Summary
In National Education Corp. v. Bell Howell Co., No. 7278, 1983 WL 8946 (Del.Ch. Dec.13, 1983) (unpublished), a Chancellor assumed, without deciding, that the shareholders' interests could not be adequately represented by the named company, although it ultimately held based upon other Rule 19(b) factors that the action did not need to be dismissed.
Summary of this case from Glancy v. Taubman Ctrs., Inc.Opinion
C.A. No. 7278.
Submitted: December 5, 1983.
December 13, 1983.
A. Gilchrist Sparks, III, Esquire, Morris, Nichols, Arsht Tunnell, Wilmington, Delaware.
Charles F. Richards, Jr., Esquire, Richards, Layton Finger, Wilmington, Delaware.
Gentlemen:
The defendant Bell Howell Company has moved to dismiss this suit for failure of the plaintiff National Education Corporation ("NEC") to join indispensable parties. NEC is a shareholder of Bell Howell and it has brought this action to challenge the propriety of certain aspects of a stock dividend declared by the board of directors of Bell Howell whereby a new issue of preferred stock has been authorized and issued to the holders of the common stock of Bell Howell.
Initially, NEC sought to enjoin the issuance of the preferred stock. However, its application for a preliminary injunction was denied and the preferred stock was issued. Thereafter, NEC amended its complaint to challenge the legality of certain of the provisions and preferences of the preferred stock and to have them declared invalid pursuant to the declaratory judgment procedure. Significantly, it does not seek to cancel the issuance of the preferred stock itself.
The preferred stock was authorized as an anti-takeover device by the board of Bell Howell. Actually, Bell Howell asserts that it was designed to protect its common shareholders against the evil of a front-end loaded, two-tier tender offer. Regardless of the relative merits of its purpose, however, the fact is that the preferred stock was issued in piggyback fashion to the then common shareholders of Bell Howell on the basis of one share of preferred for each 20 shares of common. The stock issue itself and the preferences were created pursuant to a blank stock power given to the board of directors under Bell Howell's certificate of incorporation.
While the certificate of incorporation of Bell Howell required a two-thirds vote of its common shareholders to approve a proposed merger or business combination, a provision of the preferred stock now requires approval by 80% of the preferred stock as to proposed transactions with certain specified types of companies. Certain redemption and conversion rights are also attached to the preferred shares in the event that another party acquires a 40% or more interest in Bell Howell while the same rights are denied to the 40% owner. The preferred also purports to carry with it certain exchange rights in the stock of an acquiring company in the event of a merger. It is primarily these provisions of the preferred stock which NEC seeks to attack without also seeking to invalidate the preferred shares themselves which, according to Bell Howell, constitute genuine preferred stock with an independent investment significance separate and apart from the common shares which formed the basis for their issuance.
The matter presently before the Court for decision is brought about by the fact that the preferred shares were actually issued to its common shareholders by Bell Howell after the preliminary injunction application of NEC was denied. Since the preferred stock is now out and on the trading market, and since, being preferred stock, it gives rise to contractual rights between its owners and the corporation, Bell Howell argues that it is now impossible to entertain NEC's complaint which seeks to void certain of those contractual rights without first joining each and every owner of the preferred shares. Such persons apparently number in the thousands and are located all over the country, thus making their joinder impossible as a practical matter. Nonetheless, since Bell Howell views them to be indispensable parties, it moves for a dismissal of the suit pursuant to Rule 19.
I conclude that the motion must be denied. It would seem to me to make a mockery of justice to grant it. To dismiss NEC's complaint under these circumstances would mean that any board of directors operating under a blank stock power with regard to authorized but unissued preferred shares could create a new series of preferred shares, include any preferences it desired no matter how illegal they might be, and insulate the provisions of such preferred stock from judicial attack by the simple expediency of issuing them pro rata to common shareholders as a stock dividend before the matter could be presented to a court for a determination. To hold this to be the status of the law as dictated by Rule 19 would seem illogical.
Questions concerning the application of Rule 19 are dreary things. The same is true of the case decisions which grapple with such questions. One of the more dreary of these is the leading decision in Provident Tradesmens Bank Trust Co. v. Patterson, 390 U.S. 102 (1968), a case which undertakes to interpret Federal Civil Rule 19 in light of its 1966 amendment. Since the interpretation of the Federal Rules of Civil Procedure by the federal judiciary are given great weight by the Delaware judiciary in questions concerning the interpretation of their own parallel court rules, Canaday v. Superior Court in and for New Castle County, Del.Supr., 119 A.2d 347 (1955), the decision of the United States Supreme Court in Provident Tradesmens Bank must be considered instructive.
In that case it was pointed out that findings of indispensability under Rule 19 must be based upon "pragmatic considerations." By general definition, that which is pragmatic means the practical as opposed to the intellectual or the idealistic. As stated more verbosely in Provident Tradesmens Bank at 390 U.S. 119:
"The decision whether to dismiss (i.e., the decision whether the person missing is `indispensable') must be based on factors varying with the different cases, some such factors being substantive, some procedural, some compelling by themselves, and some subject to balancing against opposing interests. Rule 19 does not prevent the assertion of compelling substantive interests; it merely commands the courts to examine each controversy to make certain that the interests really exist. To say that a court `must' dismiss in the absence of an indispensable party and that it `cannot proceed' without him puts the matter in the wrong way around; a court does not know whether a particular person is `indispensable' until it has examined the situation to determine whether it can proceed without him."
Rule 19 deals with two categories of persons, namely, persons who, because of their particular interest in the subject matter of the litigation or because of the need to avoid future needless and inconsistent involvement between them and those who are already parties, are to be joined as parties if feasible under Section(a) and, under Section(b), persons who meet the standards for joinder if feasible under Section(a) but whose actual joinder as parties is not feasible, i.e., where such persons cannot be made parties to the action for some reason (usually one dealing with jurisdiction). As to this second category, Rule 19(b) provides that if such a person cannot be made a party, then "the Court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent persons being thus regarded as indispensable."
Thus, strictly speaking and as indicated in the previous quotation from Provident Tradesmens Bank, a case is not dismissed under Rule 19(b) because of the failure of the plaintiff to have joined an indispensable party, but rather it is dismissed only in the event that the Court determines on the particular circumstances of the case that in equity and good conscience the suit should not be permitted to go forward in the absence of those persons who have an interest in the matter as defined in Section(a). It is such a determination that renders the absent persons "indispensable."
Thus, the bare fact that a person has in interest in or has rights that will be effected in some way by the outcome of the litigation between the existing parties does not automatically make him an indispensable party. Rather, he becomes indispensable only if the Court determines that the nature of his interest or involvement when measured against the existing circumstances is such that the case should not go on without him. In making this determination Rule 19(b) requires the Court to consider four factors, namely:
(1) To what extent a judgment rendered in the person's absence might be prejudicial to him or those already parties;
(2) The extent to which, by protective provisions in the judgment, by shaping relief, or other measures, the prejudice can be lessened or avoided;
(3) Whether a judgment rendered in the person's absence will be adequate; and
(4) Whether the plaintiff will have an adequate remedy if the action is dismissed for non-joinder.
And to reiterate, it is indicated by Provident Tradesmens Bank that these are "pragmatic considerations," that is to say considerations governed by practicality and flexibility bility rather than by idealistic and mechanical standards bottomed upon allegedly inseparable substantive rights. Shutten v. Shell Oil Company, 421 F.2d 869 (5th Cir. 1970).
Relying on this approach, NEC cites several federal cases which have postdated the amendment to Rule 19 and in which it has apparently been held that where a party already present in a case is in a position to fully represent the interest of absent persons, their joinder as parties is not necessary as a practical matter under Rule 19(a) even though joinder is feasible. If the joinder of an absent party is unnecessary for this reason even where his joinder would be feasible, then Rule 19(b), which is activated only when it is not feasible to join the interested persons, does not come into play. Thus, such a person cannot become an indispensable party since that status is only achieved pursuant to Rule 19(b). See, Owens-Illinois, Inc. v. Lake Shore Land Company, 610 F.2d 1185 (3rd Cir. 1979); Fetzer v. Cities Service Oil Company, 572 F.2d 1250 (8th Cir. 1978); Nationwide Auto Transporters, Inc. v. Morgan Driveaway, Inc., 441 F.Supp. 755 (S.D.N.Y. 1977); Toney v. White, 476 F.2d 203 (5th Cir. 1973).
NEC points out that Bell Howell is in a position to adequately represent the interests of all of its preferred shareholders here and that it has every reason to do all in its power to defend the provisions of the stock being attacked by NEC since Bell Howell, and its lawyers in this action, are the ones who created them, arguably to protect the interests of the shareholders. Because of this NEC argues that the presence of several thousand preferred shareholders as parties is unnecessary as a practical matter even if it was feasible to join them all. In view of this NEC argues that Bell Howell's preferred shareholders should not be regarded as indispensable parties under Rule 19(b), and it asks that the motion to dismiss be denied.
This argument has a great deal of appeal, and I am tempted to accept it without more under the particular circumstances of this case. This is especially true in light of the decisions of our Supreme Court in both Baker v. Providence and Worcester Company, Del.Supr., 376 A.2d 131 (1977), in which the legality of scaled voting rights contained in a certificate of incorporation were passed upon without all of the shareholders being joined as parties, and in Wood v. Coastal States Gas Corporation, Del.Supr., 401 A.2d 932 (1979), where the Court characterized the suit as being a dispute between the preferred and the common shareholders and then proceeded to decide the issue even though the owners of the common stock were not parties to the action. It would seem obvious that in both of these cases the defendant corporation, as a practical matter, advocated a position which was representative of the absent shareholders even though their voting and property rights were involved in the outcome of the decisions.
At the same time, I am mindful that the issue of indispensable parties under Rule 19 was not specifically addressed either inProvidence and Worcester or in Coastal States and thus the reported opinions in those cases — as opposed perhaps to the results — do not stand as precedent as such for the position being advocated by NEC. I am also mindful of the line of Delaware cases which either hold or indicate that shareholders are indispensable parties in actions brought to cancel their stock or to cancel rights derived from their stock. Elster v. American Airlines, Inc., Del.Ch., 106 A.2d 202 (1954); Hodson v. Hodson Corp., Del.Ch., 80 A.2d 180 (1951); West v. Sirian Lamp Co., Del.Ch., 42 A.2d 883 (1945). As stated in Hodson, supra, at 80 A.2d 181:
"It is the rule, long settled in this state, that the owner of shares of stock in a Delaware corporation is an indispensable party to an action to cancel such shares or to restrain the voting of or the payment of dividends on such shares."
And recently, in Instituto Bancario Italiano v. Hunter Engineering Company, Inc., Del.Supr., 449 A.2d 210 (1982) it was observed that the owner of shares sought to be cancelled by the plaintiff clearly had an interest relating to the subject matter of the action such that disposition of the action in his absence as a practical matter might have impaired or impeded his ability to protect that interest. Thus, the Court went on, the shareholder met "the criterion set forth in Rule 19 for an indispensable party" and therefore, in the event that he could not be joined, equity and good conscience mandated a dismissal of the complaint. 449 A.2d 226.
Therefore, assuming without deciding that all of the preferred shareholders of Bell Howell meet the criterion of Rule 19(a) as being persons who should be joined as parties if feasible, and acknowledging that the joinder of all such persons is not only nonfeasible but is impossible, I examine the situation further in light of the considerations enumerated in Rule 19(b).
To begin with a judgment in this matter rendered in favor of Bell Howell will not be prejudicial at all to the preferred shareholders. Also, a judgment in favor of NEC on one or more of its points of contention will not result in a cancellation of all rights of the preferred shareholders in their shares even in the event that such a judgment is binding on them. At worst, it would deprive them of something to which they should not have been entitled in the first place under the corporate laws of Bell Howell's state of incorporation.
Secondly, it is possible, depending on the outcome of the matter, that a final order or judgment could be shaped so as to lessen or avoid any prejudice to the preferred shareholders. At this point there is no way of ascertaining what, if any, such protective provisions might include. But at the earlier stages of this case Bell Howell suggested that even if NEC was correct in its contentions, the Court could grant it relief without necessarily having to enjoin the issuance of the preferred stock. If Bell Howell could argue this as a possibility then, I assume that I can accept it as a possibility now.
Thirdly, NEC seeks a declaration that certain provisions and preferences of the preferred stock are illegal. I think that such a determination is possible between the present parties and in the absence of all other preferred shareholders. A declaratory judgment as a matter of law as to the legality or illegality of the challenged provisions would seem to be about as adequate a judgment as one could obtain. It is not necessary to have the presence of several thousand shareholders as parties in order to make this legal determination.
Finally, and most importantly, NEC will have no adequate remedy if this action is dismissed because of the nonjoinder of all other preferred shareholders. If Bell Howell's position is accepted, then the fact that several thousand shareholders located throughout the country cannot be made parties to the action — a proposition which, if not an absurdity, lends itself more toward idealism than it does toward practicality — then neither NEC nor any other shareholder of Bell Howell can ever obtain judicial review of the action taken by the board of directors of Bell Howell which, among other things, arguably altered the previously existing voting power of the common shareholders with regard to mergers and business combinations through the issuance of the preferred stock dividend. In equity and good conscience I cannot accept such a proposition as being warranted under Rule 19.
In summary, I conclude that even if the preferred shareholders are considered to be proper parties for joinder under Rule 19(a), and even though all such preferred shareholders cannot be made parties, equity and good conscience requires that the action should proceed among the parties before the Court in the absence of the preferred shareholders. Added to this, of course, is the fact that as a practical matter Bell Howell has a special interest in defending the validity of all provisions of the preferred shares and can be expected to do so in good faith, thus affording a strong measure of representation to the interests of the preferred shareholders. Accordingly, under the circumstances of this case, I conclude pursuant to Rule 19(b) that the members of the mass of preferred shareholders of Bell Howell are not indispensable parties to this action.
Bell Howell has also argued that the preferred shareholders are made indispensable parties by statute by virtue of the language of the Uniform Declaratory Judgments Act found at 10 Del.C. § 6511, and that as a consequence dismissal of the suit is required under the statute independent of any interpretation under Rule 19. On this point, however, I agree with NEC that the apparent weight of authority is that the criterion of Rule 19 is uniformly applied in determining whether a declaratory judgment action should proceed in the absence of parties whose interests might be at stake.
For the reasons given the motion of Bell Howell to dismiss is denied. IT IS SO ORDERED.