Opinion
Civil Action No. 8674.
Submitted: June 19, 1987.
Decided: July 8, 1987.
Edward P. Welch, Esquire, and Andrew J. Turezyn, Esquire, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, Wilmington, and William P. Frank, Esquire, and Richard S. Simon, Esquire, of SKADDEN, ARPS, SLATE, MEAGHER FLOM, New York, Attorneys for Plaintiff.
John H. Benge, Jr., Esquire, of ALLMOND, EASTBURN AND BENGE, Wilmington, and Theodore W. Rosenak, Esquire, of ZUCKERT, SCOUTT, RASENBERGER JOHNSON, Washington, D.C., Of Counsel, Attorneys for Defendant.
MEMORANDUM OPINION
Section 220 of the Delaware General Corporation Law affords to stockholders a right, upon making a demand in the proper form, to inspect a corporation's books and records for any proper purpose. The myriad cases enforcing or refusing to enforce rights claimed under that provision of law deal largely with the question whether a proper purpose for such inspection has been shown. Whether the person asserting the right of inspection is a stockholder entitled to such an inspection is a question that has engendered very little litigation because the statute contains a clear and easily applied test. Subsection (a) of section 220 provides that "as used in this section, `stockholder' means a stockholder of record." And the "record" referred to is identified with equal clarity. Section 219(c) provides that "the stock ledger shall be the only evidence as to who are the stockholders entitled to examine . . . the books of the corporation."
This books and records case is unusual in that there is no issue concerning either the propriety of the asserted purpose of the inspection or the formal correctness of the demand. Rather, the ultimate issue is whether plaintiff occupies a status entitling it to rights under section 220. That issue is not easily resolved by the clear language of Section 219 because the defendant has maintained no stock ledger and thus, of course, plaintiff is not a stockholder of record as defined by that section.
Earlier in this litigation, defendant, Rainbow Navigation, Inc., moved for a summary judgment of dismissal on the ground that plaintiff, Pan Ocean Navigation, Inc., was not a Rainbow "stockholder." In denying that motion, the court acknowledged the utility of a strict construction of the statutory language limiting rights under section 220 to persons registered as stockholders on a corporation's stock ledger:
Corporations ought not have to guess as to the identify of the person making demand nor, under the statute, should a corporation be put to the expense and trouble that would be occasioned by an investigation into such a person's status. The statute's requirements . . . provide a quick, fair and dependable way for the company to evaluate that aspect of a demand.Pan Ocean Navigation, Inc. v. Rainbow Navigation, Inc., Del.Ch., Allen, C., Civil Action No. 8674 (February 18, 1987). The corporation's motion was nevertheless denied. It was held that it would be inequitable to foreclose all persons from the rights afforded by section 220 simply because no person was registered as a stockholder on the company's stock ledger. The corporation's own inaction has deprived it, and this court, of the administrative benefits that the statutory scheme envisions. It was held that, in these circumstances, a trial would be necessary to determine whether Pan Ocean should be deemed, in equity, a stockholder of record of Rainbow. That trial has now been held and this is the court's opinion in support of the conclusion that plaintiff is entitled to inspect the books and records of Rainbow as permitted to stockholders under section 220.
I.
Pan Ocean is a Nevada corporation wholly owned by a trust — a pension plan — established by a labor union. The trust is the Master, Mates and Pilots Individual Retirement Account Plan ("IRAP"). As of April, 1983, the IRAP entered into a discretionary Investment Management Agreement with Tower Asset Management, Inc. contemplating the investment by Tower Asset of the IRAP's trust funds or some of them. Tower Asset was one of three entities (the others being Tower Capital Corporation and Tower Securities Corp.) utilized by Andrew Levy and others in the conduct of business including serving as an investment advisor.
Rainbow is a Delaware company formed July 15, 1983 to engage in the business of operating a liner service, primarily carrying U.S. military cargos, between the United States and Iceland. Its certificate of incorporation authorized the issuance of 1,000 shares of common stock. According to Rainbow's then outside legal counsel (PX 4), on March 1, 1984, 300 shares of Rainbow common stock were issued to HTI Ships, Inc. (a company controlled by Mr. Mark Yonge and Mr. Ted DeWitt) and 200 shares issued to Mr. N.H.S. Van Reesema.
I put the matter this way because I find in the record no corporate resolutions or minutes of board action relating to the issuance of any stock.
Rainbow was in early 1984 little more than an idea in the mind of Mark Yonge. It needed seed money. On March 28, 1984 Rainbow entered into an agreement with Tower Asset providing that if Tower Asset purchased, on behalf of its clients, two $300,000 Rainbow debentures, the purchaser would be entitled to purchase 250 shares (out of 1,000) of Rainbow stock. Thereafter, the IRAP, acting through Tower Asset, lent $300,000 to Rainbow in the form of the purchase of a debenture.
On June 26, 1984 Tower Asset requested Rainbow's attorney to issue 250 shares "per the March 28, 1984 agreement" to the IRAP. On July 19, 1984 Rainbow's counsel prepared a certificate for 250 shares in the name of Tower Securities, Inc. Apparently for reasons relating to the federal ERISA statute ( 29 USC § 1001 et seq.) Mr. Levy, as agent of the IRAP, determined it would be best for the IRAP's interest in Rainbow to be held through Pan Ocean, a corporation wholly owned by the IRAP. On July 25, 1984 Mr. Yonge, president of Rainbow, wrote to Rainbow's outside legal counsel as follows:
I am returning share certificate no. 4 [for] 250 shares originally issued to Tower Securities, Inc. Please reissue shares in the name of Pan Ocean Navigation, Inc., address same as Tower in New York City.
No certificate was prepared by Rainbow's counsel in accordance with these instructions.
A document dated January 1, 1985 (the Shareholder Agreement) signed by Mr. Yonge for HTI Shipping, Mr. Van Reesema, and Mr. Levy (as president of Pan Ocean) set forth provisions governing the management of Rainbow. The Shareholder Agreement also provided:
The parties agree and confirm that as of the date of this Agreement the stock of Rainbow is owned as follows:
HTI 450 shares Van Reesema 250 shares Pan Ocean 300 shares
The Shareholder Agreement has not been amended or superseded nor has a material transfer of stock among those persons occurred.
Nevertheless, in August, 1985 Rainbow prepared two certificates for 150 shares each in the names of the IRAP and Tower Capital Corp. These certificates were not delivered to anyone but were kept in Rainbow's safe where they remain. It has been determined in litigation in the United States District Court for the Southern District of New York that no Tower entity has or had a beneficial interest in Rainbow but that any legal interest it may be deemed to have or have had is held for the benefit of the IRAP.
The foregoing constitute the facts relevant, in my opinion, to a determination of the question whether Pan Ocean may, in equity, be deemed a shareholder of Rainbow entitled to inspect its books and records. A second issue tendered by defendant is whether the interest in Rainbow owned by the IRAP through its investment advisor or Pan Ocean was validly pledged and whether, if so, that pledge was effectively foreclosed terminating the IRAP direct or indirect equity interest in Rainbow. I will defer a statement of those facts now and will turn instead to the reasons I conclude that Pan Ocean is (or at all events was) an equitable stockholder of record of Rainbow.
II.
Rainbow's principal argument that Pan Ocean was never a Rainbow stockholder is that the IRAP was considered by everyone to be the shareholder and, it contends, that if the IRAP was the shareholder then Pan Ocean was not. Plaintiff denies the premise of this argument pointing to the Shareholder Agreement and the November 22, 1985 opinion of Rainbow's legal counsel (PX4) which treat Pan Ocean and not the IRAP as the shareholder, in support of that position.
I regard the attempted dichotomy between the IRAP and Pan Ocean as unhelpful in this setting where rights under section 220 are asserted and there is no stock ledger to resolve questions of record ownership. Indeed, the distinction between the IRAP and Pan Ocean, which may be very material in some contexts, is highly artificial in this setting. While the various participants sometimes referred to the shares as belonging to Pan Ocean and sometimes thought of or referred to them as the IRAP's, in the context in which most or all of the contemporaneous statements concerning stock ownership were made, a distinction between the IRAP and Pan Ocean was immaterial. For example, whether the successor investment advisor thought of the investment as being the IRAP's (which, of course, it was either directly or indirectly) and expressed this in a way consistent with their view that the IRAP was a "shareholder" deserves very little weight if the issue is whether Pan Ocean was a shareholder for purposes of section 220. Nor does the legal opinion of Rainbow's lawyer, Mason, (PX4) that Pan Ocean owns 30% of Rainbow go far to establish that the IRAP was not a "shareholder"; Mason was focusing on ownership interests among the economic interests involved in the venture, of which the IRAP/Pan Ocean was one, not on the question whether it was the IRAP or Pan Ocean which was "the stockholder."
The Shareholder Agreement (PX1) that is signed by each of the investor interests, however, does seem to me a document of some formality and deserving of substantial weight on this question. It, too, identified interests among investor groups, but the IRAP, who had the authority to cause its interest to be held by its subsidiary, did act in that important instance as if it had done so and all other shareholders acknowledged that fact by entering an agreement with Pan Ocean as a stockholder of Rainbow.
More important, however, to my analysis than the question how actors variously referred to the IRAP/Pan Ocean interest in Rainbow, are two uncontested facts. First of these is the fact that Pan Ocean is wholly owned by the IRAP and the second is the admission by Rainbow that the IRAP is a stockholder of Rainbow. Thus, (putting aside for the moment questions concerning the alleged pledge by Tower Capital Corp. of the IRAP/Pan Ocean shares and the later alleged foreclosure on that collateral) Rainbow admits that the IRAP, at any rate, possessed the rights of a stockholder. Its contention here is, thus, the technical one: that the wrong party made the demand to inspect its books and records. It is urged that the wholly-owned IRAP subsidiary was not the correct party to make that demand, rather, the IRAP itself was (insofar as it is willing to concede that any person might be thought to have any possible rights under section 220 when no person was listed on a stock ledger).
As indicated in the February 18 memorandum opinion in this matter, technicalities may sometimes be very material in a books and records case, because those technical matters (the requirement of an oath, for example, or that the person making demand be a stockholder of record or, if an agent of such a person, that the power of attorney or other writing authorizing the agent to act be submitted) are not simply formalistic, but are functional in each instance. The requirement that a demand be made by or in the name of a record stockholder is designed to provide specific administrative benefits to a corporation faced with such a request. Likewise, the proposition that a demand made by the parent of or a subsidiary of a record shareholder in its own name would be unavailing is supported by similar practical considerations.
But, once the court is forced to inquire into the underlying facts concerning stock ownership because the corporation has maintained no stock ledger as contemplated by sections 219 and 220, there is, in my opinion, little or no continued utility in insisting that a valid demand is one made by a shareholder rather than a wholly-owned subsidiary of the shareholder. The purpose of that distinction — affording ease and certainty to the corporation in evaluating 220 demands — can in no event be served in such circumstances and the distinction therefore loses importance. Accordingly, since Rainbow contends that the IRAP "owned the disputed interest in Rainbow" and acknowledges that Pan Ocean is wholly owned by the IRAP, I can perceive no reason grounded in practical concerns or equitable considerations to deny to the financial interests represented by the IRAP and Pan Ocean a right to inspect Rainbow's books and records in pursuit of a concededly proper purpose.
In so holding, I do not mean to imply that I find the IRAP to be "the stockholder" for these purposes. I, rather, think that if it were necessary (and sensible) for these purposes and on this record to choose which of the IRAP or Pan Ocean should, to the exclusion of the other, be afforded rights under section 220, the record would point to Pan Ocean. See Brown Dep. p. 22; Levy Dep. p. 15; PX1; PX4. However, such a distinction, where there is no stock ledger and where other corporate formalities have been ignored, seems too artificial to offer the soundest basis for decision.
III.
I turn now to Rainbow's contention that the stock owned by the IRAP through Pan Ocean was pledged on October 30, 1985 by Andrew Levy (acting with authority) to secure a $183,000 loan made by Rainbow to Sea-Bridge Express, a wholly-owned subsidiary of Pan Ocean, and that the Rainbow stock securing that loan was foreclosed upon, terminating any stockholder interest that the IRAP or Pan Ocean may have had in Rainbow.
This contention raises a welter of factual issues including whether the $183,000 was a loan or not, whether the claimed security interest was given for consideration, and whether Mr. Levy had authority to grant a security interest in the stock in question at the time he purported to do so. These questions, however, need not be resolved as I conclude that, even assuming resolution of them in favor of Rainbow, the record still shows that no valid security interest in all of the stock owned by the IRAP through Pan Ocean was created and, even if one assumes such an interest came into existence, it was not effectively foreclosed.
Legal analysis of this issue begins with the observation that the IRAP/Pan Ocean stock interest in Rainbow was uncertificated as that term is used in Article 8 of the Delaware Uniform Commercial Code, 6 Del.C. § 8-101 et seq. Generally, a certificated security is evidenced by an instrument "issued in bearer or registered form." 6 Del.C. § 8-102(1)(a)(i). An uncertificated security is a share or other ownership interest in a corporation not evidenced by an instrument, 6 Del.C. § 8-102(1)(b); it is essentially a book entry on the issuer's stock ledger and transfers of interests, including security interests, in such stock may be effected by registration, 6 Del.C. § 8-108. A security of a kind or class typically represented by an instrument may, nevertheless, be treated as uncertificated in some instances:
The parties have stipulated that the validity of the pledge is to be governed by Delaware law.
If a certificated security has been retained by or surrendered to the issuer or its transfer agent for reasons other than registration of transfer, other temporary purpose, payment, exchange or acquisition by the issuer, that security shall be treated as an uncertificated security for purposes of this Article.6 Del.C. § 8-102(1)(c). The Pan Ocean/IRAP ownership interest in Rainbow, if it was intended by the issuer to be represented by an instrument, was nevertheless represented by a certificate that was either never issued or was "retained by . . . the issuer."See supra pp. 4-6. Thus, that interest must be treated for purposes of Article 8 as an uncertificated security. See Bankhaus Hermann Lampe KG v. Mercantile Safe Deposit Trust Co., 466 F.Supp. 1133, 1142-44 (S.D.N.Y. 1979).
In addressing the question whether a valid security interest was created, we turn first to the provisions of Article 9 of the Uniform Commercial Code which generally governs the creation, perfection and enforcement of security interests in property. That article broadly applies to "any transaction (regardless of its form) which is intended to create a security interest in personal property . . . including . . . instruments [and] general intangibles. . . ." 6 Del.C. § 9-102(1)(a). Security interests in securities are not excluded from its terms. See 6 Del.C. § 9-104. Thus, in the first instance, we turn to Article 9 to determine the validity and effectiveness of the claimed security interest.
Section 9-203 governs the formal requisites of a security interest. It provides in part that:
(1) Subject to the provisions of . . . Section 8-321 on security interests in securities . . . a security interest is not enforceable . . . and does not attach unless:
(a) The collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral . . .;
(b) Value has been given; and
(c) The debtor has rights in the collateral. (emphasis added)
Debtor is defined in § 9-105(d) and includes, where the debtor of the obligation secured is not the owner of the collateral, the owner of the collateral.
The referenced section, 8-321, provides in part:
(1) A security interest in a security is enforceable and can attach only if it is transferred to the secured party . . . pursuant to a provision of Section 8-313(1).
* * *
(3) A security interest in a security is subject to the provisions of Article 9, but:
(a) No filing is required to perfect the security interest; and
(b) No written security agreement signed by the debtor is necessary . . . except as provided in paragraph (h), (i) or (j) of Section 8-313(1).
Section 8-313(1) determines when a transfer of a security to a purchaser (including security interests in a security) occurs. With respect to uncertificated securities its provisions include the following:
(1) Transfer . . . to a purchaser occurs only:
* * *
(b) At the time the transfer, pledge or release of an uncertificated security is registered to him . . .;[or]
* * *
(h) [At the time written notification of the transfer signed by the debtor (in the case of a newly created security interest) is received by designated persons with responsibilities or rights with respect to the collateral] [or]
(i) With respect to the transfer of a security interest where the transferor has signed a security agreement containing a description of the security, at the time new value is given by the secured party.
Subparagraph (j) has no arguable relevance to this case.
Reading these provisions together, it appears clear that, in this instance, involving an uncertificated security in which no registration of a pledge was made on the issuers books, the purported pledge is not enforceable unless there is a writing signed by the the owner of the collateral reasonably identifying the property subject to the lien.
If the stock were deemed "certificated," the requirement of Section 9-203(1)(a) would not be satisfied by Rainbow's possession of certificates since, in all events, those certificates are not held "pursuant to agreement."
Rainbow claims that the requirement of section 9-203(b) of a writing is satisfied by an October 30, 1985 letter signed by Andrew Levy on the letterhead of Tower Capital Corporation. (PX8.) That letter forwarded a Promissory Note of Sea-Bridge Express together with an unconditional guaranty of Pan Ocean. It concluded with the following:
Tower Capital Corporation hereby pledges its stock interest in Rainbow Navigation, Inc. as security for the payment of the aforementioned promissory note.
Sincerely,
TOWER CAPITAL CORPORATION
Andrew A. Levy President
As of October 30, 1985 Mr. Levy served as president of Pan Ocean as well as each of the Tower entities. Very shortly thereafter he was removed from office as Pan Ocean's president and Tower Asset Management was removed as investment advisor to the IRAP. It is contended that the October 30 writing was back-dated and that Mr. Levy had no authority to execute a security agreement on behalf of IRAP or Pan Ocean at the time the document was actually signed. Assuming that the October 30 document is accurately dated, it nevertheless does not satisfy the requirements of section 9-203(1)(a), in that the document does not contain an adequate "description of the collateral."
The description of collateral in a security agreement should be written with reasonable clarity so that those with an interest in the matter, potential future lenders and reviewing courts, need not hazard a guess as to just what property was intended to be covered. See 6 Del.C. § 9-110; United States v. First National Bank in Ogallala, 470 F.2d 944 (8th Cir. 1973). This level of clarity is absent in the October 30 writing. What is a reasonable reader to conclude was intended to be covered by the phrase "Tower Capital Corporation['s] . . . stock interest in Rainbow"? Recall that in mid-July, 1984, Mr. Yonge, the recipient of the October 30, 1985 letter, had sent a single 250 share certificate registered to Tower Securities, Inc. to Rainbow's counsel with instructions to re-issue it to Pan Ocean. Recall also that later (as of January 1, 1985) Mr. Levy, the signatory of the October 30 letter, had (along with Mr. Yonge) signed the Shareholders Agreement which "confirmed" that, as of January 1, 1985, the stockholders of Rainbow were HTI Ships, Inc., N. Van Reesema and Pan Ocean, but that thereafter Rainbow had in its possession an unissued certificate for 150 shares inscribed with the name of (but never delivered to) Tower Capital Corporation. In these circumstances, one cannot with any confidence know from the description of the collateral contained in the claimed security agreement what is the body of collateral in which an interest is purportedly created. Even if parol testimony were to be considered, I could not conclude that the parties each intended the language used to embrace all of the stock owned indirectly by the IRAP. See Levy Dep. at 150-55. The description of the covered collateral is fatally obscure.
I therefore conclude that Rainbow has not acquired a valid security interest in the Rainbow stock owned by the IRAP through Pan Ocean. Moreover, even assuming that there was such a valid security interest, the record establishes that Rainbow did not take the steps necessary to validly foreclose upon that interest. Specifically, it did not comply with the requirement of section 9-505(2) which requires a secured party "in possession" of collateral to give notice to a debtor of an intention to retain the collateral in satisfaction of the debt in default. While I have earlier indicated the view that Rainbow was not in possession of the collateral "pursuant to an agreement," nevertheless, as the issuer of uncertificated stock, with concomitant power (with or without right) to unilaterally transfer legal title to its stock, the strictures of 9-505(2) must be read to extend to it. The power to transfer legal title, in other words, renders an issuer "in possession" of its own stock for purposes of 9-505(2).
Rainbow does not seem to contest this, but, rather, points to its letter of February 14, 1986 (PX9) as satisfying the notice requirement of 9-505(2). That writing provided in pertinent part:
If payment [on the Sea-Bridge Note] is not received on or before five days from receipt of this notice, legal action will be taken to collect notes together with accrued interest and costs including action against collateral provided for in latter dated October 30, 1985. . . .
This writing does not give the debtor notice that the secured party "propose[s] to retain the collateral in satisfaction of the obligation." 6 Del.C. § 9-505(2). It threatens legal action against the collateral, but does not specify what type of action is threatened. I cannot read this communication as serving the function that 9-505(2) intends. At least when the rights of no third party purchaser from a secured party in possession intervene, failure to comply with the requisites of 9-505(2) should be read to preclude the effectiveness of the purported foreclosure. Fletcher v. Cobuzzi, 499 F.Supp. 694, 699 (W.D.Pa. 1980); In re Sports Autos, Inc., 6 U.C.C. Rep.Serv. 991; J. White R. Summers, Uniform Commercial Code § 26-8 (2d ed. 1980).
Finally, I have considered and reject Rainbow's argument that no consideration was paid to support the claim of the IRAP through Pan Ocean to the stock in question, its argument of collateral estoppel (the federal court did not attempt to focus upon relative rights of IRAP and Pan Ocean inter se) and its vague argument of unclean hands.
For the foregoing reasons, I conclude that Pan Ocean, while not a stockholder of record of Rainbow, nevertheless is, in equity, entitled to be so treated for purposes of section 220. I am satisfied as well that the other elements of a proper section 220 demand have been satisfied in this instance. I will, therefore, direct the parties to confer and attempt to agree on a form of implementing order. Failing such agreement, plaintiff may submit an order on notice.