Lehrman v. Cohen

Brief Fact Summary.

Jacob Lehrman, (Plaintiff), brought suit against NM. Cohen, (Defendant), alleging the creation, issuance, and voting of a Class AD stock resulted in an illegal arrangement and the election of Joseph B. Danzansky as president of Giant Food, Inc. constituted a breach of contract and a breach of fiduciary duty. Plaintiff appeals the Delaware Court of Chancery grant of summary judgment in favor of the Defendant.

Synopsis of Rule of Law.

The test for a voting trust is whether 1) the voting rights of the stock are separate from the other attributes of ownership; 2) the voting rights granted are intended to be irrevocable for a definite period of time; and 3) the principal purpose of the grant of voting rights is to acquire voting control of the corporation.

Facts.

Giant Food Inc., (Giant), is controlled by the Lehrman and Cohen families each owning equal voting stock designated as Class AC (held by the Cohen family) and Class AL (held by the Lehrmans). Each class is entitled to elect two members of Giant’s four-member board of directors. A dispute arose within the Lehrman family and to end the dispute, an arrangement was made permitting Plaintiff to acquire all of the Class AL stock. In addition, the arrangement established, and the stockholders unanimously ratified, a fifth directorship to resolve a dead lock which would have continued if the equal division of voting power between the AL and AC stock were to continue. A third class of stock was created called AD stock that had the power to elect one director but was not entitled to dividend or liquidation rights except repayment of par value.
By resolution of the board of directors, the third class of stock was issued to Joseph B. Danzansky who elected himself as Giant’s fifth director. In 1964 the holders of AC and AD stock voted together against the holders of AL stock to elect Danzansky president of Giant replacing Defendant who had been president of Giant since its incorporation. Danzansky then resigned as director and elected in his place, Millard F. West, Jr., a former AL director. Plaintiff then brought this suit.

Issue.

Whether the Class AD stock arrangement is illegal as a voting trust.

Whether the Class AD stock arrangement is sufficiently close to the substance and purpose of Section:218 as to warrant its being subjected to the restrictions and conditions imposed by that statute.

Whether the creation of a class of stock having voting rights only and lacking any substantial participating proprietary interest in the company violates public policy.

Whether the AD stock arrangement is illegal because it permits the AC and AL directors to delegate their duties to the AD director.

Held.

No. The AD stock arrangement is not a voting trust because it does not separate the voting rights of the AC or AL stock from the other attributes of ownership of those classes of stock.

No. The statute only regulates trust and pooling agreements amounting to trusts, not other arrangements possible among stockholders.

No. The statute permits the creation of stock having voting rights only as well as stock having property rights only.

No. The AD stock arrangement is not invalid on the ground that it permits the AC and AL directors of the company to delegate their statutory duties to the AD director.

Discussion.

The AD stock arrangement did not separate the voting rights of the AC or AL stock from the other attributes of ownership. Each stockholder retained complete control over the voting of his stock. The AD stock arrangement became a part of the capitalization of the company. It is true that the creation of the AD stock may have diluted the voting power of the AC and AL stock but a voting trust is not necessarily the result.

Section:218 regulates trusts and pooling agreements amounting to trusts but not other types of arrangements possible among stockholders. The AD stock is neither a trust nor a pooling agreement and therefore it is not controlled by the Voting Trust Statute.

The creation of a class of stock that has voting rights only does not violate public policy. First, there was no separation of the voting rights of the AC or AL stock from the other attributes of ownership. Second, the purpose of the Voting Trust Statute was to avoid secret uncontrolled combinations of stockholders formed to acquire voting control of the corporation to the detriment of non-participating shareholders. The AD stock arrangement did not violate this purpose. Thirdly, assuming the AD stock arrangement exposes a loophole in Section:218 as it was intended to operate, it is up to the legislature to block it.

The AD stock arrangement had a proper purpose. Stockholders may protect themselves and their corporation by an otherwise lawful plan against the fatal consequences of a dead lock in the directorate of the corporation. The arrangement was created by the unanimous action of the stockholders of the company by amendment to the certificate of incorporation. Therefore, assuming there is a delegation of duty, it was made by stockholder action.