Speiser v. Baker

525 A.2d 1001 (Del. Ch. 1987)

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Nature of the Case

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Facts

The present action is under Section 211(c) of our corporation law and seeks an order requiring the convening of an annual meeting of shareholders of Health Med Corporation (D), a Delaware corporation. The second issue is whether the circular ownership of stock among the companies involved in this litigation violates Section 160(c) of state general corporation law. Section 160(c) prohibits the voting of stock that belongs to the issuer and prohibits the voting of the issuer's stock when owned by another corporation if the issuer holds, directly or indirectly, a majority of the shares entitled to vote at an election of the directors of that second corporation. P is the owner of 50% of Health Med's common stock. P is president of Health Med and one of its two directors. Leon Baker (D), who owns the remaining 50% of Health Med's common stock is Health Med's other director. Baker (D) is able to frustrate the convening of an annual meeting by simply not attending. Thus, the need for the Section 211 action. Baker (D) asserts that a meeting should not be ordered. Baker (D) seeks a declaratory judgment that shares of another Delaware corporation -- Health Chem (hereafter 'Chem') -- held by Health Med may not be voted by Health Med. The prohibition of Section 160(c) is asserted as the legal authority for this affirmative relief. Chem, a publicly traded company, is owned as follows: the public (40%), P (10%), Baker (D) (8%) and Health Med (D) (42%). Health Med is itself wholly owned indirectly by Chem and P and Baker (D). Chem owns 95% of the equity of Health Med (D). Chem's 95% equity ownership in Health Med is not represented by ownership of 95% of the current voting power of Health Med (D). Chem owns an issue of Health Med (D) convertible preferred stock with an unqualified right to be converted immediately into common stock of Health Med (D)representing 95% of Health Med's (D) voting power. Unconverted, it carries the right to only approximately 9% of Health Med's (D) vote. After conversion, Med (D) would be barred by Delaware law from voting under Del. Code Ann. tit. 8, § 160(c). This structure permits P and Baker (D) to control Chem while together owning less than 35% of its equity. The conversion of the preferred stock in Health Med (D) would result in the destruction of the Baker-Speiser control mechanism. Health Med (D) would certainly be unable to vote its 42% stock interest in Chem. The voting power of the public stockholders of Chem would increase from 40% to 65.6%. P and Baker (D) no longer get along. P now seeks a Health Med (D) stockholders meeting for the purpose of removing Baker (D) as one of Health Med's (D) two directors in order to remove his independent judgment from the scene. As for the 211 issue, without Baker (D), the company’s quorum requirement was not met. Baker (D) answered with a counterclaim in that P would take control of Med (D) in breach of fiduciary duties owed to other shareholders. Baker (D) moved for a declaratory judgment that Med (D) cannot votes is Chem shares. P moved to dismissed.