No. 2310 October Term 1979, Appeal from the Order of the Court of Common Pleas of Lehigh County, Civil Section at No. 78-E-88.
Thomas C. Sadler, Jr., Allentown, for appellants.
Richard T. Muller, Allentown, for appellee.
Spaeth, Brosky and Van der Voort, JJ.
[ 280 Pa. Super. Page 629]
This appeal arises from an order dismissing, in part, preliminary objections to a complaint in equity.
Appellee, plaintiff below, is a director, officer, and minority shareholder of Class A voting common stock of the Crowder Jr. Company, a Pennsylvania corporation. Appellants, defendants below, are the Crowder Jr. Company and the remaining directors, officers, and shareholders of Crowder's outstanding Class A voting common stock. Appellee's complaint against appellants was filed on August 15, 1978, and is in five counts.
Count I alleges as follows. In February 1975, Crowder, acting through a special meeting of its directors, adopted an Employee Stock Ownership Plan, to be administered through an Employee Stock Ownership Trust. Crowder appointed several of the individual appellants as trustees of the Plan and as administrators of the Trust. At the time of the creation of the Plan and Trust, Crowder's stock structure consisted of 1,954 shares of Class A voting stock (which were owned entirely by the parties), 30,000 outstanding shares of 7% cumulative preferred stock, and 30,000 shares of authorized but unissued 7% non-cumulative preferred stock. On December 21, 1976, Crowder's directors, over appellee's objection, voted to contribute the 30,000 shares of 7% non-cumulative preferred stock to the Trust. The stock was valued by the directors at $270,000, and was combined with a $30,000 cash contribution. On April 25, 1977, the individual appellants, as majority shareholders of the Class A voting stock, amended Crowder's Articles of Incorporation, over appellee's objection, to (a) give the Board of Directors the power to fix by resolution the designations, preferences, qualifications, limitations, restrictions, and special or relative rights of any class or series of stock, and (b) authorize the issuance of 200,000 shares of a new Class B non-voting common stock. The Board subsequently adopted a scheme of rights and preferences for each class and series
[ 280 Pa. Super. Page 630]
of Crowder stock that accorded Crowder's Class A voting stock lowest priority to corporate dividends and distributions of assets. On December 19, 1977, the Board of Directors, over appellee's protest, issued 217 shares of Class B stock, which it valued at $689.00 per share, and contributed them to the Trust. The value given to the stock by the Board grossly understated its real value.
On the basis of these allegations, Count I charges that the Board purposely gave Crowder's Class B stock a low value so that more shares of stock could be issued and contributed to the Trust than was warranted. It further charges that appellants, through the issuance of the Class B and non-cumulative preferred stock, have watered down Crowder's capital structure, and effectively denied appellee any return on his Class A voting stock. In addition, Count I charges that appellants are guilty of self-dealing and waste of corporate assets because 1) they have never authorized a dividend on Crowder's Class A stock, even though Crowder has shown substantial and continuous growth over the last decade; 2) they have caused Crowder to make excessive contributions to the Trust; 3) as full-time employees and officers of Crowder, four of the individual appellants (who together also own a majority of the Class A stock) are in a position to benefit directly from the contributions made by Crowder to the Trust; and 4) the individual appellants enjoy generous salaries, bonuses, pension benefits, and retirement benefits, which, though not excessive by themselves, when coupled with Crowder's failure to declare a dividend on Class A voting stock manifest an "unreasonable, oppressive, arbitrary and discriminatory" corporate policy against appellee's financial interests as minority shareholder of the corporation.
Count II of the complaint, brought by appellee as an individual, alleges that the acts mentioned above constitute a violation by appellants of their fiduciary duty to him and the corporation under 15 P.S. § 1408 (1979-80 Supp.) and the common law.
[ 280 Pa. Super. Page 631]
Count III, brought by appellee as a shareholder on behalf of the corporation, makes the same allegations as Count II. In addition, Count III alleges that the individual appellants are confronted with an irreconcilable conflict of interest in their positions as fiduciaries of the Trust and as officers, directors, and shareholders of Crowder.
Count IV of the complaint, also brought by appellee as a shareholder on behalf of the corporation, alleges:
64. The Defendants, as members of the Board of Directors, officers of the corporation, or counsel thereto, in making grossly excessive contributions of newly-issued and grossly under-valued Crowder Common "B" Stock have violated at least two requirements (see paragraphs 65 and 66 below) imposed on fiduciaries of employee benefit plans by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., 88 Stat. 829, which requirements are contractually binding on the corporation and its directors.
65. Under ERISA § 404(a)(1)(A), ESOP fiduciaries must operate such a plan for the " exclusive benefit" of the participants in the plan. In light of their self-serving and illegal acts, i. e., funding the ESOP in such a way that it operates primarily for their own benefit and only secondarily for the benefit of Crowder or the plan participants, and set forth in more detail in the preceding paragraphs, the Defendants have violated this provision of the statute and the contractual provision of the Plan and Trust binding on them as Directors and trustees.
66. Also, ERISA Sections 404(a)(1)(B) and (C) provide that a plan fiduciary must discharge his duties with care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.
67. The acts of the Defendants as set forth in detail above violate the "prudent man" requirement of the statute and made part of the Crowder Plan and Trust by ...