| Page 107 93 A.2d 107  33 Del.Ch. 293, 38 A.L.R.2d 425
STERLING et al.
v.
MAYFLOWER HOTEL CORP. et al. Supreme Court of Delaware.
Nov. 18, 1952.
Page 108
S. Samuel Arsht (of Morris,
Steel, Nichols & Arsht), of Wilmington, and
Stephen S. Bernstein (of McLaughlin &
Stern), of New York City, for plaintiffs
below, appellants.
William S. Potter (of Berl,
Potter & Anderson), of Wilmington, and
Claude A. Roth, of Chicago, for Hilton
Hotels Corp., defendant below, appellee.
Aaron Finger (of Richards, Layton
& Finger), of Wilmington, and William J.
Friedman and Maurice Rosenfield, of Chicago,
for Mayflower Hotel Corp., defendant below,
appellee.
SOUTHERLAND, C. J., and WOLCOTT
and TUNNELL, JJ., sitting.
SOUTHERLAND, Chief Justice.
The principal question presented
is whether the terms of a proposed merger of
Mayflower Hotel Corporation (herein
'Mayflower') into its parent corporation,
Hilton Hotels Corporation (herein 'Hilton'),
are fair to the minority stockholders of
Mayflower.
[33 Del.Ch. 296] The essential
facts are these:
Mayflower and Hilton are both
Delaware corporations. Mayflower's sole
business is the ownership and operation of
the Mayflower Hotel in Washington, D. C. It
has outstanding 389,738 shares of common
stock of $1 par value. Hilton and its
subsidiary corporations are engaged in the
business of owning, leasing, operating and
managing hotel properties in many of the
large centers of population in the country.
Hilton has outstanding, in addition to an
issue of Convertible Preference stock,
1,592,878 shares of common stock of $5 par
value.
On December 18, 1946, Hilton
acquired a majority of the outstanding
shares of Mayflower. Thereafter it continued
to make purchases of Mayflower stock. On or
about February 4, 1952, it purchased 21,409
shares at a price of $19.10 a share, and on
that date made an offer to all other
minority stockholders to buy their shares at
the same price. As of March 25, 1952, Hilton
owned 321,883 shares, or nearly five-sixths
of the outstanding stock.
From the time of the acquisition
by Hilton of a majority interest in
Mayflower, Hilton's management had
contemplated a merger of Mayflower with
Hilton. Soon
Page 109 after such acquisition, however, litigation
ensued in the District of Columbia between
Hilton and certain minority stockholders of
Mayflower, not terminated until late in the
year 1951. In the early part of 1950 the
Mayflower directors discussed the question
of ascertaining a fair basis of exchange of
Mayflower stock for Hilton stock. All of the
Mayflower directors (nine in number) were
nominees of Hilton, and it was the view of
the board (as well as of the Hilton board)
that an independent study should be made by
competent and disinterested financial
analysts for the purpose of evolving a fair
plan of exchange. Three of the members of
the board (Messrs. Fleming, Folger and
Baxter) had been directors before the
acquisition by Hilton of its interest in
Mayflower, and appear to have had little or
no interest in Hilton. Messrs. Fleming and
Folger were of opinion that although the
study should be made no definite action
should be taken upon the plan thereby to be
developed until the Washington litigation
should be finally terminated. The other
directors deferred to this view.
[33 Del.Ch. 297] In the early
part of 1950 Standard Research Consultants,
Inc., a subsidiary of Standard & Poor, was
retained to make the study, and Mr. John G.
Haslam, its Vice President, undertook the
work. Later he submitted a study which
determined a fair basis of exchange of
Hilton stock for Mayflower stock to be
three-fourths of a share of Hilton for one
share of Mayflower. No action was taken on
the basis of this study.
The Washington litigation having
been finally terminated, Mr. Haslam on
January 7, 1952, was again retained to
continue and bring up to date his prior
study and to develop a fair plan of
exchange. Thereafter he submitted his final
study (hereinafter referred to as 'the
Haslam report'), which embodies his
conclusion that a fair rate of exchange
would be share for share. A plan for a
merger upon this basis was approved by the
boards of directors of both corporations.
The directors--at least the Mayflower
directors--appear to have relied largely on
the Haslam report to justify their action. A
formal agreement of merger was entered into
on March 14, 1952, providing for the merger
of Mayflower (the constituent corporation)
into Hilton (the surviving corporation), as
authorized by the provisions of Section 59
of the General Corporation Law, Rev.Code of
Del.1935, par. 2091, as amended. Each
outstanding share of Mayflower is converted
into one share of Hilton. A separate
agreement between Hilton and Mayflower
provides that for a limited period Hilton
will pay $19.10 a share for any Mayflower
stock tendered to it by any minority
stockholder. At stockholders' meetings held
in April the requisite approval of the
merger was obtained. At the Mayflower
meeting 329,106 shares were voted in favor;
4,645 against. Holders of 35,191 shares of
Mayflower who objected to the merger did not
vote. The Hilton stockholders voted
overwhelmingly to approve the merger.
On April 7, 1952, plaintiffs
below (herein 'plaintiffs'), holders of
32,295 shares of Mayflower stock, filed
their complaint in the court below, seeking
injunctive relief against the consummation
of the merger, on the ground that the terms
of the merger are grossly unfair to the
minority stockholders of Mayflower, and that
the Mayflower directors entered into the
merger agreement in bad faith.
[33 Del.Ch. 298] The Chancellor,
having issued a temporary restraining order
against the consummation of the merger,
heard the case on a motion for a preliminary
injunction. A large number of affidavits
were filed and voluminous depositions were
taken. The Chancellor found no fraud or bad
faith in the case and concluded that the
plan was fair to the minority. He also
determined that a quorum of Mayflower
directors was present at the board meeting
of March 6 when the merger was approved. See
89 A.2d 862. On June 18 he denied injunctive
relief, and plaintiffs thereafter appealed.
Plaintiffs' principal contention
here, as in the court below, is that the
terms of the merger are unfair to
Mayflower's minority stockholders.
Plaintiffs invoke the settled rule of law
that Hilton as majority stockholder of
Mayflower and the Hilton directors as its
nominees occupy, in relation to the
minority, a fiduciary position in dealing
Page 110 with Mayflower's property. Since they stand
on both sides of the transaction, they bear
the burden of establishing its entire
fairness, and it must pass the test of
careful scrutiny by the courts.
Keenan v. Eshleman, 23 Del.Ch. 234, 2 A.2d
904, 120 A.L.R. 227; Gottlieb v. Heyden
Chemical Corp., Del.Ch.,
90 A.2d 660.
Defendants agree that their acts must meet
this test. We therefore inquire whether the
facts sustain the conversion ratio of share
for share which forms the basis of the
merger agreement.
As the Chancellor observed, the
Haslam report forms the principal
justification for the terms of the merger.
We accordingly examine it.
The report is an elaborate study
of some forty pages (including charts) with
a long appendix containing analyses of
pertinent financial data. The principles
upon which it is based are set forth in the
Chancellor's opinion. See 89 A.2d page 867.
Implicit in the report is the assumption
that the legal principles governing the
transaction require a comparison of the
value of the stock of Hilton with the stock
of Mayflower. Since the report is the basis
of the conversion terms of the merger
agreement, it is in effect directed to a
determination of the question whether, upon
the conversion of Mayflower stock into
Hilton stock, the Mayflower minority
stockholder[33 Del.Ch. 299] will receive the
substantial equivalent in value of the
shares he held before the merger. Thus a
comparison is required of factors entering
into the ascertainment of the values of both
stocks. In Haslam's opinion the problem
reduces to 'a comparison of the operating
trends of each of the corporations and of
the investment characteristics of the two
stock issues.' A summary of some of the more
important comparisons developed in the
report is set forth in the margin.
1 On the basis of these
comparisons, as well as upon consideration
of the past history and future prospects of
the two corporations, Haslam concludes that
the financial record of Hilton has been
substantially superior to that of Mayflower,
and that purely upon a statistical basis it
could be argued that Hilton should not offer
better than three-fourths of a share of
Hilton for one share of Mayflower.
Nevertheless it is his opinion that, because
of the problems incident to Hilton's control
of Mayflower and the advantages incident to
complete ownership, a share-for-share
exchange will be fair and reasonable to all
concerned.
An affidavit of J. Sellers
Bancroft, Vice President in charge of Trust
Department investments of Wilmington Trust
Company, [33 Del.Ch. 300] sets forth his
conclusion, reached after a review of Mr.
Haslam's study and an examination of
pertinent financial data, that a
share-for-share exchange is unquestionably
fair.
The Haslam report contains no
finding of net asset value--a factor
nevertheless proper
Page 111 to be considered. Plaintiffs submitted
affidavits containing an appraisal of the
Mayflower Hotel (including land) and an
estimate of reproduction cost (less
depreciation) of the hotel proper. These
affidavits indicate a value of upvards of
$10,000,000. If plaintiffs' figure of a
minimum value of $10,500,000
2
be accepted (it was accepted by the
Chancellor), a share of Mayflower stock
would have a liquidating or net asset value
of about $27 a share. Defendants submitted
an affidavit of J. B. Herndon, Jr., Vice
President and Treasurer of Hilton, to the
effect that two of the hotel properties of
Hilton (the Conrad Hilton and the Palmer
House in Chicago), which are carried on the
books at $26,800,000, have a value of at
least $60,000,000. Mr. Hilton gave some
testimony to the same effect. If the
indicated increase of $33,200,000 be
accepted, there is added to Hilton's per
share book value about $20, making an asset
value of about $38 a share. Haslam submitted
a comparison of 'indicated values' of the
hotel properties, arrived at by assuming
rates of capitalization of earnings derived
from plaintiffs' appraisal of the Mayflower
Hotel and applying such rates to the Hilton
earnings, and, by two different methods,
arrived at figures of $30.56 and $40.82 as
'indicated' net asset values of a share of
Hilton stock. Plaintiffs submitted no
evidence of value of the Hilton hotel
properties.
Now, it will be noted that all of
the comparisons above set forth except that
of market value are in favor of Hilton. As
for the market value of Mayflower stock, it
appears to be conceded by all parties to be
fictitious, that is, higher than would be
justified in a free and normal market
uninfluenced by Hilton's desire to acquire
it and its policy of continued buying. At
all events, that is the natural inference
from the evidence. If we lay aside market
value, and also disregard the comparison of
book values--a factor, as the Chancellor
said, of little relevancy in this case--we
find three [33 Del.Ch. 301] comparisons of
various degrees of importance--earnings,
dividends and net asset value--all in favor
of Hilton.
If, therefore, we should accept
the findings in the Haslam report and the
principles on which it is based, and also
accept the evidence bearing on comparative
net asset value of Mayflower and Hilton
stock, we should have to conclude that a
share of Hilton stock has a value at least
equal to a share of Mayflower stock, and
that no unfair treatment of the Mayflower
minority stockholders has been shown.
But we are confronted at the
outset with the contention of the
plaintiffs, basic to their case, that the
Haslam report and the comparisons of value
therein developed are wholly irrelevant to
the issues before us. This contention, urged
with much vigor--and repetition--is that the
transaction here assailed is in substance a
sale of assets by a fiduciary to himself.
That the transaction is cast in the form of
a merger, they say, is of no consequence; it
is in effect a sale, and the only relevant
comparison to be made is the comparison of
the value of the transferred assets--worth
$10,500,000--with the value of the
consideration--389,738 shares of Hilton
stock of a market value of $5,846,700; a
disparity so shocking as to stamp the
transaction as a fraud upon the Mayflower
minority stockholders.
If plaintiffs' contention should
be accepted it would follow that upon every
merger of a subsidiary into its parent
corporation that involves a conversion of
the subsidiary's shares into shares of the
parent, the market value of the parent stock
issued to the stockholders of the subsidiary
must equal the liquidating value of the
subsidiary's stock. On its face this
proposition is unsound, since it attempts to
equate two different standards of value. In
the case of many industrial corporations,
and also in the instant case, there is a
substantial gap between the market value and
the liquidating value of the stock; and to
apply to the merger of such corporations the
proposition advanced by plaintiffs would be
to bestow upon the stockholder of the
subsidiary something which he did not have
before the merger and could not obtain--the
liquidating value of his stock. See Porges
Page 112 v. Vadsco Sales Corp., 27 Del.Ch. 127, 32
A.2d 148.
[33 Del.Ch. 302] What is the
reasoning by which plaintiffs would lead us
to sanction such a result?
Plaintiffs start with a quotation
from the opinion of Chancellor Wolcott in
the case of Cole v. National Cash Credit
Ass'n, 18 Del.Ch. 47, 156 A. 183, 188, which
involved a merger of several Delaware
corporations. Preferred stockholders of
National (one of the constituent
corporations) charged that if the merger
were effected the asset security underlying
the preferred stock of the surviving
corporation that was to be given in exchange
for their preferred stock in National would
be less in value than that which underlay
their National stock; and that this
reduction in value flowed from an
undervaluation of National's assets in
comparison with the assets of the other
merging corporations. Plaintiffs' charge of
unfairness was thus based upon alleged
disparity in comparative net asset values.
The Chancellor said:
'The case therefore is one that rests on
the sole fact of alleged undervaluation and
overvaluation of the assets of two of the
merging companies.'
Announcing a rule embodying a
test of fraud applicable to such a case, the
Chancellor continued:
'Where that is the case the rule adopted
by this court as applicable to the sale of
corporate assets would seem by analogy to
supply a sound basis for guidance. While a
consolidation is quite distinct from a sale,
yet, from the viewpoint of the constituent
companies, a sale of assets is in substance
involved. Here it is the sale feature of the
merger and that alone with which we are
concerned. Looking then at the transaction
as one where the stockholders of the
defendant are in substance selling its
assets to another in exchange for securities
issued by the latter, what is the rule by
which the value derived in exchange for the
assets is to be tested for the purpose of
discovering whether or not fraud can be said
to have been shown? This question is
answered by the case of
Allied Chemical & Dye Corp. v. Steel & Tube
Co., 14 Del.Ch. 1, 120 A. 486.' 18
Del.Ch. 57-58, 156 A. 188; emphasis
plaintiffs'.
Seizing upon the emphasized
language and disregarding the facts to which
it was directed, plaintiffs say in effect: A
merger is essentially a sale of assets; this
transaction is a sale of assets by a
fiduciary (Hilton) to itself for shares of
stock worth shockingly less than the assets
sold; therefore the transaction is a fraud.
So runs the syllogism.
A manifest fallacy, we think,
lurks in the basic premise of this
reasoning. A merger may be said to 'involve'
a sale of assets, [33 Del.Ch. 303] in the
sense that the title to the assets is by
operation of law transferred from the
constituent corporation to the surviving
corporation; but it is not the same thing.
It is, as the introductory clause of
Chancellor Wolcott's language affirms,
something quite distinct, and the
distinction is not merely one of form, as
the plaintiffs say, but one of substance. A
merger ordinarily contemplates the
continuance of the enterprise and of the
stockholder's investment therein, though in
altered form; a sale of all assets (the type
of sale referred to in the Cole case)
ordinarily contemplates the liquidation of
the enterprise. In the first case the
stockholder of the merged corporation is
entitled to receive directly securities
substantially equal in value to those he
held before the merger; in the latter case
he receives nothing directly, but his
corporation is entitled to receive the value
of the assets sold. The scope of the
applicable sections of our General
Corporation Law (Section 59, relating to
mergers and consolidationds, and Section 65,
relating to sales of all the corporate
assets) may to some extent overlap; but this
is not to say that the two procedures differ
only in form. They are, in general, distinct
and designed for different ends.
The instant case supplies an apt
illustration. The Mayflower assets are not
to be liquidated; the property is not for
sale. Its directors and stockholders have
determined, not that the venture should be
terminated, but that it should be integrated
completely with the Hilton enterprise.
Having made this decision they had the
Page 113 right to avail themselves of the means which
the law provides for just such a purpose,
subject always to their imperative duty to
accord to the minority fair and equitable
terms of conversion.
Nor do we think that the Cole
case supports plaintiffs' contention. The
quoted language embodies, as Chancellor
Wolcott indicated, an analogy and not a
definition. The question actually before him
was one of comparative net asset values.
Thus, at the beginning of that portion of
the opinion which deals with the objections
of the preferred stockholders, he said:
'The crucial point on which their
complaint turns is one of value--whether or
not they as stockholders in one of the
constitutents are to receive in exchange for
their present holdings, stock which has a
value commensurate with the asset
contribution which their company is making
to the common pool.' 18 Del.Ch. 55, 156 A.
187; emphasis plaintiffs'.
[33 Del.Ch. 304] Plaintiffs
interpret the words 'commensurate with' as
meaning 'equal to'. Thus they say that the
quoted language makes it plain that a
comparison of the value of the assets
transferred with the value (i. e., market
value) of the stock issued in exchange is
the only relevant factor to be considered.
But this is not what the language
says nor what it means. The reference is to
the value of the assets underlying the stock
extinguished by the merger compared with the
value of the assets which will underlie the
stock to be received upon the consummation
of the merger. Thus, in a later part of the
opinion the Chancellor speaks of the
question before him as one involving 'the
relative participations of the merging
companies in the total assets thrown into
the merger pool', 18 Del.Ch. 59, 156 A. 188,
and ultimately resolves the question by
comparing the net asset value of a share of
the stock extinguished with a similar
valuation of the stock to be received. There
is no suggestion in the case that in
determining the fairness of a merger net
asset value of one stock should be compared
with market value of the other.
The unsoundess of such a method
of comparison is illustrated by the
subsequent decision
Mitchell v. Highland-Western Glass Co., 19
Del.Ch. 326, 167 A. 831. In that case
all of the assets of Highland were to be
sold to Mississippi Glass Company for shares
of stock of the seller. The consideration
was alleged to be grossly inadequate.
Plaintiffs' counsel argued that the number
of shares issued in payment for the sale was
based on a ratio of assets of two to one;
whereas the assets were nearly equal in
value, and the ratio was grossly unfair. To
develop this argument he took the full book
value of the seller's assets as their fair
value, but refused to value the stock
received by the same method. The Chancellor
dismissed the argument with the terse
comment: 'Manifestly that is unjustifiable.'
19 Del.Ch. 333, 167 A. 834.
Plaintiffs' attempt to push to
extremes the analogy drawn from a sale of
assets leads them to a wholly untenable
position, viz., that upon a merger a
stockholder of a subsidiary is entitled to
receive securities equal in value to the
liquidating value of his stock. As we have
already indicated, this proposition is
unsound. Speaking generally, a merger
effects an exchange of shares of stock [33
Del.Ch. 305] in a going concern for shares
in another going concern. In determining the
fairness of the exchange liquidating value
is not the sole test of the value of either.
In the Porges case, supra, preferred
stockholders objected to a merger which
accorded recognition to the common stock on
the ground that the common shares were
without value--that is, without liquidating
value. Implicit in this objection was the
assumption that liquidating value was the
sole test by which the measure of
recognition accorded to the common stock in
the merger was to be evaluated. Vice
Chancellor Pearson rejected the argument,
pointing out that the preferred stockholders
had no right to require liquidation of the
corporation and that the rights of the two
classes of stock must be viewed in the light
of the fact that the corporation was a going
concern. He announced the following rule:
Page 114
'To arrive at a judgment of the fairness
of the merger, all of its terms must be
considered.' 27 Del.Ch. 134, 32 A.2d 151.
A similar rule obtains in
ascertaining the value of stock in appraisal
proceedings under the merger statute. In
such cases the liquidating value of the
stock is not the sole test of value; all
relevant factors must be considered.
Tri-Continental Corp. v. Battye, Del.Ch., 74
A.2d 71;
Chicago Corp. v. Munds, 20 Del.Ch. 142, 172
A. 452; and Root v. York Corp., Del.Ch.,
50 A.2d 52.
The cases cited to us by
plaintiffs from other jurisdictions do not,
we think, afford any support to their
contention. Thus, in Wheeler v. Abilene
National Bank Building Co., 8 Cir., 159 F.
391, liquidation of the corporate property
and distribution of the consideration to the
stockholders had been determined upon by the
management. The president and majority
stockholder procured a sale to himself for
an amount less than could have been obtained
from another prospective purchaser. We agree
with the conclusion reached in that case but
it is of no help to plaintiffs here.
Jones v. Missouri-Edison Electric
Co., 8 Cir., 144 F. 765, involved a merger
which was adjudged grossly unfair to the
minority stockholders of the constituent
corporation because they were to be given
shares of stock of an asset value far below
the asset value which underlay their stock
prior to the merger. The fraud there charged
is similar to that charged in the Cole case,
[33 Del.Ch. 306] that is, a gross disparity
in asset value, compelling the conclusion
that the merger was unfair to the minority.
This case is likewise inapposite.
Outwater
v. Public Service Corp., 103 N.J.Eq. 461,
143 A. 729, Vice Chancellor Backes held
a merger unfair to the minority because
their securities in the constituent
corporation were converted into preferred
stock redeemable within three years at the
option of the surviving corporation. The
court held that the contingency of the
elimination of the stockholder's right of
permanent participation in the merged
company was unfair and the right to exercise
the option to redeem was oppressive and
inequitable. Not only is the case of no
assistance to plaintiffs, but implicit in it
is approval of the test of fairness which we
think the correct one, viz., that upon a
merger the minority stockholder shall
receive the substantial equivalent in value
of what he had before.
Plaintiffs stress some language
in each of the opinions in the Jones and
Outwater cases, similar to that in the Cole
case, analogizing the transaction under
review to a sale. As in the Cole case, this
language must be read in the light of the
facts to which it is directed.
In May v. Midwest Refining Co., 1
Cir., 121 F.2d 431, sale of a subsidiary's
properties and liquidation of a corporation
was determined upon by the majority
stockholder. A charge in the complaint that
the sale to the controlling stockholder was
in breach of its fiduciary duties because it
made no attempt to sell to anyone except
itself was held to be sufficient in
allegation to support a finding of unfair
treatment. No question of merger was
involved.
In Lebold v. Inland Steel Co., 7
Cir., 125 F.2d 369, a dissolution of a
subsidiary and a purchase of all of its
assets by the parent corporation was held to
have been determined upon in bad faith. In
the case at bar there is no evidence that
any of the Mayflower's directors acted in
bad faith or from corrupt motives in
determining that a merger should take place.
This case is likewise not in point.
No case is cited to us holding
that upon a merger of a subsidiary into a
parent corporation the minority stockholders
of a subsidiary are entitled to the
liquidating value of their stock.
[33 Del.Ch. 307] In the instant
case the Chancellor held that in a case of
merger 'all relevant value factors must be
considered in arriving at a fair value for
comparison purposes.' 89 A.2d 866.
For the reasons above given, we
find no error in this ruling.
The main question of law having
been resolved against the plaintiffs, we
turn to their remaining contentions.
Criticisms of the Haslam report.
Page 115
Plaintiffs make some criticisms
of the Haslam report designed to rebut or
weaken its findings.
First, they say that the Haslam
report is unacceptable because it was
designed as a plan for a voluntary exchange
and not in contemplation of a merger; the
word 'merger', say the plaintiffs, does not
occur in it. Hence (plaintiffs apparently
argue) it has no bearing on the fairness of
a merger plan.
We think the argument wholly
unsubstantial. It reduces to a criticism of
the use of the word 'exchange' instead of
the word 'conversion'--the term technically
correct in describing the effect of a
merger. Obviously comparisons used to
determine, abstractly, the fairness of a
voluntary exchange of one share of stock for
another are equally pertinent in determining
the fairness of a compulsory exchange, that
is, a conversion of one share of stock into
another. Moreover, it is scarcely to be
supposed that the Haslam report was obtained
for the purpose of inducing minority
stockholders to make a voluntary exchange.
From the beginning of Hilton's control a
merger had been looked forward to.
Next, plaintiffs assert that the
Haslam report contains certain errors in the
figures developed. They say that the Haslam
report uses the figure of $14.38 as the book
value of Mayflower stock, whereas the
testimony shows the correct figure to be
$17.50; that the Haslam report uses the
figure of $16.25 a share as the market price
of Mayflower, whereas Hilton had paid $19.10
a share for the stock; and that the
comparison of earnings of the two
corporations appearing in the report is
inaccurate in that a nonrecurring item of
$70,000 of litigation expense was not
eliminated from the computation and capital
improvements amounting to about $41,000 had
[33 Del.Ch. 308] been charged to maintenance
and repairs on Mayflower's books. All these
criticisms were advanced in the court below
and were carefully considered by the
Chancellor, who found them all without
merit. The comparison of book values, as we
have above indicated, is of little relevancy
here; the market value, as we have shown, is
fictitiously high, and Hilton's purchases at
$19.10 a share are, under the circumstances,
no evidence of true market value. As for the
other matters--if they represent anything
more than a difference of accounting
opinion--they are immaterial, since, if the
soundness of the criticisms be conceded and
the suggested corrections be made, the
comparison of earnings would still be in
favor of Hilton. We approve the Chancellor's
findings on these matters.
An argument of more substance is
directed to the question of the net asset
value of a share of Hilton.
Noting the omission in the Haslam
report of any comparison of such values,
plaintiffs develop the contention that the
defendants, having the burden to justify the
terms of the merger, have failed to sustain
it, since no proper appraisal of Hilton's
physical assets has been made. As for the
evidence submitted after the suit was filed,
plaintiffs say that it is of little value
and inadequate to supply the deficiency in
the Haslam report. At the very least, they
contend, defendants' failure to present
formal appraisals of Hilton's assets calls
for fuller investigation of the matter than
was possible at a hearing on a motion for a
preliminary injunction, and the status quo
should be preserved until final hearing.
As we have already held, net
asset value is one of the factors to be
considered in determining the fairness of a
plan of merger. But the requirement that
consideration be given to all relevant
factors entering into the determination of
value does not mean that any one factor is
in every case important or that it must be
given a definite weight in the evaluation.
Cf. Tri-Continental Corp. v. Battye, supra.
The relative importance of several tests of
value depends on the circumstances. Thus, in
some cases net asset value may be quite
important. See Cole v. National Cash Credit
Ass'n, supra; and Jones v. Missouri-Edison
Electric Co., supra. But in the case at bar
it is of much less importance than the
factors analysed in the Haslam report. We
are dealing here [33 Del.Ch. 309] with
corporations engaged in the hotel business,
whose capital is invested largely in fixed
assets. The shares of such corporations are
worth,
Page 116 from the viewpoint of an investor, what they
can earn and pay. A comparison of net asset
values may have some weight, but it is of
much less importance than demonstrated
capacity of the corporation to earn money
and pay dividends.
Allied Chemical & Dye Corp. v. Steel and
Tube Co. of America, 14 Del.Ch. 64, 122 A.
142, Chancellor Wolcott, dealing with
the relative importance of replacement costs
and earning power as standards of value in
connection with industrial property,
expressed the view that earning power is by
far the more important. 14 Del.Ch. 73, 122
A. 142. And compare 1 Bonbright, Valuation
of Property, Ch. XII, pp. 240-244, 'Bearing
of Asset Valuations on an Enterprise
Appraisal'. In respect of earning power the
superiority of Hilton stock is clearly
shown. In these circumstances we deem the
evidence adduced by defendants upon the
issue of comparative net asset value to be
sufficient to discharge whatever duty they
were under in respect of the matter; and
this notwithstanding the inconclusive nature
of the 'indicated values' arrived at by
Haslam.
Plaintiffs say that the directors
of Mayflower did not give proper
consideration to the question of the value
of Mayflower's assets in their approval of
the terms of the merger. As we have shown,
the only pertinency of this figure is to
develop a comparison of net asset value per
share between Mayflower stock and Hilton
stock. Since the deficiency of the Haslam
report in this respect is supplied by other
evidence the effect of which is to
corroborate the findings of the Haslam
report, we think this omission (if it was an
omission) of little significance.
Nor are we impressed with
plaintiffs' claim that they were afforded in
the court below insufficient time to
controvert defendants' evidence in respect
of the value of Hilton's assets. If the
issue was then deemed important and the time
available was believed to be inadequate for
procuring and filing controverting
affidavits, plaintiffs could have applied to
the court for indulgence in this regard.
But, apart from this consideration, it is
difficult for us, in the light of
plaintiffs' main contention, so earnestly
pressed, to [33 Del.Ch. 310] believe that a
comparison of net asset value was deemed by
them to be an issue of any consequence. They
chose to pitch their case upon a theory of
law--already examined and found to be
erroneous--that dispensed with any
consideration of comparative net asset
values, as well as of values derived from
comparisons of earnings and dividends. The
record indicates that further investigation
of comparative net asset values would yield
no evidence favorable to Mayflower--much
less evidence sufficiently weighty to
overthrow the findings of the Haslam report.
We think that the foregoing
contentions are without merit.
Hilton's offer to buy Mayflower
stock at $19.10 a share.
The facts with respect to this
offer are set forth above. The price derives
from a purchase by Hilton in February, 1952,
of 21,409 shares of Mayflower stock at
$19.10 a share from a group headed by John
E. Meyers, one of the interveners in the
Washington litigation. A similar offer is
now made to the remaining minority
stockholders in connection with but not
technically as a part of the plan of merger.
Upon these facts plaintiffs build
an argument that the price thus voluntarily
paid by Hilton, and still offered for
Mayflower shares, shows the unfairness of
converting one share of Mayflower into one
share of Hilton. This argument assumes that
the price in Hilton's offer is better
evidence of value than the prices of the
over-the-counter market and the values
indicated by the Haslam report. This does
not follow; on the contrary, the true
inference would seem to be that, for
whatever reason, Hilton paid for a large
block of shares somewhat higher than real
value. Messrs. Baxter and Fleming, two of
the directors who had served under the prior
management, are of the opinion that
Mayflower stock is not worth $19.10 a share.
After the Meyers purchase, Hilton may have
determined to continue the offer to others
in order to avoid any charge of having
accorded the Meyers group special treatment.
But Hilton's reasons for doing so are not
here important; it is enough to say, as the
Page 117 Chancellor said, that the minority
stockholders of Mayflower suffer no harm
from the offer and have no ground of
complaint. [33 Del.Ch. 311] Conclusion.
We have considered all of
plaintiffs' objections to the fairness of
the proposed merger, and find ourselves in
accord with the Chancellor's conclusion that
no fraud or unfairness has been shown.
The question of a quorum.
There remains for consideration
the contention that no quorum was present at
the meeing of the board of directors of
Mayflower on March 6, 1952, at which the
merger was approved.
Six of the nine directors were
present--Messrs. Baxter, Folger, Fleming,
Herndon, Hilton and Mack. Under the by-laws
a quorum consists of five directors.
Plaintiffs appear to concede that Messrs.
Baxter and Folger were qualified to act, but
say that the others are, by reason of some
interest in or connection with Hilton,
disqualified for quorum purposes.
Defendants' answer (among others) is that
Mayflower's certificate of incorporation
permits the counting of interested directors
for quorum purposes; and plaintiffs reply
that the provision to that effect is
invalid.
An excerpt from Article
Thirteenth of Mayflower's certificate of
incorporation is set forth in the margin.
3 In substance, so
far as here pertinent, it provides that,
fraud being absent, a transaction with
another corporation is not invalidated by
reason of the existence of interlocking
directors or directors otherwise interested
in such other corporation; and further
provides that any such [33 Del.Ch. 312]
director may be counted toward a quorum. It
is this latter provision which is assailed
as invalid.
Paragraph 8 of Section 5 of the
General Corporation Law, Rev.Code of Del.,
1935, Par. 2037, sub-par. 8, provides:
'8. The Certificate of Incorporation may
also contain any provision which the
incorporators may choose to insert for the
management of the business and for the
conduct of the affairs of the corporation,
and any provisions creating, defining,
limiting and regulating the powers of the
corporation, the directors and the
stockholders, or any class of the
stockholders, or, in the case of a
corporation which is to have no capital
stock, of the members of such corporation;
provided, such provisions are not contrary
to the laws of this State.'
Plaintiffs say that the word
'laws' in the concluding proviso of this
paragraph means the common law as well as
statute law; and that the provision in
Mayflower's charter permitting an interested
director to be counted toward a quorum is
contrary to the common law of this state as
announced
Blish v. Thompson Automatic Arms Corp., 30
Del.Ch. 538, 64 A.2d 581. If plaintiffs
are right, this proviso, originally enacted
in the General Corporation Law of 1899, Vol.
21, Laws of Del.Ch. 273, has the effect of
forbidding the stockholders of a Delaware
corporation to modify by agreement the
effect of any rule of the common law
relating to the regulation of the corporate
enterprise. Such a construction
unwarrantably narrows the scope of the
enabling portion of the paragraph. That
portion confers, in the most general
language, the right to include in a
certificate of incorporation any provision
deemed appropriate for the conduct of the
corporate affairs. The rapid development of
Page 118 corporation law in this country--certainly
in this state--furnishes repeated examples
of departure from common law principles, and
negatives the suggestion that the
legislature intended by this provision to
codify (in effect) all the common law rules
applicable to the governance of corporate
affairs.
Butler v. New Keystone Copper Co., 10
Del.Ch. 371, 93 A. 380, a charter
provision authorizing sale of all the
corporate assets with the consent of
three-fourths in interest of the
stockholders was upheld against the
objection here made, viz., that such a
provision was not expressly authorized by
statute and was contrary to the common law.
We are unwilling to assent to plaintiffs'
contention that all the rules of the common
law applicable to [33 Del.Ch. 313]
corporations are brought within the sweep of
the phrase 'laws of this State.'
Plaintiffs cite the case of
State ex rel. Cochran v. Penn-Beaver Oil
Co., 4 W.W.Harr. 81, 34 Del. 81, 143 A. 257,
in which the Superior Court en Banc held
invalid a charter provision amounting in
effect to a denial of any right of
inspection of corporate books by a
stockholder. The reasoning of the court
appears to emphasize the introductory
language of paragraph 8 rather than the
language of the proviso and draws a
distinction between regulation and
prohibition of the common law rights of
stockholders. There is also language
suggesting that a right given by the common
law may not be abrogated. We need not review
the soundness of this reasoning except to
say that if the opinion is read as
announcing the broad rule contended for by
plaintiffs we cannot agree with it. The case
is, of course, clearly distinguishable upon
its facts.
On the other hand, it is clear
that the scope of the proviso is broader
than the field of statutory law.
Greene v. E. H. Rollins & Sons, Inc., 22
Del.Ch. 394, 2 A.2d 249, 252, a charter
provision was found to contain unreasonable
restraints on alienation of shares of stock
and was held invalid. Answering the argument
that a corporate charter is a contract
binding on the stockholders, Chancellor
Wolcott said:
'No individual may exercise his broad
power to enter into contract relations with
another so as to offend against what the law
deems to be sound public policy.'
The language of Section 5,
Paragraph 8, was not discussed; but the case
may be said to hold that the broad powers
conferred by Paragraph 8 of Section 5 of the
General Corporation Law do not authorize the
stockholders to contract with each other or
with the corporation to achieve a result
forbidden by settled rules of public policy.
Such a provision would be 'contrary to the
laws of this State.'
A precise delimitation of the
scope of the proviso is difficult to
formulate; the limits of 'public policy' are
ill-defined and changing. We do not attempt
a definition; but we say that the
stockholders of a Delaware corporation may
by contract embody in the charter a
provision departing from the rules of the
common [33 Del.Ch. 314] law, provided that
it does not transgress a statutory enactment
or a public policy settled by the common law
or implicit in the General Corporation Law
itself.
Turning to the charter provision
before us, we find it to be one relating to
the powers of the directors in conducting
the corporate business. It permits
interested directors to be counted toward a
quorum. There is no Delaware decision
dealing directly with the validity of such a
provision, although in Martin Foundation v.
North American Rayon Corp., Del.Ch., 68 A.2d
313, the Chancellor upheld the validity of a
charter provision that broadened the
definition of disqualifying interest of
directors for quorum purposes. In Piccard v.
Sperry Corp., D.C.N.Y.1943, 48 F.Supp. 465,
affirmed 2 Cir., 152 F.2d 462, Judge Rifkind
was of opinion that the law of Delaware did
not forbid such a provision.
We see no reason to hold that
stockholders may not agree that interested
directors may be counted toward a quorum.
Such a provision does no more than to permit
the directors to act as a board, leaving
untouched questions of alleged unfairness or
inequity that it is the duty of the courts
in a proper case to resolve. Interlocking
directorates are not in themselves unlawful
and a provision such as here assailed, which
Page 119 merely facilitates the functioning of the
board, cannot be said to constitute a
contract contrary to public policy. The
Blish decision does not announce any
doctrine of public policy but merely
approves a general rule of the common law.
Action of interested directors under
authority of such a provision will
necessarily receive careful and objective
scrutiny when reviewed in the courts, but
this is not to say that the stockholders may
not lawfully grant authority to act as a
board. The Chancellor's comments on the
bearing of such a charter provision upon the
efficient functioning of a board of
directors are pertinent. He said:
'The basis for the common law rule is the
prevention of conflict between duty and
self-interest or divided interest.
Italo-Petroleum Corp. v. Hannigan, 1 Terry
534, 14 A.2d 401. However, there are
many cases where there is such a conflict
and the court deals with it as here, by
placing the good faith and fairness burden
on those espousing the transaction.
Assuming, as I have here done, that action
by a quorum of directors is necessary, it
would seem unrealistic to say that no action
could be taken because of the inability to
procure a disinterested quorum. [33 Del.Ch.
315] To adopt a rule having that effect,
particularly where stockholder approval is
also necessary, is merely to invite
subterfuge and encourage the election of
so-called dummy directors.' 89 A.2d 866.
This is in effect to say that
such a provision may well fill a legitimate
need in the efficient functioning of the
corporate enterprise. We agree; and we see
no basis for declaring it unlawful.
We are of opinion that at the
meeting of the Mayflower directors at which
the merger was approved a quorum was
present. This conclusion makes it
unnecessary to consider other reasons
advanced by defendants in defense of the
validity of the meeting.
The order of the Court of
Chancery of New Castle County dated June 18,
1952, is affirmed; and the cause is remanded
to that court for further proceedings in
conformity with this opinion.
1 Comparisons drawn from Haslam report:
Average Earnings Per Share
Hilton Mayflower
1947"1951 Average:
Before income taxes and extraordinary items 4.31 2.17
After income taxes and extraordinary items 2.79 1.17
1951 to Nov. 30:
Before income taxes and extraordinary items 4.22 3.14
After income taxes and extraordinary items 2.37 1.15
Dividends Per Share
1947"1951 Average 1.07 .34
1951 1.20 .40
Book Value Per Share
Nov. 30, 1951 Per books 18.26 14.38
Adjusted 18.42 13.98
Market Value Per Share
1950 average 12.88 11.25
1951 Average 15.46 15.56
Approximate current price [at date of study] 14.75 16.25
2 Arrived at by adding to the appraised
value $500,000 in liquid assets.
3 'Thirteenth: In the absence of fraud,
no contract or other transaction between
this Corporation and any other corporation
or any partnership or association shall be
affected or invalidated by the fact that any
director or officer of this corporation is
pecuniarily or otherwise interested in or is
a director, member or officer of such other
corporation or of such firm, association or
partnership or is a party to or is
pecuniarily or otherwise interested in such
contract or other transaction or in any way
connected with any person or persons, firm,
association, partnership or corporation
pecuniarily or otherwise interested therein;
any director may be counted in determining
the existence of a quorum at any meeting of
the Board of Directors of this Corporation
for the purpose of authorizing any such
contract transaction with like force and
effect as if he were not so interested, or
were not a director, member or officer of
such other corporation, firm, association or
partnership; * * *.' |
