35 Del. Ch. at p.611, 123 A.2d at p.899
In 1947, a Delaware corporation known as American Independent Oil Company was organized to exploit a concession for oil and gas in the Kuwait-Saudi Arabian Neutral Zone in the Middle East.1 The three plaintiffs, James S. Abercrombie, Phillips Petroleum Company and Sunray Oil Corporation, and seven of the defendants became the stockholders of American.2 Under the Organization Agreement as supplemented, each stockholder was allowed to name to the board of directors one director for each 5,000 shares of stock held. The Certificate of Incorporation provided for cumulative voting.3
On March 30, 1950, certain defendants executed a so-called Agents' Agreement.4 The defendants Davies, Signal, Hancock, Globe, Lario and Ashland, who together own a majority of American's outstanding stock, entered into the Agreement with the following designated agents: W. W. Vandeveer, Davies, Jehle, John W. Hancock, Marshall, Black, Mosher and Young.5 The Agreement provided that the contracting shareholders should deposit with the agents their certificates for shares of American, the certificates to be endorsed or powers executed. The agents were to deliver the certificates and powers to a bank to be selected. The bank was to hold them in escrow. However, they could be withdrawn from escrow at any time upon the signatures of any seven agents.6
The Agreement provided that during its term the agents shall have the sole and exclusive voting power of the stock subject to this Agreement.7 The vote of the agents was to be exercised as a unit on any matter on which a vote of the stockholders is called for, as any seven of said agents shall direct and determine. If the agents did not agree the matter was to be submitted to arbitration in accordance with a procedure set out in the Agreement.8 The shareholders undertook to deliver to the agents and keep in effect during the life of the Agreement proxies giving such agents the power to vote the stock at all meetings.9 The Agreement was irrevocable for a period of ten years from its date unless seven agents voted to terminate it or less than 50% of the outstanding shares remained subject to the Agreement.10
The Agreement further provided that the shareholders should use their best efforts to cause the agents representing the corporate shares to be and remain identical with the persons representing the corporate shareholders on the board of American. The corporate shareholders would use their best efforts to cause their representatives on the Board of Directors to vote to initiate, maintain in effect or discontinue any general policy, plan, or program for the company as determined by the Agents or by any seven thereof.11 In the event of the failure of any such director so to vote, all parties agreed to cooperate and act in any legal manner possible to cause any director voting contrary to any such determination by the Agents to resign or be removed and to be replaced upon the Board.12
On December 9, 1954, a directors' meeting was held in Chicago at which all directors were present.13 A resolution was then adopted calling for a special meeting of the board to be held on December 16, for the purpose of considering and taking action upon proposed amendments to the by-laws, one of which would authorize the board to remove any officer without cause.14 This resolution received the affirmative votes of the six directors representing plaintiffs and the director representing Deep Rock.15 The other defendants who were parties to the Agreement opposed the resolution and stated that Ashland's directors violated the Agreement when they voted as they did.16
Plaintiffs, who are not parties to the Agreement, filed this action in the Court of Chancery of Delaware, New Castle, seeking a declaration that the Agreement is invalid.17 The case was decided on plaintiffs' motion for summary judgment, with the court issuing its opinion on January 16, 1956, granting reargument on April 30, 1956, and issuing a supplemental opinion on June 20, 1956.18
Whether the Agents' Agreement deprives the board of directors of their statutory function of management of the business of the corporation?19
Under 8 Del.C. § 141(a), the business of every corporation organized under the provisions of this chapter shall be managed by a board of directors.20 Stockholder agreements that substantially encroach on the duty of directors to exercise independent judgment on matters of management policy are invalid, particularly absent unanimous stockholder approval.21
Yes. The Agreement requires that the corporate shareholders use their best efforts to cause their representatives on the Board of Directors to vote to initiate, maintain in effect or discontinue any general policy, plan, or program for the company as determined by the Agents or by any seven thereof.22 In the event of the failure of any such director so to vote, all parties agreed to cooperate and act in any legal manner possible to cause any director voting contrary to any such determination by the Agents to resign or be removed and to be replaced upon the Board. The agents are identical to the directors representing the shareholders.
The Preamble shows the Agreement covers all matters which might come before the board. It binds directors in advance to predetermined decisions even if contrary to their own best judgment on management policy.23
The director provisions of the Agents' Agreement are invalid as an unlawful attempt by the stockholders party to the Agreement to encroach upon the statutory powers and duties imposed on directors by the Delaware corporation law.24
Whether the Agents' Agreement is invalid because it constitutes a voting trust that fails to comply with the Delaware statute governing voting trusts?25
A voting trust under 8 Del.C. § 218 requires an agreement by which signing stockholders authorize trustees to transfer record title to their own names as trustees for the period of the trust.26 Agreements in which shareholders bind each other as to how they shall vote their shares through agents, without transfer of legal title, are not voting trusts subject to the statute.27
No. The Agreement provides that the contracting shareholders deposit their certificates for shares with the agents, who deliver them to a bank to hold in escrow withdrawable upon the signatures of any seven agents.28 The agents vote solely by virtue of proxies given by their principals rather than holding legal title. The Agreement itself provides mechanics for the possible future creation of a voting trust, showing the parties did not intend to create one upon execution.29 The stock certificates and powers remain with the escrow agent, precluding the agents from holding legal title during the term.30
The Agents' Agreement is not invalid for failure to comply with the Delaware Voting Trust statute because it is not a voting trust.31
Whether the director provisions of the Agents' Agreement are severable from the stockholder provisions?32
Whether a contract is divisible or entire is governed by the intention of the parties, to be determined from the terms and subject matter of the contract together with any pertinent facts or circumstances.33
Yes. After deleting the director provisions that committed agents in their director capacities to follow predetermined decisions, the remaining stockholder provisions require delivery of stock and proxies to agents with exclusive voting power exercised as any seven agents direct, or by arbitrator if they disagree.34 These provisions allow the agents to exercise voting control of the corporation.35 They implement the stated intent and purpose of the Agreement to initiate or maintain any general policy, plan or program by electing or retaining personnel through majority stockholder action.36
The facts that the Agreement was executed to prevent Phillips Petroleum Company from gaining control and that defendants advanced substantial sums further support that the parties would have wanted the Agreement to stand with only the stockholder provisions.37
The director provisions of the Agents' Agreement are severable from the stockholder provisions, so the stockholder provisions cannot be declared invalid.38
Whether the Agents' Agreement as delimited after severance is invalid as a voting trust, as a pooling agreement, or because its proxy provisions are not coupled with an interest?39
A pooling agreement in which shareholders bind each other as to how their shares shall be voted through agents subject to the shareholders' control is valid.40 Proxies given pursuant to such an agreement may be irrevocable for the term when supported by legal consideration and a strong element of reliance, even without a traditional interest in the stock itself.41
No. The Agreement provides that the contracting shareholders deposit their certificates for shares with the agents, who deliver them to a bank to hold in escrow withdrawable upon the signatures of any seven agents. The delimited Agreement is a valid pooling agreement because the agents represent specific shareholders, are subject to removal at the will of the shareholder who selects them, and must first attempt to reach an agreement for unified voting, with arbitration only in case of disagreement.42 The proxies are irrevocable because the stockholders jointly obligated themselves as part of the binding pooling agreement to keep them in effect.43 Defendants advanced substantial additional sums for the use of American at least in partial reliance upon the validity and effect of the Agreement including the proxy provisions.44
The Agreement is not a voting trust for the reasons stated under the second issue.45
The Agents' Agreement as delimited after severance is a valid pooling agreement whose proxy provisions are irrevocable and is not invalid as a voting trust or pooling agreement.46