classes of shares

In 1928 E.C. Barton formed E.C. Barton & Co. The corporation is a non-public closely-held Delaware corporation headquartered in Arkansas. It is engaged in the business of selling wholesale and retail lumber in the Mississippi Delta. The corporation issued two classes of common stock consisting of Class A voting shares and Class B non-voting shares. Substantially all of the corporation's stock was held by Mr. Barton at the time of his death in 1967. Mr. Barton was survived by his second wife Martha K. Barton who died in 1985 and by his daughter and granddaughter from his first marriage. Pursuant to Mr. Barton's testamentary plan 49 percent of the Class A voting stock was bequeathed outright to eight of his loyal employees. The remaining 51 percent of Class A along with 14 percent of Class B was placed into an independently managed 15-year trust for the same eight people. Sixty-one percent of the Class B non-voting stock was bequeathed outright to Mrs. Barton. Mr. Barton's daughter and granddaughter received 21 percent of the Class B stock in trust. The non-voting Class B shares Mr. Barton bequeathed to his family represented 75 percent of the corporation's total equity. Mrs. Barton gave certain shares of Class B non-voting stock to her three children Guy C. Blackwell Owen G. Blackwell and Martha G. Hestand. In 1973 the corporation purchased all of the Class B stock held in trust for Mr. Barton's daughter and granddaughter at a price of $45 per share. Mrs. Barton sold the remainder of her Class B shares to the corporation in January 1975 at a price of $45 per share. These transactions left Mrs. Barton's three children collectively with 30 percent of the outstanding Class B non-voting stock. The children have no voting rights despite their substantial equity interest in the corporation. The children are also the only non-employee Class B stockholders. The corporation made repeated self-tender offers to repurchase the children's Class B shares. The corporation first offered to repurchase the children's stock at $45 per share shortly after they acquired it from Mrs. Barton. The children rejected the offer and the stock subsequently split 25-for-1 in 1976. A second unsuccessful repurchase offer was made in 1977 at $8.22 per share. In 1979 the corporation again approached the children and offered to repurchase their stock at a price of $15 per share. Martha Hestand accepted the offer and tendered her shares to the corporation. Guy and Owen Blackwell however refused to sell their shares at that price. The corporation made no further repurchase offers until May 1985 when the ESOP undertook a tender offer to repurchase 48,000 shares of Class B stock concurrently with a tender offer by the corporation for 39,000 Class A and 100,000 Class B shares at a price of $25 per share. The book value of the Class A stock and the Class B stock at that time was $38.39 and $26.35 respectively. The remaining children and the other plaintiffs in the present action refused to sell. In November 1975 the corporation established an ESOP designed to hold Class B non-voting stock for the benefit of eligible employees of the corporation. The ESOP is a tax-qualified profit-sharing plan whereby employees of the corporation are allocated a share of the assets held by the plan in proportion to their annual compensation subject to certain vesting requirements. The ESOP is funded by annual cash contributions from the corporation. Under the plan terminating and retiring employees are entitled to receive their interest in the ESOP by taking Class B stock or cash in lieu of stock. It appears from the record that most terminating employees and retirees elect to receive cash in lieu of stock. The corporation commissions an annual appraisal of the corporation to determine the value of its stock for ESOP purposes. Thus the ESOP provides employee Class B stockholders with a substantial measure of liquidity not available to non-employee stockholders. Beginning in 1982 the corporation purchased additional key man life insurance policies in connection with agreements entered into between the corporation and nine key officers and directors. In 1985 the corporation purchased eight $300,000 keyman life insurance policies. In the five-year period 1985 to 1989 the corporation paid approximately $450,000 in net key man premiums. The premiums exceeded the corporation's declared dividends in 1986 and 1989 even after the earnings on the policies were deducted. Plaintiffs are 14 minority stockholders of Class B non-voting stock of the corporation. The individual defendants are the members of the board of directors. The corporation is also a defendant. Plaintiffs collectively own only Class B stock and own no Class A stock. Their total holdings comprise approximately 25 percent of all the common stock outstanding as of the end of fiscal year 1989. At all relevant times the board consisted of ten individuals who either are currently employed or were once employed by the corporation. At the time this suit was filed these directors collectively owned approximately 47.5 percent of all the outstanding Class A shares. After a five-day trial that included live witness testimony, depositions, and documents, the Vice Chancellor held that the corporation's low-dividend policy was within the bounds of business judgment. The Vice Chancellor also held that the executive compensation levels were not excessive. The Vice Chancellor ruled in favor of defendants on these issues. The Vice Chancellor further held, however, that the defendant directors had breached their fiduciary duties to the minority. The basis for this ruling was that it was inherently unfair for the defendants to establish the ESOP. The basis for this ruling was also that it was inherently unfair for the defendants to purchase key man life insurance to provide liquidity for themselves while providing no comparable method by which the non-employee Class B stockholders may liquidate their stock at fair value. The trial court entered judgment requiring use of all key man premiums plus interest to repurchase Class B stock from non-employee holders at an independent appraisal price. The judgment also included a requirement that future repurchases offer equal terms to those stockholders. The Supreme Court of Delaware reviewed the decision of the Court of Chancery.

Sinclair Oil Corporation operated primarily as a holding company in the business of exploring for oil and of producing and marketing crude oil and oil products. At all times relevant to this litigation, Sinclair owned about 97% of Sinven’s stock. Sinven was incorporated in 1922 and has been engaged in petroleum operations primarily in Venezuela and since 1959 has operated exclusively in Venezuela. The plaintiff owns about 3000 of 120,000 publicly held shares of Sinven. Sinclair nominates all members of Sinven’s board of directors. Almost without exception, they were officers, directors, or employees of corporations in the Sinclair complex. By reason of Sinclair’s domination, Sinclair owed Sinven a fiduciary duty. From 1960 through 1966, Sinven paid out $108,000,000 in dividends ($38,000,000 in excess of Sinven’s earnings during the same period). The Chancellor held that Sinclair caused these dividends to be paid during a period when it had a need for large amounts of cash. From 1960 to 1966 Sinclair purchased or developed oil fields in Alaska, Canada, Paraguay, and other places around the world. Sinclair made no real effort to expand Sinven. Sinven was not permitted to participate and was confined in its activities to Venezuela. In 1961 Sinclair created Sinclair International Oil Company, a wholly owned subsidiary used for the purpose of coordinating all of Sinclair’s foreign operations. On September 28, 1961, Sinclair caused Sinven to contract with International whereby Sinven agreed to sell all of its crude oil and refined products to International at specified prices. The contract provided for minimum and maximum quantities and prices. Although the contract called for payment on receipt, International’s payments lagged as much as 30 days after receipt. International did not comply with this requirement. The plaintiff brought a derivative action in the Court of Chancery against Sinclair. The Chancellor applied the intrinsic fairness standard and ordered Sinclair to account for damages sustained by its subsidiary, Sinclair Venezuelan Oil Company (hereafter Sinven), organized by Sinclair for the purpose of operating in Venezuela, as a result of dividends paid by Sinven, the denial to Sinven of industrial development, and a breach of contract between Sinclair’s wholly-owned subsidiary, Sinclair International Oil Company, and Sinven. Sinclair appealed from that order to the Supreme Court of Delaware.