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Page 591
139 A.2d 591 
37 Del.Ch. 244
Kingsley H. GERLACH, Kingsley H.
Gerlach, Jr., and Reeves
Lewenthal, Plaintiffs,
v.
Grant GILLAM, Wrightson Christopher and
United Printers &
Publishers (Incorporated), a Delaware
corporation,
Defendants.
Court of Chancery of Delaware, New
Castle County.
March 18, 1958.
[37 Del.Ch. 245] Arthur G. Logan,
Wilmington and Ernest A. Gross of Curtis,
Mallet-Prevost, Colt & Mosle, New York City,
for plaintiffs.
Aaron Finger, Wilmington, Carlos
A. Spiess and Roger W. Barrett of Mayer,
Friedlich, Spiess, Tierney, Brown & Platt,
Chicago, Ill., for defendant, United
Printers & Publishers, Inc.
MARVEL, Vice Chancellor.
Plaintiffs, who claim to be the
holders of a substantial number of shares of
the defendant corporation, an established
manufacturer of calendars, greeting cards
and the like, sue on behalf of themselves
and all other stockholders of United
similarly situated, and '* * * in the right
of United'. The original complaint charges
the defendant, Gillam, with having so
dominated the corporate defendant through an
unusual management contract that over a
period of some twenty years he has been able
to select
Page 592
the directors of the corporation and
otherwise control its management to such a
degree that in the autumn of 1957 he caused
such a board to approve contracts between
the corporation and himself and others as
stockholders of three Canadian corporations,
which contracts are allegedly not in
United's best interests. These Canadian
corporations, which are not parties to this
action, bear the names, Rust Craft Ltd.,
Friendship House Ltd., and Volland Ltd.
The original complaint sought an
accounting from the defendants, Gillam and
Christopher, concerning United's past
business transactions with the Canadian
corporations, and also claimed that Gillam's
control of United having been seriously
threatened last summer by the efforts of
plaintiffs and other stockholders to call a
special meeting and vote in additional
directors independent of Gillam, he reacted
by rapidly developing a plan to sell stock
of the Canadian [37 Del.Ch. 246]
corporations to United in a transaction
which would, if consummated, result in
Gillam and his associates receiving 150,322
shares of United stock in exchange for their
Canadian stock, thereby giving them control
of the corporation as a practical matter. As
of now, Mr. Gillam is allegedly not a
stockholder of United.
Injunctive relief was sought not
only against consummation of such purchase
and sale, which had been approved by the
directors other than Gillam subject to
stockholders ratification, but also the
continued performance of certain so-called
color separation supply contracts now in
force between United and the Canadian
corporations. Under these contracts United
supplies positives of card designs to the
Canadian corporations, thereby eliminating
for them a substantial and costly step in
card production. The original complaint
charged that incomplete and even misleading
information had been sent to stockholders by
the Gillam dominated management for a number
of years, and in an amended and supplemental
complaint it was specifically alleged that
management had solicited votes and proxies
for a special stockholders' meeting convened
on November 19, 1957 for the purpose of
passing on the plan to purchase stock in the
Canadian corporations '* * * by false and
misleading statements and by statements
lacking the candor requisite to obtain a
valid proxy * * *' In the amended and
supplemental complaint, plaintiffs prayed
that the Court declare that despite a
numerically favorable vote such proposal had
not been legally ratified at such meeting
because of such statements.
Prior to the meeting and on the
basis of the original complaint and
supporting affidavits, plaintiffs had moved
to enjoin the special stockholders' meeting,
and on November 15, this Court, while
declining to enjoin the holding of such
meeting, entered an order which restrained
United '* * * from putting into effect the
three agreements relating to the proposed
acquisition by United of the outstanding
shares of the three Canadian companies * *
*' This order, while technically a
preliminary injunction issued on a ten days
rule to show cause has been treated by
counsel as a restraining order, and this is
the decision of the Court as to whether or
not such order should be dissolved and the
corporation[37 Del.Ch. 247] permitted to
consummate the transaction complained of
prior to trial.
Following the November 19
meeting, management filed a certificate to
the effect that at the meeting at which
520,200 shares of common stock were entitled
to vote, 246,609 shares voted for adoption
of a resolution ratifying the agreements for
the purchase of stock of the Canadian
corporations in exchange for 150,322 shares
of United common stock, and 204,670 shares
against such purchase. On the basis of such
vote management asks to be permitted to
carry out the contemplated exchange of stock
free of interference by this Court.
The corporation's basic
contention in support of its motion for the
lifting of the present injunction is that
regardless of the wisdom of the contracts
under attack, they have been ratified by the
stockholders
Page 593
after approval by allegedly non-interested
directors at a meeting which Mr. Gillam did
not attend and that as an elementary matter
of corporate democracy there is no
conceivable basis to support plaintiffs'
claim for injunctive relief. It is contended
and cannot be denied that where a majority
of fully informed stockholders ratify action
of even interested directors, an attack on
the ratified transaction normally must fail.
Counsel for the corporation further point to
the long drawn out battle for control of the
corporation which began last summer (a
contest in which plaintiffs actively
participated), the use of proxy material by
plaintiffs and their associates since that
date, and charge that plaintiffs' present
contention that defendant's proxy material
for the November 19 meeting was false and
misleading, is simply an exhibition of poor
sportsmanship.
The situation presented by the
papers before me is the reverse of the one
found in the ordinary case involving the
purchase and sale of corporate assets. A
sale of assets case often involves a charge
of conflict of interest on the part of a
corporate fiduciary who is at the same time
the direct or indirect would-be purchaser of
his corporation's assets. Here, on the other
hand, a corporation has agreed in exchange
for its own shares to purchase shares of
stock largely owned by the fiduciary, so
that the Delaware statute and cases which
control [37 Del.Ch. 248] in the field of
presumptions and burdens of proof when a
sale of corporate assets is attacked are not
strictly in point but do provide a guide.
See 58 Columbia Law Review, 251 at 256 et
seq.
First of all in the present
situation I have no doubt concerning Mr.
Gillam's obligation to exhibit complete
candor in dealings involving a conflict
between his personal interests and those of
United's stockholders. Under a unique
arrangement originating in 1932, first
through General Management Corporation and
later through a partnership known as General
Management Company, Mr. Gillam for a fee to
be paid originally to his corporation and
then to his partnership was given broad
managerial powers over the affairs of
United, which at the inception of the
arrangement was in serious financial
straits.
The 1937 version of this
continuing and essentially unchanged
contract between United and General
Management Company, of which Mr. Gillam was
the controling partner, provided in part:
'The Company will have general
supervision over the Corporation's
operations to the extent that the
Corporation agrees to give the Company full
cooperation and to follow recommendations
made by the Company promptly and to give
them a fair trial. Grant Gillam, as
Comptroller, shall continue to supervise the
fiscal operations of the Corporation, its
divisions and its subsidiaries, and no
monies shall be borrowed by the Corporation,
its divisions and its subsidiaries, and no
payments shall be made to any of the
Creditors of the Corporation, its divisions
and its subsidiaries without the approval of
such Comptroller. The countersignature of
such Comptroller or some person or persons
designated by him, shall be required on all
checks, notes or obligations for the payment
of money made or issued by the Corporation,
its divisions or any of its subsidiaries.
The Corporation, however, reserves the right
to pay its entire bank indebtedness at any
time.'
Mr. Gillam, upon becoming
comptroller, managed United's affairs with a
strong hand even to the extent of
pre-preparing minutes of directors'[37
Del.Ch. 249] meeting in his capacity as
secretary of the corporation, a position he
has held during most of the period of
question, and notwithstanding the sworn
protests of individual directors that they
have not been at any time dominated by Mr.
Gillam, I am satisfied that the management
contract, which by its
Page 594
very nature carries the reserved right in
the comptroller to terminate his employment
upon failure of the board to go along with
his suggestions, has given Mr. Gillam until
recently a very strong position not only in
his relations with the directors but also
with the stockholders. While there appear to
have been differences of opinion at times
between United's other directors and Mr.
Gillam, such as the one involving the site
for a new plant in 1950, Mr. Christopher,
then a director and now president of the
corporation, felt obliged to consult Mr.
Gillam on the matter, though Gillam was not
then on the board of directors. Thus the
overall picture presented on the present
record is that of strong personal and
contractual leadership exercised by Mr.
Gillam in all fundamental matters affecting
United's interests over the past twenty-five
years and a tendency on the part of other
directors not to look too closely into Mr.
Gillam's plans. In view of these
relationships any transaction involving a
conflict between the interests of the
corporation and those of Mr. Gillam would be
at the least voidable unless ratified by
informed stockholders.
Reverting to the transaction
under attack, it appears that prior to
approval by United's directors of the
proposed acquisition of stock in the
Canadian corporations a report of Duff,
Anderson & Clark, industrial investment and
financial analysists, was prepared for the
directors' consideration. The report, which
was favorable in a subdued manner, concluded
that the acquisition of the three Canadian
companies would result in (a) a small
reduction in the book value of United's
common stock and (b) a modest improvement in
United's earnings per share resulting from
the contribution of Canadian earnings. The
report earlier noted among advantages to be
gained by the Canadian stockholders would be
the obtaining by them of a readily
marketable security, namely United common,
in exchange for their Canadian shares, but
made no effort to dig into the value of
United common stock and appears to treat the
transaction as if it were a [37 Del.Ch. 250]
merger and not a purchase and sale of
corporate shares. More significantly the
report, while disclosing Mr. Gillam's stock
interests, does not point up the
consequences of his dominant position in the
Canadian Companies, does not attempt to
analyse or evaluate the existing supply
contracts between United and the Canadian
corporations, or to emphasize the
solidifying of management control which
would result from consummation of the
transaction.
Turning to the proxy statement,
the critical information in such statement
in my opinion must of necessity be that
concerning the supply contracts. They were
the lifeblood of the Canadian corporations.
I do not deem it appropriate at this time to
go into the history of these contracts and
the origin of the rates therein fixed as
these are matters to be more appropriately
sifted out in the accounting phase of this
case. Suffice it to say that the section of
United's proxy statement of October 18, 1957
entitled 'Organization and Early History of
the Canadian Companies' fails to disclose
the dates of the Canadian supply contracts
or to describe how they were negotiated and
whether or not Mr. Gillam took part in their
negotiation. The giving of the essentials of
these transactions to the stockholders could
not but have helped to clarify how prices
for the color separation positives and other
services dealt with in said contracts were
arrived at and adjusted and point up Mr.
Gillam's apparently ambiguous position on
both sides of the bargain. In short the
proxy statement compounds the shortcomings
of the Duff, Anderson & Clark report by
failing to give the stockholders this
essential information, thereby making it
impossible for them to make an objective
evaluation of the proposed transaction. In
addition, candor as to other factors in the
transaction is also absent in the proxy
statement, such as the failure to give a
logical reason for United's disposal
Page 595
of its Canadian interests to Gillam in 1946
at a time when such business was prospering
and why foreign rights were granted by
United to the Canadian corporations in which
Gillam had such a substantial personal
investment.
Were this a case simply of
excessive zeal on the part of a management
seeking to present proposed corporate action
to stockholders in the light most favorable
to management even though such plan of [37
Del.Ch. 251] action contain benefits for
individual directors, this Court should not
at this stage be overly concerned with
matters which might more properly have been
included in the proxy statement, unless
fraud is clearly apparent, Schiff v. RKO
Pictures Corp., Del.Ch., 104 A.2d 267, and
Empire Southern Gas Co. v. Gray, 29 Del.Ch.
95, 46 A.2d 741, and it can hardly be
denied that plaintiffs and their associates
made every effort to thwart management's
plan.
Consummation of the transaction
here under attack, however, will mean a
drastically strengthened management position
insofar as stock ownership is concerned.
Without considering the question of
pre-emptive right, a point not argued,
Yasik v. Wachtel, 25 Del.Ch. 247, 17 A.2d
309, I am satisfied on the present
record that plaintiffs should be protected
from a strengthening of management's present
position. Furthermore, while present
consummation of the transaction complained
of would not make plaintiffs' case moot as
Allied Chemical & Dye Corporation v. Steel &
Tube Co., 14 Del.Ch. 1, 120 A. 486, yet,
if at final hearing the Court should find
that stockholders were not sufficiently
informed effectively to ratify the
transaction complained of or that the
transaction is otherwise fraudulent as
constituting pro tanto a gift of assets, the
United stock bargained for by the holders of
the Canadian stock should be available for
cancellation. Mr. Gillam and Mr. Christopher
have not appeared and the other Canadian
stockholders are not parties.
In acting upon an application for
interlocutory injunctive relief, a court of
equity is bound to balance the conveniences
of the opposing parties. As stated
Bayard v. Martin, Del., 101 A.2d 329, 333.
'The probability of ultimate success,
being of obvious practical importance, is
one of the elements which must always be
weighed in the balance, along with the
probability of any harm to be suffered by
one party or the other on account of giving
the requested temporary relief, or
withholding it, as the case may be.'
There being no showing on the
present record of urgent need for changing
present business arrangements between the
corporation and [37 Del.Ch. 252] the
Canadian corporations, the equities are on
plaintiffs' side. No other way of
maintaining the status quo than through a
continuation of the present injunction has
been suggested, and such injunction will not
be dissolved.
On notice, an order to such
effect will be entered.
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