Oberly v. Kirby

592 A.2d 445 (1991)

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Nature of the Case

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Facts

Kribys (P) charged that their brother Fred Kirby II (D) sued for the illegal removal from the board of directors and alleged that D used the corporation for his personal benefit. Oberly (P1), the Attorney General of Delaware, intervened on behalf of the public beneficiaries of the F.M. Kirby Foundation, Inc. P1 challenged the propriety of various transactions and a breach of fiduciary duty by D in approving those transactions. The Foundation was organized by Fred Kirby, the grandfather of D and P. Grandpa made his fortune from a chain of five and dime stores that were bought out by F.W. Woolworth. Grandpa established the Foundation for religious, charitable, scientific, literary, and educational purposes. Things went well for the first 50 years. D assumed prime responsibility in 1953. In 1973, D was left as the corporation's only member. Grandpa's son did well on his own account and bequeathed one million shares of railroad holding stock to the Foundation. In 1985, that stock was by far the Foundation's largest asset. The Foundation owned 15% of the railroad and that stock constituted 80% of its assets. D took over the railroad when his father was incapacitated. D became the COO and chairman of the board. The railroad flourished by selling its assets and investing in an array of diversified subs. D negotiated the sale of some of the railroad assets for 11.5 million shares of American Express stock worth then about $370 million. This left the railroad the single largest shareholder of American Express with D getting a seat on its board. Because of new laws, because the Foundation was subject to an excise tax because of its supermajority holdings in the railroad. The Foundation was required to reduce its holdings in railroad stock or face the excise tax. As a dodge for this new law, the railroad company became aware that a stock exchange of Foundation railroad stock for railroad American Express stock would avoid the new law. Both parties would get substantial profits and railroad would pay no tax, and the Foundation would pay only the two percent excise tax that applies to all profits of private foundations. The complicating factor was that D was both the chairman of railroad and president of the Foundation. All four Foundation directors held substantial blocks of railroad stock. The transaction was thus an interested transaction. D resolved the matter by having the Foundation attorney reach an agreement with the railroad. The attorney was not authorized to seek other potential buyers of railroad stock. The railroad retained Merrill Lynch. A stock purchase agreement was finally reached. To avoid registration under Rule 144, it was suggested that the railroad shares be bought at a discount below market price. Compliance with Rule 144 would limit the liquidity of the shares in the hands of the buyer for a period of two years. As a result, a substantial discount would be demanded by any potential buyer. The attorney suggested that a premium was in order because of the tax benefit. Eventually, the parties agreed to split the difference and exchanged shares. Foundation's 1,118,826 shares were swapped for 2,062,940 shares of unregistered American Express stock. The Foundation never retained an investment banker to determine if the transaction was fair. The Foundation board unanimously approved the transaction. The railroad approved without the vote of D or his father. Everybody got involved and the court ruled the transaction fair. This appeal followed.