Summary
stating that "[i]t is possible to cure any technical defect in the wording of demand at trial," and that "[t]he burden of persuasion to cure a technical defect at trial is, however, upon a plaintiff"
Summary of this case from Pershing Square, L.P. v. Ceridian Corp.Opinion
Civil Action No. 7976.
Submitted: April 10, 1985.
Decided: April 18, 1985.
DECISION AFTER TRIAL ON PLAINTIFFS' DEMAND TO INSPECT STOCKLISTS: DENIED.
Arthur G. Connolly, Jr., Esquire, and Collins J. Seitz, Jr., Esquire, CONNOLLY, BOVE, LODGE HUTZ, Wilmington, DE, Attorneys for plaintiffs.
Paul P. Welsh, Esquire, and Donald E. Reid, Esquire, MORRIS, NICHOLS, ARSHT TUNNELL, Wilmington, DE, Attorneys for defendant.
MEMORANDUM (unreported) OPINION
Plaintiffs are shareholders of Texas Air Corporation, a Delaware corporation, ("Texas Air") and seek to inspect the list of shareholders pursuant to 8 Del. C. § 220. Texas Air has refused to allow inspection of the stocklist asserting that plaintiffs have not made a proper demand and that plaintiffs' true purpose is an improper purpose. After trial, I find from the unusual procedural and factual circumstances of this case that plaintiffs' request to inspect the stocklist must be denied.
I
It is clear from the facts adduced at trial that the real interest of plaintiffs concerns Continental Air Lines, Inc. ("Continental") and plaintiffs' interest in Texas Air is only because of its relationship with Continental. Texas Air owns the majority of the stock of Continental Airlines Corporation which owns all of the outstanding stock of Continental. Both Continentals and certain affiliates, not including Texas Air, filed voluntary Chapter 11 Bankruptcy petitions on September 24, 1983 in the United States Bankruptcy Court for the Southern District of Texas, Houston Division ("Bankruptcy Court"). Continental had operated the 8th largest passenger airline in the United States and had net losses of over $500 million since the airline industry was deregulated in 1978.
After filing the Chapter 11 petition, Continental was shut down briefly. It then reopened but attempted to operate on a more austere basis. Continental was permitted by the Bankruptcy Court to terminate its pre-petition collective bargaining agreements. It then offered its pilots, as well as other employees, less generous employment terms. Some pilots found this acceptable. The Airline Pilots' Association International ("ALPA"), the pilots' union, however, rejected the new terms and, on October 1, 1983, went on strike.
Continental has been able to operate despite this strike and had a net profit of over $50 million for the year ending on December 31, 1984.
Plaintiff-Taylor is a former pilot of Continental who is a member of ALPA and plaintiff-Carpenter was a pilot of Continental and a member of ALPA until he reached the mandatory retirement age for pilots and retired on February 1, 1985. Both have taken an active role in the strike.
The strike has been a long and bitter one. ALPA has been extremely vocal and has managed to initiate Congressional Inquiry into the safety of Continental's continued operations. ALPA has also organized rallies or picketing at the places of business of three of Continental's outside directors and, apparently, has a program of action to encourage pilots to quit flying for Continental, to create a financial drain on Continental, and to publicize Continental as unsafe. ALPA has also undertaken a vigorous media campaign urging passengers not to fly Continental because of alleged safety deficiencies and for other reasons.
In June of 1984, ALPA solicited for pilots who owned stock in Texas Air. Plaintiffs apparently came forward at that time or at the time of an earlier solicitation. Resolutions were then submitted in their names to the Board of Texas Air with a request that two resolutions be submitted to the stockholders for adoption. The resolution submitted in Mr. Taylor's name would require the corporation to submit to its stockholders an annual report as to Texas Air's potential liability for any accidents involving Continental due to a lack of safety. Mr. Carpenter's resolution seeks to involve the stockholders in fare setting policies of Continental. Both resolutions, on their face, do not seem to be the type of resolutions which would be the subject of a bonafide proxy campaign.
A letter under oath dated February 6, 1985, and denoted as "DEMAND FOR OPPORTUNITY TO INSPECT CORPORATE STOCK LEDGER" was sent to Texas Air by Ronald G. Kurtz, the agent of the plaintiffs. The purpose of the inspection was to allow preparation of a list of shareholders so that the plaintiffs could "communicate with these stockholders regarding issues concerning the Company's affairs and its management and operations, including the Company's relationship with Continental Airlines Corporation, a Delawar a corporation that filed a petition in bankruptcy on September 24, 1983." Texas Air took the position that the letter did not state a proper purpose. A letter dated March 28, 1985 — but not under oath — was sent by Mr. Kurtz as a "supplemental demand letter" and stated that the stocklist was necessary so that plaintiffs could solicit proxies in favor of passage of the two resolutions.
The Securities Exchange Commission has apparently refused to require that the materials of the plaintiffs be sent along with Texas Air's annual proxy materials. That decision is currently under appeal. Texas Air, however, seemed to indicate in its pre-trial brief that it was willing to send out plaintiffs' materials with its own proxy solicitations. This offer was not repeated at trial, however. Even if Texas Air agreed to do this, however, defendants do not find this arrangement satisfactory because one of them states that he may wish to contact shareholders directly by phone and they also do not wish their proxy to arrive with the materials of the corporation. The annual meeting of Texas Air will take place at an unannounced date during the month of May.
II
Plaintiffs contend that they have made a demand which is sufficient under 8 Del. C. § 220. Their primary purpose is claimed to be to solicit proxies which is, of course, a proper purpose. Kerkorian v. Western Airlines, Inc., Del. Ch., 253 A.2d 221 (1969), aff'd., Del. Supr., 254 A.2d 240 (1969). They correctly assert that once a primary purpose is properly established, secondary motives which may be improper are irrelevant. C M M Group, Inc. v. Carroll, Del. Supr., 453 A.2d 738 (1982).
Texas Air, however, contends that the demand was insufficient when made and has been improperly supplemented and that, therefore, the complaint fails to state a claim upon which relief can be granted and should be dismissed. Texas Air also contends that plaintiffs' primary purpose for inspection of the stock ledger is to obtain a list of stockholders so that economic pressure can be exerted upon Continental by ALPA. Such a purpose is argued to be improper as it is not related to plaintiffs' interest as shareholders of Texas Air but rather is related to ALPA's interest as a partisan in a strike against Continental.
III
A shareholder making a demand under 8 Del. C. § 220 must state the substance of his intended communication in a manner sufficient to allow the corporation, and the courts, to determine whether there is a reasonable relationship between his purpose and his interest as a shareholder. Northwest Industries, Inc. v. B.F. Goodrich Company, Del. Supr., 260 A.2d 428 (1969). The demand may, however, be given an expanded reading when viewed in light of surrounding circumstances, "such as an impending stockholders' meeting". Weisman v. Western Pacific Industries, Inc., Del. Ch., 344 A.2d 267 (1975).
It is also possible to cure any technical defect in the wording of the demand at trial. Henshaw v. American Cement Corp., Del. Ch., 252 A.2d 125 (1969). Devon v. Pantry Pride, Inc., Del. Ch., C.A. #7843, Hartnett, V.C. (November 21, 1984); Odyssey Partners v. Trans World Corp., Del. Ch., C.A. #7125, Hartnett, V.C. (March 29, 1983); Hatleigh Corp. v. Lane Bryant, Inc., Del. Ch., C.A. #6318, Hartnett, V.C. (February 5, 1981). The burden of persuasion to cure a technical defect at trial is, however, upon a plaintiff.
The initial demand of the plaintiffs was defective because it lacked the requisite specificity. Northwest Industries, Inc. v. B.F. Goodrich Company, supra; Weisman v. Western Pacific Industries, Inc., supra. The supplemental demand did not cure the deficiency because it was not under oath as is required by the statute.
Although plaintiffs could have cured the defect at trial under the rule of law set forth in Henshaw v. American Cement Corp., supra, they did not because the plaintiffs' testimony at trial clearly established that they do not really desire to communicate with the stockholders of Texas Air for a purpose reasonably related to their stock holdings in Texas Air. It is abundantly clear from the entire record that they did not really initiate this action and that plaintiffs' participation in this action is merely a sham. This suit was initiated by ALPA and it solicited its members owning Texas Air stock to come forward in order to enable it to find a method of bringing this action. ALPA had all the resolutions drawn up and the plaintiffs signed them having admittedly been in no way involved in their drafting. The same apparently is true of the original and supplemental demand letters. I also find that none of the costs are being paid by plaintiffs but are being underwritten by ALPA and that ALPA's sole interest is attempting to find ways to exert economic pressure on Continental. I also find that plaintiffs' real interest, like that of ALPA, is to bring economic pressure on Continental in connection with the strike.
Plaintiffs correctly claim that once a proper purpose for solicitation of proxies has been established, all other purposes are secondary and should not be considered by the Court. It is clear, however, that the real party in interest is ALPA and there was no evidence whatsoever introduced by plaintiffs as to its purpose in seeking a stocklist. Plaintiffs' original demand for a stocklist did not sufficiently state the substance of their intended communications, their supplementary letter must be disregarded, and the evidence at trial fell far short of what is required to cure the deficiency. The demand for a stocklist for that reason alone must be denied.
IV
Once a stockholder has properly complied with the provisions of 8 Del. C. § 220 respecting the form and manner of making a demand, the burden of proof to establish that the purpose is improper shifts to the corporation. 8 Del. C. § 220(c); Hatleigh Corp. v. Lane Bryant, Inc., supra.
As I have held, the plaintiffs did not properly comply with the provisions of 8 Del. C. § 220 in that their form of demand was deficient and they did not cure the deficiency at trial because they did not show that they seek the list for a proper purpose.
Even if plaintiffs' demand could be held to have been proper, and even if the plaintiffs were the real parties in interest, it is clear from the entire record at the trial that the respondents have borne their burden of establishing that the purpose for the demand is improper.
It is clear from the entire record that ALPA, which is the real party in interest, is intent upon inflicting economic pressure upon Continental in order to force it to accede to ALPA's demands. And it is clear that ALPA will use whatever legal means it can to obtain that result. I have no doubt, from reviewing all the evidence, that ALPA and the plaintiffs are not really interested in obtaining a stocklist to communicate with the stockholders of Texas Air about the forthcoming annual meeting, but rather desire it in furtherance of a plan to bring economic pressure on Continental. This is not a purpose reasonably related to a stockholders' interest in the corporation from which a stockholder list is sought. Weisman v. Western Pacific Industries, Inc., supra; State ex rel Theile v. Cities Serv. Co., Del. Supr., 115 A. 773 (1922); State ex rel Linihan v. United Brokerage Co., Del. Supr., 101 A. 433 (1917); General Time Corp. v. Talley Indus., Inc., Del. Ch., 240 A.2d 755 (1968).
V
This Court is always reluctant to deny a stockholder's request to inspect a stocklist. It is an unusual case, indeed, there a stockholder's demand to inspect a list of stockholders in connection with a pending annual meeting is denied. The acts here, however, provide the exception to the general rule.
Needless to say, a labor organization which is a stockholder can, under proper conditions, obtain the necessary means to communicate with its fellow stockholders for a proper purpose and in a proper manner. This is not the situation here, however.
The plaintiffs' demand for a stocklist is denied. IT IS SO ORDERED.