November 12, 1963
Appeal, No. 6, March T., 1963, from decree of Court of Common Pleas of Allegheny County, July T., 1958, No. 2767, in case of John F. Beggy v. George H. Deike, Sr., John T. Ryan, Jr., George H. Deike, Jr. et al. Decree reversed; reargument refused December 30, 1963.
Ella Graubart, with her Charles F.C. Arensberg, and Patterson, Crawford, Arensberg & Dunn, for appellant.
John C. Bane, Jr., with him Gilbert J. Helwig, Ernest R. Dell, Charles L. Albright, Jr., and Reed, Smith, Shaw & McClay, for appellees.
Before Bell, C.j., Musmanno, Jones, Cohen, Eagen and Roberts, JJ.
[ 413 Pa. Page 76]
OPINION BY MR. JUSTICE ROBERTS
Appellant, by complaint in equity, seeks to rescind certain sales of stock to officers and majority stockholders of a corporation rather than to the corporation itself as required by the terms of a restrictive agreement. The decree of the court below dismissed appellant's complaint; hence, this appeal.
Appellant began his employment with Mine Safety Appliances Company (MSA) as an office boy at age 15, and thirty years later, at his separation from the company in May, 1948, occupied the position of vice president, secretary and treasurer. From 1931 until April, 1950, he served also as a director of the corporation. On August 2, 1948, appellant and MSA executed
[ 413 Pa. Page 77]
a written agreement which recited that appellant, as owner of 12,860 shares of common and 3,215 shares of preferred stock, was required to grant MSA the first opportunity to purchase any stock he should wish to sell, and that if MSA failed to exercise its right to purchase within thirty-five days, appellant was free to sell the shares to any purchaser.*fn1
At all times since the organization of MSA in 1917, the Deike and Ryan families, together, have been the largest and majority owners of the capital stock of the company. In 1955 and 1956, defendants George H. Deike, Sr., and John T. Ryan, Jr., were chairman of the board and president of MSA, respectively. The other defendants, George H. Deike, Jr., and Helen D. Henderson, are the son and daughter of the chairman of the board, and Mary Irene Ryan is the wife of the president.
In March, 1955,*fn2 appellant desired to sell some of his common stock and requested his attorney to contact MSA. This information was communicated to George H. Deike, Sr., chairman of the board, who informally related to the board appellant's offer to sell
[ 413 Pa. Page 78852]
shares. The directors indicated to Deike that the company was not interested in acquiring the stock. However, neither appellant nor his attorney was so advised. Deike, on March 8, 1955, confirmed to appellant's counsel, by letter signed "Geo. H. Deike, Chairman of the Board," willingness to purchase 850 shares at the offered price per share, with instructions to deliver properly endorsed stock certificates to the Potter Bank for a check in full payment.*fn3 Appellant delivered 852 shares to the bank and received the bank treasurer's check for $11,076. The stock was not acquired by the corporation, but by Deike and Ryan individually. As found by the chancellor, the identities of the purchasers "... may not have been known at the time to the plaintiff ...." Four hundred twenty-six shares were transferred to Ryan's wife and 213 shares each to Deike's son and daughter.
Approximately 13 months later, in April, 1956, appellant desired to sell and additional 894 shares of common stock, and he once more asked his attorney to contact MSA. The Board of MSA was advised that appellant offered to sell, but the corporation again indicated to Deike that it had no interest in making the purchase. However, Mr. Deike fixed the price at $15 per share and directed that the certificates be delivered to the Potter Bank where a check in full payment would be ready. Appellant delivered the certificates
[ 413 Pa. Page 79]
to the bank and received the bank treasurer's check for the purchase price. Again neither appellant nor his attorney was informed that MSA was not acquiring the stock but that Deike and Ryan were each individually purchasing 447 shares.
In February, 1957, MSA itself purchased appellant's remaining 6,519 shares of common stock at$50 per share, but in April, appellant brought suit against the company in federal court to rescind that sale, charging violations of the Federal Securities and Exchange Act. During trial, the litigation was settled. However, in January, 1958, at the federal pre-trial proceeding, appellant's counsel learned for the first time that the stock offered to MSA in 1955 and 1956 under the first refusal provision of the restrictive agreement was purchased not by the corporation but by the chairman of the board and the president of the company for themselves and their families.
Prior to and throughout the period of the negotiations for the 1955 and 1956 sales, MSA's wholly owned subsidiary, Callery Chemical Company, had been engaged in research dealing with the element boron, a component of high-energy fuel. As a result of negotiations with the Navy, it received a Letter of Intent from the Navy Department dated June 6, 1952, for the planning and construction of a plant for the production of boron. The minutes of the Callery Board meeting of January 26, 1955, disclosed that: "As reported at the last meeting, we were asked to attend a meeting in Washington, D.C. to discuss the future planning of financing facilities and the production of our product. As a result of this meeting, we have submitted to the Navy Department the complete planning report covering our anticipated requirements, and this report is currently being reviewed and studied by Navy personnel."*fn4 Current information on the progress of
[ 413 Pa. Page 80]
the negotiations was given to the Board of Callery at various succeeding meetings.*fn5 Callery's continued research, submission of proposals to and negotiations with the Navy culminated in a "Cost-Time Facilities Contract" with the Navy dated June 26, 1956, for the construction of a $38,000,000 plant at Muskogee, Oklahoma, for the production of boron.
In order to obtain the Navy contract, MSA was required to and did guarantee the performance of the contract. In addition, it was obliged to secure participation of a suitable associate for completion of the program. For this purpose, negotiations with Gulf Oil Corporation were initiated early in 1956 and concluded in a contract dated February 6, 1957. Under the agreed participation, Gulf purchased 50% of the capital stock of Callery for $2,400,000.
While both Deike and Ryan were personally carrying on these negotiations at or about the time the stock purchases from appellant were made, and some information was relayed to the Boards of MSA and Callery, as previously indicated, neither Beggy nor other outside stockholders could have been informed about these activities, since they were of a highly confidential nature, disclosure of which was forbidden by the federal government. Upon disclosure of the contract both by the company and the government in late June, 1956,
[ 413 Pa. Page 81]
the price of "over-the - counter" sales of MSA common stock began to rise steeply, and in 1958, small lots of the stock were sold at a price higher than $300 per share.*fn6
In June, 1958, after five months of negotiations for the return of the shares, the present equitable proceeding was brought to rescind the 1955 and 1956 sales of stock. The chancellor concluded that the purchasers of the stock were under no legal or fiduciary obligation
[ 413 Pa. Page 82]
to disclose to appellant that his offer had been refused by the corporation and that they, in fact, were the purchasers of the stock; that it was legally immaterial whether or not appellant was aware of these facts; that the prices paid for the stock were the fair market prices; and that appellant was barred from equitable relief by his delay in bringing this suit.
It is appellant's position that he offered to sell his stock to the company, as required by the restrictive agreement of 1948, not to the individual defendants, and that the purchase by them (and subsequent transfer of stock to themselves or their families) without his knowledge or consent was a violation of his rights under the contract and a fraud upon him. Appellant contends also that Deike and Ryan, majority stockholders and top management executives, had confidential corporate information of special facts and circumstances involving secret and continuing negotiations with the Navy not available or known to him, and that in purchasing stock from him, the chairman of the board and the president of the company traded on inside confidential information and sought to profit personally on the basis of confidential knowledge acquired in their capacities of corporate fiduciaries. While it is conceded that neither Deike nor Ryan could disclose the confidential data to appellant, it is contended that they were likewise precluded from using that information for their own benefit.
Appellees vigorously contend that as majority stockholders and principal corporate officers, they owed to appellant no fiduciary obligation, and that their purchases of his stock were free from fraud, deceit or other wrongdoing and furnished no basis entitling appellant to rescind the sales. They seek to sustain this position primarily on the argument that appellant, by virtue of his years of management association with MSA, had "intimate knowledge" of the company's traditional
[ 413 Pa. Page 83]
policy of avoiding public distribution of its stock and encouraging instead acquisition of shares by its officers, employees and "other friendly interests", and that when the company bought back its stock (in accordance with by-laws or contract provisions), the company did not retain such stock in its treasure but redistributed the purchased stock to its "own officers and employees, and others closely associated with the company in some business way." It is further contended that appellant may not prevail in this proceeding because he unduly delayed his action for rescission and, hence, is guilty of laches. In support of this result, appellees argue that had appellant made known his election to rescind the sales earlier and shortly after the award of the Muskogee contract had become known to him in 1956, appellees might have reversed the sales "at a cost of not more than $15.00 per share," whereas his attack on the validity of the sales coming in April, 1958, at a time when shares (in small lots) were being sold at prices "higher than $300.00 per share," made the cost and difficulty of any attempt to restore the status quo "insuperably great."
Basic to the present litigation is the status of the agreement of 1948 between appellant and MSA. This Court has recently reaffirmed the principle that a contract provision which requires an offer of stock first to other stockholders (or to the corporation) before sale to outsiders is valid and enforceable. Mather Estate, 410 Pa. 361, 189 A.2d 586 (1963). In the Mather case, we upheld a decree of specific performance directing a decedent's estate to sell stock representing majority control to surviving shareholders at the price fixed in a restrictive agreement, $1 per share, a figure far below actual value at the time ($1,060 per share). The controversy in Mather was based on the very great disparity between the contract price and the actual value of the stock. Here, the principal dispute
[ 413 Pa. Page 84]
centers on substitution of persons not named or included in the contract in place of the expressly named corporate purchaser. If MSA failed to purchase, the terms of the agreement gave only to appellant the choice of purchaser.
It is clear that Mather requires strict adherence to the terms of the bargain entered into by the parties.
The equitable principles which there mandated that one having a contract option to purchase stock be granted the full benefit of the precise terms of the obligation to sell surely is equally available to deny to a purchaser an unfair advantage achieved by a sale contrary to the language of the contract (and to the offer to sell) without knowledge in the seller of the true nature of the transaction.
The evidence discloses that the offers of sale were made by appellant's attorney directly to MSA through its chairman of the board, George H. Deike, a personal acquaintance of the attorney. Although Mr. Deike knew that the Board had no intention of accepting appellant's offer, the "acceptance" from "Geo. H. Deike, Chairman of the Board"*fn7 failed to indicate the board's position and gave every appearance that Deike was acting for the corporation, not for himself. So also with other letters concerned with the stock sales.*fn8 At no time prior to 1958, therefore, did appellant know or have reason to believe that the shares, in fact, had been
[ 413 Pa. Page 85]
purchased by Deike and Ryan for themselves and their families.
The identity of purchasers of stock is quite important, especially where the purchaser is a principal officer and majority stockholder in a closely held corporation who has access to information not generally available to the public or to other shareholders. See Strong v. Repide, 213 U.S. 419, 425 (1909); Binns v. Copper Range Co., 335 Pa. 257, 6 A.2d 895 (1939); Imbrie v. Community Loan Co., 131 Pa. Superior Ct. 398, 200 Atl. 149 (1938). The market inference which logically flows from a purchase of additional shares by such a corporate officer is that something of importance may be occurring in the affairs of the company. Appellant reasonably could have concluded that if the acquisition were worthwhile to the Deike and Ryan families to the exclusion of others, it might have been just as worthwhile for him to retain his stock. At the very least, their desire to purchase would have been a proper factor for his consideration and determination of the quantity and price of shares to be sold. He was entitled to this information, particularly
[ 413 Pa. Page 86]
since he was not disposing of his entire holding.*fn9
The court below concluded, as appellees strongly argue here, that in view of appellant's long and intimate relationship with MSA, he knew of the custom of the company to make distributions of stock to its officers, friends and employees. Appellees contend that knowledge of this policy made immaterial the actual identity of the purchasers, since appellant should have known that the corporation itself would retain none of the stock. The simple answer to such contention is that custom could not supplant the express terms of the written agreement entered into with knowledge of the custom. Moreover, careful examination of the record reveals that the custom and policy, knowledge of which appellees attribute to appellant and upon which the former base their case, was not followed in these transactions.
Although the policy of MSA was to distribute stock purchased under restrictive agreements to key employees, officers, etc., no such distribution was here made. As stated in the brief for appellees: "The members of the Deike and Ryan families have usually shared in these distributions, among other things, no doubt, in order to preserve their positions as majority stockholders," and "The plan of distribution were settled, and the distribution prices fixed, by the directors of the Company, and were always so formulated as to preserve, by at least narrow margins, the majority positions of the Deike and Ryan families, considered as a group ...." Further, in a 1954 transaction, where stock was purchased directly by one of the Deikes from
[ 413 Pa. Page 87]
the estate of a late shareholder pursuant to a restrictive agreement, the purchaser did not retain the shares for himself or his family, but immediately redistributed the stock more broadly, as was the custom. Here, the stock was taken entirely by the Deike and Ryan families. Thus, even assuming, as contended by appellees, that knowledge and expectation of compliance with the corporation's distribution policy would have made immaterial the identity of the actual purchasers of appellant's stock, the failure to comply with that policy renders totally ineffective the argument based upon it.
Nor can appellees effectively contend that appellant has suffered no damage because he received the fair market price for his shares. What they term "fair market price" was based only upon knowledge then available to the public. However, when the confidential information previously in possession of Deike and Ryan was released to the public, the market price of shares in MSA rose sharply. The price that appellees contend was fair on the market was not fair as between appellant and appellees under these circumstances.
Viewed realistically, the undisputed factual situation is simply this: MSA did not exercise the first refusal option granted it by the contract. Instead, appellees, without disclosure to a appellant and without his knowledge, consent or acquiescence, availed themselves of a contractual option not granted to them.
This result neither MSA nor appellees could, by their own conduct or unilateral action, legally or equitably impose upon appellant.
The remaining argument posed by appellees is that appellant's long delay after the award of the Muskogee contract in June, 1956, and after consummation of the negotiations with Gulf convicts him of laches. To the contrary, in 1956, appellant had no reason to suspect
[ 413 Pa. Page 88]
that he had been dealt with not in accord with the terms of the agreement. The stock sales by him in 1955 and 1956 were, to his knowledge, to the corporation pursuant to its express terms. The 1957 sale of shares by appellant directly to MSA, subsequently attacked in the district court on federal grounds, was in exact compliance with the contract. It was not until January, 1958, at pre-trial proceedings in the federal action, that appellant discovered the identity of the purchasers of his stock and that neither the terms of the contract nor of his offer to sell had been observed in 1955 and 1956. Only at that time was appellant aware of the facts giving rise to the cause of action presently before us; only then did he have reason to seek rescission of those sales. Suit was begun in June, 1958, after negotiations for the return of the stock had failed. The additional delay of five months was not unreasonable under the circumstances.
Restoration of the status quo ante does not appear to be as "insuperably great" as appellees urge. Although they purchased the stock at a fraction of its later worth, the increase in value is a paper figure as to them, since it does not appear that they have disposed of any of the shares. Indeed, the structure of the corporation and appellees' family control indicate that they have retained the shares. None of the elements of Iaches, see Thompson v. Curwensville Water Co., 400 Pa. 380, 162 A.2d 198 (1960), are here present.
We conclude that rescission should have been granted.
Mr. Justice O'BRIEN took no part in the consideration or decision of this case.
Decree reversed and remanded for the entry of an appropriate decree not inconsistent with this opinion. Costs to be paid by appellees.