*1 CUMMINGS, ARTISTS al. UNITED v. et INC., CIRCUIT,
THEATRE et al. 1, September Term, [No. 1964.] *3 25, 1964. November Decided *4 and Ham- argued J., before C.
The cause Henderson, Marbury JJ., Horney, Sybert, and and mond, Prescott, Circuit, J., Judge Chief Fourth Judicial McLaughlin, assigned. specially Jr., Simpson, P. Thacker
Stephen Duggan, with whom were Bartlett, Kwit; Skadden, Hawkins, Richard Kenneth J. & Plom, Arps, Joseph H. Plom Arps, & H. Meagher, Slate Leslie Kalmus; Martin Marbury, and M. and & J. Geoffrey Piper brief, Noonberg, and for the McDonough ap- A. Lewis pellants. Pomerantz, Pomerantz,
Abreham Levy, with whom were L. Alim, Block, Celler, Weisman, Spett Haudek & Julius Levy; & Milton Sheinberg, Adolph Kaufman; C. Weisman and S. Prisch, brief; Prisch and H. on the Herbert Goldfluss, A. and Bruñe, Bruñe, M. with whom Iglehart Robertson & Robertson, Jr., brief, Harrison M. on the for the appellees.
Sybert, HornEy, J., delivered the of the Court. opinion J., McLaughlin, J., specially assigned, Dissenting dissent. McLaugh- opinion by Horney, J., infra, at page which lin, J., concurs.
This is an appeal by Maxwell Cummings and other com- plainants below from two decrees the Circuit Court of Balti- more City (Oppenheimer, actions, entered two J.), equity each denying injunction restrain consummation of an “Agreement and Plan of Reorganization” (hereinafter called “Exchange Agreement”) which had been entered into by one of the appellees, Circuit, United Artists Theatre (United Inc. Artists), with Michael and Marshall Naify and other members of the Naify family, who are the other appellees. By agreement parties two suits were equity consolidated for trial action, with a mandamus the subject matter of which was closely related actions, to the equity and the court handed down the three decisions simultaneously. Although there was no appeal from the decision in action, the mandamus the close relation- ship the three suits will necessitate some reference to the mandamus case later this opinion. The two equity suits will be treated together, below, as was done since the only signifi- cant difference between them is that all parties to the Exchange Agreement joined are as defendants in the second injunction action, whereas in the first only United Artists is the defend-
6 ant. The suits Maxwell originally were instituted by appellant Montreal, Quebec, a director and shareholder However, United Artists. subsequently were complaints and amended to include 17 other shareholders as complainants, the actions made representative. to the
A brief examination of the facts relatively leading up execution of will be United Exchange Agreement helpful.1 Artists is a with its Maryland corporation principal place which, affiliаted through business in New York and directly business. in the motion exhibition companies, engaged picture stock It is a an authorized capital held publicly in 1,600,000 stock traded shares of a class of common single P. George Skouras over-the-counter market. Since years had and for several been the of United Artists president of directors. (He had been chairman of the 13-man board Artists’ prin soon after the trial One of United below.) died Theatres, Inc. stock interests is in California cipal in the motion which is a Nevada (United Cal), corporation, business, from in estate exhibition business and the real picture income is derived. the latter of about one-half of its which stock of all the issued United Artists since owned 50% owned the other family of United Cal and the Naify 50%. clan, chairman Michael father of the Naify, Naify in fact controlled the 8-man of directors of United Cal and sons, Marshall and Two of Naify’s and United Cal. operated Robert, of United Cal. vice-president president served corporations-— n directors of the two interlocking There were Skouras, Mar George four on both boards: P. directors served Hassanein, Bollengier. M. and A. shall Naify, Salah E. Artists, it was in became of United president When Skouras 1951), lost (it actually money ap- financial situation declining of its theatres. location some parently poor due part days produced a court lasted 1. The trial in the lower addition, transcript pages exhibits. and over 100 over pages in evidence. depositions were introduced than 1200 of more lengthy opinion, court, filed 40 individual addition facts will findings in its discussion of fact. This Court attempt exhaustive. be However, in- But United Cal financial condition. good *6 plowed Naify stead substantial dividends Michael issuing back earnings corporation. most of United Cal’s into that Skou- Artists was ras dissatisfied returns United became with the and as early from of United Cal its receiving ownership 50% to some regard as 1952 made to Michael in Naify overtures kind of unification Cal. of United Artists and United close friends Michael and had been
Although Naify Skouras had never and business for years, associates many Skouras him of his rather dominated and was unable to shake out Naify From to 1962 conservative United Cal. operation Skou meetings ras made intermittent overtures to Naify. Several for unif rejected were held each any proposal but time Naify ication.2 The with the car negotiations mainly Naifys negotia out at times others took though ried over by Skouras one Arnold tions. Hassanein was but more C. Child- frequently Ar designee house—a director of United Cal and a of United negotiator. tists—was the Artists and the fam- (United Naify just complex 2. one facet of a Unification with United Cal plan strengthen On of United Artists its economic outlook. Prospectus January 25, in issued a connection United Artists 400,000 public stock with the sale of shares of its common some heading following contained the “Plans which statement under management time has for for some Consolidation”: “The UATC working plan or otherwise on a into been consolidate UATC companies unify or all in it direct some or has a which acquisition in these interests indirect interest. The of the outside hoped through companies of com- the issuance to be achieved stock, 600,000 been that have mon and shares of common stock * * purpose.* In authorized but unissued are available this are acquisition opinion management, of these interests will integrated operation those theatres which make for a more operated presently has an interest but which are UATC improving UATC, resulting in economies and also definite position year, in furtherance In the samе current UATC.” Rowley Artists, plan, interest which owned United 50% Theatres, agreement bought of settle- In the other 50%. whereby parties there other ment was entered into with several Artists, exchange between United be an of stock Skouras would Corp., Metropolitan Playhouses, Inc. This and Theatres Reorganization” its fairness is known as “Eastern York. New are the courts of reasonableness now before the United ily right each had the four members to appoint Skouras, Marshall Cal at the invitation of board.) board to Naify help became a member of United Artists Artists. Max- familiarize the with the affairs of United Naifys well Artists shares Cummings began acquiring 1962, following and became a director in February July discussion with Skouras. 23, 1962, to Michael Naify. (It
On wrote February Skouras until should be noted that did not meet Skouras letter, his again In his mentioned May 1962.) Skouras June long Artists’ return standing dissatisfaction with the United investment, its that the bank- United Cal and went on to state ers of and that their pres- United Artists were also dissatified sure him under the con- might to exercise the require power tract a neutral Naifys between United Artists and the to have *7 divi- chairman of United Cal’s board if United Cal’s appointed increased, dend declarations were not but indicated Skouras that merger he did not since he a thought favor such move or Michael deal would be best for all concerned. buy-or-sell 2, 1962, this letter on March Naify rejecting answered merger leaving negotiations but the door for proposal open 1962, the basis of a deal. In the fall of pro- buy-or-sell Skouras to half in United Cal for posed interest purchase Naifys’ $7,200,000 At the rejected by Naifys. but this proposal later, Marshall Naify sug- time of this or sometime rejection, shares of gested Naifys exchange to their Skouras 1,200,000 for shares of United Artists stock. United Cal stock this. rejected Skouras to
Cummings became aware desire apparently Skouras’ of United Artists with United Cal at least unify operations 1962, as as or when he first met Ac- early Skouras. May June own had in Cummings’ to he mind some cording testimony, management kind of of the United Artists even when shake-up shares. He wanted began purchase specifically he first to Skou- however, he men- resign ras to as did not president; apparently, 1963, early tion this to until some nine months after Skouras Although he had become director. desired a Cummings change during he seemed from management, period July been in general until 1963 to have favor perhaps May Artists—including of United Eastern reorganization plans with United and the unification fn. 2 ante) Reorganization (see his de- noted, first time made 1963, he for the In as early Cal. known to management the United Artists Skou- regarding sires that things, other Skou- among ras. At time he proposed, that Artists, and that Cum- ras down of United president step 13-man board of to name six directors to the be allowed mings these rejected proposals. United Artists. Skouras in early by Cummings other proposals There followed several Artists stock all of including an offer to buy re Again owned these family. proposals Skouras led Cummings jected, but the discussions between Skouras on April to a letter to Marshall writing Naify3 Skouras letter, and knew of the Apparently Cummings 1963. Skouras letter to contents. Cummings testified that consented its had conversations with Cum stated he had several Skouras with the mings becoming and that impatient slow Cal and that Cum negotiations with United progress buy had other that he mings suggested, among things, Skouras more negotiations Naifys out and then with the pursue Cal, bring to to effect a out United or vigor merger, buy deal, successful, bring about a if about buy-or-sell but the dissolution of that Cummings’s United Cal. noted Skouras suggestions litigation would lead to and that therefore probably the best to do and the thing Naifys would be Skouras find a solution themselves. 26, 1963, let-
On April Naify Marshall replied Skouras’s ter after He family. it with the stated that discussing Naify *8 was still to a but that if family opposed merger, necessary deal buy-or-sell might Although be accepted. language it, this letter does not indicate letter apparently Skouras caused concern on great result was Naifys’ part. negotiations between United Artists and the were ac- Naifys ne- May celerated. The called Naifys attorneys Hassanein, Skouras, gotiations between for and Michael Naify Naify’s health, negotiations 3. Because Michael bad were Naify, then them often with Marshall discussed made who family. his father and other members of the interest their half exchange Naifys led to a proposal Before 1,000,000 Artists. of United for shares in United Cal noted, was pro- Cummings, negotiations, these during Artists United changing methods of several posing Skouras all 1963, had rejected after In late May Skouras management. other him that he with informed Cummings previous proposals, for control. fight intended to begin proxy shareholders meeting 1963, 23, announced United Cal On May 3, At on 1963. Skou- to be held of its board directors June 11, for July was rescheduled meeting ras’s request attended, in an resulted meeting, which 1963. The Skouras 2, 1963, Nai- which the under August reached about agreement 725,000 for shares in United Cal all of their fys exchange would shares of United Artists. In form. to take fight beginning proxy that time
By upon demand made written had Cummings late June 30, 1963, July and on a list of shareholders Artists for United meet a special requested and six other stockholders Cummings di of all on the removal to take action of the shareholders On their successors. rectors, and to elect Cummings, except 5, 1963, meeting regular monthly of a notice August 1963, 7, August on of directors to be held Artists board the terms reference to No specific was mailed to the directors. let but the was made Artists Naify-United submit a report would president ter did mention in United remaining interest the proposed acquisition 50% 6, August would be taken thereon.4 On and that action Cal 1963, Naifys had at the negotiations request further 740,000 shares would receive Naifys and it was decided that the 725,000. stock, lower court than (The Artists rather of United “to compensate demanded this increase Naifys found that the Artists on of United contingent liability for the Naifys deficiencyjudgment.”) income tax held. meeting the scheduled directors’ August On regular required meeting as it was a 4. notice was this No fact, meeting letter reminder. and the was a mere already notice lеft for the York when had New reached Montreal. *9 absent.5 board, directors were Skou only the 13-man three
Of sum Exchange by Agreement ras the discussion of the began it, prop to leading explaining marizing negotiations up buy control acquire would which Artists erties United the acquisi how stating briefly out the and finally Naifys and left the then Naify tion was Marshall take place. busi on to other after hoard moved did not return until ness. Cummings asked where report,
After his completed Skouras was to exchanged to be stock which was the United Artists four come from sources: come from. it would He was told that 450,134 9,400 shares Artists treasury, shares from the United unissued, 257,707 were to be shares were authorized but then Theatres, own shares Inc. purchased (whose from Claire Sainte Cal), half Artists and United were owned half and United 22,759 At from United Cal. acquired and shares were to be .Babb, director, financial Bollengier, request Jervis J. Artists, United on the reported and treasurer of vice-president total assets and net worth of United Artists and United Cal individually together. and He distributed to the members schedules, had at prepared request five which been Skou- ras, of United and Artists showing earnings Cal United past of the stock showing acquisition effect projected Childhousе, earnings. Arnold a director and treasurer of United Cal (by designation Artists), presented United then an oral Cal, including United individual report evaluating evaluation all of Cal’s properties. Cummings United asked whether any Artists’ valuation United had been made as had properties been done for United Cal and was answered in the negative. present, only directors 5. Of the three one had been con- regard Exchange Agreement. Among sulted the direc- S. and A. E. present George Skouras, tors P. M. Hassanein Bollengier, directors, all of whom were also United Cal Naify, president Marshall of United Cal and member of its board parties and of the Artists also board and one of United Agreement. Exchange Exchange Under the terms of Agreement, Naify 81,955 Marshall was to receive shares United exchange Artists stock in for his shares Cal. he Also Stephen 15,525 Naify receive as trustee for Michael shares Naify 15,525 and as trustee Marsha shares. *10 Cummings that made suggested one be but did not the board He agree. then asked matter be share- submitted to the Frisch, holders of United Artists for Mr. approval. secretary Artists, of United stated that counsel that Maryland had advised shareholder was approval Frisch, who is also necessary. Artists, counsel for United presented to the meeting a of copy the Exchange Agreement and summarized its provisions para- graph paragraph. Cummings then action on requested that the matter be him postponed give time to the agree- study ment. The board this rejected suggestion. The was then approved only with Cummings voting in negative. the He- his gave as reason that he needed time to examine the agree- ment.
Marshall Naify then returned to the meeting. The board moved on to the written demand for a special shareholders’ meeting which had been filed with 30, the on July Frisch that 1963. stated special counsel had in advised a writ- ten that opinion request did not conform to Maryland cor- law or to poration by-laws corporation. The opinion stated that the number shareholders demanding special meeting was not sufficient. The for request the special meeting denied, in voting the affirmative. The- only Cummings then a considered demand rec- Cummings inspect Artists, 30,. ords of United which also had on been filed July Frisch stated that upon 1963. advice counsel the de- special rejected, Cummings- need not with. It was complied mand be The board then a voting appointed alone the affirmative. aсtion in the which was proxy fight committee to take proxy Cummings voting under abstained from this already way. adjourned minutes after the connection. Forty-five Naify with Marshall was executed Exchange Agreement Naify family. behalf of the signing 30,. August Agreement Exchange Under the terms of to tax On that clearance). set (subject date was closing 740,000 date, of its- all of shares Artists was have United for all of the stock in exchange Naify family’s stock for ready consummation Cal. effects United One Ex- hold about- be that the would Agreement Naifys would change of the shares of Artists. 46% August On a for a writ of Cummings petition filed mandamus law court He the court below. prayed order the board of directors United Artists to call meeting of its shareholders for the all of removing purpose successors, directors except and to elect their since the board had refused to call request such meeting. On the same day Cummings filed a to enjoin suit equity United Artists from consummating Agreement. the Exchange 22, 1963, August On a second suit was instituted ask- equity relief same as in the first but requesting that all parties the agreement be enjoined from consummating it. above, (As noted these complaints were subsequently amended to include other shareholders as complainants besides Cum- mings.)
In the mandamus action Cummings asked for judg summary ment and the lite, suits for equity injunctions asked pendente but it by stipulation was agreed that all three cases would be together
tried and that the Exchange Agreement would not be consummated until after the decision in the The court below. S, lo-wer court 1963,6 handed down on its decisions December ordering United Artists board of directors to call a special 7, of meeting its shareholders refusing but to the con enjoin summation of the latter connec Exchange Agreement. the found, effect, tion of Judge exchange the Oppenheimer fair, critical, stock with the was not but Naifys only indeed to 3; opinion findings The 6. of fact filed on December and were 5; the order and decrees were filed on December the of and writ mandamus was on December 6. issued question presented Briefly 7. the in the action stated mandamus special meeting by the was whether for was made demand a by required holders of of shares United Artists as 25% question (1957), 38(c). Code Art. sec. The to this answer by turned certain Artists shares held whether United Sainte Theatres, Inc., indirectly by Claire owned United Artists. purposes of a The court held that for the the demand for below special meеting by the shares held Claire were out- Sainte standing meaning (1957), 43(b)(1), of Code Art. within the sec. requested outstanding shares had and that thus 25% wrongfully meeting had refused to and the accede demand. and that the motiva- corporation, principal Artists
the United by Cum- attempt was not frustrate the tion of the but company’s management, mings change and others to in that a “Substan- corporate purpose rather serve legitimate, virtual freedom with California’s tial economies could be effected reserves; be better man- there could from cash high debt savings with in refinanc- of United Artists agement debt and California’s operation Artists’ losses ing; tax sav- there would be substantial consistent record profits, a uniform ings; purchasing organization there could be operated hundreds motion theatres owned picture management could be more effective two there companies; and large use of executive the theatres for the better personnel; United Artists losses of the threatres which operation cash leases be eliminated long-term under could operates settlements.” filed, and decrees were same which the order upon
On the day in the action for filed a trial motion mandamus post for relief to include request leave amend his prayer consummating from court order the defendants to refrain share- holding Exchange Agreement pending special court leave to amend. There meeting. holders’ denied no but from the only now from the mandamus decision appeal Agreement actually decisions. The equity Exchange two of the stock after the decision below exchange consummated by was held to the pursuant shareholders’ mandamus, majority (as aug- but shareholders writ *12 against the shares issued the voted re- Naifys) mented of moval the directors.
I of is the lower appellants The contention the court first the refusing enjoin in consummation the Exchange erred finding in the mandamus action that it after was Agreement, a continuance of denial during wrongful executed of a The relief meeting granted, of shareholders. they say, special that the board of directors incongruous. They argue could Agreement while Exchange unlawfully not into the deny- enter shareholders’ meeting for a and that special request into under such entered circumstances is re- void
15 add, And, of the board’s illegality gardless they fairness. the fact that action аt the is August meeting compounded the directors of the shareholders was opposed knew a majority also continu- not to the but to the only Exchange Agreement board, in office Cummings. ance of the members of the except There is no board’s refusal to call real evidence that the good shareholders’ was not made faith. On coun- contrary, the board acted on the advice of experienced sel and legal this advice to be erroneous the although proved question involved was one. The court below simple to reach able a decision the mandamus action after full only consideration of law in a trial developed complete the facts and hereafter, Moreover, on the merits. as we shall develop to make advantageous had a choice between accepting offer that might well be lost the loss by delay, risking transaction calling spe- action thereon by postponing cial meeting, which had been advised need not do. they they
In support quote their the follow position appellants ing from the Hand in case of opinion Judge Learned Linahan, 144, den., Moore v. 117 F. 2d Cir. cert. (2 1941), Moore, Sаrgent sub nom. & Co. v. : U. 628 (1941) S.
“* * * directors, although so hold long of- they fice and use an honest are immune from judgment, * * * the control of their shareholders. power commit a one day before know they they are to be to a displaced, course known to be disap- proved by majority not one to be generously extended. the shareholders Normally should have their way.” Maryland cases support the general rule as stated by Judge Inn,
Hand at the beginning the quotation, Rolling Inc. v. Iula, A. cited, Md. 2d 758 and cases (1957), but we find in the nothing record the instant case to it bring within the exception recognized in the balance of the quotation. There is no showing that the United Artists board did not act good regard faith. to the allegation that the board knew of the shareholders was majority opposed the Exchange Agreement and to the continuance office of the members of *13 not show does the evidence board, Cummings, than other against voted would have of the shareholders majority
that a have replaced or would Agreement Exchange of the approval of fact As matter given opportunity. if the board members with Skou- cooperated had the lower court found Un- in 1963. early with United Cal during negotiаtions ras court’s here situation, supports the evidence like the Linahan meet- August board at the Artists that the United finding to be faith believed it in good on matter which ing passed culmina- was the and which for the benefit of negotiations. of at least ten years tion N. Cooperative, Knolls v. The rely appellants Lazar in but point, being directly 1954), Ct. (Sup. Y. 2d 407 S. us. one before from the substantially we think the case differs Lazar, corporate of the directors found that the the court meet- call both an annual refused to defendant had improperly re- consider the meeting and a stockholders special to call both the directors The court ordered moval directors. motion stockholder’s meetings granted plaintiff and further making from the corporation for an injunction prohibiting of the corporate in which some final to a partnership, payment interested, for construction officers and directors were been meetings until the had house for the corporation, apartment bar from the one at But find the case distinguishable held. we were the The directors office ways. in three (1) Lazar York court The New cooperative. original incorporators constituted at the time the board was illegally held effect that because under question, of the transaction there State’s members to serve only Cooperative Corporations Law stockholders, first annual which under meeting until the months directors should have called many pre- law the interim In the (2) by-laws coopera- but had failed to do. viously, annual meeting was set for the first shareholders’ a date tive since no had been held but the court found that (3) board was its own shareholders of violating by-laws. the calling had demanded of a share- cooperative for the stated the re- purpose considering holders’ meeting directors, but the board had refused. The court moval of pointed *14 the call- with dealing New York statute out that under the corpora- of meetings of shareholders’ special cooperative for a the meeting a requirement tions there was specific before us of held In the case removal directors be “promptly”. on 7 a elected board August board of directors was duly the a an- not an interim one which had refused to call first nual shareholders’ there was no of United meeting; violation a board; and, the action of in by-law by Artists the contrast law, the New York the statute to relating Maryland special fixes no meetings meeting shareholders’ time when such must be held. cases, also cite three other Glenn v.
Appellants
Kittanning
Co.,
340,
v.
Brewing
Atl.
Pa.
510
Trask
(1918);
St.
Chase,
Kullgren
&
1910);
Navy
Therefore we a lawfully hold that where directors denies a for a shareholders' request of directors good and then act as a board faith continues to in a manner on the carrying corporation business the which best the interests of the appears corporation, to serve or bad faith the board agreement by entered into without fraud such time is not the Although aрpel- void. during necessarily of allowing lants that such a would have the effect say holding shareholders, a board forestall control a con- adequate effect of trary holding would have the preventing from on carrying directors the business with- corporation out resort to the courts. While the do not frequent appellants claim that a board of directors should not be able to carry business while to call the any refusing special meeting, they contend that where an action has an effect on control of the where But we think that may the board not act.
corporation, to further a good corporate of the action is primary purpose faith, rule would suggested purpose good and it taken of directors board. The board unduly power limit such except all of a may powers exercise law, are reserved to the stockholders. charter or by-laws ; see also Art. sec. 9 52(a) Code sec. (1957), Art. given relief under facts of this case the (a)(7). Therefore was not incongruous.
II is that appellants second contention major court the consummation enjoin “erred refusing below the motive such Exchange Agreement, since *15 in of Artists”. management was to a the United change frustrate In between interlocking before us there were directors the case not only United and Marshall Naify Artists and Cal the sat on one of to the parties both boards but also was Ex- change Although actually participate he did Agreement. never- the 7 he voting August meeting, discussion at the the theless to negotiations leading up took active in the part of moti- moment the agreement. Putting aside the question vation, circum- must first decide whether under the other we the stances be a test in upholding of the case fairness should earlier, fact that As said mere validity we agreement. wrongful the board approved by during itself not of refusal call shareholders’ does to a is whether agreement, question but the here invalidate Marshall interlocking directors and added circumstances fair- consideration of the Naify’s prevent judicial participation ness of agreement. Naify, to the involvement Marshall respect
Even his is fairness is the rule test. generally proper accepted Lattin, referring treatise law of Professor corporations, on the us, to the before states: similar one situations is not necessary the director’s presence “Where is not and his vote quorum required constitute resolution, most courts hold transaction carry the * * This *. rule is prac- if fair to the valid
19 tical and tends the sort of contract other to produce duty, transaction which strict adherence to directoral circumstances, is, in other tends to produce—that fair contract. It gives corporation protection of an unfair which is all case contract the protection it needs.”
Lattin,
6,
12,
Corporations, Ch.
sec.
258. The au
p.
Law of
thor’s statement of the rule is
text
other
writers.
supported by
Henn,
Corporations,
239,
Handbook
sec.
See
p.
Law
374;
Fletcher,
3
Private
Cyclopedia
Corpora
Law
tions,
962,
437. The
sec.
cases
Maryland
recognize the stated
p.
Iula,
Inn,
rule.
Rolling
Inc. v.
supra;
See
Indurated Concrete
Abbott,
v.
Corp.
195 Md.
result the fact that two have corporations directors does not of itself invalidate a between transaction them.” No fraud on of the directors was interlocking the part shown. the circumstances Therefore surrounding approval not Exchange Agreement do make the fairness in- test applicable unless there is merit the appellants’ contention that motivation of the board is of directors here. significant
The court below there found that were at least two motives
20 Exchange Agreement:
for the board’s
action
approving
Artists,
that
of
Cummings might
fear
control Unitеd
gain
Cummings;
since at least
over
Naifys
preferred
Skouras
and the belief that the consummation of the
would
agreement
maintain,
serve
The
legitimate
purpose.
appellants
corporate
however,
that the fear
finding
that the court was in error
not
control was the
motiva
Cummings’ assumption
principal
action;
tion for the board’s
contend in the alternative
they
that the mere
the lower court that the fear
Cum
finding by
mings’
motivating
required
of control was a
factor
assumption
fairness.
holding
regardless
was invalid
cite several cases to
their alternative contention.
They
support
The
Bond Ass’n
Mtge.
decision of this Court cited is
v.
only
Baker,
157 Md.
while
do
further than the
appear
go
Maryland
not
as far as the
contend
do. In Trask
go
appellants
they
do
Chase,
Atl.
is-
supra,
1910),
v.
which involved the
(Me.
control,
sale of
so
suance and
stock
as manipulate
although
necessary
the court did not hold that it was
that manipulation
transaction,
of control be the sole
it did state
purpose
it must at least be the
primary purpose.
that
The court
Co.,
(Wis.
v.
J. Luther
This brings us to the court appellants’ contention below erred in not law, finding, a matter of that manipula- tion for control was the the board’s principal motivation for action on August however, 7. In evidence, view of the we do not find that the lower court was in its determination wrong that the principal motivation was to serve the interests best the corporation. Although negotiations it is true that the the Naifys became accelerated after informed Skou- ras that he intended to is uncontradicted wage proxy fight, it that negotiations had been on for a of ten going years pеriod prior to that board, time. All members of the Cum- including mings, and, were well aware of appar- the fact that Skouras directors, ently, the other had a unification of some long desired kind with United Cal. The that court below found specifically United Artists needed additional and that the working capital United Cal assist- furnish it with considerable operation would ance in this added regard. Cummings’ merely impetus threat negotiations sug- is no merit to the already There progress. gestion had the enter into this Skouras control, true, his trans- perpetuate control. it is would be ferred to the on friendly who were terms with Naifys Skou- ras, but there is no evidence of an or im- agreement, express plied, under which would retain actual control. The Skouras contend, however, that appellants significant there no dif- *18 and control themselves directors perpetuating ference between assume, if we friendly group. it to a transferring Even merely this would without that in a case contention deciding, proper merit, where the lower court be of under the facts before us n hadbefore it sufficient evidence to find that mo- principal control, caused by was not related to the effect on control tive the board’s action is not of compelling significance.
To their contention that the motivation for primary support to con- Exchange Agreement the action taken on the related trol, the state that the was and agreement negotiated appellants and in with such such that the board approved speed secrecy 'did not have an consider the which opportunity advantages was claimed it would bring it to the The corporation. appel- one- completely lants also maintain that the was agreement was that information Naifys, inadequate sided favor 7, of directors on and there August to the board that presented Art- any was a absence of valuation of United complete prior The ists’ before the board approved agreement. properties by «courtbelow found that specifically agreement action August meeting the board at the in all proper respects, the board members considering that familiar generally leading with the to the negotiations up agreement Artists, after and that financial of United standing assets and finally (but pos- ten Michael negotiations, Naify years and that be- exchange, in favor of the sibly only momentarily) dis- could Naify’s quickly cause of personality opportunity We feel that the factors mentioned above appear. surrounding its relate primarily Exchange Agreement approval behind its approval. fairness not to motivations purpose a good corporate Therefore we hold that where n being for an action motivation and is the principal furthered directors, of such fact that the consummation on the control of the corpora- transaction some effect may have fall will stand or agreement depend- tion is immaterial and the fair to the corporation. on whether it is Ill “in the court below erred refusing claim that appellants n of the Exchange Agreement, the consummation since enjoin requisite without merger a de effected such facto 23, re sec. 66(d), Art. Code approval”. (1957), shareholder of the shares holders of favorable two-thirds quires vote be with the court merger. agree We accomplish order to argument do support facts in the case low that the It merger. facto would effected a de Exchange Agreement situa merger in order for a court to find a de facto seem that of a formal must be merger present most the elements tion a specificdesignation agree obvious exception with the Henn, Cor in his Handbook merger. ment as a Law porations in sec. states at that: (cit. supra), p. * *19 “* * in case of one or the a more cor- merger another into with the result porations merge cease to exist and the latter’s corporate former exist- * * * continues ence “* * * of continuing the as of the time corporation, * * * the of the constituent takes over assets merger liabilities, their and issues its and assumes corporations basis, for the of stock, stock exchange on some fair constituent corporations.” the appellants of is The present. none the elements mentioned
Here their conten- support several decisions rely on out-of-state cited each case carefully analyzed Judge Oppenheimer tion. were all distinguish- and concluded they the that by appellants with his and therefore agree analyses able on their facts. We Applestein cases. necessary only it to discuss one the deem Corp., 2d 146 (N. Super. Board & Carton 159 A. v. United J. of all the relied by appel- is cases the 1960), representative “* * * that (at 154) every case court held p. lants. In that the merger in a is found corporate factor this present corporate a formal designation transaction plan, except, perhaps, court found that was a ‘merger’.” as a The there transfer of other; and all assets of one corporation all the shares the to the of all the liabilities of the one assumption the by other; a of interests” “pooling corporations; dissolu- tion of one the combination of corporations; officers of both corporations; and directors the shareholders of the corporation would surrender their shares dissolved and receive issued if we newly surviving corporation. shares Even assume, all a formal deciding, without the elements of such, merger, designation need not be except present a a court to find de facto in the case before us no ele merger, ments of formal the court merger present. agree a are We no below that there is evidence that United Cal would not con tinue to exist as a as a owned separate corporate entity wholly out, of Unitеd Artists. As the court subsidiary pointed Delaware courts have refused find a de facto situ merger ations more than the one before resembling merger closely us. Co., v. American Maracaibo Fidanque See A. 2d (Del. But for our 1952). a statement purposes made the court by Orzeck v. Englehart, 195 A. 2d is 1963), (Del. “* * * more importance: is not the purchasing corporation owner of the assets of other corporation, merely but stockholder with all Nor do the incidents such. the corpo rate identities merge reason one solely purchase of all of the other’s stock.” Therefore record upon present we cannot that a was either or ef agree merger contemplated fected, since a merger no elements of in the appear agreement, express implied. does not find that that if this Court appellants argue it should find that merger, amounted to de facto about management very easily bring of United Artists can
a merger without shareholder
under the
provisions
approval
under
Code
Art.
it is true that
*20
(1957),
Although
sec. 67.
this
it
merge
section a
be able to
into
parent corporation may
owned
shareholder
it is
wholly
subsidiary
approval,
without
actiоn
purely
whether such
will eventuate here.
speculative
IV
This
us
brings
to the contention
the
that the
appellants
court below erred
was
finding
Exchange Agreement
It
fair.
should be noted that it
the burden of
placed
the
proving
directors,
fairness of the
on the board of
agreement
apparently
the
rule rather
applying
duty
than the business
fiduciary
judg-
Crothers,
Transport,
573,
ment
Ross
rule.
Inc. v.
See
Md.
;
A.
Fitzgerald,
2d 267
see also Warren v.
(1946)
189 Md.
476,
As the trial lasted fourteen noted Exchange to the fairness the testimony tial of the related part as witnesses financial were called Agreement. experts Several the court had the evaluate opportunity both sides their as were made. The court de- substance of statements they voted an extended of its to a discussion portion opinion do not it neces- fairness of the Therefore we deem agreement. question great to discuss the fairness detail. sary said, As we have the court below found that the correctly directors’ considera- August gave adequate tion to Exchange Agreement all circum- considering stances appellants involved. The contend that the agreement true, one-sided in favor it is as the Although Naifys. found, lower court that the warranties and con- representations those of United tained in were almost agreement entirely Artists, that this alone would agree we with its conclusion render unfair. United Artists as agreement and it is uncontra- dealing with the individuals Naifys dicted that were as to the af- relatively uninformed Naifys fairs of A closely related contention is that the Artists. were furnished with Naifys complete information relative to execution Artists prior the financial condition of United Naifys terms that the of the all agreement protective included therein. desired to in the were agreement have placed found, risks in en- taking As the Naifys court into the since the annual statements tering agreement heavy obliga- showed Artists had two that United corporations relatively tions Cal’s debt was small. whereas United Even would though give prac- the consummation tical Artists to the as the court ob- Naifys, control United be worth less than a may part.” served “the whole fairness of detеrmining The lower court the agreement relied this Court the case of heavily language Warren Co., 478, 483, Md. v. Balto. Transit 154 A. 2d 796 (1959), “* * * is to be wherein we indicated that valuation determined: value, all material factors and elements that by appraising affect *21 circumstances, in- indicated weight to each the giving assets its and its operations, of the business the nature cluding of its liabilities, the investment value earning its capacity, and like stock, stock, of stocks price value of the the market character, and regularity the amount surplus, the size of the dividends, company, and industry prospects future a factual will, is basically if Therefore fairness any.” and good be dis- findings lower court’s will determination Rule 886 a. erroneous. Maryland turbed unless clearly the dis- recognizes its throughout opinion The court below of the two corporations. between the financial conditions parity ratio of United five years, It found that “During past has been approximately its current liabilities Artists’ assets to one, California’s one to minor fluctuations. only with [But] one, a ratio which is almost three to current ratio assets-liability maintained through five-year period.” has been more or less dividends, regular made As to it was found that Unitеd Cal earlier, large as noted it retained though, declarations (even de- Artists had not earnings), of its whereas United proportion im- no foreseeable clared several any years, dividends provement. in relation to the
The record this case is very complex assets, lia- of the stock of the two and their corporations value stems, believe, at least bilities and we earnings. problem from the that the several financial called part, experts fact as to which should be accounting witnesses differed method court used of the items mentioned. The lower valuation chose to to the which give greater weight testimony those the fairness of the out agreement, tended uphold pointing that these individuals were more familiar with the pic- motion ture than the others. hearing exhibition business It found after all the was fair testimony Exchange Agreement in fact favorable to Artists its considering relatively financial condition. poor
We hold that the test fairness was to the properly applied all Agreement and that under Exchange circumstances pres- finding ent the court was correct fair. appellants
Decrees affirmed; to pay the costs. *22 in which filed J., following dissenting opinion,
Hornby, concurs. J., specially assigned, McLaughlin, lower court decrees of the majority affirming the opinion and others cases—brought by Cummings Maxwell equity (the Cummings Artists Theatre Cir- against United group) cuit (United Artists) (the Naify Michael others Naify to restrain of group) exchange agree- consummation the stock ment (whereby the were assured control Naify group practical of United the simultaneous order in Artists)—notwithstanding the mandamus call a proceeding United Artists to requiring special of its stockholders for meeting removing purpose directors of the corporation to the pursuant request Cum- mings group (which but for the consummation of exchange agreement might have been in the seems to be based majority), on the conclusion that control of the was imma- corporation terial and that the agreement should or fall stand depending whether it was fair to the corporation.
While it
bemay
true that the board of directors denied the
for a
request
faith,
special
meeting
stockholders
it
good
error,
was
in my
opinion,
refuse the
relief
injunctive
sought
by
Cummings group. Cf. Richman v. DeVal Aerodynamics,
183 A. 2d
where,
here,
569 (Del.
1962),
Ch.
the request
for a special
meeting
stockholders was denied because the
board of directors was of the opinion that the requisite percent
age
demand,
shareholders had not made a
the request was
held to have been wrongfully denied and a mandatory injunc
tion compelling the special meeting
Furthermore,
was granted.
in a subsequent suit to recover counsel fees incurred in the
injunction proceedings—see Richman v. DeVal Aerodynamics,
from when knew that the taking they the action from of- them removing ing requested purpose opposed fice action contemplated and that the corporate of stockholders. group affords Art. 38(c), specifically Code Although (1957), § twenty-five “holders of to not less than per- shares entitled cast,” to have a right spe- cent all the votes entitled be cial others among of stockholders called for the purpose, from director directors specified 52(d), removing “any § office,” the for a meet- request by group was refused and the the secretary *23 ex- meeting board of directors at its next the regular approved change agreement the had formu- president lated a formal deny- with the resolution Naify group passed court, though stockholders’ The lower requested meeting. that action fear by motivated finding gain control as well as Cummings group might by belief that consummation agreement legiti- would serve a mate un- held that the was fair corporate purpose, circumstances, der the and the has affirmed this hold- majority ing.
But regardless of the fairness of the it exchange agreement, seems clear to me that affirmance has the effect of nullifying, if it does not repeal outright, right of stockholders statutory in a case such as this to call a for purpose removing directors. affirming, majority has not cited case for single that a proposition board of directors may, in the exercise good faith under circumstances which ap- fair pear to be to the shift corporation, control means of stock transactions from one of stockholders to group another before with a lawful complying request a special meeting to re- main, move directors. In the all that the majority has done this case is to to distinguish the cases try relied on Cum- reversal, mings to group entitle them to often without signifi- success, cant and to hold that “where a good corporate pur- shown, is a shift pose” in control is not only permissible but is On the proper. contrary, there are a number of cases this and other states which are indicative of what the holding ought to be in a situation such as this case involves. Besides the cases
29
Bond As
hereinafter discussed
length, Mortgage
at some
see
Baker,
Kull
sociation
(1929)1;
v.
157 Md.
While the ultimate result exchange stock may prove Artists, be beneficial to United it is that it was the apparent fear of dissolution of United Cal (United California Theatres) if control, were in and the known intention of Cum- mings a wage proxy fight gain control of Artists, which motivated the execution of the stock exchange agreement. *24 As a stock, result of the of exchange the Naify through group, their of ownership Artists stock and United Artists 46% stock, of ownership United Cal gained only practical 100% control of United Artists hut still retained their control over United Cal. The swiftness with which the exchange agreement was executed after the denial of the special meeting of stock- holders, the fear the group had of Naify the Cummings group and the resulting advantage to the Naify group, clearly indi- cate that the primary of purpose the actions of the in board ex- 1. There are also by two nisi decisions the Circuit Court ftrius City. of Baltimore Products, published See United Funds v. Carter Daily Sept. 33, 1963, in the Record of and Maslin v. Baltimore Radio Show, filed Circuit Court No. 2 on of the latter Jan. directly point. which is meeting, the was to
ecuting special the denying Cummings shift control of United so as the prevent Artists of from sought. exchange the control group gaining they therefore, stock instead of some effect on the control having effect, found, the has a total the as had corporation, majority in United as to which was to force group dominating be Artists.
Furthermore, distinguish the effort of despite majority Cooperative, by- Y. (1954), v. Knolls 2d 407 N. S. Lazar a duly that of United was saying the board directors Artists illegally, not an one office holding elected board and interim of' a by-law not a violation of that action of the was time when statute fixed no Maryland United Artists and that held, is di- a must be it is Lazar special meeting apparent that For, case, holdings, they point here. that rectly case, of a to be were to effect that the denial ought in this the- though stockholders’ even improper in- have delay consequent entailed calling might one should not and that stockholders’ rights jury funda- for the since their have been violated sake it was speed called, and not that of right special meeting mental to have board, which was constituted the determinative- unlawfully factor. or
For cases not cited either of the contending groups Co., Pub. 2d see Rowland v. Times majority, 35 So. an control 1948), where issuance of stock shifted (Fla. after a stockholders had been special meeting wrongfully denied, compli to be unlawful the fact that despite held the issuance of would not concerning ance a statute stock and see corporations; have been in the best interests Co., Liquid v. 206 N. Thwing (Mich. Weibatch W. Scale issuance of stock was unlawful even 1925), where an held though subsequently it was voted in best interests the- corporation. case, there was no showing this where that the stockhold-
ers,
so,
had
been
do
would have
given
opportunity
they
and replaced
removed
incumbent directors
them with
board,
no
where there was
related
showing
*25
had a new
not have beеn approved
would
exchange agreement
agreement
in office before the
placed
been
of directors
serious
is a
consummated,
where there
and particularly
was
out”
“carrying
control was a
shift in
as to whether the
question
request-
of the corporation,
business affairs
ordinary
their abso-
deprived
have been
should not
stockholders
ing
exchange
and held before the
called
meeting
lute
to have
right
For,
a well-
allowing
consummated.
finally
given
having
without
shift
control
stand
irreversible
nigh
remove
attempt
to even
the stockholders
opportunity
23,
directors,
and
38(c)
of Art.
provisions
unwanted
§
§
far as the
so
nugatory
rendered absolutely
52(d)
thereby
have been
This should not
concerned.
Cummings group
Co.,
Y.
2d
84 N.
Mfg.
S.
Weisblum v.
Falco
permitted. See
Li
im-
Court,
be
that it would
stating
(1947),
where
meet-
at a special
that the action taken
for it
assume
proper
interests of the
against
would be
the best
their lawful
stockholders of
thereby deprive
requesting
of stockhold-
meeting
for a
rights,
request
special
held
meeting was
refusal to call the
ers was
and that the
proper
board of directors that
the belief of the
improper despite
corporation.
would
а detrimental effect
have
State,
of this
If
the lower court decreed is to be the law
what
is,
the vital
open
as the
has said it
leaves
majority
opinion
has,
if any.
still
Not
as to what force Art.
question
38(c)
§
the board
answered
makes it
question
possible
have
this
own shares or
having
directors
its
any corporation,
at its
to perpetuate
shares of affiliated corporations
disposal,
for a
merely denying
request
itself
office indefinitely by
then,
sort of stock
meeting of stockholders and
some
transaction, either retain control or
it to a friendly group.
shift
this
ought
This
to be
fact is
what
possible
exactly
Baker, supra
said in
Bond Association v.
Mortgage
(at
Court
Md.),
legislature
320 of 157
would not be tolerated. As the
p.
intended,
should
undoubtedly
rights
it is the
stockholders that
in
and the
should not allow directors to
be
courts
protected
rights
they
these
under
circumstance when
are
fringe upon
any
of a lawful
to remove them from office under
plan
aware
§
Inn,
Iula,
Inc. v.
212 Md.
130 A. 2d
Rolling
Cf.
52(d).
*26
2d
C. A.
In my opinion proceedings. remanded for further versed me to that he concurs say authorizes McLaughlin Judge views herein expressed. v. FELTGEN FELTGEN Term, 9, September 1964.] [No.