Burton v. Exxon Corp.
583 F. Supp. 405 (1984)
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Rule of Law:
When a majority stockholder dominates a subsidiary and engages in self-dealing transactions, the intrinsic fairness test applies, requiring the dominant party to prove the entire fairness of the transaction to the minority stockholders, even if the actions comply with the corporate charter.
Facts:
- European Gas & Electric Company (Eurogasco), formed in 1931, had its core oil and gas assets in Hungary, Austria, and Czechoslovakia nationalized in the late 1930s and 1940s, leaving it without active business operations.
- Since 1948, Eurogasco's sole activity and reason for existence has been to pursue war damage and nationalization claims for its lost assets.
- Exxon Corporation acquired 100% of Eurogasco's First Preferred Stock, 26.5% of its Second Preferred Stock, and 90.9% of its Common Stock between 1933 and 1938 through capital infusions and purchases.
- By 1977 and throughout the pertinent period, Exxon, through its stock ownership, elected and controlled Eurogasco's entire Board of Directors, which consisted solely of Exxon employees (R.F. Dilworth, D.G. Gill, and W.W. Stewart).
- Eurogasco had never paid any dividends from its creation in 1931 through 1976, resulting in substantial dividend arrearages on both First and Second Preferred Stock.
- From 1977 to 1980, Eurogasco received $9,060,128 from the U.S. Treasury for nationalized Hungarian assets, plus additional interest income.
- During 1977-1980, Eurogasco's Board declared and paid dividends totaling $4,139,800 exclusively to Exxon as the First Preferred stockholder, which had contractual priority under Eurogasco's Certificate of Incorporation.
- Eurogasco also deposited its remaining cash with Exxon in an intercompany account during 1977-1980, receiving interest calculated by reference to yields on short-term marketable securities.
Procedural Posture:
- Plaintiff John R. Burton filed a class action lawsuit on August 13, 1981, in federal district court (United States District Court for the Southern District of New York) on behalf of Second Preferred stockholders, against Eurogasco, Exxon, and its directors, alleging breach of fiduciary duties and seeking various forms of equitable relief, including an injunction against dissolution and a return of funds to Eurogasco.
- On October 7, 1981, Exxon filed a separate petition seeking the dissolution of Eurogasco in the Delaware Court of Chancery.
- The federal district court conducted a trial on the plaintiff's claims.
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Issue:
Does a majority stockholder, acting through a dominated board, breach its fiduciary duty to minority preferred stockholders when it causes the subsidiary to pay dividends exclusively to the majority stockholder's preferred shares, or to deposit excess funds with the majority stockholder, if such actions comply with the corporate charter and provide competitive returns?
Opinions:
Majority - Goettel, District Judge
No, the defendants did not breach their fiduciary duties to the Second Preferred stockholders. The court found that Exxon, as the majority stockholder controlling Eurogasco’s board, owed a fiduciary duty to minority stockholders. The dividend payments to Exxon, to the exclusion of Second Preferred stockholders, constituted self-dealing, thereby triggering the intrinsic fairness test, which shifted the burden to the defendants to prove the entire fairness of the transactions. The court determined the dividend payments were intrinsically fair, considering several factors: the substantial uncertainty of future payments from the Hungarian Claims Agreement, the absolute contractual priority of the First Preferred dividends (which had significant arrearages), Eurogasco's lack of active business operations, and the projected decades-long wait for Second Preferred dividends if funds were retained. Furthermore, the board had a fiduciary duty to address preferred dividend arrearages, and delaying payment to Exxon might have constituted an oppressive abuse of discretion. Similarly, the deposit of Eurogasco's cash with Exxon was found to be intrinsically fair because the interest rates paid were competitive with available short-term investments of comparable safety and liquidity. Consequently, the plaintiff's request for an injunction against dissolution was deemed moot as no underlying breach of fiduciary duty was established.
Analysis:
This case clarifies the application of Delaware's intrinsic fairness test in situations where a controlling stockholder engages in self-dealing with a subsidiary, particularly regarding dividend declarations and intercompany financial arrangements. It emphasizes that self-dealing can trigger this heightened standard even if the minority stockholders are not contractually 'entitled' to the immediate benefit, provided they are excluded to their detriment. The decision illustrates that fulfilling contractual obligations to a senior class of preferred stock, even if it exhausts available funds and leaves no payout for junior preferred classes, can be deemed intrinsically fair when supported by sound business judgment, the company's financial state, and the terms of its corporate charter. The case provides important guidance on balancing the duties owed to different classes of shareholders within a dominated corporate structure.
