Opinion
Civil Action Nos. 14392, 14444.
Submitted: September 13, 1995.
Decided: December 28, 1995.
M. Duncan Grant, Esquire and Sean P. McDevitt, Esquire, of PEPPER, HAMILTON SCHEETZ, Wilmington, Delaware; Attorneys for Plaintiff Harald Niehenke.
Gregory V. Varallo, Esquire, C. Michael Cochran, Esquire and Matthew E. Fischer, Esquire, of RICHARDS, LAYTON FINGER, Wilmington, Delaware; OF COUNSEL: O'MELVENY MYERS, Newport Beach, California; Attorneys for
Defendants Right O Way Transportation, Inc., Eugene F. Hayes, Betty J. Hayes and John D. Hayes.
David J. Margules, Esquire, of KLEHR, HARRISON, HARVEY, BRANZBURG ELLERS, Wilmington, Delaware; Attorney for Plaintiffs Martin Hubert and Diana L. Bomar.
MEMORANDUM OPINION
On June 30, 1995, Harald Niehenke, filed this action seeking the appointment of a custodian of Right O Way Transportation, Inc., a Delaware corporation, pursuant to 8 Del. C. § 226(a)(2). Mr. Niehenke alleged that he was one of two persons who constituted the board of directors of Right O Way and was a 50% stockholder. The complaint further stated that plaintiff cannot agree with the corporation's other director, Eugene F. Hayes, with respect to necessary management decisions; that he and Hayes, as equal 50% shareholders in Right O Way, cannot break this director deadlock; and that the corporation is threatened with irreparable injury as a result.
On July 11, 1995, Mr. Hayes and Right O Way filed answers denying the existence of a director deadlock and filed a counterclaim seeking a declaration, pursuant to 8 Del. C. § 225, that the Right O Way board is presently composed of four directors: Mr. Niehenke, Mr. Hayes, his wife Betty J. Hayes, and Hayes' son John D. Hayes. Hayes alleged in this counterclaim that on October 16, 1992, the corporation had granted an option to his wife to purchase 300 of the outstanding shares of Right O Way stock. Hayes contends that Mrs. Hayes exercised that option on or about July 10, 1995 and that Mr. and Mrs. Hayes acted by written consent, pursuant to Section 228, to expand the board of directors and elect Mrs. Hayes and John D. Hayes to the new board seats.
On July 28, 1995, Ms. Diana Bomar, the Vice President of Sales and Marketing for Right O Way, and Martin Hubert, the Vice President of Information Systems, filed a separate action against Right O Way, Mr. Hayes, and Mrs. Hayes, seeking specific performance of their employment agreements that purportedly included options to purchase Right O Way shares. Right O Way denied the material allegations of this complaint on August 15, 1995, and asserted counterclaims seeking a declaration that (1) Ms. Bomar and Mr. Hubert have no right to a bonus based on a percentage of Right O Way's gross revenues, and that (2) Mr. Hubert has breached fiduciary duties owed to Right O Way. This case was consolidated with the earlier filed one for trial.
A three day trial was commenced on September 11, 1995. This is the court's decision on the issues raised by the pleadings and trial.
As more fully set forth below, based upon a preponderance of the credible, admissible evidence, I conclude that the option purportedly exercised by Mrs. Hayes was not validly issued because the statutory requirements of 8 Del. C. § 157, were not complied with in creating that right. Consequently, I conclude that the actions purportedly taken by written consent of the Hayes faction — principally, the expansion of the board and the appointment of two new directors — was not legally effective, and that Niehenke and Hayes therefore remain the only two directors and equal 50% shareholders in Right O Way. Based on the inability of either Hayes or Niehenke to resolve their admitted deadlock and thereby avoid the threat of irreparable injury to Right O Way, I will therefore grant Niehenke's motion for appointment of a custodian.
With respect to the remaining claims, I conclude that Hubert and Bomar have failed to carry their burden to show by a preponderance of admissible evidence that they do have a contractual right to the stock options they claim or to a performance bonus based on 1-2% of either gross revenues or gross profits. Finally, I conclude that plaintiff should be reimbursed by Right O Way for his reasonable costs incurred in pursuing the section 226 action, including attorney's fees.
I. Application for the Appointment of a Custodian
A. The Company's History and Governance
In mid 1992, Mr. Niehenke and Mr. Peter van den Bergh negotiated concerning the purchase of the assets of a United States freight forwarding business, Right O Way Transportation Inc. (the "old Right O Way"), from its Canadian parent corporation, McCain Group Inc., for $750,000. In that connection, Niehenke consulted with Hayes, whom he knew professionally, and interested Hayes in the deal. Together Hayes and Niehenke estimated that they would need $1.5 million in capital to acquire the assets and to have sufficient working capital to operate the business. Niehenke and Hayes agreed to proceed to form an entity to acquire the assets which would have 1,500 authorized shares.
On October 2, 1992, Jon D. Karnofsky of the law firm Baker McKenzie filed a certificate of incorporation for Right O Way in Delaware and, as the incorporator, elected Hayes as sole director of Right O Way. Hayes then elected Niehenke as president. Each agreed to contribute 50% of the initial capital and hold equal amounts of Right O Way stock.
Although the stock transfer ledger indicates that Hayes contributed $1 million to capitalize the company, the evidence shows that Hayes actually contributed $500,000 in December 1992 to Right O Way and received 1,000 shares in the company. Niehenke initially contributed only $370,000 in December 1992, and later paid additional sums in October 1993 to bring his total capital contribution to $500,000. Upon payment of the full $500,000 capital contribution to reflect his intended 50% ownership of Right O Way, Right O Way recognized Niehenke's ownership of 500 shares and Hayes' ownership of 500 shares. Niehenke did not actually received the shares until April 1995.
B. Stock Options Granted to Betty J. Hayes
On October 16, 1992, immediately after incorporation and before Right O Way had issued any shares, Hayes as the company's sole director, purportedly granted an option to his wife, Betty J. Hayes, to purchase 300 outstanding shares of Right O Way stock (the "Hayes option"). Despite his previous reliance on corporate counsel for preparing and drafting corporate documents, Hayes personally drafted the option without help from an attorney. Hayes claims to have, in one sitting, signed and sealed the option and had the option notarized.
Neither the certificate of incorporation of Right O Way nor any other document reflects or relates to the grant of this option. Nor are there any resolutions by the Right O Way board of directors referring or relating to the creation or existence of the option. Hayes never informed Niehenke of the existence of the options. According to the testimony, Hayes disclosed the existence of this option to his wife, son, and two family friends unaffiliated with Right O Way. Although the option letter lists Mr. Karnofsky as a carbon copy recipient of the option, Karnofsky did not receive any documents that suggest Mrs. Hayes had an option to purchase the shares and did not discuss the issue with Mr. Hayes or anyone else.
Mr. Hayes testified that he granted the option to his wife in exchange for her promise to act as a corporate secretary and perform payroll, accounting, and bookkeeping services for Right O Way. Neither the option nor any contract introduced into evidence contained an enforceable promise for her to do so, and Mrs. Hayes did not in fact perform any of the duties of the corporate secretary as specified in Right O Way's by-laws. Mr. Hayes also admits that the option grant served, at least in part, as a means to protect his financial interest by securing his potential control over 800 (his 500 shares plus the 300 shares for which his wife held an option) out of the 1,500 authorized shares of Right O Way.
In late June 1995, Mr. Hayes directed Mrs. Hayes to exercise the option so that he could gain control of the Right O Way board. Betty Hayes delivered the option to her husband for this purpose and signed a letter prepared under the direction of his stating that she was exercising her option to purchase 300 shares of Right O Way stock. She enclosed with this letter a check (check #3415) dated June 25, 1995 and drawn on a joint account with Mr. Hayes in the amount of $300,000 to pay for the 300 shares. Although both the check and letter bear the date June 25, the five checks preceding and succeeding the check #3415 were all dated after June 27, 1995. Notably, the purported June 25 exercise falls a few days before Niehenke filed his complaint in this action on June 30.
On July 11, 1995, Hayes delivered the transmittal letter and the check to Mr. Ronald Frady, the Chief Financial Officer of Right O Way. Although he had not previously known of the existence of any such option, Frady accepted the tender and deposited the check. Right O Way then delivered the stock certificates to Betty J. Hayes.
Hayes has only produced a photocopy of a document purporting to be the option. He asserts that he lost the original letter after Mrs. Hayes had delivered it to him in late June. Only Hayes, his wife and son report having seen the original.
C. Removal of Niehenke From Office and Director Deadlock
On June 20, 1995, Hayes announced at the Right O Way headquarters in Tustin, California that he would be assuming operational control of Right O Way based on a March 1, 1994 unanimous written consent by directors Niehenke and Hayes that gave him the authority to manage the business affairs of Right O Way and remove Niehenke from his management position. Hayes and Niehenke thereafter became deadlocked on issues that the Right O Way board needed to address.
Hayes had previously assumed control of the accounting and finance related functions of Right O Way in early February 1995.
Niehenke has been negotiating with Hayes regarding a buyout of Hayes' interest in Right O Way since February 1995.
D. July 11, 1995 Written Consent Purporting to Expand the Board
On July 11, 1995, Mr. and Mrs. Hayes delivered written consents to the registered agents of Right O Way that, based on their control over a majority of the shares, purported to (1) delete and amend Section 2, Article III of the Bylaws (expanding the number of directors on the board from two to four), (2) elect Mrs. Hayes and John D. Hayes to the Right O Way Board, (3) delete in its entirety Section 1, Article XI of the By-laws (provisions relating to indemnification of directors), and (4) retain Mr. Hayes and Mr. Niehenke as directors.
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Plainly if one accepts Mr. Hayes' account as factual, his actions come dangerously close to fraud. He does not assert that he disclosed to Niehenke his purported action in granting an option to Mrs. Hayes before Niehenke made his substantial cash investment. But I find it unnecessary to address that level of analysis since I conclude in all events that no valid option was issued.
Certain facts cast doubt on that account. Although the option is evidenced by a written document that Hayes testifies to have issued while the sole director of Right O Way, other facts cast doubt over the timing of the options: (1) the notary did not recall notarizing the option; (2) despite his prior reliance on legal counsel to prepare all other corporate documents, Hayes independently drafted the option; (3) Hayes failed to contemporaneously apprise Niehenke — an intended equal interest holder in the venture — of the option; and (4) Hayes admittedly issued the option for the purpose of "protecting" his investment in Right O Way.
In purporting to issue an option to his wife, Hayes failed to adhere to provisions in section 157 which require that the terms of the options be separately stated in either the certificate of incorporation or in a resolution adopted by the board of directors. There is no persuasive evidence of such board resolution. Consistent with the interest in protecting against fraudulent, secretive or otherwise improper issuance of stock option rights and with other evidence questioning the timing and valid issuance of the Hayes Option, the failure here to adhere to statutory formality renders the Hayes Option void and unenforceable. Mrs. Hayes, therefore, did not obtain validly issued Right O Way common stock through exercise of that option, and the written consents executed on July 7 and 10, 1995, consequently fail to represent sufficient shares to act with effect.
Section 157 provides in relevant part:
The terms upon which, including the time or times which may be limited or unlimited in duration, and the price or prices at which any such shares may be purchased from the corporation upon the exercise of any such right or option, shall be such as shall be stated in the certificate of incorporation, or in a resolution adopted by the board of directors providing for the creation and issue of such rights or options, and in every case, shall be set forth or incorporated by reference in the instrument or instruments evidencing such rights or options.
See Sai Man, Ltd. v. Personal Computer Card Corp., Del. Ch., C.A. No. 11579, Hartnett, V.C. (June 18, 1991) (declining to enforce claimed options where, in addition to failing to adhere to statutory formalities mandated by section 157, plaintiff could not produce a written option and the directors testified that they did not discuss or approve stock options).
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With Niehenke and Hayes thus as equal shareholders and unable to continue the governance of the corporation, this court will appoint a custodian for a period of one (1) year to resolve issues for which the directors cannot reach a decision. This period may be extended, for good cause, upon application on notice. Plaintiff Niehenke may submit an order implementing the foregoing on notice.
Right O Way and Mr. Hayes informed the court through a letter from their counsel on September 5, 1995 that they would not oppose the appointment of a custodian if the court found the Hayes option invalid.
II. Option Claims of Ms. Bomar and Mr. Hubert
In their suit against Right O Way, Mr. Hubert and Ms. Bomar assert an immediate right to stock options pursuant to oral promises allegedly made at an early meeting in Valley Stream, New York. At that meeting Hayes Niehenke met with certain individuals in order to interest them in working for the to-be-acquired Right O Way. Plaintiffs Hubert and Bomar claim that the Investors promised each of those persons a cash bonus of $25,000 a year for four years upon the company's "break even;" and an option to ratably purchase up to 10% of the company for $100,000 over four years. Plaintiffs allege that these rights have ripened when Right O Way achieved break even performance in the fiscal year ended June 30, 1994. They thus now seek specific performance of these rights.
Counterclaim plaintiff Right O Way, in turn, seeks a declaratory judgment that the employment offers made to the management team at the Valley Stream meeting did not include a performance bonus equal to 1-2% of gross revenues. In their answer to this counterclaim, Hubert and Bomar effectively conceded their rights to a gross revenue based bonus and instead assert a right to a percentage of gross profits. While maintaining that they were in fact offered a bonus based on gross revenues, the counterclaim defendants argue that the investors had actually intended to grant a bonus based on a percentage of gross profits.
Based on my review of the evidence, I conclude that the Investors did not contractually bind themselves either to issue stock options or to pay performance bonus based on gross revenues or profits.
A. The Valley Stream Meeting
In conjunction with their efforts to negotiate the purchase of the assets of old Right O Way from McCain Group Inc., Hayes and Niehenke (the "Investors") sought to enlist an experienced and competent management team to run the new Right O Way. Pursuant to this goal, the Investors called a daylong meeting on August 29, 1992, at the offices of Albion International in Valley Stream, Long Island (the "Valley Stream meeting"). In attendance were the Investors, Andrew Titley of Albion, and five individuals previously employed with Niehenke at Amerford International Corp. who comprised the prospective management team of Right O Way: Peter van den Bergh, Martin Hubert, Thomas Drake, Diana Bomar, and Vittorio Favati.
The morning session primarily consisted of reviewing the business of Right O Way. Mr. van den Bergh and Mr. Titley generally reported on the losses of the company and the difficulty of improving financial performance. Based on the expected effect of the new management on performance, however, they forecast January 1993 as the break even month (the first month in which the bottom line was something other than a loss) and projected a $275,000 profit in the first full year following the acquisition.
The afternoon session began with a general presentation of the proposed compensation packages, followed by series of individual meetings relating to compensation issues. The individuals reconvened after these discussions and the Investors restated the compensation offer. The undisputed provisions of the offer included a $75,000 base salary, a car allowance, a medical plan, insurance, vacation, a 401(k) plan, and other standard benefits. In light of a reluctance of the managers to move from more financially secure and profitable positions at Amerford to join the Right O Way venture, the Investors also offered a one time $25,000 cash bonus upon break even. The Investors discussed the possibility of stock options and other types of future bonus compensation, but as set forth below, no specific offer was made that day, including such future payments.
Mr. Favati decided to withdraw during lunch.
Hubert, Drake, and Bomar accepted the employment offer within a few days of the meeting. Van den Bergh initially decided against accepting the offer but, after working for another company, eventually returned to work for Right O Way.
B. Efforts at Memorializing the Agreement
It was agreed that Mr. Hayes would see to written employment contracts for the consideration of the prospective managers. Mr. Drake was asked to create a first draft outlining the substance of the discussions at the Valley Stream meeting. Mr. Drake and Mr. Hubert met thereafter to draft an employment letter. Hubert had recorded notes of the Valley Stream meeting, as well as additional terms not discussed at the meeting but which Drake and Hubert nevertheless considered desirable. These notes mention a $25,000 bonus "upon break even as stock equivalent" and a profit share equal to "1-2% of revenue optional as stocks thereafter," with "revenue" replacing the crossed-out words "gross profit." Drake and Hubert agreed that Drake would draft an employment letter based on these notes.
Terms included in the notes but not specifically discussed at the Valley Stream meeting include a standard full medical plan or its cash equivalent, air travel life insurance, a 10% company 401(k) contribution, and salary adjustments tied to changes in the Consumer Price Index.
Drake sent a one page employment letter, dated September 3, to Titley and Hayes. The letter reflects the substance of the notes jointly prepared by Drake and Hubert with the exception that the letter mentioned a profit share bonus based on 1-2% of gross revenues, as contrasted with the "1-2% of profits" language in the notes. In addition, the reference to a profit share bonus in this letter did not incorporate the language "optional as stocks thereafter."
The company responded in mid-September with a document titled Draft Compensation and Employment Agreement dated July 30, 1992. This proposed agreement provided for the grant of 100,000 Stock Appreciation Rights (SARs) over five years, effective upon a registered public offering of the company's stock, a sale of 50% of the company's assets or stock, or a merger involving a change of control.
Drake responded in a September 16 letter to Hayes which enclosed the September 3 employment letter and a mark-up of the "July 30 Compensation and Employment Agreement." The proposed revised July 30 employment agreement, provided additional SAR rights but no stock or stock options. Drake sent Hubert a copy of his revisions and his letter to Hayes and wished him good luck.
In October 1992, Hubert received a draft employment agreement from Right O Way's Vice President of Human Resources. This draft agreement did not contain any references to stock grants or options or to a bonus based on percentage of gross revenue or profit. Hubert later told Hayes that this draft agreement was "full of error" and asked him if he had received the letter Drake sent to him. Hayes replied that he had not received or reviewed it, but would do so at some later time. No written contract was prepared.
In the following two years, Hubert and Bomar repeatedly asked Hayes for a formal stock option plan. Each time, the parties received assurances that Hayes had somebody working on creating some form of employee stock participation plan.
Hubert asked about the options at Right O Way's Christmas party in 1992 and on other occasions when he had a private moment with Hayes. Bomar inquired about the options at the 1993 Right O Way Christmas party and during a barbecue at the June 1994 general managers meeting in Newport Beach.
After Right O Way recorded a profit of about $250,000 in the fiscal year ended June 30, 1994, Bomar and Hubert brought up the topic of stock options again. Niehenke also had discussions with Hayes on this subject. While nothing was finally accomplished on that subject, Hubert, Bomar, and Drake did each received a $10,000 cash bonus, an amount that Niehenke claims was the maximum the company could afford based on cash flow and other financial conditions.
In November 1994, Niehenke directed Ronald Frady, Vice President and Chief Financial Officer of Right O Way, to draft an option plan. Frady delivered a plan to Niehenke and Hayes at the 1994 Christmas party. Hayes, however, did not consider the immediate implementation of the plan as appropriate since Right O Way had not achieved consistent profitability. Niehenke informed management of the firm that a plan had been drafted and that the board would review the plan and soon release the information.
Hubert, Drake and Bomar sent a letter dated January 9, 1995, requesting a written contract implementing the promises allegedly made at the Valley Stream meeting regarding the offer of shares to the founding management team. This letter "suggest[s]" granting to each member of the founding management team an option to purchase up to 100,000 shares over four years at $1 per share plus interest calculated at 7.5% per annum, and requests the drafting of a formal legal document "[u]pon acceptance." The letter, however, does not include language located in the September 3 employment letter and the preparatory notes regarding a $25,000 cash or stock bonus or a gross revenues performance bonus.
Hubert, Drake, and Bomar each received a reply letter from Hayes, dated January 20, stating that Hayes would not presently consider offering options to the founding management team. (At this point Hayes and Niehenke were not trusting each other and Hayes no doubt was cautious not to allow control to fall into the hands of persons he might have reasonably assumed were aligned with Mr. Niehenke.)
Niehenke did not sign this letter, and testifies to have told Hayes that they had in fact made these promises and that the managers had some entitlement to write this letter of intent.
Upon meeting with an attorney, Drake, Bomar, and Hubert decided to prepare a more sternly worded letter regarding their stock option and performance bonus claims. Based on this understanding, Drake drafted a letter dated March 17 stating that Mr. Hayes' January 20 response failed to address any of the promises made and agreements reached under which the managers started with Right O Way. In this letter, Bomar, Drake and Hubert assert their entitlement to (1) a bonus of $25,000/year for four years after the company reaches break even, which they claim occurred at the close of the fiscal year ending June 30, 1994; (2) stock options to acquire 100,000 shares at $1.00/share; (3) an incentive bonus plan ranging from 1-2% of gross revenues, paid annually; and (4) reimbursement for legal fees incurred in pursuit of these claims. Mr. Hubert and Ms. Bomar presented this letter to Niehenke who, after crossing out the provision relating to the gross revenues bonus, signed it and thereby "accepted and endorsed" the claims therein stated.
The managers, however, decided that the tone of the letter was too harsh and had Mr. Drake draft a second letter. Aside from softening the more confrontational language of the earlier draft, the second letter makes reference to a claimed right to 10% of company not mentioned in any other writing and does not mention the reimbursement of legal expenses provision included in the first draft. Aside from these changes, the second letter recites essentially the same entitlements as presented in the first letter. Although Niehenke had previously crossed out the reference to a performance bonus, Drake again included a performance bonus provision so that the managers could consistently present what they believed to be the entirety of the offer as presented at the Valley Stream meeting.
Upon receiving a copy of this second letter from Drake, Hubert and Bomar presented this letter to Niehenke who again crossed out the provision relating to the performance bonus. Although Niehenke also crossed out the stock option provision, he later wrote in "two is OK," referring to the numbered paragraph relating to the stock option claim. Niehenke signed the letter, but Hayes refused to sign the document
In two identical letters drafted by counsel and dated June 2, Mr. Hubert and Ms. Bomar requested a definitive agreement evidencing option rights to acquire up to 100,000 common stock shares representing 10% of the outstanding shares at $1.00/share. The letter also requests payment of the $25,000 bonus less the $10,000 already received and incorporation of the performance bonus of 1-2% of gross revenues into a formal agreement for the future and secured by a promissory note for the past. Hubert and Bomar directed any response to their attorney and indicated in their respective letters that they would institute legal action if Hayes did not reply by June 19.
A brief reply letter dated June 18 from Hayes' attorney reiterated that Hayes was not aware of any promises made concerning the award of options or other compensation.
Bomar and Hubert then sent separate letters dated June 28 to the Right O Way board purporting to exercise 1/10 of their claimed options. Each included a check for $10,000 to purchase 10 shares at $1,000/share. The letters noted that this partial exercise did not signify an intent to waive their right to exercise their remaining option rights. For the first time, Hubert and Bomar claimed that the option rights entitled them to an undiluted 10% ownership interest in the company. Hayes rejected the purported exercise.
C. Validity of the Option Claims
Upon review of the evidence, I conclude that plaintiffs have failed to prove that they had an enforceable agreement with Right O Way that provided for any bonus or option rights beyond a one time $25,000 cash bonus payable upon break even.
Under the law of the State of New York, which applies to this claim, to obtain specific performance of the alleged employment contracts, plaintiffs must sustain a heavy burden in producing objective signs of the existence and terms of the agreements sought to be enforced. See e.g., Oscar Prods., Inc. v. Zacharius, 893 F. Supp. 250, 255 (S.D.N.Y. 1995); ReproSystem B.V. v. SCM Corp., 522 F. Supp. 1257 (S.D.N.Y. 1981), rev'd on other grounds, 727 F.2d 257 (2d Cir. 1984). Plaintiffs must prove a "meeting of the minds, demonstrating the parties' mutual assent and mutual intent to be bound," and must establish " all essential terms of the alleged contract with sufficient definiteness that the Court can interpret its terms." Oscar Prods., 893 F.Supp. at 255.
In assessing the validity of the alleged oral contract providing for the bonus and stock options, I apply New York law since (1) both parties have cited and noted the possible applicability of New York case law, and (2) by the parties admission, the substantive law of other jurisdictions potentially relevant to this inquiry ( i.e., the applicable contract law of California and Delaware) display no material difference from New York law on the points addressed herein.
Trial testimony fails to establish that a contract to grant options was formed. Hayes claims that neither he nor Niehenke promised stock options and that he did not discuss options outside of "pep" talks in which he mentioned only the possibility of granting options in the future. Drake similarly claims that the stock options were discussed only as a concept item for possible future implementation and were not offered as part of the compensation package.
The other participants in the meeting contend that stock options were an integral part of the compensation package offered to the prospective management team. As understood and recounted by Niehenke, van den Bergh, Hubert, and Bomar, the stock option offer presented to the prospective management team in toto after reconvening from individual compensation meetings consisted of the opportunity to purchase 10% of the company for $100,000 over four years after "break even."
Even the witnesses who testified that stock options were discussed in depth nevertheless concede that participants did not discuss certain key aspects of the options: e.g., the number of shares outstanding or available for option, or consequently, the price per share. Other considerations not discussed at the meeting include the specific attributes of the shares subject to the option ( e.g., common or preferred, voting or nonvoting), the exercise period of the options, the definition of "break even" ( i.e., whether it meant black figures for a single year or for cumulative performance from inception), and whether the parties would receive the bonus and options for the four consecutive years following break even, even if Right O Way posted a loss during one or more of those years.
Contemporaneous documentation relating to the substance of the agreement reached at the Valley Stream meeting is helpful in determining the extent of actual agreement reached. Tracing the parties understanding of the employment offer, as manifest in correspondences between the parties, back to a time closer to the meeting date reveals less certainty among the negotiations over the terms of the agreement and serves to impeach at least partially the testimony of both sides.
In addition to discounting Hubert's and Bomar's claims that they were offered stock options as part of the oral employment agreement, the various documents — some of which include documents signed by Drake claiming an entitlement to stock options — also serve to contradict Drake's testimony that the stock options represented only a concept item.
The most recent correspondences relating to the options assert claims similar to those presented in trial. In separate letters dated June 28 and sent to Right O Way, Bomar and Hubert claimed an entitlement to an undiluted 10% share of the company for $100,000 and purported to exercise options to purchase 10 shares at a price of $1,000 a share (based on their entitlement to 10% of the 1,000 shares outstanding at the $100,000 price).
But, in the two sets of letters dated June 2 and March 17, 1995, respectively, claimants characterized their option agreement as permitting the acquisition of 10% of the company for $100,000 and acknowledged a cash bonus of $25,000/year for four years. They specified a price of $1.00 a share and quantity of 100,000 shares, and did not mention an "undiluted" right to 10% of the company.
The two March 17 letters do not in themselves comprise written contracts for cash bonus and option rights. Although Niehenke signed the letters, he did not have the authority to independently bind the corporation to an obligation to issue options. See 8 Del. C. § 157 (1991) (requiring that options be approved by the Board).
The individual recaps prepared in early February 1994 by van den Bergh, Drake, and plaintiffs Hubert and Bomar present more marked differences from these later correspondences and plaintiff's claims at trial. Drake, Hubert, and Bomar each mention a right to a $25,000 bonus on break even to be taken as cash or stock. However, none of the recaps (1) mention the right to acquire 10% of the company through an option plan; (2) specifically mention "options," although they do refer to the "opportunity" to acquire stock; (3) specify whether the managers would receive $25,000 as a one time bonus or as an annual bonus for each year after break even; or (4) mention the four year period that Niehenke, van den Bergh, Hubert, and Bomar testified was the length of the option plan (Drake and Bomar specified a five year cap on the right to purchase shares while Hubert and van den Bergh failed to mention a time period). Again, as compared to their trial testimony, the recaps of Drake and Bomar specifically noted a number of shares (25,000 shares/year) and a price per share ($1.00).
Motivated partly by concerns over clarifying their rights in light of a possible transition in ownership and partly by the advice of Niehenke, the managers separately prepared statements based on their recollection of the employment terms offered at the Valley Stream meeting.
Mr. Hubert's statement noted in relevant part that
[u]pon breakeven of the company the founding vice-presidents would receive $25,000 bonus with the possibility of taking this in stocks. Thereafter 20% of the net profits was supposed to be distributed equally between the team members as a Bonus on an annual basis. Taking the lack of capital into consideration up to 30% (changed from 20%) of the company were supposed to be transferred to the founding team by using the bonuses and other means.
Mr. Van den Bergh's recap presented a more generalized statement in which he noted that the offer made to the prospective management team:
included shareholdings in the company. There was further a firm strategy proposed to also offer shares to more employees on a not then defined formula. There also would be an opportunity to increase shareholdings through performance bonus (e.g. bonuses to be paid in part or full through shares) in Right-O-Way.
Ms. Bomar remembered the employment offer to have provided for a bonus to each manager, upon breakeven, of $25,000 offered in stock, cash, or a combination of both with an opportunity to purchase further stock at $1.00 a share capped at 25,000 shares per person per year for five years.
Mr. Drake recounted that the investors offered to give each prospective manager, after break even, a bonus of $25,000 paid with company stocks or their equivalent with the additional opportunity to purchase 25,000 shares per year at $1 a share with a five year cap. Based on the receipt of 125,000 shares by each prospective manager at $1 a share, Drake approximated this offer as granting the managers a 20% interest in the company. Drake also recalled that Niehenke offered an additional bonus on one-half of one percent of gross revenues at the end of Right O Way's fiscal year.
Hubert did mentioned that 30% (changed in the recap from 20%) of the company would be transferred to the management team through bonuses and other means, but testified that neither the 20% or 30% figure was mentioned at the meeting. Drake noted that right to purchase 25,000 shares per year over five years would "equate to an approximate figure of twenty percent (20%) [of the company, based upon the present and future potential market price of the company]."
Drake apparently derived the 5 year figure from in the Incentive Compensation Agreement dated July 30, 1992 which referred to the grant of stock appreciation rights (SARs) over a 5 year period. Bomar testified that she similarly relied on the Incentive Compensation Agreement in drafting her recap and likely obtained the 5 year figure from that source.
Van den Bergh's recap fails to specify the number of shares available under any option or share issuance program.
A January 9, 1995 letter characterizes the option as a right to purchase up to 100,000 shares over four years at a price of $1.00/share plus interest calculated at 7.5% per annum. As with the recaps, this letter does not mention the 10% figure.
Drake testified that the 100,000 figure derived from the Incentive Compensation Agreement sent to Hubert in October 1992 promising 100,000 SARs.
Plaintiffs Hubert and Bomar contend that the 7.5% interest addition to the share price represented a concession to the alleged unlimited exercise period of the option.
Notes complied by Drake and Hubert immediately after the meeting, and the draft employment letter prepared from these notes, mention a $25,000 bonus upon break even or as stock equivalent. Neither the notes nor the draft employment letter mentions option rights to acquire up to 10% of company or specify the number of years for which the stock rights or bonuses would be granted. Drake testified that the "as stock equivalent" language in the notes and the letter was not discussed at the Valley Stream meeting, and that he intended both the stock bonus and profit share/performance bonus terms in the notes as starting points for negotiations.
In parsing the evidence, it is clear only that the plaintiffs were promised a one time $25,000 bonus upon break even. The record otherwise displays conflicting accounts of the employment offer that only become clarified in documents and trial testimony three years after the meeting at which the bonus and options were purportedly promised. The elements as now claimed of the option (1) permitting the purchase of 10% of the company (2) over four years (3) for $100,000, appear only in documents drafted in 1995. The 10% figure, not mentioned in any of the recaps, appears only in the most recent correspondences.
At a minimum, the conflicts between the recaps and trial testimony demonstrate that the parties cannot consistently recall or articulate, even at points close in time to the event in question, the specifics of what would be an admittedly important but relatively straightforward employment term. More generally, plaintiffs cannot adequately explain why the documents prepared closest in time to the Valley Stream meeting — the notes by Hubert and Drake and Drake's employment letter — fail to specify certain terms integral to the claimed option right ( e.g., the 10% figure or the 4 year time period) or include terms additional to the agreement as presented at trial ( e.g., a specific price per share or specific number of shares).
In addition, the admitted lack of agreement on several important aspects of the options — the specific number of shares and consequently the price per share, the exercise period of the option, the definition of "break even," whether the bonuses or options would continue to accrue for those years after "break even" in which Right O Way suffered losses — not only indicates that the parties failed to agree on several important terms but also suggests the lack of an agreement altogether.
In sum, the subjective understanding of the employees, as evidenced in trial testimony, cannot overcome the objective signs in the documentary record that the parties did not reach a legally binding agreement regarding option rights at the Valley Stream meeting. As is clear from the record, the parties did not agree on essential terms of the option. Plaintiffs have failed to prove even their spare claim that the Investors promised 10% of the company for $100,000 over four years after break even. Although a contract can be formed despite material open issues, see e.g., Metro-Goldwyn-Meyer, Inc. v. Scheider, 360 N.E. 2d 930, 931 (N.Y. 1976); Lee v. Joseph E. Seagram Sons, Inc., 413 F. Supp. 693, 698 (S.D.N.Y. 1976), the absence here of a clear quantity term and the failure to agree on several other important terms ( i.e., the specific number of shares, the exercise period of the option, the definition of "break even," etc.) indicates the absence of even a core agreement for which plaintiffs have asked this court to supply additional terms. This court therefore concludes that plaintiffs Hubert and Bomar have not here sustained their burden of proving that the Investors offered and the plaintiffs accepted a contract of employment containing an enforceable right to stock options in the future.
III. Bonus Claims
A review of the evidentiary record similarly indicates that plaintiffs were not in fact offered a bonus based on either gross revenues or gross profits and that such a bonus did not comprise part of any oral employment agreement reached between the parties at the Valley Stream meeting.
The trial testimony fails to establish whether the investors promised the management team a bonus based on either gross revenues or profits. Niehenke and Hubert testified that the performance bonus consisted of a right to 1-2% of gross revenues, with van den Bergh agreeing generally that they were promised 1-2% of some revenue or profit figure. In contrast, Hayes maintains that neither he nor Niehenke offered a performance bonus based on a percentage of gross revenues or profits, and Drake testified that the performance bonus represented a conceptual item not part of the firm offer to the management team. Perhaps most significantly, however, counterclaim defendant Bomar testified that she did not recall being promised a bonus based on either gross revenues or gross profits and that a performance bonus was not part of the employment offer.
Although several communications from Ms. Bomar refer to the 1-2% gross revenues bonus, she testified to have signed those letters based on assurances by Mr. Hubert and Mr. Drake that they were discussed.
The documentary record further indicates that the investors did not promise a performance bonus based on gross revenues or profits. As contrasted with the claimed option rights, mention of a gross revenue bonus appears in some of the earlier documents — the notes of the Valley Stream meeting and the September 16 employment letter — as well as in the two March 17 letters. However, Mr. Drake, the author of the employment letter and a participant in drafting the notes, has testified that the gross revenues bonus was not offered at the Valley Stream meeting and represented an item subject to negotiation.
Additionally, the recaps prepared by the management team fail to show a consistent understanding of a performance bonus right. None of the recaps mention a right to a bonus of 1-2% of gross revenues or profits. Drake's recap comes the closest to these figures, mentioning that Niehenke had promised them bonus compensation of 1/2 of 1% of gross revenues. Hubert's recap, in contrast, notes that 20% of net profit was to be distributed equally among the team members on an annual basis. Van den Bergh's recap makes some broad reference to "an opportunity to increase shareholdings through performance," which he testified referred to a percentage based bonus. As consistent with her trial testimony, Bomar's recap did not mention an incentive bonus or a right to a percentage of gross revenues or profits.
The size of a bonus based upon either 1-2% of gross revenues or profits relative to company margins is also hard to square with a binding agreement, given the slight margins in this business.
Right O Way's total net profit for the year 1994 was only $263,000, amounting to .4% of gross revenues and approximately 1.4% of gross profits. The testimony is that such slight margins are usual in the freight forwarding business.
Thus, based on a review of the relevant evidence, this court finds that company has proven by a preponderance of the evidence that the oral employment agreement with the managers did not include a bonus based on either gross revenues or profits. With respect to Right O Way's claim against Mr. Hubert for breach of fiduciary duty: Because neither Mr. Bautista nor any other individuals actually carried the alleged instruction of Mr. Hubert, Right O Way has not established as an initial matter that a breach of fiduciary duties occurred. See Chrysogelos v. London, Del. Ch., C.A. No. 11910, Jacobs, V.C. (Mar. 25, 1992) (in the context of a motion to dismiss, finding breach of fiduciary duty claim facially inadequate where complaint failed to allege that certain transactions claimed to have breached fiduciary duties were actually executed). If there is neither harm to the corporation nor benefit to the fiduciary there is no basis for retrospective judicial relief.
Requiring plaintiff to show that Hubert's orders were executed and the resistors actually cut does not place upon plaintiff the burden of proving injury as prohibited under Cede Co. v. Technicolor, Inc., Del. Supr., 634 A.2d 345 (1993) (finding plaintiff need not prove injury or amount of injury to sustain a breach of fiduciary duty claim sufficient to rebut business judgment protection). In this case proving injury would involve the separate inquiry of whether the executed act of cutting resistors caused harm to Right O Way.
IV. Request For Attorney's Fees
In bringing this action for a custodian under Section 226, Mr. Niehenke has conferred a corporate benefit. The parties have not briefed very extensively the question whether that benefit should support an award of reasonable attorneys' fees. In all events, the general principles governing the question are well understood. See Tandycrafts, Inc. v. Initio Partners, Inc., Del. Supr., 562 A.2d 1162, 1165 (1989). Those general principles suggest that the reasonable expense of the benefit now produced — the stalemate-breaking custodian — are to be borne by the corporation, including Mr. Niehenke's reasonable attorneys fees.
Defendants have argued that plaintiff should not receive costs and fees because of his role in precipitating the deadlock. Defendants contend that Hayes' distrust of Niehenke, and consequently the deadlock, stem from an alleged illicit scheme by Niehenke to defraud the corporation by delaying receivables and holding such funds in his South American companies. The record, however, does not provide sufficient evidence for this court to make such a determination of relative culpability in causing the deadlock, and this court will not therefore deny reimbursement where Niehenke has otherwise provided a benefit to the corporation. Furthermore, defendants should recognize their own role, as counterclaim plaintiffs, in contributing to the length and complexity of this section 226 action by seeking declaratory relief premised upon the validity of the Hayes Option, a premise which the counterclaim plaintiffs have failed to sustain.
The request by all other parties in the these two cases for costs and fees are denied. The parties will confer on an appropriate form of order, including the nomination of a custodian and terms of his or her appointment.