Baronv.Allied Artists Pictures Corp.

Plaintiff Lewis, a stockholder of Allied Artists Pictures Corporation, a Delaware corporation, originally brought suit to have the 1973 election of directors declared illegal and invalid and to have a master appointed to conduct a new election pursuant to 8 Del. C. §§ 225 and 227.¹ He later filed a second action seeking the same relief as to the 1974 election of directors, and the two causes were consolidated for decision based upon the cross-motions of the parties for summary judgment.² Both sides agree that there is no material dispute of fact and that the matter is proper for summary judgment.³

Allied was originally started in the mid-1930s as Sterling Pictures Corporation and later changed its name to Monogram Films before adopting its present name in the early 1950s.⁴ In 1954, needing capital, Allied amended its certificate of incorporation to permit issuance of 150,000 shares of preferred stock at $10 par value with dividends payable quarterly on a cumulative basis.⁵ The amendment provided that if six or more quarterly dividends on the preferred stock are in default, the preferred stockholders voting as a class shall have the right to elect a majority of the directors until all dividends in default are paid.⁶ The amendment also required creation of a sinking fund into which ten percent of the excess of consolidated net earnings over preferred dividend requirements would be set aside each year for redemption of preferred stock at $10.50 per share.⁷

Regular quarterly dividends were paid on the preferred stock through March 30, 1963.⁸ Thereafter Allied suffered losses that impaired the capital represented by the preferred stock, prohibiting dividend payments under 8 Del.C. § 170.⁹ By September 1964 the corporation was in default on six quarterly dividends, triggering the preferred stockholders' right to elect a majority of the board, which they have exercised ever since.¹⁰ As of the December 11, 1973 election, Kalvex, Inc. owned 52 percent of the outstanding preferred stock while holding only 625 shares of Allied's 1,500,000 shares of common stock.¹¹ Kalvex has since acquired additional common shares or convertible securities.¹² Officers and directors of Allied overlap substantially with those of Kalvex, and for fiscal 1973 the officers and directors of Allied as a group received $402,088 in compensation.¹³

In 1964 Allied was assessed a $1,400,000 tax deficiency by the Internal Revenue Service and entered an agreement to pay it over time on the condition that no dividends would be paid without IRS consent until the deficiency was satisfied.¹⁴ Allied's financial condition fluctuated through 1974, with net losses in most years.¹⁵ In 1972 Allied acquired rights to, produced, and distributed the film Cabaret, which became its largest grossing film to that point, followed by a $7,000,000 commitment to Papillon, which proved even more successful.¹⁶ For fiscal 1973 Allied had net income in excess of $1,400,000 plus a $2,000,000 tax carry-over.¹⁷ Prior to the 1973 election the IRS balance owed was some $249,000, and as of the 1974 election one final payment remained.¹⁸ Prior to the 1973 election Allied was in default on forty-three quarterly preferred dividends totaling more than $270,000; by the 1974 election the arrearages exceeded $280,000.¹⁹

Plaintiff contends that in one or more years since the preferred stockholders gained control, the financial statements showed either net income or capital surplus larger than the accumulated arrearages, so the board had a duty to pay the arrearages and the IRS balance to return control to the common stockholders at the next annual election.²⁰ Plaintiff seeks an order for a new election at which the board would be elected by the common stockholders.²¹