized Landgarten's right to inspect the bylaws, it only remains for York to represent to Landgarten that his copy is complete and current. If it would be simpler for York to present another set of the bylaws, that procedure would be acceptable.
Demand Nos. 2 and 3. Minutes of York board meetings and executive committee meetings. Inasmuch as Landgarten was not a stockholder of York before July 1, 1985, inspection will be required only from that day forward.
Demand No. 4. Records relating to transfer of assets by York to Techland. I find that the only evidence relating to such transfers that is of questionable propriety concerns the Avatar communication boards discussed above. Accordingly, York will be required to allow inspection of all corporate records relating in any way to that transaction.
Demand No. 5. Records relating to the receipt of funds by York, its officers and directors and their families and the transfer of funds to Techland. I find that the evidence supports inspection of this category of documents only to the extent that they relate to transfers from the executive payroll account from July, 1985 to the present and any loans made to officers, directors and their families.
Demand No. 6. Records of York's dealings with entities that have given licenses to Techland. In light of Techland's precarious financial condition, I find that Landgarten's evidence that Techland has not made all payments to its licensors does not, standing alone, justify inspection of these documents.
Demand No. 7. Documents filed with the SEC. These documents have been produced.
Demand No. 8. Minutes of stockholders' meetings since June 1, 1985. It appears from the evidence that Landgarten is interested in obtaining the minutes of the June 14, 1985 stockholders' meeting not to investigate possible corporate mismanagement but to pursue his claim that he is a director. Accordingly, no inspection of this category of documents will be required.
Demand No. 9. Techland's books and records since July 1, 1985. Plaintiff has conceded that this demand is overbroad and has withdrawn it.
Demand No. 10. Bank statements and related documents for various Techland bank accounts. This demand, likewise, is overbroad. Landgarten may not inspect the subsidiary's bank records except as they relate to specific transactions as to which inspection is being ordered.
Demand No. 11. Documents relating to Beningson's employment contract. These documents have been produced.
Demand No. 12. Documents relating to York's loans to Beningson during York's 1985 fiscal year. Since there is some indication that Beningson obtained interest-free loans from the company he controlled, I find that Landgarten has established the right to inspect all documents in this category.
Demand No. 13. Documents relating to the employment of Beningson's daughter. Plaintiff has not made a showing of impropriety that would entitle him to inspect this category of documents.
Demand No. 14. Documents relating to the issuance of stock to Beningson. Since the evidence indicates that any questionable transactions relating to such stock issuance occurred prior to the time that Landgarten became a stockholder of York, I will not require York to produce documents in this category.
Demand No. 15. Documents relating to Techland's refusal to pay royalties of Software Systems, Inc. For the reasons stated in connection with Demand No. 6, no inspection will be required in this category.
Demand No. 16. Copies of Forms 3 and 4 filed with the SEC by York directors. York's only objection to this demand is that the documents requested are required to be filed by the directors, not the corporation. Accordingly, if York has copies of such documents in its own files, they must be made available to Landgarten.
Demand No. 17. Copies of communications and documents relating to the payment of taxes. For the reasons discussed in connection with Demand No. 6, these documents need not be produced.
Demand No. 18. Documents relating to York's dealings with K M Holding. Landgarten introduced no evidence in support of this demand. Thus, these documents need not be provided.
Demand No. 19. Documents relating to Beningson's acquisition of funds from York to pay for shares of Avatar stock. Since it appears from the evidence that this transaction occurred prior to July 1, 1985, Landgarten is not entitled to inspect these documents.
Demand No. 20. Documents relating to the charge of management fees by York to Techland. Since it does not appear that Landgarten's interest as a York stockholder is affected by this transaction, he is not entitled to inspect this category of documents.
Demand No. 21. Documents relating to fees charged by York to the York Research Computer Partnership. Landgarten failed to introduce evidence that would support his interest in obtaining these documents and, accordingly, they need not be made available for inspection.
Demand No. 22. York's most current stock ledger and its stock ledger as of April 29, 1985. York has complied with the second portion of this demand, but Landgarten is still entitled to a current stock ledger.
For each category of documents as to which the demand was upheld in whole or in part, I find that Landgarten is entitled to inspect relevant documents generated on or before the date of this decision. As a matter of equity, I find that it would be unreasonable to require Landgarten to make another demand to obtain documents generated during the pendency of this litigation.
IT IS SO ORDERED.