Opinion
Civil Action No. 8035 (Consolidated).
Submitted: December 4, 1987.
Decided: January 27, 1988.
ON RESPONDENT'S AND INTERVENOR'S MOTION THAT THE COURT SHOULD CONSIDER THE PROPRIETY OF THE ISSUANCE OF SHARES: DENIED.
Januar D. Bove, Jr., Esquire, CONNOLLY, BOVE, LODGE HUTZ Wilmington, DE.
Thomas Herlihy, III, Esquire, HERLIHY WIER, Wilmington, DE.
Mr. Richard C. Fabiniak, Lancaster, NY.
Mr. Thaddeus J. Fabiniak, Cheektowaga, NY.
Gentlemen:
Respondents and Intervenors moved to have the court proceed to consider whether certain shares of common stock of Hybrilonics, Inc., were improperly issued because of the inadequacy of consideration. Because this issue is now moot, the motion must be denied.
I
This action was commenced pursuant to 8 Del. C. § 225 and was brought to have ascertained the directors of the corporation after two competing slates of directors had claimed the right to manage the corporation.
One of the issues raised in this suit was whether five million shares of stock issued to Thaddeus J. Fabiniak and Richard C. Fabiniak (collectively "Fabiniaks") could be voted and counted.
In April of 1986, the Fabiniaks filed a complaint challenging the election of certain directors to Hybrilonics (now a Respondent) pursuant to 8 Del. C. § 225. In May of 1986, Richard Freeman, Gregory R. Hill, William Lerner and Atlantic Financial Concepts ("Atlantic") (collectively referred to as "intervenors") filed a similar suit, pursuant to 8 Del. C. § 225, also challenging the election of directors. As part of its § 225 claim, Intervenors sought to have the transfer of five million shares issued to the Fabiniaks set aside as being issued without an adequate consideration and sought to compel Thaddeus Fabiniak to transfer 11,250,000 shares of Hybrilonics to Atlantic, pursuant to a pledge agreement. The two actions were consolidated.
On July 16, 1986, without ruling on the merits of the conflicting claims, I ordered that the annual meeting of Hybrilonics be held on September 30, 1986. The primary purpose of this meeting was to elect directors. On October 1, 1986, a court-appointed Special Master reported to the Court that Dwyer, Ivey, and Ashenberg were elected directors at this annual meeting. By Order of November 13, 1986, I confirmed that election without ruling on the validity of the issuance of the five million shares.
By letter of April 3, 1987, the Intervenors informed the Court that the Fabiniaks had transferred the other 11,250,000 shares they owned to a transfer agent for transmission to Atlantic and that, therefore, the only remaining issue in their view was the validity of the issuance of the five million shares to the Fabiniaks.
Respondents and Intervenors now desire to have the Court consider their claim that the five million shares issued to the Fabiniaks were issued for inadequate consideration and should be cancelled and returned to Hybrilonics.
At a December 4, 1987 hearing, Respondents and Intervenors requested that this court proceed to rule on the validity of the issuance of the five million shares. In addition, Intervenor Atlantic advised the Court that it may now seek sanctions against the Fabiniaks for failing to cause the transfer agent to transfer the shares to Atlantic. The Fabiniaks did not appear at this hearing.
II
The fatal flaw of the Respondents' and Intervenors' motion to have the Court now consider the validity of the issuance of the five million shares is that the challenge to the ownership of the five million shares was raised in an action commenced pursuant to 8 Del. C. § 225, which states in relevant part:
§ 225. Contested election of directors; proceedings to determine validity.
(a) Upon application of any stockholder or director, or any officer whose title to office is contested, or any member of a corporation without capital stock, the Court of Chancery may hear and determine the validity of any election of any director, member of the governing body, or officer of any corporation, and the right of any person to hold such office, and, in case any such office is claimed by more than 1 person, may determine the person entitled thereto; and to that end make such order or decree in any such case as may be just and proper, with power to enforce the production of any books, papers and records of the corporation relating to the issue. (emphasis added)
In order to rule on the validity of an election, ". . . the Court can go beyond a mere determination of voting rights and finally adjudicate the ownership of stock, invalidate stock found improperly issued, and set aside an election at which the invalid stock was voted . . .". E. FOLK, The Delaware General Corporation Law, 270 (1972). See North American Uranium Oil Corp. v. South Texas Oil Gas Company, Del. Ch., 129 A.2d 407 (1957).
Several cases indicate the broad power the court has in fulfilling its responsibility. See, e.g., Rosenfield v. Standard Electric Equipment Corp., Del. Ch., 83 A.2d 843 (1951); Mercek v. Rothwell Oil Co., Del. Ch., 68 A.2d 721 (1949); In Re Diamond State Brewery, Del. Ch., 2 A.2d 254 (1938); Standard Scale and Supply Corporation v. Chappel, Del. Supr., 141 A. 191 (1928).
As I stated, however, in Bossier, et al. v. Connell, et al., C.A. No. 8624-NC, Hartnett, V.C. (October 7, 1986), letter op. at 5, "The purpose of 8 Del. C. § 225 is to grant a quick method of review of the corporate election process in order to prevent a corporation from being immobilized by controversies as to who are its proper officers or directors."
The present motion seeks to have the court determine the ownership of the five million shares in a proceeding brought pursuant to 8 Del. C. § 225 although the most recent election of directors was found to be valid over one year ago.
Respondents and Intervenors fail to recognize the basic purpose of 8 Del. C. § 225 which is to have promptly determined the validity of an election of directors so that a corporation will not be immobilized. Bossier, supra. In the present case, the relief which 8 Del. C. § 225 provides has already been given and the issue now being raised does not relate to the validity of any election of directors. I therefore find that the determination now sought by the Respondents and Intervenors is moot as to this litigation and now goes beyond the scope of 8 Del. C. § 225.Palmer v. Arden-Mayfair, Inc., Del. Ch., C.A. No. 5549, Brown, C. (July 6, 1978), memo op. at 15; 4 Del. J. Corp. L. 6177 (1979). See also Levin v. Metro-Goldwyn-Mayer, Inc., Del. Ch., 221 A.2d 499, 503 (1966).
III
In summary, Respondents' and Intervenors' motion to have the Court consider their claims that the stock was improperly issued in this 8 Del. C. § 225 action is denied. While the allegations of inadequate consideration in the issuance of shares may have merit and can undoubtedly be addressed in an appropriate suit, this claim is now moot in this 8 Del. C. § 225 action because there is no pending challenge to an election of directors.
IT IS SO ORDERED.