263 A.D. 97 | N.Y. App. Div. | 1941
In this stockholders’ derivative action, these are cross-appeals from portions of a judgment entered after trial at Special Term. Defendants appeal from the parts of the judgment directing them to account and granting injunctive relief in plaintiffs’ favor. Plaintiffs cross-appeal solely on the ground that additional and more drastic injunctive relief was denied; plaintiffs’ appeal from other parts of the judgment has been withdrawn.
The suit was instituted by plaintiffs Louis Blaustein and Jacob Blaustein derivatively as officers and directors of Pan American Petroleum & Transport Company, and by all Blaustein plaintiffs as large minority stockholders of Pan Am, plaintiffs together owning 901,914, about twenty per cent, of the 4,702,945 shares issued. Louis Blaustein died after commencement of the action, and his executors were substituted as plaintiffs. Defendants Jackson and Bullock were not served. Defendant Standard Oil Company (Indiana) is a majority stockholder of Pan Am owning at the time of trial 78.64% of its stock. Two other stockholders are plaintiffsintervenors.
The gist of the charges litigated on appeal is that Standard Oil Company (Indiana) as majority stockholder of Pan American Petroleum, acting through its nominees on the board of directors, dominated Pan American and in breach of claimed fiduciary duties exploited Pan American’s corporate opportunities for Indiana’s profit. The trial lasted over five months; the record on appeal consists of thirty-three printed volumes of nearly 15,000 pages; the briefs on appeal total 1,400 pages; the learned trial court wrote a comprehensive opinion including also his decision, findings of fact and conclusions of law being waived. If we are to keep within the reasonable limits of a judicial opinion, only facts essential to a disposal of the issues on appeal may be stated.
The complaint was considered by this court on a prior appeal from an order entered on a motion to strike out certain matters (251 App. Div. 704).
Introduction.
To understand the issues presented, a preliminary statement of the factual genesis of the litigation is required. For brevity we will refer to the individual and corporate plaintiffs as “ the Blausteins; ” to Standard Oil Company (Indiana) as “ Indiana; ” to Standard Oil Company (N. J.) as “ New Jersey; ” to Pan Ameri
Prior to 1923 Louis and Jacob Blaustein were engaged in the successful marketing of gasoline products largely in the Middle Atlantic States. In 1922 they incorporated under the names of Amoco and Baltimore. In 1923 they sold one-half of the stock of their two corporations to Pan Am which through a subsidiary guaranteed all Amoco’s and Baltimore’s gasoline requirements for ten years ending December 31, 1933, at five and one-quarter cents under the local market price. This contract is referred to as “ the umbrella contract.” Integrated with Pan Am’s contractual arrangements, Amoco and Baltimore continued to prosper. The Blausteins in the 1923 contract acquired no Pan Am stock. Between 1925 and 1929 Indiana acquired ninety-six per cent of Pan Am’s stock.
Pan Am was organized in 1915. Its main sources of supply were petroleum products imported from Mexico and Venezuela; it had its largest refinery in Aruba, Dutch West Indies, and also a tanker fleet. Pan Am had not successfully developed foreign markets but New Jersey had. In 1930 American producers were strongly urging a Federal embargo or prohibitive tariff on imported petroleum. Because of this state of facts, in April, 1932, the “ Sea View contract ” (so called from the place of its making) was entered into between Pan Am and New Jersey. Pan Am in effect sold all its foreign petroleum producing properties to New Jersey for $50,000,000 cash and seven per cent of New Jersey’s stock, and New Jersey agreed to supply Pan Am’s gasoline requirements to December 31, 1933, the end of the umbrella contract.
The Blausteins charged that this transaction and certain alleged secret options in connection therewith to purchase Pan Am’s domestic retail marketing facilities were part of a conspiracy between Indiana, New Jersey and others against Pan Am. Sub
In April, 1932, in connection with the proposed sale of Pan Am’s foreign properties to New Jersey, the Blausteins purchased a small quantity of Pan Am stock to secure a legal position and they retained counsel, thus threatening by litigation to tie up the proposed sale. This agitation on the part of the Blausteins led to negotiations, partly controversial, and on July 15, 1932, an agreement (called from its place of making the “ White Sulphur agreement) ” was concluded between Indiana, Pan Am and the Blausteins, giving the Blausteins twenty-six per cent and Indiana seventy per cent of Pan Am’s stock and providing equal representation for both on the board. That agreement, however, was canceled in October, 1932, at the Blausteins’ request.
Negotiations were resumed and finally resulted in what is called the “ definitive agreement ” between Indiana, Pan Am, Amoco, Baltimore and the Blausteins, signed February 17, 1933, predated to January 1, 1933. The purpose, as stated in the agreement, was to effect a reorganization of the companies concerned “ to form a complete cycle and unit in the oil business ” which would acquire property, produce its own reserves of crude oil products, refine and market them.
Pan Am acquired the balance of Amoco and Baltimore stock. Out of a total of 4,702,945 shares of Pan Am, the Blausteins received 1,286,876 shares; they were to direct marketing of the reorganized company for four years; for such time the father, Louis, was to be president and the son, Jacob, executive vice-president of Pan Am at salaries jointly totaling $120,000 a year, and also president and general manager, respectively, of Amoco which became Pan Am’s chief marketing subsidiary. In connection with their Pan Am stock, they were given an option or so-called “ put ” under which they could compel Indiana to purchase all or any part of their Pan Am shares at book value plus $1 per share but not less than $13.52 a share. This option, which for four years protected the Blausteins from loss, was used by them to the extent of selling 384,962 shares.
The agreement also provided that Pan Am “ shall actively proceed to secure its own sufficient crude oil production as a reserve ” for its requirements, and for such purpose “ shall immediately allocate an initial sum of $3,000,000 to be expended under the supervision of the Board of Directors for the acquisition of crude oil producing properties.” All parties agreed “ to use their best efforts, resources and personnel ” to establish and maintain a sufficient backlog of crude oil properties; until such reserve was accumulated Pan Am had the option “ to require Indiana to supply, to the extent of its ability and without loss to itself, * * * all or any part ” of Pan Am’s deficiency “ at average prevailing field prices.”
The agreement also provided that the board of directors of Pan Am “ shall have the right at all times to fully control the business of the Company and to reverse any decision of the Blausteins whether upon marketing operations or otherwise.” In the event of disagreement, the Blausteins were given the option of terminating their management contract and requiring Indiana to buy their stock under the above-mentioned stock option. While the Blausteins continued to hold twenty-five per cent of the Pan Am stock issued to them, they had the right to name three, of the nine Pan Am directors and two of the seven executive committeemen and they did so during the main period in litigation from the end of March, 1933, to the date of the commencement of the action in January, 1937.
At the Blausteins’ request, because it contained matters of a “ personal ” nature, the definitive agreement itself was not presented to the stockholders at the Pan Am stockholders’ meeting on March 27, 1933; instead a plan of reorganization embodying its corporate features was presented. The Blausteins’ four-year personal insurance against loss was not revealed to the other minority stockholders in the plan or at the stockholders’ meeting.
On March 28, 1933, the three Blaustein nominees were elected to the Pan Am board, Louis as director and president, Jacob as director and first vice-president, and Alvin Thalheimer, an “in law ” relative of the Blausteins, as director. The other directors were the defendants McKeever, Carroll, Seubert, Barkdull, Bullock and Jackson. Seubert was president of Indiana. He and the three last named above were directors of Indiana. Accordingly, of a
Plaintiffs contend that defendants fraudulently breached the letter and spirit of the definitive agreement and violated claimed fiduciary duties as majority stockholder or directors of Pan Am, including the duty to make Pan Am a fully integrated company. These alleged breaches relate to four major factors in the oil business, viz., processing, production, purchasing and pipe lines. In processing, the claimed breach was the failure to build, as expressly required by the definitive agreement, a 40,000-barrel a day refinery by 1934, and instead building only a 24,000-barrel refinery. In production, the breach alleged was failing to provide Pan Am with its backlog of crude oil producing properties and using instead the production properties of Indiana’s subsidiaries to Indiana’s claimed profit. In purchasing, the charge was failing to provide Pan Am with its own separate crude oil purchasing department and using instead Indiana’s subsidiaries to Indiana’s claimed profit. With regard to pipe lines, the charge was failing to provide Pan Am with its own trunk pipe line and using instead that of Indiana’s subsidiary to Indiana’s alleged profit and Pan Am’s loss.
Against the director defendants, in addition to alleged conspiracy, fraud, waste, misfeasance, negligence and breach of trust, plaintiffs also charged breach of sections 60 and 61 of the General Corporation Law. There were minor claims on which the trial court directed judgment for defendants from which plaintiffs do not appeal; the claims are not relevant to issues raised on appeal and, accordingly, we do not mention them.
Basic Rulings of Trial Court.
The court found that there was no conspiracy as charged by plaintiffs among any of the defendants and dismissed that cause of action in its entirety on the merits as against all defendants and granted defendants judgment on the merits thereon against plaintiffs. From this part of the judgment against them, plaintiffs withdraw their appeal.
In connection with the processing branch of the case, plaintiffs charged that defendants, including New Jersey and Teagle, its president, in bad faith fraudulently and intentionally wasted Pan Am assets and compelled it to pay millions of dollars in excess of what its refined products would cost if Pan Am had built its own 40,000-barrel a day refinery by February, 1934, as expressly required in the definitive agreement. The trial court ruled that as Indiana, the claimed fiduciary, had made no profit on this transaction, plaintiffs had the burden of proof to show that there was fraud and waste, and held that plaintiffs failed to sustain such
As against defendants on the other three main factors, production, purchasing and pipe lines, the trial court basically held that Indiana, as majority stockholder, so dominated Pan Am as to become a fiduciary for the minority; that it profited through such domination at Pan Am’s expense in the transactions relating to production, purchasing and pipe lines and must account for all such profits. The court .ruled plaintiffs had the burden to show Indiana was a fiduciary, but once that fiduciary relation was shown, and the court held it had been shown, the presumption of propriety in the votes of the majority directors was held to be destroyed, and in all these transactions in which Indiana was claimed to profit at Pan Am’s expense, the burden was shifted to defendants affirmatively to show the transaction was justified and also fair. For justification, the court required defendants to show that it was impossible under any circumstances to procure the necessary production, purchasing and pipe fine facilities in any manner other than the directors did. The court did not find that ¿he terms of the transactions and contracts made in connection with these matters were in themselves other than fair and reasonable and according to the prevailing market prices, but held this was immaterial as the burden of justifying the initial act of entering the transaction to Indiana’s alleged profit was not sustained. On these three factors the court also held the individual defendant directors personally and severally Hable with Indiana, not on the ground of fraud, bad faith or personal profit, but on the ground that they co-operated through their votes in appropriating for Indiana, Pan Am’s corporate opportunities and profits in the production, purchasing and pipe fine transactions and directed them also individuaUy to account.
While the court expressly ruled the definitive agreement could not bind the directors’ judgment in connection with the refinery,
In addition to directing an accounting and appointing a referee to take and state the account, the court granted broad injunctions restraining defendants from (1) interfering with free competition between Pan Am and its subsidiaries and Indiana and its subsidiaries with regard to the purchase of crude or crude properties; (2) preventing Pan Am from establishing its own purchasing department, constructing its own gathering systems and its own pipe line; or (3) diverting legitimate business opportunities of Pan Am to Indiana or its subsidiaries. The court refused, however, plaintiffs’ demand for more drastic injunctive relief forbidding Indiana from voting its own stock, directing transfer of its stock to a representative of the court, requiring so-called “ independent ” directors to be elected, or directing Indiana to dispose of its stock by distribution among its stockholders; this was denied on the ground that such relief “ would deprive Indiana of its property rights * *
Defendants’ Appeal.
We will now consider the trial court’s rulings in greater detail and our disposition of the issues raised in relation to the three major factors on which defendants were held liable.
The Purchasing and Pipe Line Transactions.
At the outset it is essential that the claimed liability of Indiana and the director defendants be considered in the light of the facts and circumstances presented when the directors were required to act, not in the fight of hindsight available years after when the trial was had. When the directors met after the reorganization in the spring of 1933, they knew that Pan Am for its 1934 market required nearly 17,000,000 barrels of crude oil or about 48,000 barrels per calendar day; that the New Jersey contract provided adequate supplies of gasoline only to December 31, 1933, and that the vital problem was how to meet all Pan Am’s requirements from and after January, 1934. To the extent that such requirements were not met, Pan Am would lose pro tanto its market, customers and profitable operation.
A purchasing department in the oil business is a separate department or subsidiary that purchases crude oil, locates its sources, secures connections, gathering and storage systems, and arranges for transportation. The definitive agreement made no mention
Even if the definitive agreement explicitly required Pan Am immediately to create in 1933 a separate purchasing department and to build its own trunk pipe line, that would not deprive the directors of the right and the duty to exercise their own judgment and discretion in the matter. With regard to processing, the definitive agreement was most explicit, and despite this the trial court properly held that it was the directors’ duty “ to use their best judgment irrespective of the definitive agreement.”
This is not an action ex contractu brought by the Blausteins as parties to the definitive agreement. Instead of suing on that agreement they elected to bring this derivative suit as minority shareholders and directors based not upon a breach of that contract but on the stated charges of (1) fraud, (2) conspiracy, (3) waste, (4) negligence, and (5) breach of trust. The trial court did not find in plaintiffs’ favor on the first four grounds and the issues on appeal essentially relate to the fifth, the alleged breaches of fiduciary duties. The definitive agreement was properly admitted in evidence, but it was not the basis of an action on contract, nor in our opinion should it, in this derivative action, have been taken as the basis- of the defendants’ duty, obligation or liability. In imposing liability the trial court relied on the definitive agreement as outlining “ the affirmative obligation ” of Indiana. This ruling suggests an intendment that Indiana as majority stockholder should have dominated the board to carry out the agreement whether or not in the directors’ judgment its proposals, expressed or implied, were deemed wise and expedient by the directors themselves when called upon to act. The opinion indicates a determination to enforce in this derivative action the definitive agreement in all its clauses including so-called inferential clauses (except on the refinery issue) just as they might be sought to be enforced
We think the definitive agreement could not deprive the directors of their duty to manage the corporation in the exercise of their own judgment and discretion in the light of facts and conditions faced when they were called upon to act. Even if the objects of signatories to the agreement seemed to them at the time they signed it the highest wisdom and the best possible course for Pan Am to pursue, neither that agreement nor any other contract among such parties could be made the inflexible rule of corporate policy from which directors could not deviate without breach of duty. Corporate management is vested by law in the corporation’s directors and no such contract can bind directors to predestined action irrespective of their own judgment and discretion. (Manson v. Curtis, 223 N. Y. 313; McQuade v. Stoneham, 263 id. 323; Rosenthal v. Light, 185 App. Div. 702; affd., 227 N. Y. 587.) To the processing clauses where the provisions requiring a refinery were most explicit as to type, size, capacity and date of completion, the trial court applied this rule, but failed to apply it to the other factors on which the agreement was either silent or indefinite. We think this was error.
The directors’ problem in the spring of 1933 was to make reliable arrangements for dependable crude oil supplies to meet proposed refinery operations to be initiated by January, 1934, on the enormous initial scale of 48,000 barrels a day. Spot or open market purchases for such supply could not be relied on by prudent men. Accordingly, within the relatively short period allowed for successful planning, the directors had either to organize a separate purchasing department and successfully solicit in the field sufficient sources of crude, provide the large personnel and all the other required physical facilities so as to have an assured and immediately available gathering system, trunk pipe line and storage for the required quantity of crude; or in the alternative to make contracts with established purchasers and pipe line owners on fair terms.
Eighty-five per cent of the oil legally allowable under Texas regulations was being purchased and gathered by major companies. The definitive agreement provided that Indiana would “ supply to the extent of its ability and without loss to itself * * * all or any part of the deficiency in crude oil * * * necessary for Pan Am’s requirements at average prevailing field prices.” There was no guaranty, however, that Indiana or S. C. O. P. would be continuously able to furnish such crude as Pan Am might at any time call for. Such assurance reasonably required contractual arrangements defining the numerous details.
All the directors, including the Blausteins, at the May 31-June 1, 1933, meeting agreed that S. C. O. P. would handle the purchase of all crude for Pan Am on the basis of a charge of five cents a barrel until December 31, 1933, then to be revised downward. Drafts of the crude oil purchasing and pipe line contracts were submitted to the board at the meeting on July 28, 1933.
Jacob Blaustein testified that at the July twenty-eighth meeting he objected that the proposed purchasing contract was to be one of purchase and sale rather than agency and that the contract would prevent Pan Am from using crude oil, if any, produced by a production affiliate and crude that might be acquired at lower prices. Clarence L. Tappen (deceased since the trial), of the firm of Kellogg, Emery & Inness-Brown, since 1915 Pan Ain’s general counsel, produced at the trial the original draft of the contract on the margin of which he had made notes of Blaustein’s objections, and testified from such notes that Blaustein had not objected that the contract was one of purchase and sale rather than agency. Tappen was corroborated by other witnesses and the minutes make no mention of such specific objection. Barkdull, Stephens, Carroll, Jackson and McKeever concurred in the Blausteins’ objection to the complete requirement feature of the contract. Here it may be \ noted that if, as claimed, Indiana dominated a completely sub- ( servient Pan Am board, the majority could have then accepted a j complete requirement contract with S. C. O. P. and thus forthwith I effectively prevented Pan Am from entering production, if that was ) their purpose. They did not do so. On the contrary, an additional / paragraph on “ Cheaper Crude ” was thereafter incorporated into ; a three-year contract with S. C. 0. P. to provide that Pan Am could purchase directly in the field from other sources, if it could ¡ do so for less than S. C. 0. P.’s cost charges to it. In the con-) temporary documents there is the absence of objection to the marketing charge or the selling arrangement. The definitive agreement connotes a selling arrangement.
The purchasing contract finally approved, the Blausteins alone objecting, provided that S. C. 0. P. would sell and deliver to Pan
The same problems faced the directors in the spring of 1933 with regard to pipe line transportation which is closely associated with crude purchasing. It was conceded that the cheaper arrangement would be to have Pan Am build its own direct trunk pipe fine two hundred miles long from the East Texas field to the Gulf Coast, provided it could get sufficient connections, physical and contractual, to assure a supply to meet by 1934 its required refinery output of 48,000 barrels a day. Although the definitive agreement said nothing with regard to the construction of a pipe line, the trial court, considering such line necessary to a fully integrated company, held it had been inferentially agreed to; that Indiana had taken this business opportunity for itself through its subsidiary S. P. L. at a profit, and accordingly directed Indiana and the directors to account for all profits made (including an alleged secret profit on a so-called Winkler transaction) and for all damages sustained by Pan Am not having its own trunk pipe line.
The board’s paramount problem in 1933 was the assured sufficient supply whether through Pan Arc’s own trunk line or through
On June 28, 1933, Peake submitted four possible plans for transportation which he discussed in a separate conference with Louis Blaustein. The latter agreed that he was willing to go along on plan No. 3. This required Humble to acquire and transport crude from East Texas to Bullock Station, S. P. L. to increase the capacity of its fine from Hufsmith to 50,000 barrels a day, Pan Am to build Sinco stub fines to Baytown and Texas City, and S. P. L. to lease to Pan Am the portion of its fine from, Mexia to Houston. Peake told the board that Humble would. turn over to S. C. O. P. additional crude connections in East Texas to the extent of 10,000 barrels based on the then legal East Texas allowable of 550,000 barrels a day, and said that other East Texas crude was not available in the volume required by Pan Am. The board after full discussion by unanimous vote, including the Blausteins, directed the incorporation of Pan American Pipe (a Pan Am subsidiary); authorized S. P. L. to construct for Pan Pipe a twenty-mile pipe fine from York Junction to Baytown and a thirty-one mile fine from Sinco to Texas City; authorized Pan Am’s pipe line subsidiary to assume the contract between S. P. L. and Humble for the first three years of its term, thus giving Pan Am the benefit of the lower tariff agreement Humble
At the next meeting on July 28, 1933, the pipe line arrangements previously unanimously approved in detail were presented to the board in the form of contracts and adopted by majority vote. Blaustein alone objected, not because the contracts were by their terms unfair, unreasonable or unnecessary, but, as the minutes of the meeting show, because they were closely related to the purchasing contract to which he took exception.
At the trial Jacob Blaustein testified that he voted in the negative because the contract was inconsistent with an “ understanding ” at the previous meeting that S. C. 0. P. would act as purchasing agent until January, 1934, instead of as seller. All director defendants present at the meeting contradicted this and testified he objected solely on the ground that Pan Am would be prevented from utilizing the crude properties it might acquire. Their testimony was corroborated by Tappen, Pan Am’s general counsel, who testified that Blaustein made no reference to any “ understanding ” of any “ agency ” arrangement. The proposed contract was not inconsistent with any understanding reached at the previous meeting. Blaustein’s action in originally agreeing to the contracts in principle indicates that all the directors at the time were convinced that the pipe line transportation arrangements were reasonable, necessary and fair.
f? The salient issue on the proposed trunk pipe line was the availability of connections in the East Texas field in the spring and summer of 1933. Jacob Blaustein testified he knew of plenty of connections (and also spot purchases) but did not at the time make any specific suggestions of them to the board. The pipe line scout reports on which plaintiffs rely do not show loss of connections by purchasers but only changes in pipe line carriers. They are not helpful in determining availability of connections. Plaintiffs produced as their expert, one Hudnall, an oil geologist and appraiser who had never represented a purchaser of crude. In answer to a hypothetical question, he expressed the opinion that it would have been possible to obtain connections between April and December, 1933, of sufficient legally produced oil to provide by January, 1934, a flow of 48,000 barrels a day.
Against this was the unanimous opinion of all defendants’ witnesses who in 1933 represented thirteen of the major purchasing companies engaged at that time in crude purchasing in the East
At the end of its opinion the trial court expressed a doubt as to the wisdom “ at this late date ” of constructing a separate Pan Am trunk pipe line and asked for further memoranda, but evidently resolved the doubt in plaintiffs’ favor, as the judgment granted on this aspect of the case is in effect a mandatory injunction directing construction of a trunk pipe fine. We see no reason why these directors were under a binding mandate to build a separate Pan Am trunk pipe line and provide a separate purchasing department or subsidiary during the first years of the company’s existence and the worst years of the economic depression, when they con-
The court also found, as part of the 1933 pipe line arrangement, that Indiana through S. P. L. profited by procuring for itself from Humble a reduction of about six cents in the cost of transporting Indiana crude from a field called the Winkler field in West Texas to Whiting, Ind.; that the S. P. L.-Humble pipe line arrangement was part consideration for that reduction; and accordingly directed defendants additionally to account for any sums saved by S. P. L. as a result of such reduction.' The controversies between Humble and S. P. L. concerning the Winkler tariff had nothing whatever to do with Pan Am. They had commenced long before there were any negotiations on Pan Am’s pipe arrangements. The adjustment of that dispute, having no relation to Pan Am’s pipe supplies, was a bona fide transaction in which S. P. L. received no profit at Pan Am’s expense. The accounting decreed is clearly erroneous.
Crude Production.
The definitive agreement expressly provided that Pan Am should secure its own sufficient crude oil production properties, immediately allocate $3,000,000 for the acquisition thereof, and all parties were to use their best efforts to secure a sufficient backlog of crude oil properties for Pan Am.
The trial court found that all major oil companies have the policy of procuring their own crude production lands or leases to become fully integrated companies; that Pan Am especially needed such properties since, by the sale of its foreign properties, it had lost its own chief sources of supply; that prima facie there was an obligation on the directors to procure such oil-producing lands but that they did not begin to do so until May, 1935, the first properties being actually purchased in September, 1935; that the sole reason asserted for the delay, the opinion rendered by Stephens, Indiana’s general counsel and Pan Am director, that it would be illegal under the Texas anti-trust laws for Pan Am then to enter Texas production, was not valid; that Pan Am’s own counsel were not
The sole reason advanced for not procuring Pan Am’s own crude properties before 1935 was not, as in the case of purchasing and pipe lines, the economic and other factual difficulties but the opinion on which the directors relied that the Texas anti-trust laws made it illegal for Pan Am to engage in Texas production because it was seventy per cent (later seventy-eight per cent) owned by Indiana which abeady had a wholly owned subsidiary, S. O. & G., engaged in such production.
On March 25, 1933, Stone and Agerton, Texas lawyers, reported that it would be legal for Pan Am to enter Texas production. On April 27, 1933, Stephens told Seubert that he agreed with Stone that the directors of S. P. L. and S. C. O. P. could also serve as dbectors of a Pan Am producing company to be organized to operate in Texas. Stephens, however, testified that he answered the only specific question submitted at the time, namely, the legality of interlocking directors. The trial court found he had approved thereby introduction of a Pan Am producing company into Texas. On August 8, 1933, Stephens, Indiana’s counsel and the only lawyer on the Pan Am board, told Seubert that in his opinion the Texas anti-trust laws prohibited Pan Am from going into Texas production because of Indiana’s majority stock control
On the trial it appeared that Steinmann had previously, in 1933, procured both an oral and a written opinion from Weems but it was never revealed to the board. The trial court held that IS. 0. & G. was buying property in the East Texas field at the very time Indiana was preventing Pan Am from entering production there and proposing to sell through S. C. 0. P. all crude required by Pan Am’s Texas refinery; that factually and legally Pan Am | could have done the work itself if permitted to do so; and accord-j ingly directed the accounting above indicated not merely of profits | but of the lands as well. Specifically the directors’ liability was I not based on bad faith, or fraud; in the final analysis they were i made liable because it was held that they did not consult counsel j other than Stephens.
Article 7426 of title 126 of the Texas Civil Statutes defines a trust as “ a combination of capital, skill or acts ” by two or more corporations which, among other things, (1) creates or may tend to create restrictions in tr'ade or commerce, (2) prevents or lessens competition, (3) unites any interest in connection with the sale or purchase of any commodity for transportation, or (4) abstains from engaging in or continuing in business or from purchase or sale of commodities partially or wholly within the State. Article 7427 makes a combination of corporations a monopoly when (1) direction of affairs is “ brought under the same management or control for the purpose of producing ” a trust or when such “ management or control tends to create a trust ” or (2) when one “ corporation acquires the shares,” bonds, properties, etc., of another corporation “ for the purpose of preventing or lessening, or where the effect of such acquisition tends to affect or lessen competition.” Penalties for violation of these laws were drastic, viz., mandatory jail sentences from two to ten years, heavy fines, forfeiture of corporate charters, and in the case of foreign corporations, forfeiture of the right to do business in Texas; trials were a jury risk; and, as an incentive to prosecution, successful district attorneys were permitted to share in a substantial percentage of the fines. Indiana owned ninety-nine per cent of S. O. & G. and seventy
Stephens testified that in 1932 at the White Sulphur conferences he had advised Steinmann of the facts leading to the formation of S. 0. & G. on the advice of Judge Batts to avoid a literal continuing violation of the anti-trust laws. Barkdull, Seubert and Tappen corroborated Stephens with regard to the information disclosed at the White Sulphur conference. Blaustein denied that the anti-trust issue had ever been mentioned until after the definitive agreement, and the transfer of the stock, and Special Term so found. At a board meeting on March 7 and 8, 1933, attended by the Blausteins, Tappen suggested a consideration of the legal status of a second production company going into Texas. Thereafter on March 12, 1933, Tappen, Pan Am’s general counsel, and Steinmann discussed whether a producing company should be formed in Texas or in Delaware and qualified in Texas. On March thirteenth Tappen wrote Steinmann that until the legal issue was cleared Indiana was unwilling to introduce the proposed production corporation into Texas. Tappen, Barkdull, Carroll and McKeever all testified that at a meeting -on March 17, 1933, Blaustein had been informed specifically about the Texas antitrust law questioned and agreed to postpone the formation of the production company. The minutes of the meeting indicate that the Texas laws were discussed.
We do not believe that the references to the Texas laws in the minutes and documentary evidence referred, as the trial court found, merely to the matter of whether a Texas or a Delaware corporation should be organized. On the contrary, they relate to the introduction of a producing company into Texas and thus tend to corroborate defendants’ testimony. Steinmann on cross-examination refused to deny that the legal question “as to the entry of a Pan American producing company ” in the State of Texas had been discussed with him prior to March 28, 1933. It should be patent why an issue of that kind was not specifically mentioned in the definitive agreement or plan of reorganization which might later be used in a Texas criminal prosecution. The weight of the credible evidence established that Steinmann and the Blausteins were informed of the matter. Stephens’ letter of April 27, 1933, dealt with the only question he was then specifically asked to _ answer, which he had submitted to Judge Stone, namely, whether there was anything illegal in an interlocking directorate. S. O. & G., organized in 1930, consisting in part of a merger of other com-
We find that Pan Am counsel were consulted regarding the anti-trust issue. Tappen and his partners, Frederick R. Kellogg and Dean Emery, regarded as doubtful the legality of the proposed Texas production corporation. Pan Am’s general counsel frequently consulted with Stephens in the matter and concurred in his opinion. Moody, former Attorney-General and Governor of Texas; Judge Strong, for forty-three years a Texas lawyer and former judge of the Texas Commission of Appeals; Black, a member of the Texas bar for thirty-three years and leading Texas appellate counsel; and Wright, an experienced Texas corporate and trial lawyer, all agreed with Stephens’ conclusion.
The final Batts-Weems opinion was based in part on the idea that the Texas anti-trust laws were unconstitutional. That was subsequently proved to be erroneous. (State v. Standard Oil Company, 130 Tex. 313; 107 S. W. [2d] 550; Tigner v. Texas, 310 U. S. 141.) It also relied on a case decided after Stephens had rendered his August, 1933, opinion which was said by Batts and Weems to apply the “ rule of reason ” to the anti-trust laws. (Jones Investment Co. v. Great Atlantic & Pacific Tea Co., 65 S. W. [2d] 495.) That had not been the rule applied immediately before. Writing in February, 1935, Batts and Weems stated that “ until recently no rules have been laid down which would enable an attorney to come to a safe conclusion as to what might be held by the Texas courts. Recent decisions have placed the matter in a much more satisfactory condition.”
:¡ The trial court did not find bad faith on the directors’ part / in relying on Stephens’ opinion but found breach of a fiduciary \ duty in not procuring other additional legal advice. The court \ found that Stephens’ opinion was not a crass subterfuge or contrary to his own belief. Each case must be decided on its own facts. Important considerations are the presence of good faith and the absence of fraud or self-enrichment by the director giving and the directors acting upon the advice. In that state of facts and with Stephens’ opinion concurred in by Pan Am’s own general counsel \we think the directors exercised their discretion honestly and in jgood faith and under all the facts and circumstances disclosed < were justified in deferring at the time entrance of a Pan Am pro\duction company into Texas.
x Plaintiffs do not appeal from the holding that there was no conspiracy or from the judgment against them and in defendants’ favor on the conspiracy count. Yet plaintiffs argue this appeal as though the conspiracy with its alleged deliberate fraud
Indiana’s Claimed Domination as Majority Stockholder.
The trial court properly held that before Indiana could be held as a fiduciary, plaintiffs had the burden of proving that Indiana dominated and controlled Pan Am. In finding that plaintiffs sustained such burden, the court went back to the New Jersey sale when Indiana owned ninety-six per cent of Pan Am stock and found that “ domination ” then began and had continued to the trial. There is no tangible evidence of this, and the court’s finding was an inference based on claimed circumstantial evidence which in our opinion is contradicted by the weight of the contrary evidence.
Mere ownership of a majority or all the stock of a corporation does not in and of itself spell domination. Stockholders are not ipso facto trustees for each other. (Kavanaugh v. Kavanaugh Knitting Co., 226 N. Y. 185; Gamble v. Queens County Water Co., 123 id. 91.)
The fiduciary role is not assumed, and the obligation will not be imposed, until a majority stockholder usurps the functions of the directors in the management and conduct of the business of the corporation to the detriment of the corporation and the minority. (Cleary v. Higley, 154 Misc. 158; affd., 246 App. Div. 698; application for leave to appeal denied, 270 N. Y. 673; Kavanaugh v. Kavanaugh Knitting Co., 226 id. 185.)
The fiduciary obligation has been imposed where the majority exercised control so as to bring about reorganization and foreclosure resulting in the minority’s receiving nothing (Southern Pacific Co. v. Bogert, 250 U. S. 483); where control was exercised to bring about foreclosure so as to enable the majority to acquire property at less than its value to the injury of minority stockholders (Farmers’ Loan & Trust Co. v. New York & Northern R. Co., 150 N. Y. 410); where it was sought to dissolve the corporation, depreciate value of corporate property and minority proportional interest therein (Kavanaugh v. Kavanaugh Knitting Co., 226 N. Y. 185); and in cases where control was exercised to enable the majority to take the assets and business of a corporation or more than a proportionate share of the corporate property to the exclusion of the minority. (Morse v. Metropolitan Steamship Co., 87 N. J. Eq. 217; 100 A. 219; modified as to receiver’s title, 88 N. J. Eq. 325; 102 A. 524.) When
In imposing the fiduciary duties on the majority stockholder herein, • the trial court relied on many cases that formulate the law of fiduciary duty for strictly technical and formal trustees. Magruder v. Drury (235 U. S. 106, 120) related to an executor, an express testamentary trustee, who received for his own firm a commission on certain loans. Jackson v. Smith (254 U. S. 586) related to a receiver of the assets and property of an estate who arranged with others to bid in such assets when sold at an advertised sale. Michoud v. Girod (4 How. [U. S.] 503) related to an executor.
Other cases relied on are distinguishable on their facts. In Irving Trust Company v. Deutsch (73 F. [2d] 121) a trustee in bankruptcy of Acoustic Products Corporation sued Deutsch, Acoustic’s president, who had been instructed by resolution to
The fiduciary theory will not be employed merely to enable a minority to dictate corporate policies. We think the evidence establishes that Pan Am was managed during the period in question by its own board of directors, exercising in the transactions attacked their own judgment for what, at the time, they believed in the light of existing facts and circumstances to be for Pan Am’s benefit. At no time was a majority of Pan Am’s board or its subsidiaries directors, officers or employees of Indiana. There were originally four Pan Am-Indiana interlocking directors, Seubert, Barkdull, Stephens (succeeding Bullock in 1933) and Jackson. Jackson apparently attended few meetings after March 28, 1933. In 1933 and 1934 when most of the transactions attacked occurred, three of the nine directors were named by the Blausteins and voted as a single block. McKeever and Carroll, vice-chairman and treasurer of Pan Am, were neither directors nor officers of Indiana. McKeever had been associated with Pan Am since 1915, years before Indiana had any stock in the company. Carroll had been employed by Indiana but had joined Pan Am in 1927. To get the benefit of Indiana’s stock purchasing plan, he was nominally on Indiana’s payroll, but Pan Am reimbursed Indiana for his entire salary. There is no proof that Seubert or anybody else dictated McKeever’s or Carroll’s votes against their own mind
In the final analysis, the trial court seemed to rest its decision on what it referred to as the frailties of human nature. The court said it was inconsistent with “ all human experience ” that when Seubert, Barkdull and Stephens walked into a Pan Am board meeting they could forget they were directing heads of Indiana. The issue, however, in each case is not to be decided on general views of human nature but on the particular facts established in each case showing the type, character, standing, experience, integrity, ability and the action taken by the particular directors involved. On the court’s own reasoning, the status after trial contains as before all the same “ potentialities of domination.” Yet the court properly denied Blaustein’s request to have these men removed and so-called “ independent ” directors elected in their stead.
Perhaps it may be desirable, as some contend, to prohibit by law all interlocking directorates or personnel. Wé are not called upon to pass on that. Thus far neither the numerous statutory corporate laws, State and Federal, nor court decisions have outlawed interlocking directors as such. Determination of domination may not rest merely in the fact that there was an interlocking directorate, especially where, as here, at no time was there a majority of Indiana interlocking directors on Pan Am’s board and the directors acting in good faith did not personally profit in any way in the transactions in question. The trial court expressly so found. The individual director defendants were held liable for this enormous judgment although the court did not find any fraud, bad faith, conspiracy or personal profit on their part in any of the transactions attacked.
On this record, we hold plaintiffs have failed to establish by a preponderance of the credible testimony that Indiana, as majority
Berle and Means in The Modern Corporation and Private Property (pp. 236, 237) state that a director becomes “ a dummy not because of a contract but because of his nature. First-rate men will never be dummies; third-rate men can never be prevented from being dummies where they are in fact dependent on the will of a small group, even though no precaution is taken by contract to make them so.” The directors here attacked were first rate men of outstanding experience, ability and recognized character individually and as officers in the oil business in the United States. Neither in the prolonged examinations before trial nor in the direct or cross-examinations at trial was anything established to impugn their integrity, competency or ability. Nothing was adduced to show that any of them, including McKeever, who was never connected with Indiana, and Carroll, who was never an Indiana director or officer, were not acting with an honest desire to serve the corporation’s interest.
Directors are not trustees in the strict, technical sense of the term. (3 Fletcher on Cyclopedia of Corporations [Perm, ed.], § 838, at p. 146.) They occupy what Pomeroy calls positions of partial trust. “ To sum up, directors and managing officers, in addition to their functions as mere agents, occupy a double position of partial trust; they are quasi or sub modo trustees for the corporation with respect to the corporate property, and they are quasi or sub modo trustees for the stockholders with respect to their shares of the stock.” (4 Pomeroy’s Equity Jurisprudence [5th ed. 1941], § 1090, pp. 265, 267.) The conduct of directors in relation to their corporation and its stockholders is primarily the subject of proceedings in equity. In Bosworth v. Allen (168 N. Y. 157) it was said: “ While courts of law generally treat the directors as agents, courts of equity treat them as trustees and hold them to a strict account of any breach of the trust relation. For all practical purposes they are trustees when called upon in equity to account for their official conduct.”
Directors usually have control of the records of a corporation and are in an advantageous position to offer proof upon any matter which affects their conduct in relation to the corporation. Spellman on Corporate Directors says: “ When a stockholder or other interested party attacks transactions entered into by or with members of the board, fairness requires that the burden of proof should rest upon the affected directors to justify the acts complained of * * * ” (§ 191, p. 502.)
“ Once a prima facie case of liability has been established, the burden of going forward with the proof rests upon the director to contradict the evidence against him. The ultimate burden of proof, however, remains with the plaintiff, who must establish his case by a preponderance of the evidence. On the other hand, where the director seeks to avoid liability upon admitted facts, through the introduction of exculpatory evidence, such as the fact that he resigned before the action complained of, the burden of proof as to these facts is on him.” (§ 262, p. 650.)
In Glen Allen Mining Co. v. Park Galena Mining Co. (77 Utah, 362, 384; 296 P. 231, 240) the court formulates the rule as follows: “ The authorities everywhere recognized the rule that, where a fiduciary relation is shown to exist, the burden is upon the fiduciary to show good faith and fair dealing in his relations with his cestui que trust. It is frequently said that the relation of a director to his corporation is not that of trustee and cestui que trust. But it does not follow from that statement that the director is not bound by the same rules of good faith, full disclosure, and fair dealing as surrounds the trustee in dealing with the cestui que trust. As agents intrusted with the management of the corporation for the benefit of the stockholders and creditors, they occupy a fiduciary relation, and are held hable to the corporation as trustees. The liability of directors and other officers to the corporation is determined by substantially the same principles which determine the liability of any other agent to his principal for failure to perform the duties which he has undertaken.”
In its opinion the. trial court said: “ It should be emphasized that there is no claim, and no finding, that any of the individual defendants [the directors] profited personally in any way in any of these transactions. The individual directors defendants are being held hable not because they received any part of the profits themselves or because they took over for themselves any business opportunities of Pan Am., but on the ground that they appropriated for Indiana the transactions and profits herein discussed.” In view of this determination of no personal profit in any form and as there was no finding that they acted fraudulently, negligently or in bad faith, the individual defendants were entitled to the benefit of the presumption that their actions were fair and
In Fisher v. Bishop (108 N. Y. 25, 28) the Court of Appeals, in discussing obligations growing out of a confidential and fiduciary relationship, said: “ Lord Cranworth in Smith v. Kay laid down the rule in these words (7 H. L. 771) :
Corporate Opportunities.
One who occupies a fiduciary relationship to a corporation may not acquire, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence. This rule is stated in Loft, Inc., v. Guth (2 A. [2d] 225, 238) as follows: “ if a business opportunity comes to him [the fiduciary] which is in the line of his corporation’s activities and of advantage to it and especially if really
In Lincoln Stores, Inc., v. Grant (309 Mass. 417; 34 N. E. [2d] 704), in discussing the doctrine, the court said: “ Directors of corporations have often been said to be trustees. In any event, they occupy a fiduciary relation toward the corporation, and have a duty of reasonably protecting and conserving its interests. Beaudette v. Graham, 267 Mass. 7, 12; 165 N. E. 671; Brown v. Little, Brown & Co., Inc., 269 Mass. 102, 117; 168 N. E. 521; 66 A. L. R. 1284. * * * In this connection it has been said that the duty is only coextensive with the trust so that, in general, the legal restrictions that rest upon officers in their acquisitions are generally limited to property in which the corporation has an interest already existing, or in which it has an expectancy growing out of an existing right, or to cases where the officers’ interference will, in some degree, prevent or hinder the corporation in effecting the purposes of its creation. Lagarde v. Anniston Lime & Stone Co., 126 Ala. 496, 502; 28 So. 199; Tierney v. United Pocahontas Coal Co., 85 W. Va. 545, 564; l02 S. E. 249. It has been said that a director cannot be allowed to profit personally by acquiring property that he knows the corporation will need or intends to acquire, Golden Rod Mining Co. v. Bukvich, 108 Mont. 569; 92 P. [2d] 316, and that this interest, actual or in expectancy, must have existed while the person involved was a director or officer. Colorado & Utah Coal Co. v. Harris, 97 Colo. 309; 49 F. [2d] 429; Guth v. Loft, Inc., Del. Sup., 5 A. [2d] 503, 510, 511. See Trice v. Comstock, 8 Cir., 121 Fed. 620, 626, 627; 61 L. R. A. 176.”
We find here, however, no factual basis sufficient to support - ‘ the broad ruling that property bought by S. O. & G. in a particular ; territory must be held to have been acquired for the benefit of Í Pan Am. A corporation of the character of the latter had no • monopoly of the territory. (Colorado & Utah Coal Co. v. Harris, 97
It is impossible accurately to determine what would have happened had Pan Am been allowed to avail itself in a reasonably normal manner of its legtimate business opportunities.” The only “ prevention ” sought to be established here was the negative one of postponing activity in crude production. It does not appear that it was ever proposed that Pan Am purchase any of the properties which it has been determined must be held in trust for it. Blaustein > testified that although he knew of many cheap properties at the/' time he did not present them to the board. S. 0. & G. and its)"-' predecessor corporations had been seeking oil lands and leases for their own proper corporate purposes for years prior to the ■ reorganization of Pan Am in 1933; the oil lands and leases so sought were necessary and appropriate for its business. Its principal predecessor, the Dixie Oil Company, had begun geological work in the Gulf Coast area in 1923 and between 1924 and 1930 had acquired leases in numerous Texas Gulf counties. The East Texas field, one of the greatest oil fields in the world, was discovered in 1930 and 1931. An independent expert testified that due to chaotic conditions little trading was done in the East Texas field till the latter part of 1933. There was development of the Gulf Coast between 1935 and 1938 and more widespread use of geophysical instruments.
S. O. & G. did not discover, buy or develop any fields with funds, assets or information of Pan Am. It had the right to explore for oil wherever it could be found. The trial court’s holding is in effect that Pan Am as against S. O. & G. had the exclusive right to explore in the’East Texas and Gulf Coast regions. At the time S. O. & G. was in competition in Texas with practically all the major oil companies and up to April, 1939, S. O. & G. was producing less than fifty per cent of Indiana’s own crude requirements. For crude produced by S. O. & G. and resold to Pan Am at posted
, Our reading of the cases in which the doctrine of corporate opportunity has been applied leads us to the conclusion that one primary requisite for the application of the doctrine is the existence of a presently recognizable, tangible expectancy on the part of the corporation in the property, whether tangible or intangible, at the time of acquisition by the fiduciary. (Lincoln Stores, Inc., v. Grant, 309 Mass. 417; 34 N. E. [2d] 704.) It has also been held that the doctrine is not applicable if the opportunity is one which the corporation is financially unable to undertake. (Hauben v. Morris, 255 App. Div. 35; affd., 281 N. Y. 652; Solimine v. Hollander, 128 N. J. Eq. 228; 16 A. [2d] 203.)
/ In so far as the unproven properties are concerned, certainly they must be regarded as speculative. The trial court has not imposed the burden and expense of such speculation on Pan Am, but has given it that which was found to be profitable if later the oil therefrom was sold to Pan Am. There is also lacking in this case the element of necessity, which sometimes entitles a corporation to claim on the theory of business opportunity. Had S. 0. & G. utilized all of the oil for its own corporate purposes, Pan Am could have purchased its own requirements from other producers at prices similar to those charged by S. O. & G. Furthermore, it appears that, after the decision was made to have Pan Am embark on production on its own account, desirable properties were still available. We think the facts do not warrant the drastic and unprecedented relief here given.
Wilson.
At the close of plaintiffs’ case the trial court ruled that defendant Wilson, who did not become a director until November 26, 1934, was not hable on the processing or production issues and could be held responsible on the pipe fine and purchasing issues, if at all, only on the renewal contracts; and that only defendants in office when the processing contract was signed could be held hable on the refinery issue. Nevertheless, the judgment holds Wilson liable on all three transactions on which the other directors were
Plaintiffs’ Appeal.
Finding there was no conspiracy, the trial court properly denied plaintiffs’ motion to have all exhibits and oral testimony held admissible against all defendants and correctly ruled such evidence was admissible only against the several defendants who had part in the specific conversation or writing in question. From this ruhng plaintiffs did not appeal. Yet in their briefs they frequently use against all defendant directors evidence held admissible only against Indiana or specified directors. In the absence of such appeal plaintiffs are concluded by the ruling, and the exhibits and oral conversations may be considered only against defendants who had part in the specified exhibit or particular conversation.
Plaintiffs’ complaint and bill of particulars and proofs charged deliberate fraud, bad faith and conspiracy. At the close of plaintiffs’ case, after hearing evidence for months claiming to support such charges, the trial court expressly found that there was no prima facie case of actual fraud shown against any of the defendants. That finding was never revoked. In a comprehensive opinion covering all the issues and embracing 190 pages of the record, ample facilities were afforded to say there was fraud or bad faith if the court intended so fco find. It did not do so and dismissed the conspiracy count against all defendants.
The cases cited do not support plaintiffs’ contentions which would deny Indiana the right to vote its own stock not merely at a particular meeting or for some particular purpose but at all times and for all purposes, although its stock was lawfully acquired and legally held. The effect of the additional injunctive relief asked for on plaintiffs’ appeal herein would, in our opinion, be to deprive Indiana, majority stockholder holding seventy-eight per cent of the Pan Am stock, of its property rights in its own property. Indiana has a valid property right, the ownership of its stock carrying with it the inherent right to vote, and nothing has been shown to justify depriving it of such right. For these reasons, in addition to our rulings reversing the judgment on defendants’
Conclusion.
This is not a case in which directors fraudulently in bad faith and with personal profit to themselves have deprived the minority of their pro rata share of the company’s assets or frustrated the company in its business. The minority received their pro rata interest and, under the management of the directors attacked, the company expanded and prospered. At the time of the reorganization in 1933 the company was not producing oil; in 1939 it was producing from 5,000 to 6,000 barrels daily and had taken some 5,500,000 barrels from its property; it had acquired and built pipe line facilities, developed a fleet of tankers and built what is referred to as the most modern refinery in the world with a daily crude capacity of 93,000 barrels. Under the supervision and management of these directors gasoline sales have been increased from 8,800,000 barrels in 1933 to 16,300,000 barrels in 1939, and all sales have shown an increase in the same period of about $42,000,000. The earnings schedule has been changed from a net loss of nearly $1,500,000 in 1933 to net profits of more than $5,000,000 in 1939, and meanwhile nearly $9,000,000 dividends have been paid. The value of consolidated assets has risen from about $66,300,000 to about $90,300,000.
By the decree appealed from the defendant directors are forbidden under pain of contempt of court to determine on their own judgment whether Pan Am shall have a separate purchasing department or purchasing subsidiary or continue to handle its purchasing as- it now does, through its own personnel; they are ordered to construct a gathering system and trunk pipe line whether or not in their own judgment it is wise and expedient for the company now to do so. In the final analysis on the facts disclosed the decree substitutes the court’s judgment for that of the directors, and in its present form draws the court more and more deeply into the directorial management of the oil business, balancing the probabilities of profitable results, decreeing those which seem to the court to promise best results where there is a difference of opinion between minority and majority directors, and enjoining others. No case has been made out. which plainly shows that the action taken was “ so far opposed to the true interests of the corporation itself as to lead.to the clear inference that no one thus acting could have been influenced by any honest desire to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company and in a manner inconsistent with its interests.” (Gamble v. Queens County Water Co., supra.)
Martin, P. J., and Callahan, J., concur; Townley and Cohn, JJ., dissent and vote to affirm.
Judgment, so far as appealed from by the plaintiffs, affirmed; judgment, so far as appealed from by the defendants-appellants, reversed, with costs to the defendants-appellants, and the complaint dismissed on the merits, with costs. Settle order on notice.
7 Clark, House of Lords, 770, 771.
