Guth v. Loft

5 A.2d 503 (Del. 1939)

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Nature of the Case

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Facts

P is, a corporation engaged in the manufacturing and selling of candies, syrups, beverages, and foodstuffs. P operated one hundred and fifteen stores largely located in the congested centers of population along the Middle Atlantic seaboard. P also had the equipment and the personnel to carry on syrup-making operations and was engaged in manufacturing fountain syrups to supply its own extensive needs. It had assets exceeding $9,000,000 in value, excluding goodwill; and from 1931 to 1935, it had sufficient working capital for its own cash requirements. D became vice-president of P in August 1929, and its president in March 1930. Grace was owned by D and his family. It owned a plant in Baltimore, Maryland, where it was engaged in the manufacture of syrups for soft drinks, and it had been supplying P with 'Lady Grace Chocolate Syrup.' In 1931, Coca-Cola was dispensed at all of P's stores, and P made large purchases, averaging over 30,000 gallons annually. D requested Coca-Cola to give D a jobber's discount in view of its large requirements for syrups which exceeded greatly the purchases of some other users of the syrup to whom such a discount had been granted. Coca-Cola refused. D became incensed and contemplated the replacement of Coca-Cola. In July 1931, Megargel and D entered into an agreement whereby Megargel would acquire the Pepsi-Cola formula and trademark; would form a new corporation with an authorized capital of 300,000 shares of the par value of five dollars to which corporation Megargel would transfer the formula and trademark; would keep 100,000 shares for himself, transfer a like number to D, and turn back 100,000 shares to the company as treasury stock, all or a part thereof to be sold to provide working capital. By the agreement between the two, Megargel was to receive $25,000 annually for the first six years, and, thereafter, a royalty of two and one-half cents on each gallon of syrup. D loaned Megargel $12,000 upon his agreement to repay him out of the first $ 25,000 coming to him under the agreement between the two, and Megargel made a formal assignment to Guth to that effect. Pepsi-Cola Company was organized under the laws of Delaware in August 1931. The formula and trademark were acquired from the trustee in the bankruptcy of the National Pepsi-Cola Company, and its capital stock was distributed as agreed, except that 100,000 shares were placed in the name of Grace. Only $ 13,000 of Pepsi's treasury stock was ever sold. D was heavily indebted to P, and, generally, he was in the most serious financial straits, and was entirely unable to finance the enterprise. On the other hand, P was well able to finance it. Without the knowledge or consent of P's board of directors, D drew upon P without limit to further the Pepsi enterprise having at one time almost the entire working capital of P engaged therein. He used P's plant facilities, materials, credit, executives, and employees as he willed. Pepsi's payroll sheets were a part of P's and a single P check was drawn for both. By June 1934, P's total cash and credit advances to Grace and Pepsi were in excess of $ 100,000. Pepsi eventually turned a profit and repaid all monies “borrowed” from P but no other payments were received by P. D replaced Coca-Cola with Pepsi-Cola at all of P's stores. D spent at least $ 20,000 in advertising the beverage, whereas it never had to advertise Coca-Cola. P suffered large losses of profits at its stores resulting from the discarding of Coca-Cola. These losses were estimated at $300,000. P paid all but $500 of a settlement with Megargel for $35,000 by Pepsi. The 97,500 shares of Pepsi stock owned by Megargel were received by Pepsi and left with P as security for the advance. These shares came into D's possession. D claimed that he offered P the opportunity to take over the Pepsi-Cola enterprise. The Chancellor found that D had never offered the Pepsi opportunity to P; that his negotiations with Megargel in 1931 was not a renewal of a prior negotiation with him in 1928; that D's use of Ps money, credit, facilities and personnel in the furtherance of the Pepsi venture was without the knowledge or authorization of P's directors; that D's alleged personal guaranty to P against loss resulting from the venture was not in writing, and otherwise was worthless; that no contract existed between Pepsi and P whereby the former was to furnish the latter with a constant supply of syrup for a definite time and at a definite price; that as against P's contribution to the Pepsi-Cola venture, D had contributed practically nothing; that after the repayment of the sum of $12,000 which had been loaned by D to Megargel, D had not a dollar invested in Pepsi stock; D was a full time president of P at an attractive salary, and could not claim to have invested his services in the enterprise; that in 1933, Pepsi was insolvent; that P, until July, 1934, bore practically the entire financial burdens of Pepsi, but for which it must have failed disastrously to the great loss of P. The Chancellor ordered D and Grace to transfer the shares of stock to P; the sequestrator to pay to P certain money representing dividends declared on the stock for the year 1936; Grace and D to pay money, representing dividends declared and paid for the same year; D to account for and pay over any other dividends, profits, gains, etc., attributable or allocable to the 97,500 shares of Pepsi stock standing in his name; Grace to do likewise with respect to the 140,000 shares standing in its name; D all salary or compensation paid him by Pepsi prior to October 21, 1935; and all salary paid by Pepsi to him subsequent to October 21, 1935, in excess of what should be determined to be reasonable; D and Grace to be credited with such sums of money as may be found due them from P or from Pepsi in respect of matters set forth in the bill of complaint; and a master to be appointed to take and state the accounts. D appealed.