control and domination and majority self-dealing. See Trans World Airlines, Inc. v. Summa Corp., 374 A. 2d 5, 10 (Del. Ch. 1977); Harriman v. E.I. Du Pont deNemours and Co., supra, 411 F. Supp. at 152. The concept of control and domination has been defined as "a direction of corporate conduct in such a way as to comport with the wishes or interests of the corporation (or persond) doing the controlling." Kaplan v. Centex Corp., 284 A. 2d 119, 123 (Del. Ch. 1971). Trailer Train argues that its corporate processes are not controlled by a single dominant stockholder and that, although the vast majority of its stock is owned by railroads which use Trailer Train equipment, the interests of these user-shareholders are so diverse as to preclude any possibility that they act as a single cohesive unit. Specifically, Trailer Train points to the question of ownership-use disparity. Trailer Train contends that although Reading is one of the very few non-user shareholders, many of the other shareholders' use of Trailer Train equipment is so disproportionately small in relation to their equity that their interests are identical to Reading's. Thus, Trailer Train argues that its shareholders do not act with sufficient unity of purpose to constitute a discernible majority which unilaterally dictates the actions of the board of directors.
I do not agree. Over 90 percent of Trailer Train's outstanding stock is owned by railroads which use Trailer Train equipment and which are benefitted to some extent by the continuation of corporate policies that make equipment use the sole benefit of stock ownership. Thus, although there may be a difference in the extent to which each user-shareholder benefits from present corporate policies, there is no question that each can and does benefit and therefore each has some interest in the continuation of these policies. In addition, each has a potential for greater benefit that is only limited by its ability to generate additional business. Whatever differences in emphasis there may be among Trailer Train's operating railroad shareholders because of their disparity of use, their tracks are parallel, headed somewhere. Their differences with each other are of degree. Their difference with Reading is of kind. Reading is absolutely precluded from obtaining any return on its stock ownership by virtue of the majority's policies and it is on a dead-end siding, going nowhere. Moreover, Reading owns only 2.44 percent of Trailer Train's outstanding stock and it has only one representative on a 37 member board of directors. Therefore, it cannot possibly alter the company's present practices through internal corporate procedures because its voting power is inconsequential. Before this suit was brought, Reading tried by negotiation and persuasion to obtain a change in Trailer Train's policies, but to no avail. The domination and control by those whose interests are the opposite of Reading's is obvious, absolute, and unchanging.
The second element required for the invocation of the intrinsic fairness test, self-dealing, is present when the dominant party derives benefits in which the minority shareholders are denied the right to participate. Trans World Airlines, Inc. v. Summa Corp., supra, 374 A. 2d at 9. That element is present here. By making use of Trailer Train equipment the sole benefit of stock ownership, the board of directors has effectively permitted the company's user-shareholders to obtain a benefit which is not available to non-users,
Reading and Erie Lackawanna. Thus, the company's user shareholders have used its corporate processes to benefit themselves while at the same time they have denied any benefit to the non-user shareholders. In addition, Trailer Train's stock cannot be sold. Thus, unlike dissatisfied shareholders in many corporations, Reading does not have the easy option of just selling out. It is effectively locked into an investment which provides no return and in which what is accepted as the interests of the majority completely obliterate its own. Trailer Train's corporate policy constitutes self-dealing within the meaning of the Delaware cases.
Because the requisite elements of domination and control, and self-dealing are present in this case, I conclude that the board of director's actions must be evaluated to determine if they are intrinsically fair to Reading. I can only conclude that the board's policies fall far short of this standard and therefore constitute a breach of its fiduciary obligation of fairness. The essence of this obligation was aptly summarized by Vice Chancellor Brown in Weinberger v. UOP, Inc., 409 A. 2d 1262, 1265 (Del. Ch. 1979).
The rationale underlying the decisions in Singer and Tanzer is deeply rooted in our corporate law. It is based upon the principle that whenever a majority shareholder, or a group of shareholders who combine to form a majority, undertakes to exercise an available statutory power so as to impose the will of the majority upon the minority, such action gives rise to a fiduciary duty on the part of the majority shareholder to deal fairly with the minority whose property interests are thus controlled.
A fundamental aspect of this fiduciary obligation is the right of the minority to participate pro rata in the returns of the enterprise. Southern Pacific Co. v. Bogert, 250 U.S. 483, 487-88, 39 S. Ct. 533, 535, 63 L. Ed. 1099 (1919). See also Note, Fiduciary Duties of Majority or Controlling Stockholders, 44 Iowa Law Review, 734, 738-39 (1959). The crux of this case is that the sole return on Trailer Train's stock ownership is access to the company's fleet of railroad cars. Reading is precluded from obtaining this benefit because it no longer has use for these cars. Under the circumstances present here, it is incumbent upon the board of directors and majority stockholders of Trailer Train to permit Reading to obtain some benefit from stock ownership. A review of the record reveals that this has not been done.
Trailer Train argues that it has fulfilled its obligation to Reading in two respects. First, it contends that Reading has obtained a fair return on its investment by virtue of having access to the company's fleet of cars from 1961, when Reading first became a stockholder, until 1976, when its rail assets were conveyed to Conrail. This argument begs the question. No one disputes that while Reading was in the railroad business, it benefitted from its stock ownership. The dispositive point, however, is that since 1976, Reading has not had use for Trailer Train's fleet of railroad cars and has therefore not obtained any return on its equity interest in the company. Thus, merely because Reading benefitted at one time does not alter the fact that it has not received any return on its investment for six years.
Trailer Train's more substantial contention is that it has fulfilled its fiduciary duties to Reading. Specifically, it points to the "substantial, continuing, and costly efforts" to solve the problem which culminated in the Morgan Stanley study and the offer of $1.5 million for Reading's stock. The short answer to this contention is that despite these efforts, Reading has not derived any substantive benefit from its stock ownership since 1976.
Moreover, as will be discussed in more detail below, the $1.5 million offer is based upon an inappropriate measure of valuation and therefore does not reflect adequately the value of Reading's equity interest in Trailer Train. Thus, I am compelled to conclude that Trailer Train has breached its fiduciary allegation to allow Reading to obtain a benefit from its stock ownership which is comparable to that being received by the company's user shareholders. I turn now to the choice of remedy.
After careful consideration, I conclude that the most appropriate form of relief is to require Trailer Train to repurchase Reading's stock at fair value. Although there is no mandatory buy-out provision in the Form A car contract, under Delaware law the company is unquestionably authorized to repurchase its outstanding stock subject to several qualifications not relevant here. 8 Del. Code Ann. § 160. See also Folk, The Delaware General Corporation Law at 154 (1972) ("so long as it abides by certain restrictions, chiefly found in the caselaw, a corporation may freely purchase its outstanding stock"). There are alternatives to the buy-out remedy, i.e., the issuance of a class of dividend paying stock, but the practical problems which inhere in each make the compelled reacquisition of Reading's stock by Trailer Train the most appropriate way to resolve this dispute. See generally, Hetherington and Dooley, Illiquidity and Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem. 63 Va. Law Rev. 1, 50-62 (1977).
This does not, however, solve the problem of what constitutes fair value for the stock.
Trailer Train's theory of valuation is nothing more than the fair market value of the stock under the company's existing policies. This valuation necessarily recognizes that because Trailer Train does not seek to maximize profits and does not permit a direct monetary return on its shares, the market for its stock is limited to only one railroad which might benefit from access to the company's fleet of cars. The shortcomings of this approach are obvious. By predicating the stock's value solely upon its very limited market, Trailer Train completely ignores that by virtue of its ownership interest in the company, Reading is entitled to its proportionate share of the company's assets. See, generally, Note, Valuation of Dissenter's Stock Under Appraisal Statutes, 79 Harvard Law Review 1453, 1457 (1966). Whether viewed in terms of liquidation value or net asset value, Reading's rightful claim to a pro rata portion of Trailer Train's assets cannot be ignored in determining the fair value of its stock ownership. Because Trailer Train's proposed valuation does precisely that, it is rejected.
Reading's valuation suffers from flaws which are equally fundamental. Its theory is predicated on the fact that the rates charged by Trailer Train for the use of its equipment are lower than the per diem rates mandated by the I.C.C. for railroads. Reading contends that the saving in rates which each shareholder receives by using Trailer Train equipment constitutes a "constructive dividend" and that it is therefore entitled to 2.44 percent of total savings from 1976, when it transferred its stock to Conrail, up to December 31, 1979, plus the same percentage for projected savings for the ten year period from 1980 to 1990. I cannot accept this valuation. To begin with, the evidence clearly showed that Trailer Train's rates were set on the basis of a complex formula which did not take into account the prevailing level of I.C.C. rates. Further, there was nothing in the record which would support a finding that the I.C.C. will continue to use a formula which would keep prevailing per diem rates above those set by Trailer Train. Thus, to the extent that Reading attempts to project a constructive dividend over a ten year period, its calculations are far too speculative to support a claim of entitlement to a pro-rata share of those projections.
Although Reading's claims to a constructive dividend for the period 1976 through 1979 are based upon actual rate differentials during that period and are therefore not speculative, the return which each shareholder obtained was predicated upon use of the company's equipment and not upon proportionate equity ownership. Thus, it is misleading for Reading to base its claim upon its 2.44 percent ownership interest when the extent of any shareholder's return of this constructive dividend is predicated solely upon use. For this reason, I am unable to accept Reading's valuation as a basis for ascertaining the fair value of its stock.
A review of the record reveals that Trailer Train itself has set book value as the appropriate measurement of the stock's value. A railroad which wishes to become a shareholder must pay book value for its block of 500 shares. Finding of Fact No. 10. Moreover, a shareholder which wishes to sell its shares must first tender them to the corporation for repurchase at book value. Finding of Fact No. 16. Thus, Trailer Train has itself designated book value as the price of a block of its stock when its sale or purchase is contemplated. I conclude that book value is the fairest way to value Reading's stock. Because the current book value of a block of the company's stock was not placed on the record, I will order the parties to confer and, if possible, stipulate as to current book value. If such a stipulation cannot be made, I will schedule a supplemental hearing and determine the stock's value on the basis of the evidence presented.
CONCLUSIONS OF LAW
1. This Court has jurisdiction under the Bankruptcy Act over the matters raised in Reading's petition for the reasons stated in In re Reading Co., 2 B.R. 719 (E.D. Pa. 1980).
2. The Board of Directors and majority shareholders of Trailer Train owe a fiduciary duty of fairness to Reading.
3. In failing to permit Reading to obtain a monetary return from its stock ownership comparable to the benefits received by its user-shareholders, Trailer Train breached its fiduciary obligation of fairness.
4. The most appropriate relief is to require Trailer Train to repurchase Reading's stock at current book value.
ORDER NO. 2024
AND NOW, this 11th day of August, 1982, for the reasons expressed in the foregoing adjudication, Reading's petition to compel Trailer Train to repurchase its block of 500 shares of stock is hereby granted. Trailer Train is ordered to repurchase Reading's stock at current book value. The parties are directed to advise me within fifteen days of the date of this order if they are able to stipulate to the current book value of the stock.