June 29, 1960
VULCANIZED RUBBER & PLASTICS COMPANY
Appeals, Nos. 74, 75, 76 and 77, Jan. T., 1960, from order of Court of Common Pleas No. 6 of Philadelphia County, June T., 1959, No. 3494, in case of Vulcanized Rubber & Plastics Company v. I. Jerome Scheckter et al. Order reversed.
David H. H. Felix, with him Benson Zion, and Felix & Felix, and Curtin & Heefner, and Verrill, Dana, Walker, Philbrick & Whitehouse, of the Maine Bar, for appellants.
William T. Coleman, Jr., with him Aaron M. Fine, Harold E. Kohn, and Dilworth, Paxson, Kalish, Kohn & Dilks, for appellee.
Before Jones, C.j., Musmanno, Jones, Cohen, Bok and Eagen, JJ.
[ 400 Pa. Page 406]
OPINION BY MR. JUSTICE COHEN.
On August 20, 1959, the appellee corporation moved for and was granted a temporary order restraining the appellants, two of whom had been both lawyers and accountants of the appellee and a third a former director, from voting any of appellee's stock owned, held or controlled by appellants at any future stockholder's meeting. After holding several hearings, the chancellor, finding that certain stock was acquired by appellants in breach of their fiduciary responsibilities, decreed that the restraining order be continued as a preliminary injunction pending final hearing and determination of the case. From this order appellants have taken these appeals.
The instant suit involves another round in the struggle between the present management group of the appellee, Vulcanized Rubber & Plastics Company, and a group headed by the individual appellants, Scheckter,
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Fish and Redland, for managerial control of the appellee corporation.*fn1 The appellee, a Maine corporation
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with its business office in New York City and its factory in Morrisville, Pennsylvania,*fn2 is engaged in the manufacturing of rubber and plastics products. The appellants Scheckter and Fish, practicing lawyers and certified public accountants in Philadelphia, were employed by the appellee as tax counsel from 1944, and as accountants through their partnership in King and Company and King, Marryat and Company from 1951 until their discharge in June, 1959. In that period of time, through their various firms, they billed the appellee corporation in excess of $50,000 for professional services.
The chancellor found that from about March 1, 1956, until approximately the commencement of this action, a Weatherly Steel Castings Company and its successor, the appellant Dutron Plastics, Inc., made numerous purchases of the appellee's common stock, causing the price of the stock to increase from about $25 per share to more than $60 per share. Throughout
[ 400 Pa. Page 409]
this period, appellants Scheckter and Fish held majority control of both Weatherly Steel Casting Company and Dutron Plastics. They did not reveal their interest in these companies to the appellee, however, even though they were requested to supply this information on at least one occasion by the appellee's New York counsel and earlier, by one of appellee's officers and directors. Until December, 1958, the appellee corporation had no conclusive knowledge that the appellants Scheckter and Fish were connected with either company, nor did appellee learn that these appellants owned the controlling interest in the companies until the time of the hearing in this matter.
The chancellor next found that during the period in question, in which appellants' interests were for the most part unknown to appellee, both the appellee and the "Vulcanized Stock Syndicate" were attempting to buy appellee's common shares. The "Vulcanized Stock Syndicate" was an organization composed of directors, officers, and employees of the appellee corporation. Created in July, 1949, by a written agreement signed by the members, the syndicate's avowed purpose was to purchase stock of the appellee when it appeared on the market at favorable terms. Complete control and management of the syndicate was vested in the "syndicate managers", Stanley H. Renton, a director and chairman of the finance committee of the appellee, Prescott Beach, then an officer of the appellee, and appellant Redland, a director and treasurer of the appellee for twenty years until June, 1959, when he also was discharged. Appellant Scheckter, although not an officer, director or employee of the corporation, was allowed to be a member of the syndicate because apparently the plan was primarily his idea and suggestion. While the finding is vigorously disputed, the chancellor found that the syndicate agreement was
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drafted by Scheckter himself in July, 1949. He also found that the members of the syndicate had some "gentlemen's agreement" that they would not purchase appellee's stock individually, but only through the syndicate.
Specific instances of competitive purchases mentioned by the chancellor included a purchase by the Weatherly Steel Casting Company of a Mr. Smith's shares in disregard of a written contract between "Vulcanized Stock Syndicate" and Mr. Smith to purchase his shares, and a purchase by appellant Redland of 673 shares from Mr. Beach in June, 1959, which shares Mr. Renton was purportedly attempting to purchase for the corporation. This latter purchase was apparently financed by appellants Scheckter and Fish and is substantially the basis of appellee's charge against appellant Redland of allying himself with the other appellants and conspiring with them in breach of his fiduciary position with appellee in order to overthrow appellee's management and control.
On the basis of these findings the chancellor concluded that Scheckter's and Fish's purchases, both individually and through the corporation they controlled, as well as those of Redland, whom the chancellor found to be in conspiracy with Scheckter and Fish, were all consummated in competition with the interests of appellee corporation. The chancellor accordingly issued a preliminary injunction on the ground that appellee had shown a breach of fiduciary duty for which it was entitled to relief.
The limits of our review of the action of a chancellor in issuing a preliminary injunction are to see if the chancellor had apparently reasonable grounds for doing so. We do not further consider the merits of the case or pass upon the reasons for or against such action unless it is plain that no such grounds existed or that
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the rules of law relied upon are palpably wrong or clearly inapplicable. Rubin v. Bailey, 398 Pa. 271, 157 A.2d 882 (1960); Herman v. Dixon, 393 Pa. 33, 36, 141 A.2d 576 (1958). But at the same time the complainant must establish that it is his clear legal right, not doubtful or uncertain, to the specific relief sought; otherwise the preliminary injunction will be dissolved. McDonald v. Noga, 393 Pa. 309, 141 A.2d 842 (1958); Herr v. Rumisek, 303 Pa. 9, 153 Atl. 728 (1931). Particularly so where, as here, the complainant is a corporation for which a struggle for control exists. We must assure ourselves that the right is that of the corporate entity itself, and not some colorable right which allows the present "in" group to use the power and finances of the corporation to enhance their own position in the contest.
Appellants' principal contention is that the appellee corporation has suffered no legal wrong and was therefore not entitled to the issuance of the preliminary injunction. Our inquiry is thus limited to reviewing the chancellor's theory of the legal wrong done to the appellee, and determining whether there exists a reasonable basis in the record to support his conclusions.
The chancellor issued the preliminary injunction because he concluded that the appellants, as lawyer, accountant or director, breached their fiduciary duty to the appellee by buying certain stock in which both the appellee corporation and the stock purchase syndicate were interested without ever informing the appellee or the syndicate managers that they were going to buy the stock, or offering to either the opportunity of first purchasing the stock. Generally speaking, a corporation as such has no interest in its outstanding stock, or in dealings by its officers, directors or shareholders with respect thereto. Howell v. McCloskey, 375 Pa. 100, 99 A.2d 610 (1953); Bisbee v. Midland
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corporate interest in the stock, or have pre-empted a corporate purchase which was necessary for the appellee's prosperity or existence. Since the chancellor based his decision on the ground that the appellee had an interest in the stock, our inquiry is narrowed to determining whether the chancellor had before him a reasonable basis upon which to conclude that such a corporate interest existed.*fn4 Upon an examination of the record, and upon analysis of the applicable doctrines of corporate law, we find that the appellee corporation, as a corporate entity separate and apart from its management group, had no interest in purchasing the stock in issue, nor did it have any corporate interest or connection with the Vulcanized Stock Syndicate which could result in the appellee being legally harmed by the conduct of the appellants.
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It is clear from his opinion that the chancellor based his finding that the appellants' purchases of common stock were in competition with the appellee on the basis of the testimony of Mr. Werner, the present president of the appellee, that the corporation would have purchased the stock as it came on the market had it not been quickly purchased by Weatherly and Dutron at bids substantially higher than those the corporation could make, and on the basis of the testimony of Mr. Renton, chairman of the appellee's finance committee, that on the day prior to the appellants' purchase of 673 shares owned by Prescott Beach, he, Mr. Renton, had conceived of and offered to Mr. Beach for consideration a plan whereby the corporation would purchase the stock from Mr. Beach and make payments over a period of years. The legal error of the finding is in equating the individual intentions of Mr. Werner and Mr. Renton, but two of the nine directors of the corporation, with the intention of the corporate appellee. The separate expressions or opinions of members of the board of directors do not in law amount to an "existing interest" by the corporate entity itself. What is necessary is some affirmative action by the corporate organization which will disclose a corporate purpose, reason and program. A resolution by the board of directors will suffice. See Howell v. McCloskey, supra; Irving Trust Co. v. Deutsch, 73 F. 2d 121 (2nd Cir. 1934); Kimmell v. Geeting, 2 Grant 125 (1853).
Significantly, the record discloses that the corporation's history was one of not having ever purchased any of its own shares, that for the corporation to have made any purchase during the period of alleged competition would have necessitated making arrangements with a bank because of certain restrictions flowing from a loan arrangement, and that the financial situation of the corporation was such that a program of purchasing
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might have been burdensome. In these circumstances, some authoritative action by the board would have been necessary for the corporation to have been interested in the shares, if only to proclaim a policy of corporate purchase and to resolve the problems and practical limitations faced by the corporation in making such purchases. Under the appellee's own by-laws,*fn5 as well as the law of Maine, this would have required action by the directors acting as a board, and not singularly. Peirce v. Morse-Oliver Bldg. Co., 94 Me. 406, 47 Atl. 914 (1900); Morrison v. Wilder Gas Co., 91 Me. 492, 40 Atl. 542 (1898); Maine Rev. Stat. 1944, c. 49, § 22. There being no indication in the record that the board of directors as a body ever considered purchasing any stock,
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there could not be any existing corporate interest therein. Accordingly, it cannot be held that appellants' purchases were in competition with the corporation itself.
The competition, if any, existed between the stock purchasing syndicate and the appellants. There are ample grounds in the record upon which the chancellor could have concluded that had not the appellants bid and raised the price, the syndicate would have purchased the stock. Our concern, however, is in finding the link between the syndicate and the appellee which results in the corporation being harmed by these competitive purchases.
The self-styled "Vulcanized Stock Syndicate" was a hybrid voting trust-stock purchasing pool. As previously stated, its members were all officers, directors or employees of the appellee, except for appellant Scheckter. Each subscribing member would pay in so much money per year, and with the resulting fund the syndicate would purchase any shares of the appellee that appeared on the market upon terms satisfactory to the syndicate managers. In resemblance to a voting trust, the syndicate agreement provided that the syndicate was to have a life of not more than ten years, and gave to the named syndicate managers or their successors absolute control of the stock purchased, including voting control. Not only was the appellee not a party to this agreement, but the agreement expressly provides as follows: "(f) It is understood and agreed by and between each and all of the parties that this is a personal agreement between the signatories hereto and that it is not in any way connected with or binding upon Vulcanized Rubber and Plastics Company with relation to the employment of any of the undersigned.
"(g) It is also understood by and between each and all of the parties hereto that there is no moral or legal
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undertaking which would obligate any of the parties hereto to help perpetuate any of the parties to this agreement in their employment by said Company, it being further understood and agreed that all matters regarding the employment of the undersigned by said Company rests entirely within the discretion and judgment of the Board of Directors of said Company."
In spite of the express disclaimer of any corporate connection with the syndicate, and in spite of the fact that there were no funds of the corporation involved or any commitment by the corporation so far as managing the syndicate or shaping its policies, the appellee seeks to establish a protectable interest on the theory that the record shows that one of the purposes of the syndicate was to enable key employees of the appellee to purchase stock and thereby increase the morale of the employees. We, however, are not cited to any authority or offered any acceptable rationale, which might indicate how a voting syndicate has any corporate purpose*fn6 or how the incidental benefit derived from the key employees being able to purchase the stock in any way results in the corporation being harmed when the syndicate's purchases are thwarted. Compare DuPont v. DuPont, 256 Fed. 129 (3rd Cir. 1919). Certainly the potential harm of demoralization of these key employees is too tenuous to give rise to a claim for equitable relief enjoining voting rights of
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appellants and charging them with a constructive trust. Moreover, it would seem that if the wrongful action of the appellants was in purchasing in competition with the syndicate, the right to charge the appellants as trustees ex malificio and claim the shares under a constructive trust would lie with the syndicate members themselves. Shannon v. Baltz, 398 P1. 431, 158 A.2d 558 (1960).
Having found no corporate interest in purchasing the stock in issue, nor any connection between the Vulcanized Stock Syndicate and the appellee which gives rise to the corporation being harmed by the conduct of the appellants, and being unable to discover any definite legal theory upon which to grant equitable relief to a corporation where its fiduciaries have secretly purchased control, the preliminary injunction must be dissolved. If the appellee seeks to advocate some new corporate cause of action, it must 1wait a disposition on the merits. There being no clear present right, however, the appellee is not entitled to the issuance of a preliminary injunction to forestall the pending shift of control.
The order granting the preliminary injunction is reversed.