Summary
holding that defendants were estopped from enforcing a supermajority voting bylaw in a way that was inconsistent with prior public disclosures
Summary of this case from CBS Corp. v. Nat'l Amusements, Inc.Opinion
C.A. No. 19258-NC
Date Submitted: February 1, 2002
Date Decided: June 6, 2002
Jesse A. Finkelstein, Catherine G. Dearlove and Peter B. Ladig, Esquires of RICHARDS LAYTON FINGER, P.A., Wilmington, Delaware; and Daniel O'Rourke and Daniel C. McKay, II, Esquires of VEDDER, PRICE, KAUFMAN KAMMHOLZ, Chicago, Illinois; Attorneys for Plaintiffs.
Cathy L. Reese and Steven L. Caponi, Esquires of BLANK ROME COMISKY McCAULEY LLP, Wilmington, Delaware; Attorneys for Defendants.
MEMORANDUM OPINION
In November 2001, the plaintiffs, Hawthorn Corporation ("Hawthorn" or the "Company"), Richard E. Dousman, Donald B. Kempster, John J. Reilly, B. Gregory Trapani, and John E. Owens, brought this action under 8 Del. C. § 225, for a determination that they had successfully obtained control of Hawthorn's board of directors. Specifically, the plaintiffs seek a declaratory judgment that the voting of certain proxies, and the taking of certain written consent actions by Hawthorn's stockholders and directors, were legally valid and effective.
Alternatively and in addition, the plaintiffs seek a declaration invalidating an election of directors that occurred at Hawthorn's annual stockholders' meeting on April 17, 2001 At an earlier stage of this proceeding, the Court held that this alternative claim was legally sufficient to survive a motion to dismiss. December 21, 2001 Ruling, Tr. at 51-52.
The defendants moved to dismiss the complaint. Following oral argument on the motion, the Court denied the motion in part but reserved decision with respect to two issues, namely: (i) whether under Hawthorn's bylaws, actions taken by written consent require a vote of at least two-thirds of the Company's outstanding voting shares; and (ii) whether a written consent action that represented a majority (but less than two-thirds) of Hawthorn's outstanding voting shares was legally sufficient to elect new directors to the Hawthorn Board. The Court reserved decision on those issues, because the plaintiffs had requested leave to amend their complaint to claim that the defendants are estopped from relying on the "supermajority" bylaw provision that requires a vote of two-thirds of the outstanding shares for effective action by written consent. The Court granted leave to amend, the plaintiffs then amended their complaint, and the defendants thereafter moved to dismiss the amended complaint for failure to state a claim upon which relief can be granted. For the reasons set forth below, the defendants' renewed motion to dismiss the amended complaint will be denied.
Id. at 49-52.
I. FACTS
The facts recited herein are derived from the well-pled allegations of the amended complaint. Weinberger v. UOP, Inc., 409 A.2d 1262, 1263-64 (Del.Ch. 1979).
A. The Parties
The plaintiff, Hawthorn Corporation, is a bank holding company that is registered with the Federal Reserve Board. Hawthorn, which maintains its principal office in Mundelein, Illinois, is the corporate parent of Hawthorn Bank, an Illinois state chartered bank ("Hawthorn Bank").
The individual plaintiffs are record holders of approximately 20% of Hawthorn's outstanding common stock. The defendant, Gregory S. Kobus and members of his family, collectively own approximately 22.6% of Hawthorn's outstanding common stock.
The defendants, Gregory S. Kobus ("Kobus"), Alice V. Kobus, Gregory M. Kobus, Gerald Brin, Charles F. Deichmueller, Eric Laumer, and John D. Mull (collectively, the "old board") were directors of Hawthorn before the events that are critical to this motion. Kobus was also Hawthorn's President, Board Chairman, and Chief Executive Officer. Laumer was the Secretary of Hawthorn until he and Kobus were allegedly removed from those positions by the plaintiffs, then acting as the "new" Hawthorn board of directors.
B. The Reorganization of Hawthorn And The Adoption Of The Bylaws
Hawthorn was formed in 1998 as a holding company to own the outstanding shares of Hawthorn Bank. The shares of Hawthorn Bank were previously held in a voting trust, of which Gregory S. Kobus, Alice Kobus, John Heinz, and Richard Rosner were the trustees. At that time and under that structure, the interests of the individual investors in Hawthorn Bank were evidenced by voting certificates.
In 1998, the trustees proposed a reorganization into a holding company structure, whereby the voting trust certificate holders would receive shares of Hawthorn in a one-for-one share exchange, and would thereby become shareholders of the holding company (Hawthorn). The plaintiffs claim that this transaction was proposed and controlled entirely by Kobus, who, together with his attorneys, drafted the documents that related to the reorganization (the "reorganization documents"). It is claimed that Kobus presented the reorganization documents to the trustees for their approval, without affording them any opportunity to discuss or deliberate about the proposed reorganization.
Amended Complaint ¶ 9.
Id. ¶ 10; see also id. ¶ 9 ("[T]here was never any discussion about the Bank and its operations among the trustees. Instead, Mr. Kobus would confer with his lawyers and other advisors and then present to the trustees, fait accompli, matters for the trustees to approve without discussion").
The reorganization documents included a set of bylaws for Hawthorn. Article II, Section 9 of the bylaws (the "supermajority voting provision") states that:
When a quorum is present at any meeting, the vote of the holders of two-thirds of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation or these by-laws, a different vote is required.
Amended Complaint, Ex. E (Offering Memorandum) (emphasis added).
Article II, Section 12 of the bylaws provides that:
[A]ny action required to be taken at any annual or special meting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if consent in writing, setting forth the action so taken, shall be signed by holders of the outstanding stock have not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Id. (emphasis added).
The effect of those two bylaws when read together is to require a two-thirds vote of the outstanding shares when shareholders act by written consent.
To remove directors, however, requires only a "majority vote by the holders of a majority of shares entitled to vote at an election of directors." Hawthorn Bylaws, Art. III, § 4; see also December 21, 2001 Ruling, Tr. at 50 (holding that despite a bylaw provision requiring a 2/3 vote "of the stockholders" to remove directors, the Hawthorn bylaws contain a facially valid provision that permits the removal of directors by a majority vote of shares).
The proposed bylaws were attached as an exhibit to the Offering Memorandum, which was sent to the holders of the voting trust certificates to gain the holders' approval of the reorganization. The amended complaint alleges that the Offering Memorandum contained at least three items of confusing and contradictory information about the supermajority voting requirement. First, although the Offering Memorandum had a section entitled "Voting Rights," that section contained no discussion of the supermajority voting provision, nor was that subject addressed elsewhere in the reorganization documents. Second, the Voting Rights section of the Offering Memorandum affirmatively represented that "a majority of shareholders voting at any annual meeting will be able to elect all the directors to be elected." Lastly, the Stock Option Plan that was attached to the Offering Memorandum, and that Hawthorn's stockholders were being asked to ratify as part of the reorganization, required only a simple majority vote to amend its terms.
Amended Complaint, Ex. E at 12 (Offering Memorandum) (emphasis added).
From the time that the reorganization was proposed until the filing of this action, the Company never sent to its shareholders any communication that eliminated or clarified the confusion caused by the reorganization documents. Indeed, it is claimed that the Company's communications to its shareholders only compounded that confusion, which allegedly resulted from Kobus's having drafted the documents that were sent to Hawthorn shareholders. Specifically, it is alleged, Kobus took charge of drafting the notices (and accompanying documents) for the Hawthorn annual meetings that were held in 1999, 2000, and 2001. None of those documents disclosed the applicability or effect of the supermajority voting provision.
In connection with the 2000 annual meeting, the Hawthorn stockholders received the 2000 proxy statement, also drafted by Kobus and his attorneys. The 2000 proxy statement did not mention the supermajority voting requirement; rather, it informed the stockholders that they were being asked to ratify by a majority vote, certain Board actions that had been taken the year before. Similarly, the documents and proxy materials sent to Hawthorn's shareholders in connection with the 2001 annual meeting did not disclose or clarify the application or effect of the supermajority voting provision.
C. The Written Consent Actions
In August 2001, some of the plaintiffs sent a memorandum to certain stockholders of Hawthorn. The memorandum expressed the authors' concern over the future of Hawthorn Bank and the Company under Kobus's leadership. The memorandum also included a form of proxy that authorized the plaintiffs to act on the signer's behalf, including taking action by written consent. The proxies granted to the plaintiffs, when combined with the plaintiffs' own shares, represented a majority (but not two-thirds) of the outstanding voting shares of Hawthorn. The plaintiffs believed that a majority vote was legally sufficient to validate actions taken by written consent.
1. The First Stockholder Consent
On November 16, 2001, the plaintiffs, representing a majority of Hawthorn's outstanding voting shares, delivered to the Company a written consent of stockholders that purported to: (i) amend and restate the Company's bylaws to set the number of directors at five and to repeal certain bylaw provisions; (ii) remove all members of the old board; and (iii) elect Messrs. Dousman, Kempster, Reilly, and Trapani, together with John M. Saphir, to fill the resulting vacancies on the board of directors of the Company (the "new board").
Amended Complaint, Ex. B.
2. The Board Consent
Immediately after the first stockholders consent was delivered to the Company, the new directors executed a written consent of the board of directors (the "board consent"). The board consent purported to: (i) remove Kobus as Chairman of the Board, and as President and Chief Executive Officer; (ii) remove Eric Laumer as Secretary; (iii) adopt a proposal "declaring advisable the amendment of the certificate of incorporation of the Company to prohibit the taking of action by majority written consent of the stockholders;" (iv) elect John Reilly to the positions of Chairman of the board, President, and Chief Executive Officer; and (v) elect Richard Dousman as the Secretary of the Company.
Id. at Ex. C.
After the board consent was executed, the plaintiffs delivered to Hawthorn a written consent of shareholders to amend the Company's Certificate of Incorporation, to prohibit any shareholder action by written consent of the stockholders.
Id. That certificate amendment was filed with the Delaware Secretary of State.
* * *
At issue on this renewed motion to dismiss is whether the first and second stockholder consents, each of which was authorized by approximately 50.8% of the outstanding shares, are valid and effective, notwithstanding the supermajority voting bylaw provision. The plaintiffs ask this Court to declare that the Company's and the defendants' course of conduct amended the supermajority voting provision by implication, with the result that at all relevant times a majority vote was legally sufficient for action by shareholders either by written consent or at a shareholders' meeting. In addition and alternatively, the plaintiffs seek a declaration that the defendants are estopped from relying on the supermajority voting provision to nullify the plaintiffs' first and second written consent actions. The defendants have moved to dismiss the amended complaint on the ground that it does not allege a legally cognizable claim. For the reasons set forth below, I conclude that the renewed dismissal motion must be denied.II. ANALYSIS
A. The Applicable Procedural Standard
In considering a motion to dismiss under Court of Chancery Rule 12 (b)(6), the Court must accept as true all well-pled facts alleged in the complaint, and must draw all reasonable inferences in the light most favorable to the non-moving party. The complaint may be dismissed only when it appears "with a reasonable certainty that a plaintiff would not be entitled to the relief sought under any set of facts which could be proven to support the action." This standard governs the analysis that next follows.
In re Tri-Star Pictures, Inc., Litig., 634 A.2d 319, 326 (Del. 1993).
Rabkin v. Philip A. Hunt Chem. Corp., 498 A.2d 1099, 1104 (Del. 1985); see also In re Tri-Star Pictures, Inc. Litig., 634 A.2d at 326.
B. The Implied Amendment Claim
I first address the plaintiffs' claim that as a result of the Company's and the defendants' course of conduct, the supermajority voting provision was impliedly amended to authorize stockholder action by a simple majority vote (whether at an annual stockholders' meeting or by written consent). The implied amendment, which effectively eliminated the supermajority voting provision, is said to flow from the statements in Hawthorn's public disclosures that a majority vote would be sufficient, the absence of any contrary discussion or guidance relating to voting requirements at the annual meetings, and "other actions of the Company."
Pl. Ans. Br. at 7.
Regarding an amendment of a corporate bylaw by implication:
Ordinarily, a corporate by-law may be amended by implication and without any formal action being taken by clear proof of a definite and uniform custom or usage, not in accord with the by-laws regularly adopted, and by acquiescence therein; but usually the course of conduct relied on to effect the change must have continued for such a period of time as will justify the inference that the stockholders had knowledge thereof and impliedly consented thereto.
In re Ivey Ellington, Inc., 42 A.2d 508, 510 (Del.Ch. 1945); see also In re Osteopathic Hosp. Ass'n of Del., 195 A.2d 759, 762 (Del. 1963) (quoting with approval the In re Ivey Ellington amendment by implication standard).
In this case, the amended complaint alleges that for a sufficient period of time the Company and its officers and directors acted as if no supermajority voting requirement existed or governed stockholder action taken at a meeting. In its Offering Memorandum, the Company (through Kobus) represented that a simple majority vote of stockholders was needed to elect directors. The Stock Option Plan that was attached to the Offering Memorandum authorized amendments to the Plan by a majority vote of the outstanding shares. And, at no time did Kobus, in any later public disclosure or in connection with any of the Company's annual meetings, ever correct the impression resulting from Offering Memorandum disclosure that the election of directors could be accomplished by a majority vote. In each case the Company also affirmatively asked the stockholders to approve the previous year's Board actions by a majority vote. This course of conduct was inconsistent with, and in direct contravention of, the supermajority voting bylaw provision.
Amended Complaint ¶¶ 12, 14, 16, 21.
Id. ¶¶ 12, 16.
Id. ¶ 17.
Id. at Ex. G, at 3 (Proxy Statement and Notice of April 18, 2000 Shareholder Meeting).
That alleged course of conduct permits the inference that "there was a definite and uniform custom or usage . . . that continued for such a period of time as will justify the inference that the stockholders had knowledge therof." I therefore conclude that the plaintiffs have stated a cognizable claim that the supermajority bylaw provision was amended by implication.
In re Osteopathic Hosp. Ass'n of Del., 195 A.2d at 762 (internal quotations and citations omitted). The plaintiffs will have the burden of demonstrating that there was "[u]nanimous consent by the stockholders to a regular course of action, inconsistent with the by-laws regularly adopted." In re Ivey Ellington, 42 A.2d at 510. Because it appears from the amended complaint and the attached exhibits that neither the plaintiffs nor the defendants were aware of the supermajority voting provision, and that in fact the defendants acted as though written consent action could be taken by a majority vote of outstanding shares, at this stage "unanimous consent" can be inferred from the pled facts.
C. The Equitable Estoppel Claim
I next consider to the plaintiffs' alternate claim that even if the supermajority voting provision was not amended and remains in force, the defendants are equitably estopped from enforcing that provision against the shareholders, including the plaintiffs. I conclude that the amended complaint states a cognizable claim of estoppel as well.
An equitable estoppel arises "`when a party by his conduct intentionally or unintentionally leads another, in reliance upon that conduct, to change position to his detriment.'" To establish estoppel, it must be shown that the party claiming the estoppel: (i) lacked knowledge or the means of obtaining knowledge of the truth of the facts in question; (ii) relied on the conduct of the party against whom estoppel is claimed; and (iii) suffered a prejudicial change of position as a result of his reliance. I conclude that the amended complaint adequately pleads each of those elements.
Waggoner v. Laster, 581 A.2d 1127, 1136 (Del. 1990) (quoting Wilson v. Am. Ins. Co., 209 A.2d 902, 903-04 (Del. 1965)).
Id. (citing Wilson, 209 A.2d at 903-04).
1. Whether The Plaintiffs Lacked Knowledge, or The Means Of Obtaining Knowledge, of The Supermajority Voting Provision
First, the plaintiffs have adequately pled that they lacked knowledge of the supermajority voting provision. As set forth in the factual recital ( see pp. 2-9 supra), the amended complaint alleges that Kobus, acting on behalf of the Company, never disclosed or explained the applicability or effect of the supermajority voting requirement to Hawthorn's shareholders. In addition, Kobus "provided the stockholders with confusing and inconsistent information regarding the vote required to take stockholder action." Specifically, all the disclosures relating to the magnitude of the stockholder vote required for effective stockholder action either failed to mention the supermajority voting provision altogether or represented that shareholder action by a majority vote of shares would be sufficient. Indeed, it appears from the amended complaint that neither the plaintiffs nor the defendants were aware of the supermajority voting provision that was contained in the bylaws.
Amended Complaint ¶ 48.
The defendants did not acknowledge the existence of the supermajority voting provision until oral argument (and in their Reply Brief) on the defendants' original motion to dismiss, after which the Court granted the plaintiffs leave to amend their complaint.
The plaintiffs having adequately pled that they lacked knowledge of the supermajority voting provision, the question then becomes whether it can be inferred from the amended complaint that the plaintiffs lacked the "means of obtaining knowledge of the truth of the facts in question." On that point the defendants' argument is simple: three of the plaintiffs were at one time members of the Hawthorn board of directors and in that capacity should have been familiar with the Company's bylaws. All of the plaintiffs had easy access to, and possession of, the Company's bylaws, which, if read, would have revealed that a supermajority vote was required to take action. Therefore, the defendants urge, as a matter of law, that the plaintiffs cannot show that they lacked the means of learning of the existence of the supermajority voting provision.
Waggoner, 581 A.2d at 1136.
Messrs. Dousman, Kempster and Reilly were members of both the Hawthorn and Hawthorn Bank Board of Directors from 1999 until 2001.
Although the plaintiffs did have access to the Hawthorn bylaws, this argument ignores, and thus fails to address, the defendants' prior public disclosures, which were flatly inconsistent with the defendants' current effort to invoke the supermajority voting provision. For example, the Offering Memorandum to which the bylaws were attached, contained disclosures which stated (in direct conflict with the bylaws) that the directors could be elected, and that the Stock Option plan could be amended, by a majority vote. Also, on at least one occasion the shareholders were asked (again, inconsistently with the supermajority voting provision) to ratify Board actions by a majority shareholder vote. Those conflicting disclosures, and the fact that the supermajority voting provision was never disclosed to the shareholders in any meaningful or direct way, form the basis of the plaintiffs' claim that it was highly difficult, if not impossible, for the shareholders to learn of the supermajority voting requirement. In short, because at no time were the shareholders given accurate information about the stockholder vote that was legally required to take effective stockholder action at a meeting, the Court may infer that the plaintiffs, who had been lulled into believing that a majority shareholder vote would be sufficient, had no reason to question the Company's (and the directors') interpretation of their voting rights. Having had no reason to inquire into this subject, the plaintiffs "lacked the means," in any relevant sense, to learn of the existence of the supermajority voting bylaw requirement.
Indeed, the bylaws themselves contain contradictory provisions regarding the supermajority voting requirement. See supra note 8 (removal of directors by a majority vote of outstanding shares).
2. Whether The Plaintiffs Relied On The Defendants' Actions
The defendants next argue that the estoppel claim is legally insufficient because as a matter of law, the plaintiffs cannot show that they relied on the conduct of each and every defendant against whom the estoppel is asserted. To say it differently, the defendants argue that if the plaintiffs relied upon conduct of any person, it was only that of Kobus, but not of the Company or the other named defendants.
I find that argument to be without merit, because it was Kobus who controlled the management of Hawthorn, who was primarily responsible for drafting the public disclosures, and who conducted the annual meetings. Kobus is claimed to have created the confusion and the inconsistent enforcement of the supermajority voting provision when purporting to act on behalf of the Company. Given Kobus's critical role, his conduct may (for present purposes) be imputed to the Company. To the extent that Kobus's conduct bars the Company from enforcing the supermajority voting provision, the remaining defendants, who are parties to this litigation solely in their capacities as Hawthorn directors, would be similarly barred. Because none of the remaining defendants can be heard to take a position that the Company itself is barred from advancing, all defendants are subject to the estoppel claim.
Amended Complaint ¶¶ 12, 14, 16.
See, e.g., Council of Bethany v. Sandpiper Dev. Corp., Inc., 1986 WL 10081, at *4-5 (holding that acts of the president and controlling stockholder of a company were imputed to that company).
The defendants also argue that the estoppel claims must be rejected because the plaintiffs cannot prove either, "(i) that all Hawthorn Shareholders took action upon which Plaintiffs detrimentally relied or (ii) that all Hawthorn shareholders join in their effort to estop the application of the By-laws." Def. Reply Br. at 4-5 (emphasis in original). The first argument is flawed because the plaintiffs are not claiming the shareholders are estopped from enforcing the supermajority voting provision, but rather, that the company and the defendants are estopped. The second argument — that all of the shareholders must be joined as plaintiffs in this action — finds no basis in Delaware law.
3. Whether The Plaintiffs Suffered A Prejudicial Change Position
Last, the defendants argue that the plaintiffs have not pled that "they suffered a prejudicial change in position when they reasonably relied on conduct against whom estoppel is claimed." I disagree because it can be reasonably inferred from the amended complaint that the plaintiffs suffered a prejudicial change of position in reliance on the defendants' representations that only a majority vote was needed for effective shareholder action. Specifically, the plaintiffs claim that they relied upon years of consistent public statements to that effect by Hawthorn and its board and management, and also upon the absence of any efforts by the defendants to enforce the supermajority voting provision. In reliance on that conduct, the plaintiffs invested significant time and expense to secure what they understood was the requisite majority vote needed for effective action by written consent and to gain control of the Hawthorn Board. Only after the plaintiffs acted by written consent in reliance upon the defendants' prior statements and actions, did the defendants then change their the position — now contending for the first time that the supermajority voting provision strips the plaintiffs' written consent action of its legal force. These pled facts, in my view, are sufficient to allege a prejudicial change of position.
Renewed Motion to Dismiss ¶ 13.
Amended Complaint ¶ 50.
Id. ¶¶ 23-25.
In short, the plaintiffs have stated a legally cognizable claim that the defendants are equitably estopped from relying on the supermajority provision.
III. CONCLUSION
For the above reasons, the defendants' renewed motion to dismiss under Court of Chancery Rule 12(b)(6) is denied. IT IS SO ORDERED.