447 A.2d 17 (Del. Ch. 1982)
Leonard I. Schreiber, a stockholder of Texas International Airlines, Inc., a Delaware corporation, brought this derivative action on behalf of the corporation against Jet Capital Corporation, the holder of 35% of Texas International’s stock, and against the company’s board of directors.1 The action challenged a loan made by Texas International to Jet Capital in connection with a proposed corporate restructuring.2 The case reached the Court of Chancery on cross-motions for summary judgment filed by the parties.3
On June 11, 1980, Texas International’s shareholders approved a share-for-share merger with Texas Air Corporation, a newly formed Delaware holding company.4 The merger eliminated the shareholders of Texas International and substituted an equal number of shares in Texas Air, with Texas International becoming a wholly-owned subsidiary of Texas Air.5 The purpose of the reorganization was to permit diversification and strengthen the enterprise financially.6
Jet Capital owned all of the Series C preferred stock and therefore possessed veto power over the merger because the certificate of incorporation required separate class approval by that series.7 Jet Capital opposed the merger because an Internal Revenue Service ruling indicated that the exchange of its warrants to purchase 799,880 shares of Texas International common stock would trigger an $800,000 federal income tax liability.8 Jet Capital lacked the approximately three million dollars needed to exercise the warrants early and avoid the tax.9
To overcome Jet Capital’s opposition, Texas International and Jet Capital negotiated a loan of $3,335,000 at five percent interest, secured by a pledge of Jet Capital’s Series C preferred stock having a market value of approximately 150 percent of the loan amount.10 A special committee composed of the three Texas International directors unaffiliated with Jet Capital reviewed the proposal with the assistance of independent counsel and an investment banker before recommending it.11 The board of Texas International unanimously approved the loan and submitted it to the shareholders. Shareholders approved it by overwhelming majorities of both all outstanding shares and the shares held by stockholders other than Jet Capital or its officers and directors after receiving a detailed proxy statement.12
Following the merger, Schreiber filed the present derivative suit.13 Defendants moved for summary judgment on the grounds that Schreiber lacked standing because the merger had converted his shares.14 Defendants also asserted that the record showed no corporate waste.15 Schreiber moved for summary judgment on the ground that the loan constituted vote-buying.16
Whether plaintiff has standing to maintain a derivative suit on behalf of Texas International after the June 11, 1980 merger converted his shares into shares of Texas Air?17
Under 8 Del.C. § 327 a plaintiff bringing a derivative suit must be a stockholder at the time the suit is commenced, but the requirement is not inflexible where a reorganization merger leaves the plaintiff's equitable ownership interest in the business enterprise essentially unchanged, as in Helfand v. Gambee.18
Yes. The June 11, 1980 transaction was a share-for-share merger with a newly formed holding company under which Texas International became a wholly-owned subsidiary and plaintiff's shares converted into equivalent shares of Texas Air.19 Schreiber voted against the merger and filed suit afterward, yet the structure of the two corporations remained virtually identical except for slight dilution from Jet Capital's warrant exercise.20 Denying standing would not serve the statutory purpose of preventing purchased claims and would permit abuses where the plaintiff's interest in the enterprise is unchanged.21
Plaintiff has standing to maintain the derivative suit.22
Whether the loan from Texas International to Jet Capital constituted vote-buying that rendered the transaction void?23
Vote-buying is not void per se unless its object or purpose is to defraud or disenfranchise other stockholders. The transaction is voidable and subject to ratification by a majority of disinterested stockholders after full disclosure of all germane facts.24
No. The loan of $3,335,000 at five percent interest was extended to Jet Capital solely to remove its opposition to the merger that benefited all stockholders.25 The loan was reviewed and recommended by an independent committee of unaffiliated directors with advice from independent counsel and an investment banker.26 The loan was approved by overwhelming majorities of both all outstanding shares and shares held by stockholders other than Jet Capital after a detailed proxy statement.27 The purpose was to advance the interests of Texas International's stockholders rather than to defraud them.28
The ratification after full disclosure cures any voidability.
The loan did not render the transaction void.29
Whether the loan from Texas International to Jet Capital constituted corporate waste?30
No. The loan had virtually no impact on Texas International's cash position because the advanced funds were immediately repaid upon Jet Capital's exercise of the warrants.33 The five percent interest rate equaled anticipated dividends during the period.34 The transaction received approval from a disinterested committee plus ratification by a majority of disinterested stockholders.35 Although the plaintiff contends the terms were unduly favorable to the controlling stockholder, claims of waste raise genuine issues of fact that are seldom resolved on summary judgment.36
Summary judgment on the waste claim is denied because genuine issues of fact remain.37