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J.A08008/00
MICHAEL A. WAREHIME, : IN THE SUPERIOR COURT OF
Appellant : PENNSYLVANIA
:
v. :
:
ARTHUR SCHAIER, CYRIL T. NOEL, :
CLAYTON J. ROHRBACH, JR., :
JOHN A. WAREHIME and HANOVER :
FOODS CORPORATION, :
Appellee : No. 1415 MDA 1999
Appeal from the Order entered September 7, 1999,
in the Court of Common Pleas of York County,
Civil No. 99-SU-03860-07
BEFORE: EAKIN, JOYCE and TAMILIA, JJ.
MEMORANDUM: Filed Sep 12 2000
Michael A. Warehime appeals from the order denying his request for
judicial supervision of actions of the Hanover Foods Corporation (HFC) and
certain of its shareholders. This Court is again asked to rule on disputes among
the Warehime family regarding control of HFC, and unfortunately, it is likely to
be the last time. The pertinent facts founds by the trial court are lengthy but
necessary to our disposition.
Alan Warehime, chairman and CEO of HFC from 1956 to 1989, is the father
of John Warehime, Michael Warehime and Sally Warehime Yelland. In 1988, the
family established two voting trusts with ten year terms, which together
controlled the Class B voting stock of HFC. One trust controlled 199,496 shares
of the Class B voting stock; 115,994 of these shares were beneficially owned by
Alan Warehime, and the remainder were owned by the three children. A second
trust controlled 15,025 shares of the Class B voting stock; each of Alan
Warehime's five grandchildren beneficially owns 3,005 shares. There are 218,086
shares of voting stock outside
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the voting trust. Alan Warehime was the sole voting trustee of each voting
trust.
On May 26, 1989, Alan Warehime appointed John Warehime chairman and CEO
of HFC. Upon his father's death in March, 1990, John Warehime become the sole
voting trustee of each trust.
In 1996, mindful of the pending expiration of the trusts, several of
HFC's directors formed an Independent Directors Committee to consider strategic
options for the corporation; the trial court found John Warehime had no role in
the decision to form this committee. The trial court also noted the Board of
Directors, elected solely by John Warehime, indicated it would support John
Warehime as chairman as long as he performed well.
The Committee commissioned outside consultants to review and evaluate
all aspects of the company. Although acknowledging HFC was well-managed, the
review nevertheless concluded the company would need approximately $30 million
in new capital to sustain its strategy of being a low-cost food producer.
Raising this capital would likely prove difficult because of the uncertainty
from the pending expiration of the voting trusts, and appellant's threat to
remove present management when that occurred. The Committee believed such
uncertainty posed a threat to the HFC's long-term interests, and recommended
that if HFC was unable to achieve a stable governance structure by June 30,
1997, the Board should consider selling the company to maximize shareholders'
values.
The Committee considered three strategic options for the company's
future: (1) do nothing and allow the voting trusts to expire; (2) sell the
company or a control position in the company; or (3) adopt an amendment and
restatement of HFC's Articles of Incorporation to provide a stable governance
structure. The Committee chose the third alternative.
On February 13, 1997, HFC's shareholders were notified of a special
meeting to be held
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February 24, 1997. The purpose of the meeting was to amend HFC's Articles of
Incorporation to permit 10,000 shares of Series C Convertible Preferred Stock to
be issued; the majority of the trustees of that plan were to be "disinterested
directors" as defined in Section 1715 of the Pennsylvania Business Corporation
Law (BCL). The amendments also provided a mechanism for resolving disputes among
the Warehimes(1)over the management of HFC. As described by the trial court:
In the event of a dispute among members of the Warehime family with
respect to the election of directors or other related matters during
the five years after the issuance of the stock, the Series C would be
entitled to 35 votes per share. If there is no such dispute, the Series
C shares are non-voting. The Series C Stock is convertible into Class A
common stock.
Trial Court Opinion, 6/24/97, at (Paragraph) 51.
The Series C shares thus control 350,000 votes. The Series C shares
must be voted by "disinterested directors" with no relationship to John
Warehime, who may not vote Series C shares. These directors must vote as
fiduciaries of the 401(k) plan. These shares can be outvoted by approximately
80% of the Class B stock and a majority of the Class A stock. The Committee's
consultants believed the amendments would provide stability for the company and
would ease its plan to raise capital. They advised the Board of Directors that
adoption of the amendments would be consistent with their fiduciary duties under
the BCL.
HFC shareholders were given formal notice of the proposed amendments.
In response, Michael Warehime and several other shareholders immediately sought
to enjoin John Warehime from voting the trust shares in favor of the proposal.
They asserted the amendments were
(1) In the trial court's findings reflect substantial animosity within the
family, and in particular between Michael and John. The court found appellant's
attempts to disrupt meetings of the Board warranted elimination of cumulative
voting. At a 1994 meeting of Class B shareholders, a proposal to eliminate
cumulative voting in election of HFC directors was carried by the votes from the
voting trusts. Appellant asserts this resulted in John Warehime's ability,
through the voting trust, to elect all the members of the Board, effectively
shutting out the minority shareholders.
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designed to extend John Warehime's control of the company to the detriment of
the voting trust beneficiaries and other shareholders.
After a hearing, the trial court denied the request for a preliminary
injunction. In an opinion incorporating extensive findings of fact and
conclusions of law, the trial court concluded John Warehime owed a fiduciary
duty to the beneficial owners of the shares in the voting trusts, which duty he
had not breached. The court also concluded HFC's Board of Directors acted in
good faith and in the best interests of the company in adopting the amendments.
The amendments were found to benefit HFC shareholders by providing a stable
governance structure, which permitted the company to carry out its five-year
business plan; the amendments did not advance the personal interests of John
Warehime, nor did they reflect a conflict between his personal interests and the
interests of the shareholders and beneficiaries of the voting trust. The court
concluded that due to the circumstances under which the directors were elected
to the Board by John Warehime, they were not disinterested within the meaning of
Section 1715(e) of the BLC. Finally, the trial court concluded appellant failed
to sustain his burden of proof under Sections 1105 and 1715 of the BCL, and
failed to show he was entitled to injunctive relief.
The next day, John Warehime convened a meeting and voted all the voting
trust shares in favor of the proposed amendments. John Warehime was the only
shareholder at the meeting and the only shareholder to vote for the amendments.
Two (consolidated) appeals followed. WAREHIME V. WAREHIME, 722 A.2d
1060, 1071 (Pa. Super. 1998) (WAREHIME I). A panel of this Court found the
proposed amendments radically diminished the rights attached to each share of
Class B stock, and opined such a "radical structural transformation" of the
voting rights of Class B shareholders should only occur with approval of a
majority of the voting shares. Id., at 1068. In other words, John Warehime as
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voting trustee may not speak for the actual or beneficial owners of the Class B
shares on an issue that drastically diminishes their voting rights. Applying a
duty of undivided loyalty (as opposed to good faith),(2) we held John Warehime
exceeded his authority as voting trustee and breached his duty to the trust
beneficiaries; it was irrelevant whether he acted with the good faith belief
that the proposed amendments were in the best interest of HFC. Id., at 1071. The
panel reasoned:
The adoption of the proposed amendments directly benefited [John Warehime] by
perpetuating his control, or substantially increasing the likelihood of his
continued control, of the company well beyond the expiration of the voting
trust. Moreover, his action worked to the detriment of the trust beneficiaries
as it effectively diminished their voting power and virtually assured that they
would be without any meaningful input with regard to the management of the
corporation. We, therefore, conclude that John Warehime acted beyond the limit
of his authority as voting trustee and breached his duty of loyalty to the trust
beneficiaries. It follows that the court erred in refusing to grant an
injunction against John Warehime voting in favor of the amendments to create a
new class of dispute resolution stock.
Id. (emphasis added). The case was remanded to the trial court "for further
proceedings consistent with this Opinion." Id. Both John and Michael Warehime
filed cross-petitions for allowance of appeal, which the Supreme Court granted.
We now turn to the instant action. On August 17, 1999, appellant filed
a complaint in equity seeking judicial supervision of the HFC actions pursuant
to 15 Pa.C.S. Sections 1791-1793.(3) More specifically, appellant averred
HFC intended to hold an election on September 16, 1999 under the amended
Articles of Incorporation, in "willful defiance" of this Court's December 2,
1998 rule in WAREHIME I. Appellant sought to enjoin appellees from voting the
Class C shares of stock, created as a result of John Warehime's breach of
fiduciary duty, for John Warehime's candidates for Board of Directors. Appellant
sought an order that the September, 1999 election be conducted according to the
Articles of Incorporation as they existed prior to June 25,1997.
(2) Judge Popovich dissented, and concluded the applicable fiduciary standard
was that of good faith (as opposed to a duty of undivided loyalty) as expressly
defined in the Warehime Voting Trust Agreements.
(3) Appellant named as defendants HFC, John Warehime, and three members of the
Board of Directors. These three Board members also are co-trustees of the
newly-created Class C stock issued to HFC's 401(k) plan.
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He also sought an order that HFC accept nominations of the candidates that the
Class B shareholders originally proposed and list those nominees on the ballot
at the Annual Shareholders Meeting scheduled for September 16, 1999, and an
order that the Class C shares created June 25, 1997 cannot be voted, as well as
attorneys fees, costs and "other relief as equity and justice require."
On September 7, 1999, the trial court entered an order denying
appellant's request that it enjoin the pending vote, reasoning "it does not
require the extreme emergency relief sought." Trial Court Order, 9/7/99, at 2.
The trial court also stated:
They can appeal this decision immediately to the Superior Court. It is
our belief that the complaint inequity can proceed and that perhaps
Judge Dorney can fashion an order that is consistent with the Order of
the Superior Court.
Id.(4)The trial court denied appellant's application for a stay pending appeal;
we are now asked to determine whether, in light of this Court's December 2, 1998
Opinion and Order in WAREHIME I, appellees had the right to vote the Class C
shares at the September 16, 1999 Annual Meeting.
Although appellant's complaint in equity sought judicial supervision
pursuant to Sections 179101793 of the BCL, it also sought to enjoin the pending
election alleged to be "in willful defiance of the Superior Court's ruling."
Complaint, (Paragraph) 50. On appeal from a trial court's denial of injunctive
relief, we apply the same standard of review we applied in WAREHIME I. We
determine whether there are any apparently reasonable grounds for the trial
court's ruling; we will affirm that decision unless the record shows palpable
error, misapplication of law or a manifest abuse of discretion. WAREHIME I,
at 1063.
Appellant failed to expressly request an order setting aside or
invalidating the Charter Amendments. The trial court ruled only on appellant's
request for emergency relief; that is, it
(4)This order was entered by Judge S. Kennedy. WAREHIME I was decided by Judge
Sheryl A. Dorney.
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refused to enjoin the September 16, 1999 election. Accordingly, the propriety of
that order is all that is before use.
By Order dated September 15, 1999, this Court denied appellant's motion
for a stay and for expedited relief "without prejudice to any relief to which
petitioners may be entitled, should respondents act in derogation of the prior
decision of this Court." Order, 9/15/99 (emphasis added). That prior decision
plainly held John Warehime should not have been permitted to vote in favor of
the amendments since such vote violates his duty of loyalty to the trust
beneficiaries.(5) Our analysis leads to the inescapable conclusion that the
scheme creating the Class C shares was invalid.
Since this Court held John Warehime should have been enjoined from
voting to create the Class C shares, it follows appellees should have been
enjoined from using the votes of that stock (in the September 16 election) to
sustain John Warehime's control of the corporation. In other words, the
underlying scheme was created by conduct we have condemned; that scheme cannot
now be used as a foundation for subsequent acts, including the September 16,
1999 vote. The trial court erred in not enforcing our prior decision.
The only issue before this Court is whether the trial court erred in
denying appellant's request to enjoin an act in derogation of a prior ruling of
this Court. Based on our foregoing discussion, we reverse the trial court's
order of September 7, 1999, and remand for further proceedings consistent with
this memorandum. As part of those proceedings, the June 25, 1997 vote adopting
the proposed amendments and creating the Class C shares should be set aside.
(5)This Court's December 2,1998 decision remains final unless and until it is
reversed by the Supreme Court. SHAFFER V. SMITH, 673 A.2d 872, 874 (Pa. 1996);
KURIAKOSE V. W.C.A.B., 681 A.2d 1389, 1391-92 (Pa. Cmwlth. 1996). Despite
appellees' urging, we decline to defer our decision in this case until the
Supreme Court issues its ruling. Essentially, however, appellees contend this
Court's earlier ruling has no effect unless and until it is ratified by a higher
court. Until that time, they seek to avoid its enforcement and indeed, continue
to operate HFC as if this Court had never ruled John Warehime breached his duty
of loyalty to the trust beneficiaries.
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What further relief would be appropriate on appellant's complaint is a matter
for the trial court's discretion on remand.(6)
Reversed and remanded. Jurisdiction relinquished.
Judgement Entered.
/s/ David A. Szewczak
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Prothonotary
Date: SEP 12 2000
(6)The questions of whether Section 1105 of the BCL precludes, or Sections
1791-1793 permit, the remaining equitable relief sought by appellant are not now
before us.
