Dover, Delaware. Friday, February 2, 2002. 10:00 A.M.
There are numerous reasons why corporations elect to incorporate in the state of Delaware. Perhaps the most compelling is that the state assesses no income tax on Delaware corporations’ income which is derived from sources outside its territorial limits. This alone is why both Enerco LLC and Iacardi & Sons Inc. had decided to incorporate in Delaware. It followed that the case of Iacardi Shareholders, The Plaintiffs, versus Kerri King, The Defendant, was to be heard in the Delaware Chancery Court. An L-shaped, red bricked, two and a half story building on The Green in Dover, Delaware, it is a non jury court, specializing in matters of equity.
The judge assigned to the case was vice-chancellor, William H. McCarthy, forty-eight years of of age and a specialist in corporate law. He graduated summa cum laude from Harvard Law School, cut his teeth by representing companies in their corporate wars, then was honored with an appointment to the bench at Delaware Chancery Court. He was giant of a man with heavy black eyebrows, thinning grey hair, and a scowl capable of terrifying the most aggressive lawyers in the game. In writing and by telephone he had invited the opposing litigants in the case to join him in his office. He was deeply troubled by the case and wanted to discuss his discomfort with the opponents.
First to arrive was Marsha Cooper. She was no stranger to McCarthy. They had shared numerous courtrooms over the past decade, and shared a mutual respect. He stood and hurried to receive her at his office door. “Thanks for coming, Marsha,” he said with a warm smile. “I appreciate it. Please come in and take a seat. I expect your colleague will be here shortly.”
The two sat on comfortable red leather upholstered chairs facing one another and proceeded to recapture highlights of their past experiences, scrupulously avoiding any mention of the case at hand. Their conversation was interrupted by Sydney Mortimer, the opposing attorney. Kerri had acquired a profound hatred for Mortimer, a man who had subjected her to the indignities of discovery, a necessary evil in the legal process. To her, he represented everything that was wrong about the legal system in the United States. Rather than using the law to benefit society, he used and twisted it unscrupulously to benefit himself and his clients. A thin sinewy man with zero body fat, a hawkish nose, too many teeth, and dark beady eyes, he looked more like a mobster than a lawyer. His brown pin striped suit and matching suspenders reinforced the impression. Worrisome for both Kerri and Marsha, was his reputation. In his twenty-two years as a class action litigator, he had achieved national acclaim for his successes, and had managed to compile an obscene fortune for himself in the process.
McCarthy excused himself, stood and hurried to extend the same courtesy to Mortimer as he had to Marsha. “Welcome, Sydney. Thank you for coming,” he said, once again extending his hand and a warm smile. He offered him a chair, no larger or smaller than the one occupied by Marsha. He glanced at his watch, then his guests. “I’ve ordered coffee. It should be here shortly,” he said, then rounded his desk, a beautifully hand carved mahogany behemoth, then sat in what looked more like a throne than a chair.
He stared at Marsha, then at Mortimer. “I took the liberty of inviting the two of you here at this time because I thought it would serve a useful purpose. I’ve studied the...” He was interrupted by his secretary, a twenty-something blonde wearing wire-rimmed glasses and an ankle-length, loose-fitting pale blue dress. She looked more like a law student than a secretary. She placed a silver serving set on McCarthy’s desk, then exited without a word.
All three helped themselves to coffee, then McCarthy continued, “I’ve studied the transcripts of the discoveries and listened very carefully to your arguments. I commend both of you for a job well done.”
“Why thank you, William. It’s not like you to pass out compliments,” Mortimer said with an experienced smirk.
McCarthy glared at Mortimer, silently admonishing him for his comment. “I asked the two of you to be here today because I’m deeply troubled by this case. I believe I have a clear understanding of it. If I’m correct in assuming that there are no further arguments, it is my opinion that continuing this case will only serve to enrich the two of you at the needless expense of your respective clients.” He paused to scowl at his guests. “Am I correct? Are there no further arguments?”
Both lawyers looked anxiously at each other, then nodded to McCarthy.
“So be it. Then listen very carefully to what I have to say...Inasmuch as Iacardi & Sons Inc. has a Shareholders‘ Agreement requiring a one hundred percent acceptance of an offer to purchase the company in order to validate such offer, this is a very unique case. I find that while this particular clause in the Shareholders‘ Agreement may have served the initial interests of the Iacardi family, it no longer serves any useful purpose. In light of the expanded distribution of Iacardi common stock, the clause has impaired the effectiveness of the Agreement. Specifically, by conferring disproportionate power in the hands of a minority shareholder, the clause fails to serve the interests of any of the shareholders, save and except for that particular minority shareholder.
It is not within my purview to speculate, but if it was, I would assume the Iacardi brothers overlooked this particular clause when they undertook to offer shares to the company’s employees. In fact, they may not have considered the Shareholders‘ Agreement at all when they took that decision. I say this because I see no amendments in the company’s records. Unfortunately, we can’t ask the brothers because they are no longer with us. As a consequence, I have no alternative but to deal with the Agreement as it is written.
While I find that the Defendant has broken no laws in refusing to sign the Enerco Offer to Purchase the common stock of Iacardi & Sons, and I will add that I laud her alleged motives for so doing, her action has resulted in substantial paper losses to the remaining shareholders. Applying an arithmetic calculation to the proposed purchase, by deducting an independent valuation of Iacardi common stock from the current value of Enerco common stock offered, I find that the difference exceeds one billion dollars.
Accordingly, it is my opinion that, in the absence of any further information, and assuming no change in the relative value of the common stock of the two companies, this court would find for the Plaintiff. The award would be in the realm of my calculation, plus costs, which are yet to be determined. I arranged this meeting to give both of you this food for thought, and to urge you, in the strongest possible language, to stay this action and to submit it to arbitration. As a more viable alternative, I urge the Defendant to reconsider her position and to sign the Enerco Offer to Purchase. In so doing, the defendant would avoid what would surely be a catastrophic personal financial loss, substantially appease the Plaintiff, and give Enerco what it wanted in the first place. In other words, all parties would win. That result is in sharp contrast to most cases in which there is a winner and a loser.”
McCarthy paused again for effect. He stared at each of his guests. “It is for this reason that I make my appeal.”
While McCarthy’s discourse was not entirely unexpected, it still managed to hit Marsha like a thermonuclear bomb. It was clear to her that if events unfolded as McCarthy had speculated, her client would face debts that would surely bankrupt her. In addition, her tax liability to the I.R.S. had the potential to cripple her financially. Ironically, these negative consequences would not be the result of her selfish behavior, but because she had acted solely in the interests of other people, less fortunate individuals. Marsha had to think fast. She faced McCarthy. “My client has been very successful in her career, and has done well, financially. She is not, however, in a position to fund the award you’ve proposed. She would, in fact, have no alternative but to declare bankruptcy, in which case everyone would lose. My client would be impoverished, Enerco’s offer would be nullified, and Mister Mortimer’s clients would be denied the billion dollar award they have anticipated.”
Undeterred, McCarthy responded, “It would be inappropriate for me to compel your client to sign the Enerco Offer. I have merely offered that course of action as one of her choices.”
Marsha turned to face Mortimer. “I’m prepared to discuss this with my client. Where do you stand on this?”
Mortimer gave her a victorious smirk. “Real simple, Marsha. Get your client to sign the Offer and we go away. I say that with only one proviso: that Enerco is prepared to revive its offer. The deadline in the original has expired.”
McCarthy smiled. “Very good. I’ll wait to hear from both of you and won’t schedule another hearing until I do.”