Summary
In Smith v. Biggs Boiler Works Co., 32 Del. Ch. 147, 82 A.2d 372, it was held that a voting trust agreement could not be enforced where the parties thereto contemplated the establishment of a present trust, but the certificates which were to constitute the res were held in escrow by a third party upon conditions which might never be fulfilled.
Summary of this case from In re Farm Industries, Inc.Opinion
July 6, 1951.
PETITION under Section 31 of the General Corporation Law, Rev. Code 1935, § 2063, seeking to set aside as illegal a meeting of shareholders of Biggs Boiler Works Company, at which petitioner was ousted as a director and removed as president of the company. Petition sustained.
This litigation arises from a petition filed pursuant to Section 31 of the Delaware Corporation Law to determine the validity of a purported special meeting of stockholders of The Biggs Boiler Works Company, a Delaware corporation, held on April 16, 1951, at which petitioner was both ousted from the board of directors and removed as president of the company. Defendants having filed their answer, petitioner has moved for judgment on the pleadings. The pertinent facts are these: Petitioner, hereinafter called "Smith", is the owner of 50 percent of the total issued and outstanding capital stock of The Biggs Boiler Works Company, a Delaware corporation, which I shall refer to as "Biggs." One Krizanek owns the remaining half of the stock. Smith was and still claims to be president and a director of Biggs, and Krizanek is vice president, treasurer, and also a director. In December 1950, all the stock just referred to was made the subject of a voting trust. The agreement conforms generally to the usual voting trust formed under Section 18 of the General Corporation Law of this State, Rev. Code 1935, § 2050, with the exception of the following langauge:
"The certificates for common shares of Companies owned by Shareholders are presently deposited with the First National Bank of Akron, Ohio, as Escrow Agent, under the terms of a refunding agreement entered into as of August 1, 1950 by and between Byron R. Barder, Alma I. Sherbondy (executrix of the estate of Fred J. Sherbondy), Biggs Realty Corporation, Companies and Shareholders, whereunder said certificates for shares shall be delivered to Shareholders on September 30, 1951 upon the performance of certain conditions and upon nonperformance of said conditions said certificates for shares shall be delivered to Shareholders on September 30, 1951 upon the performance of certain conditions and upon nonperformance of said conditions said certificates for shares shall be delivered to Byron R. Barder and Alma I. Sherbondy.
"Shareholders entered into an option agreement dated November _____, 1950, whereby they gave to Vera Brenten and Ruth Linkow, or their nominees, the right to purchase on or before October 31, 1951, one-third of the common shares of Companies owned by Shareholders.
"Now Therefore, in consideration of the mutual covenants herein contained and for other good and valuable consideration.
The Parties Agree."1. This Agreement shall be subject to the terms and provisions of the refunding agreement and option agreement set forth in the Recitals above.
"2. Each of Shareholders agrees that the deposit of certificates for common shares of Companies with the First National Bank of Akron, under the aforesaid refunding agreement shall be a deposit of said certificates with Voting Trustees for the purposes of the within agreement and agrees further that if and when said certificates are delivered to each of Shareholders by said Bank, he will forthwith deposit said certificates with Voting Trustees together with proper assignment or assignments thereof to Voting Trustees. Provided, however, if the option to Vera Brenten and Ruth Linkow is exercised, the common shares transferred thereby shall not be subject to the within agreement."
By stipulation of counsel the entire agreement was made a part of the complaint in this action.
The voting trustees were Smith, Krizanek and one Steadman. The escrow agreement is still in force, and as a result the stock representing the voting trust has never been, and cannot be, deposited with, or transferred to, the voting trustees until July 31, 1951.
On April 7, 1951, Smith received notice of a special stockholders' meeting called for April 16, for the purpose of removing "a Director" and promptly notified the corporation, Krizanek and Steadman that he regarded the notice as invalid and the contemplated meeting illegal. On April 21, Smith was notified that he had been removed both as director and president of Biggs under a charter provision permitting the shareholders to remove a director without cause and a by-law permitting the directors to remove officers without cause. The petition attacks the legality of Smith's removal as a director and president. More specifically it challenges the validity of the voting trust agreement upon the ground that the stock was not deposited with, nor transferred to, the voting trustees as required by the provisions of Section 18 of the General Corporation Law.
"One or more stockholders may by agreement in writing deposit capital stock of an original issue with or transfer capital stock to any person * * * or corporation * * * authorized to act as trustee, for the purpose of vesting in said person * * * who may be designated * * Voting Trustees, the right to vote thereon for any period of time * * * not exceeding ten years."
John VanBrunt, Jr., of Killoran VanBrunt, Wilmington, for the petitioner.
William E. Taylor, Jr., Wilmington, and Edward C. Crouch, of Marshman, Hollington Steadman, of Cleveland, Ohio, for defendants.
The question presented is whether a valid voting trust may be formed under Section 18 of stock then in escrow, where the voting trust agreement recites the existence of the escrow agreement, deems the stock thereby deposited as though deposited with the voting trustees and states the intention of the owners of the stock to deposit it physically with the voting trustees immediately upon the termination of the escrow agreement.
This court has repeatedly held that the provisions of Section 18 are mandatory. In re Chilson, (1933) 19 Del. Ch. 398, 168 A. 82, such an agreement was struck down where the certificates, instead of being deposited with the voting trustess, were transferred to them temporarily, stamped with a legend indicating that they were to be voted subject to the voting trust agreement and then returned to the owners. In Perry v. Missouri Kansas Pipe Line Co., (1937) 22 Del. Ch. 33, 191 A. 823, a voting trust agreement was declared invalid which by its terms purported to extend for eleven, instead of ten years, as permitted by Section 18. And in Appon v. Belle Isle Corporation, 29 Del. Ch. 127, (1946) 46 A.2d 749, another such agreement was nullified because the provisions of Section 18 concerning the extension of voting trusts were violated.
Before even considering the major objection presented here — the fact that the stock was not, and obviously cannot for sometime to come, be deposited with the trustees — some preliminary consideration should be given to another question which has given me concern. The voting trust agreement recites portions of the escrow agreement from which it may be assumed that upon the happening of certain conditions the ownership of the escrowed stock must be transferred to third parties. Parenthetically, I suppose it is fair to say that under most agreements wherein stock is pledged or escrowed, rights of third parties will accrue in the stock under certain eventualities. Should then, as a matter of judgment and sound policy a voting trust agreement, which disposes of the voting rights to stock for as long as ten years, be upheld when the stock is then in escrow and where, long before the expiration of the escrow agreement, third parties may have succeeded to the ownership of the stock? I have finally concluded that such an objection is not valid for this reason. Under the escrow agreement in this case Smith and Krizanek, the owners of the stock, would have been free to vote it as they pleased until such time as the condition happened requiring its transfer to new owners. Why, then, should they not be able to exercise their right to vote, so long as it exists, through some such legal device as a voting trust? I do not mean to say, of course, that the voting trust agreement thus formed would prevail over the rights of subsequent transferees under the escrow agreement. Such a conclusion would be absurd. I am not here dealing with such rights but merely with a dispute between those having the existing rights to vote the stock and, having the right to vote it as individuals, I can conceive of no valid objection to their joining together under a voting trust agreement to vote it so long as the voting rights exist in them.
I now turn to petitioner's main objection to the validity of this agreement — the failure to deposit the shares with the voting trustees. While as already observed, all the decisions of this court above reviewed have held that the provisions of Section 18 are mandatory, only the Chilson case bears directly upon that portion of the statute requiring that the shares be deposited with the voting trustees. The facts of the Chilson case differ from the case at bar in one important respect. In that case there was no obstacle whatsoever to the deposit of the stock with the voting trustee but the organizers of the trust, in order to save expense, deliberately violated the provisions of the section. Here it was physically impossible to comply with the requirements of the statute concerning the deposit of the shares and a larger consideration emerges — did the Legislature, intend that no voting trust could be organized with shares in pledge or in escrow?
Aside from the obvious argument that, had the Legislature intended such a result, Sec. 18 should have so specified in language permitting of no doubt, an additional answer to the legislative intent may be found in the decision of the Supreme Court in Ringling Brothers — Barnum and Bailey Combined Shows, Inc., v. Ringling, 29 Del. Ch. 610, 53 A.2d 441, 446. In that case the Supreme Court considered the validity of a contract between two shareholders to vote their shares jointly. The agreement went on to provide that in the event of a dispute between the owners as to the manner in which their shares should be voted, a named arbitrator would be called upon to decide the dispute. Each party bound himself to vote in accordance with the decision of the arbitrator. It was argued that this agreement was invalid because Section 18 of the Delaware Corporation Law provided the only means by which the voting rights to shares could be separated from ownership and that since this contract did not comply with the provisions of the section respecting voting trusts, it was necessarily invalid. The Supreme Court, nevertheless, sustained the agreement and stated, among other things:
"Having examined what the parties sought to provide by the agreement, we come now to defendants' contention that the voting provisions are illegal and revocable. They say that the courts of this state have definitely established the doctrine `that there can be no agreement, or any device whatsoever, by which the voting power of stock of a Delaware corporation may be irrevocably separated from the ownership of the stock, except by an agreement which complies with Section 18' of the Corporation Law, Rev. Code 1935, § 2050, and except by a proxy coupled with an interest. * * *"
"The broad prohibitory meaning which defendants find in Section 18 seems inconsistent with their concession that proxies coupled with an interest may be irrevocable, for the statute contains nothing about such proxies. The statute authorizes, among other things, the deposit or transfer of stock in trust for a specified purpose, namely, `vesting' in the transferee `the right to vote thereon' for a limited period; and prescribes numerous requirements in this connection. Accordingly, it seems reasonable to infer that to establish the relationship and accomplish the purpose which the statute authorizes, its requirements must be complied with. But the statute does not purport to deal with agreements whereby shareholders attempt to bind each other as to how they shall vote their shares. Various forms of such pooling agreements, as they are sometimes called, have been held valid and have been distinguished from voting trusts. * * * We think the particular agreement before us does not violate Section 18 or constitute an attempted evasion of its requirements, and is not illegal for any other reason."
In the light of this holding, the motivating argument that the Legislature must have intended that shares in pledge or escrow may be the subject of a valid voting trust becomes far less persuasive. The fair implication from the decision in the above case is that since the owners of shares in pledge or escrow may, in general, accomplish the same purpose contemplated by the voting trust statute by other legally permissible methods, then the Legislature could not have intended that shares of stock, which could not be physically deposited with voting trustees as required by the provisions of Section 18, could ever become the subject of a valid voting trust. It necessarily follows, therefore, that the voting trust agreement before me is invalid because the mandate of the section requiring a deposit of the shares with the voting trustees was not and could not be complied with.
Other arguments are advanced as to why this agreement, even though not a valid voting trust is, nevertheless, legally enforceable. It is contended that it represents a pooling agreement, of an irrevocable proxy coupled with an interest, or an agreement enforceable under the theory of the Ringling case just discussed. However, I am unable to agree with these arguments. In a pooling agreement the owners of shares combine and vote them in accordance with the agreement, but Steadman, one of the parties to the agreement, is not the owner of any of the stock in question. Again, none of the parties to this agreement, particularly Steadman, has such a legal interest in the stock of the other as to permit the construction that, in legal effect, it should be regarded as a proxy coupled with an interest. Moreover, if this agreement is construed as a proxy to the three voting trustees to vote the shares it was not an irrevocable proxy and was revoked by Smith when he wrote the corporation, Krizanek and Steadman in effect that he considered the notice of the meeting invalid and its purposes illegal. Nor, in my judgment, does the Ringling decision govern this contract because of the obvious distinction between it and the agreement under consideration by the court in that case.
It is conceded by defendants that if the agreement before me is neither a valid voting trust nor a legally enforceable contract to vote the shares jointly, then the purported ouster of petitioner, Smith, from the board of directors and as president of Biggs, was invalid. I so hold.
I regret that I have had but a limited time in which to consider the difficult problems presented by this litigation, but the need for a speedy disposition of the case is clearly indicated in order that the unsuccessful parties should have a fair opportunity to perfect an appeal.
An order will be entered in accordance with this opinion.
For denial of motion for stay preceding appeal see post p. 411, 82 A.2d 919.