The opinion of the court was delivered by: GOETTEL
This is a class action brought by plaintiff John R. Burton on behalf of himself and all other similarly situated holders of $7 Cumulative Second Preferred Stock of the European Gas & Electric Company ("Eurogasco") against Eurogasco, the Exxon Corporation ("Exxon"), R. F. Dilworth, D. G. Gill, and W. W. Stewart. The plaintiff alleges that the defendants breached their fiduciary duties to the Second Preferred stockholders, and seeks various forms of equitable relief. Briefly stated, the plaintiff argues that the defendants engaged in a course of conduct which depleted the assets of Eurogasco to the detriment of the plaintiff class. From 1977 through 1980, Eurogasco received over $9 million in compensation for the nationalization of its properties in Hungary. Eurogasco's Board of Directors used this money to pay dividend arrearages on the First Preferred Stock owned by Exxon and the excess money was deposited with Exxon. The plaintiff argues that instead of engaging in self-dealing the defendants could have invested the entire fund so as to enable Eurogasco to make payments to the plaintiff class. The plaintiff seeks an order requiring Exxon to return to Eurogasco the sum of $8,641,147, which represents the dividends paid to Exxon plus the profit Exxon has made on the dividends. In addition, the plaintiff seeks an order enjoining the defendants from dissolving Eurogasco without complying with Eurogasco's Certificate of Incorporation and Delaware law. This matter having come on for trial, this opinion will constitute the Court's findings of facts and conclusions of law under Fed. R. Civ. P. 52(a).
Eurogasco is a corporation duly organized and existing under the laws of the State of Delaware, with its principal place of business at 1251 Avenue of the Americas, New York, New York. Eurogasco has issued an outstanding 22,100 shares of $7 Cumulative First Preferred Stock, Series A (the "First Preferred"), 7,336 shares of $7 Cumulative Second Preferred Stock, Series A (the "Second Preferred") and 2,098,600 shares of common stock (the "Common Stock").
The majority stockholder in Eurogasco is Exxon. Exxon is a corporation duly organized and existing under the laws of the State of New Jersey, with its principal place of business at 1251 Avenue of the Americas, New York, New York. It owns 22,100 shares (100%) of the First Preferred, 1,945 shares (26.5%) of the Second Preferred, and 1,908,190 shares (90.9%) of the Common Stock of Eurogasco.
In addition to Exxon, Eurogasco has approximately 150 public stockholders. Of those public stockholders, approximately 120 are holders of the Second Preferred. John R. Burton ("Burton") owns and, at all times pertinent to this action, has owned 10 shares of the Second Preferred. Burton is a citizen of the State of Ohio.
At all times pertinent to this action, R. F. Dilworth ("Dilworth"), D. G. Gill ("Gill"), and W. W. Stewart ("Stewart") constituted the entire Board of Directors of Eurogasco.Dilworth and Gill were directors of Eurogasco during the period 1977-1981. Stewart served as a director from December 29, 1977, when he replaced P. W. Moyer as director, through 1981.
II. Background of Eurogasco
Eurogasco was organized in Delaware in 1931. It was in the business of exploring for, producing, transporting, and selling oil and natural gas in Hungary, Austria and Czechoslovakia. These activities ceased, however, in the late 1930's and the 1940's as a result of World War II and subsequent nationalization.
Prior to World War II, Eurogasco transferred substantially all of its assets to two wholly-owned subsidiaries, an Austrian company named Gewerkschaft Austrogasco and a Hungarian company named Magyar Amerikai Olujipari Resvenytarsasag ("MOART"). These subsidiaries held certain oil and natural gas concessions and other property rights in Austria and Hungary, respectively, During World War II, Eurogasco's Austrian subsidiary lost all its assets. In 1941, the Hungarian Government assumed control of MOART. Eurogasco never regained control of MOART during the war or during the subsequent Russian military occupation. In September 1948, all of MOART's assets were nationalized by the Hungarian Government. Since 1948, Eurogasco's principal activity has been to pursue claims for compensation for the lost assets of its two subsidiaries. Although its Certificate of Incorporation does not limit its business purpose or activities to the business in which it was engaged prior to World War II, with all of its assets destroyed or seized, Eurogasco terminated all business activities. Thus, for the last thirty-five years, Eurogasco's only activity, and its sole reason for continued corporate existence, has been to prosecute war damage and nationalization claims for its lost assets.
In the 1950's, the Austrian Government and Eurogasco entered into negotiations on Eurogasco's claims regarding its former Austrian assets. During 1961-1964, Eurogasco recovered $979,702 from the Austrian Government in connection with mining rights, royalty claims, and its interest in an oil field.
In 1956, Eurogasco filed a claim for more than $60,000,000 with the Foreign Claims Settlement Commission (the "Commission"), regarding war damage and nationalization of its former assets in Hungary. The Commission awarded Eurogasco $28,002,035. Initially only a small portion of this award was satisfied since the principal source of funds was a limited amount of Hungarian assets in the United States. Eurogasco received $987,201 during the period 1959-1967. On March 6, 1973, the United States and Hungary entered into the United States-Hungarian Claims Agreement (the "Claims Agreement"), pursuant to which Hungary agreed to pay compensation with respect to Eurogasco's claim.Commencing in September 1977, the Government of Hungary made a series of payments to the United States Treasury under the Claims Agreement, and the United States Treasury, in turn, made a series of payments to Eurogasco. Although Eurogasco's claims were extinguished by the Claims Agreement, Eurogasco subsequently received payments amounting to approximately one-third of its outstanding award against the Hungarian Government. It received the sum of $9,060,128 during the period of 1977-1980. On forwarding the 1980 payment to Eurogasco, the United States Treasury advised Eurogasco that this constituted its final payment under the Claims Agreement, and that Eurogasco should not expect to receive any additional payments with respect to the nationalized Hungarian assets.
Eurogasco used the payments referred to above to repay its indebtedness to Exxon, and to pay dividends.
III. Exxon's Interest in Eurogasco
Exxon had no role in Eurogasco's formation. When Eurogasco was formed, its promoters took Second Preferred stock. The First Preferred stock was reserved for later issuance and was designed to serve as an inducement to an outside investor who could supply the capital needed to fund Eurogasco's operations. Exxon was approached to fulfill this role. Commencing in 1933, Exxon made a series of loans and capital contributions to Eurogasco.
During the period of 1933-1934, Exxon received 22,100 shares of Eurogasco's First Preferred
and 578,500 shares of Eurogasco's Common Stock in return for conversion of certain loans and capital contributions, amounting to $2,210,000, that Exxon had made to Eurogasco. In 1938, Eurogasco issued 1,310,240 shares of Common Stock to Exxon in exchange for Exxon's agreement to lend Eurogasco the funds it required to carry on its operations from August 1, 1937 to December 31, 1938.
In 1938, Exxon purchased 1,945 shares of the Second Preferred and 19,450 shares of the Common Stock from other stockholders.
In addition to the above infusions of capital, Exxon also made loans to Eurogasco. The amount of the loans gradually increased until, in 1960, they reached a total of $2,016,924. These are loans that Eurogasco probably could not have obtained from any other source. For more than two decades Eurogasco made no repayments to Exxon. However, with the inflow of cash from its war damage and nationalization claims, Eurogasco was able to repay Exxon. Thus, commencing in 1961, Eurogasco gradually reduced its indebtedness to Exxon and by 1977 paid off such indebtedness. Exxon did not charge Eurogasco any interest on these loans during the period of 1949-1976, which would have amounted to $2.3 million.
The Fourth Article of Eurogasco's Certificate of Incorporation provides that when accrued dividend arrearages on the First Preferred and the Second Preferred remain unpaid, the exclusive right to vote for Eurogasco's directors (and, except as otherwise provided in the Certificate of Incorporation or applicable statute, on all other corporate questions) is vested in the holders of the First Preferred and the Second Preferred, voting as one class. Thus, for more than forty years, because Eurogasco has consistently failed to pay dividends on its preferred shares and Exxon has owned more than 80% of those shares, Exxon has controlled Eurogasco.
Exxon first gained representation on the Eurogasco Board of Directors when two Exxon representatives were elected in 1935. By 1937, seven of the twelve Eurogasco directors, as well as all Eurogasco officers, were employees of Exxon or its affiliates. As the original Eurogasco founders or their representatives who were on the Eurogasco Board of Directors resigned or died, the Eurogasco Board was gradually reduced in size until 1975, when it was set at three members. Since 1977, all Eurogasco directors have been employees of Exxon or its affiliates. All of Eurogasco's current officers and directors are employees of Exxon.
During the pertinent period 1977-1980, defendants Dilworth, Gill, and Stewart were the directors of Eurogasco, while also employees of Exxon.
Dilworth was a director and the Vice President of Eurogasco from 1972 through 1982
and, at the same time, a Senior Financial Advisor in the Controller's Department of Exxon. He had been employed by Exxon or its affiliates for more than 33 years. Gill has served as a director and the President of Eurogasco since 1973. He holds the position of Senior Counsel at Exxon and is the only attorney to have served on Eurogasco's Board of Directors since 1973. He has been employed by Exxon or its affiliates for more than 23 years. Stewart has served as a director of Eurogasco since December 29, 1977
and is an Assistant Treasurer of Exxon. He has been employed by Exxon or its affiliates for more than 30 years.
Since 1936, Eurogasco has not maintained offices or hired administrative personnel separate from those maintained or retained, respectively, by Exxon.
Thus it is obvious that at all times relevant to this action, Exxon, through its stock ownership, has elected and controlled Eurogasco's Board of Directors, and has made all management decisions regarding Eurogasco, its operations, the conduct of its business and the handling of its assets. The plaintiff class has had no voice in the decisions made by Eurogasco's Board.
IV. Actions by the Board of Directors
During the period 1977-1980, the Board of Directors took several actions that, the plaintiff claims, constituted a breach of the defendants' fiduciary duties.
Eurogasco's stockholders have the following rights to dividend payments pursuant to the Certificate of Incorporation and the Certificate of Designation.
The First Preferred has preference over all other classes of stock respecting the payment of dividends. Article Fourth of the Certificate of Incorporation provides that the dividends on the First Preferred "shall be cumulative, so that all unpaid deficiencies (if any) in dividends accrued on the cumulative First Preferred stock (but without interest) . . . shall . . . be declared and paid, or declared and funds for the payment thereof set apart, before any dividend . . . shall be declared or set apart for or paid on any other class of stock." The Certificate of Designation provides that the dividend rate for the First Preferred shall be seven dollars per share per annum, payable quarterly.
Pursuant to Article Fourth of the Certificate of Incorporation, holders of the Second Preferred are entitled to cumulative dividends of $7 per share per annum, payable quarterly, after the First Preferred and in preference to dividends on the Common Stock. The provisions that grant the Second Preferred a subordinated status to the First Preferred with respect to dividends are printed on the back of the stock certificates.
Pursuant to Article Fourth of the Certificate of Incorporation, dividends may not be paid to holders of the Common Stock until all accrued dividends, including those for the current quarter, are paid to holders of the First Preferred and Second Preferred.
From the date of its creation in 1931, through 1976, Eurogasco had never paid any dividends, and consequently substantial dividend arrearages had accumulated on the First Preferred and Second Preferred. As of September 1, 1977, the dividend arrearages amounted to ...