832 A.2d 76 (Del. 2003)
Giant Food Inc. was incorporated in Delaware in 1935 by N. M. Cohen and Samuel Lehrman.1 From its inception the company was controlled by the Cohen and Lehrman families through equal quantities of voting stock designated Class AC and Class AL common stock, each class entitled to elect two of the four directors.2
Samuel Lehrman died in 1949. A dispute then arose among his children regarding an inter vivos gift of shares made to the plaintiff Jacob Lehrman.3 To eliminate the family dispute and its possible disruption of company affairs, an arrangement was reached under which the plaintiff acquired all outstanding Class AL stock; the company repurchased the shares held by his brothers and sister, the Cohens made an equalizing surrender of stock for retirement, and a fifth directorship was created.4
On December 31, 1949 the certificate of incorporation was amended to create a third class of voting stock designated Class AD common stock.5 One share of Class AD stock having a par value of $10 was issued to Joseph B. Danzansky, who had served as company counsel since 1944.6 The share carried the right to elect the fifth director but no dividend rights and no liquidation rights beyond repayment of par value.7 The company could redeem the share upon the affirmative vote of four of the five directors.8
Danzansky voted his AD share in April 1950 to elect himself the fifth director and continued to serve in that capacity until 1964.9 In December 1959 the company sold 200,000 shares of non-voting common stock to the public for over $3,000,000.10 Each prospectus stated that the only purpose of the AD stock was to prevent deadlock between the AC and AL directors.11
On October 1, 1964 a stockholders' resolution granting Danzansky a fifteen-year employment contract at an annual salary of $67,600 together with options for 25,000 shares of non-voting stock was adopted by the votes of the AC and AD shares over the opposition of the AL shares.12 At the directors' meeting held the same day Danzansky was elected president by a 3-2 vote.13 On December 11, 1964 Danzansky resigned as director and voted his AD share to elect Millard F. West, Jr. as the fifth director.14
The plaintiff commenced this action on December 11, 1964. The first claim asserted that the creation, issuance, and voting of the Class AD share was illegal.15 The second claim addressed the October 1964 events and charged breach of contract and fiduciary duty.16 The parties filed cross-motions for summary judgment on the first claim. The Court of Chancery granted summary judgment for the defendants, and the plaintiff appeals.17
Whether the Class AD stock arrangement constitutes a voting trust under the Delaware Voting Trust Statute?18
Under Delaware law, a voting trust exists when three criteria are met. (1) The voting rights of the stock are separated from the other attributes of ownership. (2) The voting rights granted are intended to be irrevocable for a definite period of time. (3) The principal purpose of the grant of voting rights is to acquire voting control of the corporation.19 These criteria were established in Abercrombie v. Davies.20
No. The Class AD stock arrangement fails the first Abercrombie criterion.21 The holders of Class AC and Class AL stock did not separate the voting rights from the other attributes of ownership of those classes when they created the Class AD stock.22 The AC and AL stockholders retain complete control over the voting of their stock. Each can vote his stock directly without divestiture.23
The creation of the AD stock diluted their voting power.24 Since the first test is not met, the second and third tests, which assume divestiture of voting rights, are not reached.25 The arrangement became part of the capitalization of Giant Food Inc. rather than a trust or pooling agreement among the AC and AL stockholders.26
The Class AD stock arrangement does not constitute a voting trust under the Delaware Voting Trust Statute.27
Whether the creation of a class of stock having voting rights but no substantial participating proprietary interest violates the public policy of Delaware?28
Delaware public policy, as expressed in 8 Del.C. § 151(a), permits the creation of stock having voting rights only, as well as stock having property rights only. The statute does not require that all stock have both voting rights and proprietary interests.29
No. The Class AD stock, which has voting rights to elect one director but no dividend rights and only repayment of par value upon liquidation, was created by amendment to the certificate of incorporation of Giant Food Inc. in accordance with the broad authorization of § 151(a).30 The public policy underlying the Voting Trust Statute addresses separation of vote from stock ownership, not the creation of non-participating voting stock.31 The AD arrangement does not contravene that purpose as it was openly disclosed in prospectuses and did not involve secret combinations.32
The creation of the Class AD stock does not violate the public policy of Delaware.33
Whether the AD stock arrangement permits an unlawful delegation of directorial duties and powers to the fifth director?34
Under 8 Del.C. § 141(a), the business of a corporation shall be managed by a board of directors except as provided in the certificate of incorporation.35 Stockholders may provide in the certificate how the business is to be managed, including delegation of duties.36 This does not violate the principle that directors may not delegate their duties when the delegation is made by stockholder action via the certificate rather than by the directors themselves.37
No. The AD stock arrangement was created by unanimous stockholder action amending the certificate of incorporation of Giant Food Inc. This provided under § 141(a) for the management of the corporation through the fifth director elected by the AD stock to break deadlocks.38 The delegation, if any, was effected by the stockholders through the certificate and not by the AC and AL directors delegating their own duties.39 This is consistent with the proper purpose of protecting against stalemate in the directorate.40
The AD stock arrangement does not permit an unlawful delegation of directorial duties and powers.41