38 Del. Ch. 195 | New York Court of Chancery | 1959
The complaint herein as amended sets forth a stockholders’ derivative action which attacks the validity of stock options on the grounds that such options granted to the individual defendants without formal consideration and immediately exercisable on delivery were legally deficient under the doctrine of the Kerbs case, Kerbs v. California Eastern Airways, 33 Del.Ch. 69, 90 A.2d 652, 34 A.L.R.2d 839. Plaintiffs accordingly contend that stock issued as a result of exercise of such options constituted an improper partial gift of corporate assets being made without unanimous stockholder approval. Plaintiffs seek a decree not only cancelling the stock so issued but requiring the individual defendants to surrender such shares and to account for profits whether in the form of dividends or otherwise.
Following denial of the corporate defendant’s motion for summary judgment,
These affidavits allege in substance that even before the spring of 1950 or 1951 affiants were aware of American’s intention to make its stock available to its employees; that American’s corporate charter authorizes the issuances of employee stock and that such stock was referred to in its balance sheets. Most of the affiants allege that the expectation that American’s stock would be made available to its employees influenced their decision to continue in American’s employ prior to the spring of 1950 or 1951, as the case might be, and all of the affidavits in one form or another go on to state that in the spring of 1950 or 1951 affiants were informed that American planned to grant stock options to its executive personnel and that the expectation of receiving stock options was from that time on a factor in affiants’ decision to remain in American’s employ in executive capacities. The affidavits recite the award of options in either September of 1950 or May of 1952, and each affiant states that he continued in American’s
The affidavits then go on separately to give the dates of exercise of options (after a market rise), the financial arrangements made to acquire options, and commitments in the form of payments on homes and automobiles and the like made by optionees on the strength of their option stock.
In about one hundred of the affidavits it is alleged without specifying the exact date that part or all of the stock acquired under options was sold prior to1 July 10,1956, the date on which the individual defendants were added as parties. About one hundred and fifty of the affiants state that they borrowed in order to pay for some stock, in certain instances pledging all or part of their optioned stock. With few exceptions, however, the affidavits fail to give the amount unpaid on such loans, nor do they state what would be the actual loss to a particular affiant were rescission to be granted. On the other hand, it is clear from the affidavits that substantial sums of money traceable to the acquisition of optioned stock have long since gone into living expenses including education, and certain of the defendants state that they would not have purchased specific houses, cars and other items had it not been for their acquisition of and reliance on optioned stock. It is not made clear, however, how a holding that the options here involved are invalid would lead to a situation incapable of equitable adjustment despite the hardship which many defendants would suffer as a result of being required to give’up property or otherwise adjust to situations caused by changes in position made by them in reliance on the options.
The general defenses advanced in opposition to the relief sought by plaintiffs are laches; acquiescence on the part of the plaintiff, Wolf; statute of limitations; estoppel; section 33, subd. 5 of the New York Personal Property. Law governing so-called irrevocable offers, and inapplicability of the decisions in Kerbs and Gottlieb [Gottlieb v. Heyden Chemical Corp., 34 Del.Ch. 84, 99 A.2d 507],
In advancing these defenses, defendants stress what they conceive to be the basic equities of the case, namely that neither plaintiff
Turning first to those defenses which have to do with plaintiffs’ standing to maintain this action, it is apparent that the crux of this critical issue is whether or not plaintiffs had such knowledge of the transactions complained of as to make their failure to proceed with despatch a bar to their action. A court of equity will not permit an otherwise actionable remedy to be applied if a plaintiff’s conduct is such as to constitute waiver of such remedy or its equivalent.
Defendants first contend that inasmuch as this type of action is in effect brought in the corporation’s right, plaintiffs are bound by the corporation’s knowledge, however a stockholders’ derivative suit is normally justified only when the corporation
Notwithstanding the employment of interrogatories and the filing of affidavits since the denial of the corporation’s motion for summary judgment, it is still not clear on the record before me whether or not
The Elster suit was brought on August 27, 1952,
Having brought timely suit against the corporation and acted diligently in the prosecution of an inappropriate remedy, laches may not be imputed to plaintiffs solely because of failure to join the optionees prior to June 14, 1956, the date of the Court’s ruling that the optionees were indispensable parties, at least in the absence of a showing of justifiable prejudice, Southern Pacific Co. v. Bogert, 250 U.S. 483, 39 S.Ct. 533, 63 L.Ed. 1099. Nor was it in itself laches for plaintiffs to await a ruling in Frankel v. Donovan, 35 Del.Ch. 433, 120 A.2d 311, a case in which the options there under attack contained
Having determined that plaintiffs’ knowledge (particularly Mrs. Wolf’s knowledge and actions in reference to the 1950 options) and not mere lapse of time is the critical element in this aspect of the case, I adhere to my decision to hear evidence before determining whether either plaintiff has a standing to complain of the manner in which the options under attack were granted.
Similarly, assuming it were to be determined that plaintiffs do have standing to maintain this action, did defendants, having borrowed money to acquire optioned stock, made purchases on the strength of ownership of such stock, and otherwise changed their position, acts which are not denied by affidavit, take such affirmative action in justifiable disregard of plaintiffs’ attack? Here again knowledge is critical; there has been no opportunity for cross examination, and the facts must be heard before determining whether or not defendants acted reasonably.
As to the defense of the New York statute
Turning to the remaining defenses, I am of the opinion that because this case is concerned with alleged non-charitable gifts by a
In my opinion, the only type of estoppel which could be successfully advanced as a defense in the situation presented here must necessarily be found in defendants’ response to the grant of promised options and not in any claimed misrepresentation or concealment on the part of the promisor, the option plan and its factual workings having been fully disclosed to each optionee. However, assuming defendants have shown reliance on a promise which the promisor should reasonably have expected to induce and which did induce action or forbearance of a definite and substantial character, such cannot be deemed to create a binding contract in order to avoid injustice or hardship if the promisor had no power to make the promise relied on.
Thus the dispute before me reverts to the critical question of whether or not the options here involved were validly granted. The options having in effect been given,
The individual defendants’ motions to dismiss and for summary judgment will be denied.
Order on Notice.
. For earlier steps in this litigation see opinion in 37 Del.Ch. 213, 128 A.2d 801 and opinions therein cited.
. The board of directors in fact sought to ratify the transactions complained of by its resolution of September 16, 1953.
. Kerbs was decided on July 17, 19S2 and reargument was denied on August 28, 1952, 33 Del.Ch. 174, 91 A.2d 62, 34 A.L.R.2d 839.
. American Hardware Corp. v. Savage Arms Corp., Del., 136 A.2d 690 is concerned with adequacy of notice of a stockholders’ meeting and not with laches.
. Subdivision S, § 33, Article 3, Chapter 41, Consolidated Laws of New York.
. “Absent an employment contract, if the terms of a stock option permit exercise by the employee for the full number of shares at any time after issuance, then no amount of evidence tending to prove the advantage of the optionee’s remaining with the corporation will suffice to rebut the inference that the corporation has not received adequate consideration.” 52 Col.Law Review, 1003 at 1014.