Seagrave Corp. v. Mount Spain v. Mount

ALLEN, Circuit Judge

(dissenting).

I regret that I cannot agree with my brothers. While Fyr-Fyter has a smaller invested capital than Seagrave it has made money much faster than Seagrave and paid dividends more steadily over a period of years. It has outstanding 20,-000 shares of preferred stock and the record shows that all dividends are fully paid and not in arrears. Seagrave paid no dividends from 1941 through 1947 and in recent years it has paid dividends in an amount greater than its net earnings.

The invested capital of Seagrave is over four times that of Fyr-Fyter but during the period involved Fyr-Fyter earned more than Seagrave, the comparison being $2,160,804 for Seagrave and $2,810,396 for Fyr-Fyter during an eleven and one-half year period. The four New York directors of Seagrave insisted that dividends be paid when the corporation was not earning the amount of the dividend insisted upon. In 1951, although Seagrave earned $1.04 a share, the Wilkes group, the four New York directors, against the objection of management and the banks, declared dividends of $1.20 a share. One of the New York banks notified Seagrave that if that policy continued it would have to refuse credit. The management, which had *398 long been employed by Seagrave, (the president of the company having been a director since 1925) was opposed to the policy of declaring dividends in an amount which had not been earned and the president threatened to resign if that policy were continued.

Wetzel was unwilling to agree to the plan unless he could secure control. Control could be obtained only by resignation of the New York directors, who were in turn controlled by the Wilkes group of stockholders holding 43,000 shares. To secure their stock Wetzel offered the Wilkes group a price substantially above the market and made full disclosure of this offer as well as of the fact that he planned to secure control. As stated in the proxy:

“At the present time voting control of your Corporation is vested theoretically in its public stockholders; however, actual working control apparently exists in the group of stockholders listed in Exhibit C hereinafter mentioned. [The Wilkes group] Upon consummation of the Plan, voting control will be vested in Wm. McKinley Wetzel through his ownership, directly and indirectly, of approximately 9,485 shares of Preferred stock (out of a maximum of 20,000 shares to be issued and outstanding) and 181,084 shares of Common Stock (out of approximately 268,784 shares to be issued and outstanding).”

Wetzel also wished to retain Seagrave’s experienced management. He discussed with each of the officer-directors their attitude as to remaining with Seagrave and apprised them that he wished them to stay and work with him. There was no evidence that any of these officers expected to be or was likely to be removed. Spain, the president, had been a director for 28 years. No contracts were executed between Wetzel and the management and no rate of compensation was mentioned.

I think there is no evidence of fraud, bad faith, or breach of fiduciary duty in the proposal and approval of this plan.

While the obligations of fiduciary relationship in corporations are imposed both upon directors and upon dominant or controlling stockholders, Pepper v. Litton, 308 U.S. 295, 306 , 60 S.Ct. 238 , 84 L.Ed. 281 ; Hyams v. Calumet & Hecla Mining Co., 6 Cir., 221 F. 529 , in the absence of fraud, secret profits, dealing with the corporate assets, or concealment of material matters, mistakes of judgment upon the part of the directors do not justify the interference of a court of equity. McQuillen v. National Cash Register Co., 4 Cir., 112 F.2d 877 ; Wolfes v. Paragon Refining Co., 6 Cir., 74 F.2d 193 . It is uncontradicted that none of the directors were dealing with the corporation nor personally dealing with the corporate assets. Under the plan a transfer of less than one-half of the stock of the corporation was involved in an arm’s length transaction between two independent organizations. The proposed exchange of the preferred stock of Seagrave for the preferred stock of Fyr-Fyter was equally matched in amount and par value of stock. The fact that the controlling group of stockholders was to receive a price for the stock above the market was fully disclosed in the proxy statement. Only two of the directors benefited by receiving $20 per share for their common stock in Seagrave. They did not constitute a majority of the directors and their vote recommending adoption of the plan was not controlling.

My brothers hold that the vote of the three officer-directors in favor of the plan constituted a breach of fiduciary duty and the District Court so held. I think there is no evidence of bad faith or breach of fiduciary duty by the officer-directors. Wetzel’s statement, included in the proxy, which fully revealed to the stockholders that he intended to retain the present management, was entirely informal. No contract to that effect was executed. The arrangement hardly could have motivated the vote of Pretzman, one of the officer-directors, for he was to be demoted from general counsel to local counsel and was no longer to be chairman *399 of the board. There is not a scintilla of evidence that the officers were in danger of losing their positions with Seagrave nor that this circumstance influenced their vote as directors on the plan.

It is a general rule that a stockholder has a right to sell his stock and that selling it for his own personal interest involves no breach of a fiduciary relationship. Gamble v. Queens County Water Co., 123 N.Y. 91 , 25 N.E. 201 , 9 L.R.A. 527 . This is true though a stockholder is selling a majority of the stock and though the purchasers are willing to pay a larger price to one holding control. Levy v. American Beverage Corp., 265 App.Div. 208 , 38 N.Y.S.2d 517 . Moreover, a director or officer has the same right as any other stockholder to sell his stock to another. He does not stand in a fiduciary relation to another stockholder in respect to his stock. U. S. Steel Corporation v. Hodge, 64 N.J.Eq. 807, 54 A. 1 , 60 L.R.A. 742 ; Nelson v. Northland Life Ins. Co., 197 Minn. 151 , 266 N.W. 857 . The limitation imposed upon this general rule is that the action resulting from the sale must not be a wanton or fraudulent destruction of the rights of the minority. Gamble v. Queens County Water Co., supra.

Against the background of Seagrave’s uncertain profits and the very real advantages probable from the opening of new and profitable lines of production for Seagrave, combined with the assistance not before available of a far-flung corps of distributors, the transaction was far from a wanton or fraudulent destruction of the minority stockholders’ rights. The vast majority of the stockholders considered it good business. Concealment, which is so frequently evidence of fraud in dealings between directors, officers, and corporations, was wholly lacking. All of the material elements of the transaction, including the price to be paid the Wilkes group, the securing of control by Wetzel, and his intention to retain the present management were fully disclosed to the stockholders. The audited reports of Fyr-Fyter’s financial operation were available before the stockholders’ meeting. The District Court’s finding on concealment is not sustained by the evidence.

As to the question of financial advantage from the transaction, appellees urge that the book value of the Seagrave stock would be materially diluted by the issue of new stock. This is true, but book value is only one element to be used in appraising a going corporate business. The earnings, the payment of dividends over a substantial period, success in the competitive field, efficient management, and good will must be considered. Under the plan Fyr-Fyter’s valuable patents would be available to Seagrave. The financial record of Fyr-Fyter with its regular earnings over 11% years, including the difficult war years, and its regular payment of dividends evidently held out to the directors and stockholders of Seagrave the justifiable hope that the diluted stock would eventually earn more than the undiluted stock had earned during the period involved. Any apparent unfairness arising from the fact that Seagrave had several times the invested capital of Fyr-Fyter disappears “when the condition and earning capacity of the two companies are critically examined.” Colby v. Equitable Trust Co., 124 App.Div. 262 , 108 N.Y.S. 978, 983 , affirmed 192 N.Y. 535 , 84 N.E. 1111 .

The District Court selected the 4% years which were most prosperous for Seagrave, compared those years with the earnings of Fyr-Fyter during the same 4% years, ignoring the other years of the 11% year period in evidence, so that Fyr-Fyter’s earnings were under valued. The two companies are in the same line of business, affected by the same problems, and their average earnings over 11% years present a truer picture of their relative financial situation than that presented by the shorter period. While no one could guarantee the outcome of the consummation of the plan, the great majority of the stockholders in whose hands the government of the corporation ultimately resides voted for the plan.

The judgment should be reversed.