<PAGE> 1
IN THE SUPREME COURT OF PENNSYLVANIA
MIDDLE DISTRICT
MICHAEL A. WAREHIME : No. 251 M.D. Appeal Dkt. 1999
:
v. :
:
: Appeal from the Order of the Superior
JOHN A. WAREHIME : Court entered 12/2/98, at 709 HBG 1997
: reversing the order entered 6/24/97 and
APPEAL OF: JOHN A. WAREHIME AND : remanding to the Court of Common Pleas
THE INDEPENDENT DIRECTORS : of York County at No. 95-SU-00471-07
COMMITTEE : Civil Division
:
:
MICHAEL A. WAREHIME, : No. 252 M.D. Appeal Dkt. 1999
:
Appellant :
: Appeal from the Order of the Superior
v. : Court entered 12/2/98, at 709 HBG 1997
: reversing the order entered 6/24/97 and
JOHN A. WAREHIME, : remanding to the Court of Common Pleas
: of York County at No. 95-SU-00471-07
Appellee : Civil Division
:
:
MICHAEL A. WAREHIME : No. 253 M.D. Appeal Dkt. 1999
:
v. :
: Appeal from the Order of the Superior
JOHN A. WAREHIME : Court entered 12/2/98, at 710 HBG 1997
: reversing the order entered 7/8/97 and
APPEAL OF: JOHN A. WAREHIME AND : remanding to the Court of Common Pleas
THE INDEPENDENT DIRECTORS : of York County at No. 95-SU-00471-07
COMMITTEE : Civil Division
:
MICHAEL A. WAREHIME, : No. 254 M.D. Appeal Dkt. 1999
:
Appellant : Appeal from the Order of the Superior
: Court entered 12/2/98, at 710 HBG 1997
v. : reversing the order entered 7/8/97 and
: remanding to the Court of Common Pleas
: of York County at No. 95-SU-00471-07
JOHN A. WAREHIME, : Civil Division
:
Appellee : Argued: May 2, 2000
<PAGE> 2
IN THE SUPREME COURT OF PENNSYLVANIA
MIDDLE DISTRICT
MICHAEL A. WAREHIME, : Nos. 251, 252, 253, and 254 M.D.
: Appeal Docket 1999
Appellant at Nos. 252 and 254/ :
Appellee at Nos. 251 and 253 : Appeals from the order of
: Superior Court entered 12/02/98
: at Nos. 709 and 710 HBG 1997,
v. : reversing orders dated 06/24/97
: and 07/08/97 and remanding to the
: Court of Common Pleas of York
JOHN A. WAREHIME, : County, Civil Division, at Docket
: No. 95-SU-00471-07
:
:
Appellee at Nos. 252 and 254/ :
Appellant at Nos. 251 and 253 : 722 A.2d 1060 (Pa.Super. 1998)
ARGUED: May 2, 2000
OPINION OF THE COURT
MR. CHIEF JUSTICE FLAHERTY DECIDED: NOVEMBER 27, 2000
This is an appeal by allowance from an order of Superior Court which
reversed an order of the Court of Common Pleas of York County denying injunctive
relief in a dispute over control of Hanover Foods Corporation (HFC), a consumer
food products company. The background of the case is as follows.
Alan Warehime, the father of John A. Warehime, Michael Warehime, and
Sally Warehime Yelland, was chairman and chief executive officer of HFC from
1956 to 1989. In 1988, two voting trusts were established by the Warehimes. A
majority of the voting stock of HFC was placed into the trusts. One trust,
containing 199,496 shares of Class B voting stock, was established by Alan
Warehime and his three children. The other trust, containing 15,025
<PAGE> 3
Class B shares, was established by Alan Warehime and five of his grandchildren.
Alan Warehime served as the sole voting trustee for both trusts.
In 1989, by appointment of Alan Warehime, John Warehime became chairman
and chief executive officer of HFC. Alan Warehime continued to serve as voting
trustee for the trusts, however, until his death in 1990. Thereafter, John
Warehime, who had been designated by Alan Warehime as successor trustee, filled
that role.
Both of the trusts were designed to expire in 1998, ten years after
their creation. Anticipating this, during the 1990s Michael Warehime and Sally
Warehime Yelland made it known that they were not satisfied to have John
Warehime running HFC. Michael Warehime, who controls another consumer food
products company, Synder's of Hanover, expressed an interest in becoming
chairman of HFC. He and the other plaintiffs in this action did not, however,
develop any plans for the future of HFC; nor did they identify the management
that they intended to install. Uncertainty over the course that HFC would take
after expiration of the trusts caused instability within the company and cast
uncertainty over its operations, with the result that relations with the
company's customers and suppliers were adversely affected and it became
impossible for HFC to raise needed equity capital.
In 1994, John Warehime voted all of the voting trust shares in favor of
a proposal to eliminate cumulative voting in the election of HFC's directors.
(1) The proposal was of the
---------------------
1 No challenge to the elimination of cumulative voting has been preserved by
Michael Warehime and the other plaintiffs; hence, the matter is not at issue in
this appeal.
2
<PAGE> 4
amendments. They alleged that the amendments would, in effect, allow John
Warehime to extend his control of HFC beyond the termination of the voting
trusts.(2)
After a hearing, the trial court determined that the proposed
amendments did not present a conflict of interest between the private interests
of John Warehime and his duties as trustee of the voting trusts, that the
purpose of the amendments was not to advance the personal interests of John
Warehime and that the amendments reflected a good faith effort to serve the best
interests of HFC and its shareholders, including the beneficiaries of the voting
trusts, since the amendments assured stability in the governance structure of
HFC for a five-year period that would permit needed capital to be raised and
allow the company to grow and prosper. Accordingly, on June 24, 1997, the
request for a preliminary injunction was denied. The following day, John
Warehime convened a meeting and voted all of the trust shares in favor of the
proposed amendments; the amendments where, therefore, adopted.
Michael Warehime took an appeal to Superior Court. Superior Court held
that the trial court erred in refusing to grant an injunction against John
Warehime voting the trust shares in favor of the amendments and that by voting
in favor of those amendments John Warehime breached his duty of loyalty to the
trust beneficiaries. Warehime v. Warehime, 722 A.2d 1060, 1071 (Pa. Super.
1998). The court stated that it was irrelevant that his actions were undertaken
in good faith to benefit HFC, and that:
---------------------
2 The trusts were drafted to comply with a statutory requirement
that voting trusts not exceed a term of ten years, but that requirement was
subsequently repealed. See 15 P.S. Section 1511 (1967) (repealed 1988). See also
Christopher v. Richardson, 394 Pa. 425, 147 A.2d 375 (1959) (previous ten-year
statutory limit on voting trusts). The provision limiting the trusts to a
duration of ten years reflects the scrivener's effort to comply with the laws
extant when the trusts were created and provides no indication that the settlors
intended to prevent the trustee from voting on matters that could affect the
shares after expiration of the trusts.
3
<PAGE> 5
[W]e cannot sanction the action of John Warehime voting the
shares of the voting trusts in favor of the proposed
amendments. The adoption of these amendments, while taken for
the stated reasons of preserving the integrity of HFC's value
and ability to function profitably, will, nonetheless, serve
to perpetuate the control of the company by John Warehime for
at lease another five years and preclude the other
shareholders, including the beneficiaries of the trust, from
the ability and opportunity to make any meaningful decision
concerning the management of HFC.
Id. at 1069. In short, Superior Court held that a voting trustee's actions must
be measured against a standard of conduct requiring more than good faith, i.e.,
a standard of absolute loyalty that bars the trustee from taking any action that
extend his influence over the corporation beyond the expiration of the trusts,
irrespective of whether the actions are undertaken in good faith for the benefit
the company and its shareholder beneficiaries. We do not agree that the standard
of good faith was inapplicable. Accordingly, we reverse.
The Business Corporation Law expressly permits shareholders to enter
into voting trust agreements and assures that the provisions of such agreements
will be given effect:
(a) VOTING TRUSTS. - One or more shareholders of any business
corporation may, by agreement in writing, transfer all or part
of their shares to any person for the purpose of vesting in
the transferee voting or other rights pertaining to the shares
upon the terms and conditions and for the period stated in the
agreement.
15 Pa.C.S. Section 1768 (a) (emphasis added). Nothing in this provision or
elsewhere in the Business
4
<PAGE> 6
Corporation Law prevents shareholders from including in the terms and conditions
of the agreement a definition of the fiduciary obligation of the trustee. The
Warehime trusts include such a provision. It defines and limits the trustee's
duty to the beneficiaries, as it provides:
The Trustee will use his best judgment in voting upon the
stock held by him, but assumes no responsibility for the
consequence of any vote cast, or consent given by him, in good
faith, and in the absence of gross negligence.
Warehime Voting Trust Agreement, 4/5/88, at 2 (emphasis added); Warehime Voting
Trust Agreement, 12/1/88, at 3 (emphasis added). The language of the agreements
is clear and unambiguous. The trustee must exercise his best judgment in voting
the stock and act in good faith. Such is the extent of the fiduciary duties that
the parties placed on the trustee. Other than those duties, there are no
limitations set forth as to the manner in which the trustee's voting powers can
be exercised.
Indeed, the trustee's powers are broadly stated in the agreements, to
wit:
[T]he Trustee shall have the exclusive right to vote upon such
stock or to give written consents in lieu of voting thereon,
subject to any limitation on the right to vote contained in
the Certificate of Incorporation . . . at any and all meetings
of the stockholders of the Corporation, for whatsoever purpose
called or held, and in any and all proceedings, whether at
meetings of the stockholders or otherwise, wherein the vote or
written consent of stockholders may be required . . . .
5
<PAGE> 7
Warehime Voting Trust Agreement, 4/5/88, at 1-2 (emphasis added)3; Warehime
Voting Trust Agreement, 12/1/88, at 1-2 (emphasis added). If the parties had
intended to limit the trustee's authority to vote the shares in any manner, they
would have included a provision setting forth the subjects on which the trustee
had unrestricted voting rights and those on which the trustee did not have such
rights. For example, they could have included a provision that the trustee not
vote trust shares in favor of any proposal that would dilute the voting strength
of shares held in trust, as occurred here through creation of the Class C
shares. Instead, they granted the trustee broad power to vote "at any and all
meetings of the stockholders of the Corporation, for whatsoever purpose called
or held," subject only to requirements that the trustee "use his best judgement
in voting upon the stock held by him" and carry out his duties in "good faith."
Such is the agreement that the parties made for themselves.
The agreement, therefore, placed the trustee in the foreseeable
position of having to take actions that would benefit HFC and its shareholders
while being dilutive of the voting strength of the existing trust shares. The
inherent conflict between preserving the business prospects of HFC for the
benefit of its shareholders and the need to take actions that might temporarily
dilute the voting power of existing shares beyond expiration of the trusts did
not limit the trustee from taking action. See Flagg Estate, 365 Pa. 82, 87-89,
73 A.2d 411, 414-15 (1950) ( where conflicting interests for the trustee are
created by the settlor, trustee may proceed to act). Nevertheless, good faith on
the part of the trustee is required. Id.
6
<PAGE> 8
It is undisputed that a trustee is under a duty to the beneficiaries to
administer the trust solely in the interest of the beneficiaries. Id. at 87, 73
A.2d at 414 (citing Restatement, Trusts Section 170(1)). Here, the trial court
found that John Warehime acted in good faith for the benefit of the corporation
and its shareholder beneficiaries and that his actions as trustee were not taken
for his own benefit. By disregarding this finding and by straying from the plain
terms of the agreements which require only that the trustee exercise his best
judgment and act in good faith, Superior Court erred. Accordingly, we reverse.
Order reversed, and case remanded.(4)
Mr. Justice Saylor files a concurring opinion.
Mr. Justice Nigro files a dissenting opinion in which Mr. Justice
Castille joins.
---------------------
3 This Agreement further provides: "Trustee shall be entitled to exercise all
rights of every kind granted to the stockholders except as such rights shall be
specifically limited by the terms of this agreement or by the Certificate of
Incorporation or otherwise."
4 We remand to Superior Court for consideration of other issues that were
properly raised by Michael Warehime but which were not addressed below due to
that court's disposition of the issue concerning the trustee's duty of good
faith.
7
<PAGE> 9
IN THE SUPREME COURT OF PENNSYLVANIA
MIDDLE DISTRICT
MICHAEL A. WAREHIME, : Nos. 251, 252, 253, and 254 M.D.
: Appeal Docket 1999
Appellant at Nos. 252 and 254/ :
Appellee at Nos. 251 and 253 : Appeals from the Order of the
: Superior Court entered 12/02/98
: at Nos. 709 and 710 HBG 1997,
v. : reversing orders dated 06/24/97
: and 07/08/97 and remanding to
: the Court of Common Pleas of
JOHN A. WAREHIME, : York County, at Docket No.
: 95-SU-00471-07
:
:
Appellee at Nos. 252 and 254/ :
Appellant at Nos. 251 and 253 : 722 A.2d 1060 (Pa.Super. 1998)
ARGUED: May 2, 2000
DISSENTING OPINION
MR. JUSTICE NIGRO DECIDED: NOVEMBER 27, 2000
I respectfully dissent as I believe that John Warehime's actions
constituted a breach of his fiduciary duties to the trust beneficiaries, that
the whole effort to retain control of the voting trusts beyond their expiration
dates was a glaring example of self-dealing involving an impermissible clash
between John Warehime's private interests and the interests of the
beneficiaries, and that the possible outcome (e.g. alleged stability of the
company) does not justify the means (breach of undivided loyalty to the
beneficiaries) of achieving that result.
The Superior Court crafted a thoroughly researched and well-reasoned
majority opinion defining the duty of a trustee from which I borrow liberally.
Relying heavily on accepted treatises due to the dearth of Pennsylvania case law
on this subject, the court summarized the powers and duties of a voting trustee
as follows:
<PAGE> 10
The trustees have voting powers and such as are incident to their
trust, but are not managers of the corporation, which is the function
of the directors elected by their votes. Nor does the creation of the
voting trust give the trustee the power to destroy the beneficial
ownership interests in any manner.
Voting trustees should be held to adhere to the usual fiduciary
principles of a trust. The trustees may deal with the depositing
stockholders, but do so under the disabilities of trustees generally.
Warehime v. Warehime, 722 A.2d 1060, 1063 (Pa. Super. 1999)(quoting FLETCHER
CYCLOPEDIA CORP. Section 2091.1, at 481-82. See also GEORGE G. BOGART, THE LAW
OF TRUSTS & TRUSTEES Section 252, at 320 (rev. 2d ed. 1992)(explaining that
general rules of trust law apply to voting trusts))(emphasis added).
Thus, as the treatises recognize, a voting trustee clearly has a duty
of loyalty to the beneficiaries no less than a duty placed on all trustees of
any trust. Nonetheless, the majority opinion seeks to sanction the actions of
John Warehime by selecting a single provision of the trust documents executed by
Alan Warehime5 as evidence that the Warehime Trust permitted the lesser standard
of "best judgment" and "good faith" to govern the trustee's actions. While the
two Warehime Voting Trust agreements (collectively Warehime Trust) do direct the
trustee to use his "best judgment" and to act "in good faith," these terms do
not pertain to the duty of loyalty imposed on a trustee. Rather, they define the
required standard of care a trustee must use in exercising his powers. Thus, I
believe that while the majority opinion properly characterizes
---------------------
5 The provision of the Warehime Trust Agreement cited by the majority states:
The Trustee will use his best judgment in voting upon the stock held by him, but
assumes no responsibility for the consequence of any vote cast, or consent given
by him, in good faith, and in the absence of gross negligence. Warehime Voting
Trust Agreement, 4/5/86, at 2; Warehime Voting Trust Agreement, 12/1/88, at 3
(emphasis added).
2
<PAGE> 11
the broadness of the scope of a trustee's powers, it does not adequately
acknowledge the more constraining duty of absolute loyalty to the beneficiaries
which must pervade any and all actions a trustee undertakes.(6)
In finding that no breach of the trustee's fiduciary duty occurred
here, the majority opinion places primary emphasis on the notion that the terms
and conditions of the Warehime Trust agreements "could have" included a
definition of the fiduciary obligation more restrictive than the standards of
"best judgment" and "good faith," but did not. I do not find the omission or
inclusion of such language dispositive of the intent of the trust, as the
accepted tenets of the law of trusts and trustees regarding any specific trust
provide that the duty of loyalty is inherent in the trust relationship itself.
See BOGART, supra, Section 543, at 217-18 (emphasis added). In other words,
merely by being named trustee, the trustee's duty of complete loyalty to the
beneficiaries attaches. Thus, the trustee's actions are governed first and
foremost by the threshold "usual
---------------------
6 The Superior Court summarized the trustee's duty of loyalty as follows:
Perhaps the most fundamental duty of a trustee is that he must display
throughout the administration of the trust complete loyalty to the
interests of the beneficiary and must exclude all selfish interest and
all consideration of the interests of third persons.
* * * *
A trustee's duty of loyalty has been described as inherent in the trust
relationship. The duty is sometimes stated as the rule of undivided
loyalty, or simply the loyalty rule. Though sometimes it has been
difficult for the courts to determine whether the rule should be
applied under the circumstances of the particular case, nevertheless
the loyalty rule may be simply stated:
A trustee is under a duty to the beneficiary of the trust to administer
the trust solely in the interest of the beneficiary. The trustee must
exclude all self interest, as well as the interest of a third party, in
his administration of the trust solely for the benefit of the
beneficiary. The trustee must not place himself in a position where his
own interests or that of another enters into conflict, or may possibly
conflict, with the interest of the trust or its beneficiary. Put
another way, the trustee may not enter into a transaction or take or
continue in a position in which his personal interest or the interest
of a third party is or becomes adverse to the interest of the
beneficiary.
Warehime, 722 A.2d at 1064 (quoting BOGERT, supra, Section 543, at
217-18)(emphasis added).
3
<PAGE> 12
fiduciary principles of a trust," regardless of what standard of care is set
forth in the trust documents. I would therefore read the best judgment/good
faith provision of the Warehime Trust documents as presuming that the voting
trustee is already acting under complete loyalty to the beneficiaries before
exercising his best judgment or acting in good faith.
Furthermore, while the majority opinion focuses on the idea that
specific language of the Warehime Trust agreements "could have" delineated the
subjects on which the trustee had unrestricted voting rights and those on which
he did not, I believe the proper focus is on the plain language of the Warehime
Trust agreements that the voting trust was to expire ten years after its
execution, and that no language in the agreements provides any leeway whatsoever
to override that restriction. The Superior Court explained:
The powers and duties of the trustees are to be determined from the
trust agreement as a whole, not reading one provision to nullify
another and thus defeat the trust.
* * * *
It is a breach of trust to vote contrary to its terms, or for personal
advantage outside of and contrary to its purpose. It has been held that
voting trustees could not elect themselves or others as directors for
terms of office that would outlast the duration of the voting trust.
Warehime, 722 A.2d at 1063 (quoting 5 FLETCHER, CYCLOPEDIA CORP. Section 2091.1,
at 481-82. See also BOGART, supra, Section 252, at 320) (emphasis added). Thus,
I believe that focusing on what could have been included in the trust agreement
but was not, instead of what explicitly was included in the agreement, is a
circuitous way of giving special dispensation to John Warehime's actions. By
using the trust's shares to adopt amendments that would extend the ten-year term
of the voting trust another five years, John Warehime voted contrary to the
trust's terms and for
4
<PAGE> 13
personal advantage, plain and simple.(7) Had he acted with undivided loyalty to
the beneficiaries, the only proper procedure would have been to allow the trusts
to expire and return the right to vote their shares to the individual
beneficiaries. The beneficiaries could then vote, if they so chose, to form
another voting trust of designated duration and reinstate John Warehime as
trustee. Instead, in using the voting trusts to perpetuate his own power to vote
those shares, John Warehime not only "destroy[ed] the beneficial ownership
interests" by depriving the beneficiaries of their right to vote the shares
themselves, but clearly put himself in a position where his own interests -
keeping control of the company - impermissibly conflicted with the interests of
the trust's beneficiaries. Thus, as the Superior Court noted, John Warehime's
actions breached his duty of loyalty because they "fundamentally alter[ed] the
very corpus of the trust -the voting rights held in trust for the
beneficiaries." Warehime, 722 A.2d at 1068.
Similarly, sanctioning acts done merely in "good faith" by the trustee
does not justify a breach of complete loyalty. The Superior Court explained:
Good faith on the part of the trustee is not a defense against a claim
of disloyalty. The ignorance or innocence of the trustee is irrelevant
in deciding whether the act was disloyal, although it may be of some
influence in determining the relief granted the beneficiary.
It is not necessary that the trustee shall have gained from the
transaction in order to find that it is disloyal. If the dealing
presented conflict of interest and consequent temptation to the
trustee, it will be voided at the option of the beneficiary, regardless
of gain or loss to the trustee.
* * * *
With respect to self dealing transactions the rule of undivided loyalty
has been applied primarily to deter trustees from the temptation to
favor themselves individually over their beneficiaries. For this reason
a defense that the trustee acted in good faith . . . or that the trust
incurred no loss (or actual benefit accrued to the trust) has not been
allowed by the courts.
---------------------
7 I believe it is instructive that the proposed amendments were adopted less
than one year prior to the voting trust's termination and that John Warehime was
the only shareholder at the meeting and the only shareholder to vote for the
amendments.
5
<PAGE> 14
Warehime,722 A.2d at 1064 (quoting BOGERT, supra, Section 543, at 217-18)
(emphasis added).
In light of the above, I fail to see how John Warehime's actions, which
effectively disenfranchised the beneficiaries of their right to assume voting
control of their shares upon the natural expiration of the trusts, can be
reconciled with the absolute duty of loyalty imposed on all trustees. The black
letter law of trusts and trustees finds that the "best judgment" standard should
only be applied to decisions once the duty of complete loyalty has been
satisfied.(8) Furthermore, the duty of the trustee accommodates neither
"ignorance or innocence of the trustee" nor "good faith" as a defense to
abrogating the trustee's loyalty obligations to the beneficiaries. Consequently,
John Warehime's protestations that the creation of another class of voting stock
was done by an "independent" committee selected by an "independent" board rings
hollow, as he was bound by duty to vote against proposed amendments that would
serve to diminish the beneficiaries' voting interests. Nor do I find room to
accept an alleged beneficial outcome such as "stability of the company" as
justification for the trustee's breach of his duty of loyalty. I therefore agree
with the Superior Court that "such a radical structural transformation of the
voting rights of the [beneficiaries] should only take place with the approval of
the majority of the [beneficiaries'] voting shares, with all shares being voted
by their actual or beneficial owners and not the voting trustee." Warehime, 722
A.2d at 1068.
Finally, I note that at its core, this case is about the meaning of the
word "trust" - not merely in its legal sense but pursuant to the everyday,
ordinary understanding of the word, i.e., "a charge or duty imposed in faith or
confidence or as a condition of some relationship . . . the
---------------------
8 I find the majority's reliance on Flagg Estate, 365 Pa. 82, 73 A.2d
411 (1950), for the proposition that the trustee may proceed to act in "good
faith" where conflicting interests for the trustee are created by the settlor,
to be misplaced. As the Superior Court noted, Flagg involved a simple matter of
administration of the trust where application of a "good faith" standard was
acceptable, whereas Warehime involves the fundamental alteration of the nature
of the corpus of the trust - a diminution of the property rights held by the
beneficiaries - where undivided loyalty is required. Warehime, 722 A.2d at 1067.
6
<PAGE> 15
obligation to promote to the largest extent possible the welfare of [those
depending on the relationship]," and connotes the same qualities as the legal
concept, i.e., "reliance . . . honesty. . . worthiness . . . ." See WEBSTER'S
THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE 2456 (1993). It is
axiomatic, therefore, that regardless of whatever authority John Warehime had to
exercise his "best judgment" and act in "good faith," common decency dictates
that no person placed in a position of trust can meet even the everyday
expectations of that status without, first, last, and always being loyal to the
people who placed the trust in him. Instead, John Warehime went to extraordinary
legalistic lengths to attempt to defeat even the ordinary meaning of trust. I
would not permit a dilution of either the familiar or the legal meaning of the
word trust any more than I would permit a dimunition of these beneficiaries'
voting rights.
As the law of trusts and trustees provides that "[i]f the dealing
presented conflict of interest and consequent temptation to the trustee, it will
be voided at the option of the beneficiary, regardless of gain or loss to the
trustee," BOGERT, supra, Section 543, at 217-18, I would find that the votes
cast by John Warehime in favor of the proposed amendments should have been
voided and an injunction barring him from voting in favor of the amendments to
create a new class of dispute-resolution stock should have been granted.
I would therefore affirm the Superior Court based on its well-reasoned
opinion. Mr. Justice Castille joins in the dissenting opinion.
7
<PAGE> 16
CONCURRING OPINION
MR. JUSTICE SAYLOR DECIDED: NOVEMBER 27, 2000
Like Mr. Justice Nigro and the Superior Court majority, I see no basis
upon which to distinguish voting trustees from other fiduciaries in terms of
defining the general scope of their obligations owing to beneficiaries of the
fiduciary relationship. Therefore, I also would hold that a duty of loyalty
should ordinarily attach to the voting trustee's undertakings in relation to the
trust. See generally 5 Fletcher, CYCLOPEDIA CORP. Section 2091.1, at 481-82
(1996)(stating that "[v]oting trustees should be held to adhere to the usual
fiduciary principles of a trust").
Whether, and to what extent, parties may contractually alter or
eliminate such duties implicates an extensive, ongoing debate in the legal
community among segments sometimes denominated in the commentary as
contractarians and anti-contractarians. Compare Melvin Aron Eisenberg, The
Limits of Cognition and the Limits of Contract, 47 STAN L. REV. 211, 249-50
(1995)(explaining the basis for the imposition of some degree of mandatory,
non-waivable fiduciary duties upon controlling, corporate interests), with Henry
N. Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the
Anti-Contractarians, 65 WASH L. REV. 1, 71 (1990)(advocating private ordering of
corporate affairs, unrestricted by mandatory rules). In the present case, the
majority position could perhaps be described as having a contractarian
orientation, whereas the position of the Superior Court majority could be said
to possess anti-contractarian overtones. Even under contractarian theory,
however, in order for general principles regarding fiduciary duty to be
overridden, there must be a sufficient meeting of the minds concerning the
action of the fiduciary, which I find lacking in the trust instruments at
2
<PAGE> 17
issue. While these instruments effectively conveyed a broad array of powers,9 I
find an inherent ambiguity between the provisions limiting the effectiveness of
the trusts to a fixed, ten-year term, and the utilization by the trustee of the
trusts' authority to unilaterally establish an ongoing structure of corporate
governance that undermines control of a corporation by majority vote of its
shareholders beyond the agreed-upon time for expiration, particularly when such
action is taken in contemplation of the impending termination. Therefore, I
disagree with the majority that, in such circumstances, the voting trustee's
obligations should be deemed limited by the written agreements. Rather,
consistent with the general legal proposition advanced by Mr. Justice Nigro and
the Superior Court majority, I would hold that, at least in the absence of
express, unambiguous, contrary provisions within the voting trust instruments
(or statutory prescription), the prevailing common-law standard of fiduciary
conduct should control in such circumstances.
The scope of a fiduciary's duty of loyalty has not been closely defined
in the jurisprudence of this Court, or of other courts for that matter. To some
extent, perhaps, this is intentional (or, at least, unavoidable). As stated by
one court,
"[i]ssues of whether a corporate officer or controlling shareholder has
fulfilled fiduciary duties have arisen in a number of circumstances and
have led to the creation of various specific rules. Opinions pile
phrase upon phrase in what appears to some observers to be a mere
compilation of platitudes. Yet those platitudes express something
deeper; they are a judicial attempt to emphasize that the heart of a
corporate fiduciary's duty is an attitude, not a rule. The fiduciary
best fulfills its duties if it approaches them with the attitude of
seeking the beneficiary's interests rather than the personal interests
of the fiduciary, not if it simply tries to follow rules codified from
past decisions.
Chiles v. Robertson, 767 P.2d 903, 911-12 (Ore. App.), appeal denied, 784 P.2d
1099 (Ore. 1989), cited in Lawrence E. Mitchell, The Death of Fiduciary Duty in
Close Corporations, 138
---------------------
1 The trial court described the delegation of powers under the trust instruments
as unlimited; included within such grant of authority was the exclusive right to
decide any subject amenable to shareholder vote, without limitation. See also
Warehime v. Warehime, 722 A.2d 1060, 1067 (Pa. Super. 1998)(indicating that
"[n]ot only did the settlors give the voting trustee a controlling interest in
HFC, they conferred upon him virtually unrestricted voting powers[;] [t]he
trustee was vested with the authority to exercise all rights of every kind
granted to the shareholders").
3
<PAGE> 18
U. PA. L. REV. 1675, 1696 (Jun. 1990) [hereinafter, "Mitchell, Fiduciary Duty
"]. The complexities associated with compliance with such loosely-defined duties
are simply part of the burden borne by one occupying a position of substantial
trust. Additionally, such complexities are magnified in situations involving
concentrated ownership or control interests, such as in family and close
corporations. As noted by one commentator:
Close corporation shareholders tend to have invested substantial
personal wealth in the enterprise, magnifying the consequences of any
business decision as to a particular shareholder. Thus, any meaningful
distinction between business decisions and distributional decisions
becomes more difficult to make. Given significant stock ownership by
close corporation management, the potential for conflicts of interest
between director shareholders and non-director shareholders, or even
among director shareholders themselves, over a given decision (business
or distributional) is pervasive. While in the public issue corporation
we might still talk about the best interests of the corporation, if for
no other reason than as a shorthand for the lowest common denominator
of shareholder interest, in the paradigmatic close corporation no
discernable corporate interest exists apart from the individual
interests of the shareholders at any given point in time. In the
absence of any regulatory mechanism, internal disagreements degenerate
into power struggles.
Mitchell, Fiduciary Duty, 138 U. PA. L. REV. at 1690-91. The same commentator
has argued that the general response of the judiciary to problems of inherent
conflicts of interest has been to effectuate an inappropriate dilution of
fiduciary obligations. See id. at 1692. In the commentator's estimation, in many
jurisdictions, the duty of undivided loyalty has inappropriately yielded to a
less exacting weighing formulation, balancing the controlling interests against
those of the minority, or a mere requirement of adherence to a standard of good
faith or the business judgment rule on the part of the controlling interests.
See id. 1713-17.
Although I am sensitive to the potential for unwarranted dilution, I
believe that the nature of the underlying enterprise affects the character and
quality of fiduciary obligations owing; therefore, I would not, as some
commentators have suggested, require the wholesale prohibition of transactions
in which some degree of conflict of interest is present, such as in family and
close
4
<PAGE> 19
corporations. See generally Mitchell, Fiduciary Duty, 138 U. PA. L. REV. at 1729
(citing Brudney, Fiduciary Ideology in Transactions Affecting Corporate Control,
65 MICH. L. REV. 259 (1966)). Indeed, if this were to be made the rule, the
operations of a corporation having a structure and composition such as Hanover
Foods Corporation ("HFC") would be substantially impeded, since the controlling
interests could rarely satisfy a standard of pure, selfless disinterestedness.
Rather, I believe that controlling interests bearing fiduciary duties should be
permitted to exercise the implements of control, so long as they are truly
operating in furtherance of the interests of the beneficiaries of the fiduciary
relationship.
Pursuant to this standard, I also agree with Mr. Justice Nigro and with
the Superior Court majority that alteration of the structure of corporate
governance by a voting trustee is generally impermissible where the intent and
effect of the action is to perpetuate the trustee's own control over the
corporation beyond the life of the voting trust. In such circumstances, the
conflict of interest confronting the trustee is simply too great and cannot be
reconciled with his duty of loyalty.(10) On the other hand, however, I would not
foreclose the effectuation of necessary structural changes by a voting trustee
under the broad form of authority conveyed by the present trust instruments
where the intent underlying the changes, and their effect, are otherwise, and,
after careful scrutiny of the facts, the duty of loyalty can be said to be
fulfilled. Indeed, this latter form of action would seem to fall well within the
scope of the parties' initial intention in entrusting their interests to a
single decision maker whose own interests were, in significant part,
---------------------
10 See generally Brown v. McLanahan, 148 F.2d 703, 708-09 (4th Cir. 1945);
Friedberg v. Schultz, 38 N.E.2d 182, 184 (Ill. App. 1941) (noting that "[w]here
property is placed in the hands of trustees for a specified period courts are
careful not to permit an extension of control of the property by the trustees
beyond the period mentioned"); Fletcher, CYCLOPEDIA CORP. Section .2091.1, at
481-82 (stating that "[i]t has been held that voting trustees could not elect
themselves or others as directors for terms of office that would outlast the
duration of the voting trust" (citations omitted)); 18A AM. JUR. 2D CORPORATIONS
Section 1146 (1985 & Supp. 1999)(noting that "attempts by voting trustees to
perpetuate their control of a corporation by extending the term of the trust
beyond the period specified therein without the consent of all certificate
holders, or by improper use of their powers, have usually been unsuccessful"
(citations omitted)).
5
<PAGE> 20
in alignment with theirs. Thus, in my assessment, the critical questions in
determining John Warehime's compliance with his fiduciary obligations in
connection with the proposed amendments to HFC's articles of incorporation are:
whether, and to what extent, the amendments were intended to, and/or would have
the effect of, perpetuating John Warehime's control over HFC; and whether, and
to what extent, the amendments would inure to the benefit (or, conversely,
operate to the detriment) of the minority shareholders.
Responsive to such questions, on consideration of Michael Warehime's
motion for a preliminary injunction, the trial court issued detailed findings of
fact and conclusions of law, making a close assessment of HFC's past and present
circumstances, the interests and objectives of its ownership and management, and
the nature and effect of the amendments. Regarding the company's past
performance under existing management, the trial court found that, despite a
general decline in the industry, HFC had achieved record-high results in terms
of asset valuation, shareholder's equity and pre-tax earnings. It found,
however, that uncertainties associated with the future expiration of the voting
trusts were causing destabilization of HFC's corporate governance and would
prevent the company from raising essential capital - according to the trial
court, absent necessary stabilization, it would be impossible for HFC to conduct
business in a manner beneficial to its long-term interests, and the company
would likely deteriorate within a short time period. The trial court also found
that HFC had lost key employees and was in danger of losing others; the
uncertainties jeopardized relationships with growers and suppliers; and
particular minority interests were engaging in behaviors disruptive of corporate
governance, although they had no plan for the future of the corporation. The
trial court then described the response of HFC board members to this state of
affairs, including the formation of an "Independent Directors Committee" to
consider strategic alternatives absent advice or input from John Warehime, the
retention of several firms and individuals in this regard, and the ultimate
6
<PAGE> 21
recommendation of the amendments to HFC's articles of incorporation. See
generally Warehime, 722 A.2d at 1061-62 (describing the trial court's findings).
Against this backdrop, the trial court detailed the proposed amendments
in terms of their creation of 10,000 shares of Series C convertible preferred
stock to be issued to the HFC 401(k) plan; the fact that the issuance of such
stock effectuated no alteration in the authorized number of shares for any HFC
class of stock; the fact that the Series C stock could be voted only in the
event of a dispute among members of the Warehime family with respect to the
election of directors or other related matters for a five-year period; the
requirement that the voting trustees for the plan be disinterested directors;
and the relationship between the Series C shares and the general classes of
shares in terms of voting. The trial court found that the voting structure
embodied in the amendments constituted a necessary and neutral dispute
resolution procedure in furtherance of the essential goal of stability. Further,
the trial court specifically determined that the amendments were in the best
interest of all shareholders, including minority interests. Indeed, the trial
court went so far as to indicate that the amendments did not reflect a conflict
between John A. Warehime's private interests and the interests of the
shareholders and beneficiaries of the voting trust.(11) Thus, the trial court
held that effectuation of the proposed amendments was consistent with John
Warehime's fiduciary duties.
---------------------
11 With regard to this particular finding, I would find that the trial court
made a misstatement. Certainly, there is some degree of conflict of interest
present (at least at a subjective level) where there is a contest over control
of a company, and one side proposes to utilize a controlling interest in a
manner which may prevent his ouster. As noted below, however, where minority
shareholders themselves have conflicting interests, the trustee (and ultimately,
where necessary, a trial court) may be required to undertake some form of
balancing of those interest to determine the highest net benefit to minority
interest. Here, as I read the sum and substance of the trial court's findings,
it weighed particular subjective minority interests (for example, Michael
Warehime's desire to oust John Warehime) against more objective minority
interests (maximization of share value) and found that the highest net benefit
to minority interests would be achieved by favoring the latter. While this sort
of balancing ordinarily would not be within the court's province, since minority
interests generally do not owe fiduciary obligations to a corporation, but see
Mitchell, Fiduciary Duty, 138 U. PA. L. REV. at 1730 ( advocating imposition of
fiduciary obligations upon minority interests in close corporations as one
solution to the problem of inherent conflicts of interests), here, the minority
interests surrendered their voting rights to a trustee, and it is solely in the
context of the assessment of the trustee's performance of his duties and
obligations that this balancing occurs. Indeed, the trial court's decision to
favor the objective goal of promoting share value over subjective goals of
individual shareholders seems entirely consistent with the parties' decision in
the first instance to delegate their voting powers to a trustee to centralize
the decision making authority.
7
<PAGE> 22
The Superior Court majority, on the other hand, reached a diametrically
different conclusion. Although acknowledging the broad array of powers delegated
to the voting trustee and the trial court's findings that the establishment of a
dispute resolution procedure was in the best interest of all shareholders, the
Superior Court nevertheless viewed the reinstatement of the beneficiaries full
voting powers as the paramount consideration. Additionally, writing against the
trial court's essential determination that the amendments embodied a neutral,
fair procedure, the minority characterized them as "a plan whose sole
instrumentation is to disenfranchise beneficiaries from their rightful
empowerment as shareholders." Warehime, 722 A.2d at 1069. It concluded that:
[t]he 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.
Id. at 1071. Unlike the trial court, the Superior Court majority did not balance
the minority shareholders' voting interest against their interest in promoting
the welfare of HFC and thus maximizing the value of their shares. Rather, it
formed its own conclusions, "[t]he factual findings of the trial court
notwithstanding." Id. at 1062.
In light of the differing assessments provided by the trial court and
Superior Court, determination of the appropriate appellate standard of review
assumes a heightened degree of importance. Although the Superior Court majority
acknowledged the limited review standard applicable to a trial court's decision
to grant or deny a preliminary injunction, see Warehime,
8
<PAGE> 23
722 A.2d at 1063 (indicating that, "unless the record shows that the trial
court's ruling was palpably erroneous, a misapplication of law, or a manifest
abuse of discretion, this court will affirm the lower court's decision"), it did
not differentiate between the trial court's factual findings and legal
conclusions in terms of the character of review afforded.
Factual findings generally are to be reviewed on a deferential basis so
long as they are supported by the evidence; see Thatcher's Drug Store of West
Goshen, Inc. v. Consolidated Supermarkets, Inc., 535 Pa. 469, 477, 636 A.2d 156,
160 (1994); whereas legal conclusions are open to de novo review. See id. Here,
quite obviously, to the extent that the Superior Court's conclusion that the
character and effect of the amendments benefited John Warehime to the detriment
of the shareholders is solely one of law, it is unassailable as a matter of
fiduciary analysis, since an action taken in the self-interest of the trustee
which runs contrary to the interests of a trust beneficiary is, by definition, a
violation of the duty of loyalty. In my view, however, the factual aspect of the
conclusions concerning the operation and net effect of the amendments is
substantial, and therefore, the trial court's findings in this regard were
entitled to greater deference. See generally Mitchell, Fiduciary Duty, 138 U.
PA. L. REV. at 1677 (giving reference to the fact-specific nature of fiduciary
analysis).(12)
Although I believe that John Warehime was presented with an inherent
conflict of interest in considering the amendments, see supra note 4, given the
realities of family-controlled corporations, I would hold that a fiduciary who
is by selection self-interested may be permitted to proceed in the face of such
conflicts so long as his actions inure to the benefit of minority
---------------------
12 This Court has not articulated a universal standard of review applicable to
mixed questions of law and fact. Compare Mars Area Sch. Dist. v. United
Presbyterian Assn. of N. Am., 554 Pa. 324, 326, 721 A.2d 360, 361
(1998)(applying abuse of discretion/lack of supporting evidence standard to a
mixed question of law and fact in a given context), with City of Chester v.
Commonwealth Dept. of Transp., 495 Pa. 382, 389-90, 434 A.2d 695, 699
(1981)(stating that "[j]ust as the trial court may decide mixed questions of law
and fact, so may the appellate courts review them"). This, perhaps, results from
the fact that mixed questions differ in terms of the degree to which the legal
versus the factual aspects predominate. See generally Commonwealth v. Santiago,
439 Pa. Super. 477, 466, 654 A.2d 1062, 1072 (1994)(describing federal courts'
approach to review of mixed questions, which varies according to the
predominance of legal over factual aspects).
9
<PAGE> 24
interests. See generally Mitchell, Fiduciary Duty, 138 U. PA. L. REV. at 1688
(describing the "difficulty courts face in distinguishing actions taken in the
best interests of the corporation and shareholders from those which impinge
unfairly on the minority"). Where the minority interests themselves have
conflicting interests, as the trial court found in the present case, the trustee
initially, and the trial court ultimately, must necessarily make a decision that
will be in derogation of some minority interests, but in furtherance of others,
with the objective being to maximize the ultimate, net benefit to minority
shareholders. See supra note 3.13
Here, I would find that the trial court's conclusions concerning the
nature and effect of the proposed amendments vis-a-vis minority interests are
mixed ones of law and fact, with the factual aspects predominating, and thus
should be subject to a deferential standard of review. While acknowledging that
the amendments would dilute Class B shareholders' voting interests, the trial
court found this detriment substantially outweighed by the advancement of the
shareholders' conflicting interest in maximizing share value, which could best
be served through implementation of an effective dispute-resolution procedure.
The trial court also clearly viewed such procedure as far more neutral in
relation to the ongoing family dispute than did the Superior Court majority.
Since I believe that the trial court's findings and conclusions in these regards
are supported in the evidence and were made within the boundaries of its
decision making authority, particularly as it relates to the assessment of
likelihood of success on the merits on consideration of a motion for a
preliminary injunction, I am able to join the majority's disposition reversing
the Superior Court's order.
Finally, I note that the trial court's opinion indicates that the
present compliment of HFC directors lacked disinterestedness for purpose of
voting the Series C stock; subsequently,
---------------------
13 It merits emphasis that the unavoidable balancing of conflicting minority
interests in this context is distinguishable from the balancing of the interests
of the interests of the majority versus those of the minority, about which the
author of the Fiduciary Duty article complains. See supra (citing Mitchell,
Fiduciary Duty, 138 U. PA. L. REV. at 1713-17).
10
<PAGE> 25
however, it appears that John Warehime exercised his powers as voting trustee to
amend HFC's articles of incorporation to change the way disinterestedness is
assessed, thus allowing the present directors to vote. This action was contested
by Michael Warehime; however, the trial court denied his challenge without
opinion. This matter is the subject of a consolidated cross-appeal, and, as I
understand the majority's disposition, will be decided by the Superior Court on
remand. Without expressing any opinion as to the merits of such issue, I note
that the required disinterestedness of the voting trustees for Series C stock is
an essential element of my analysis above - if those trustee are not truly
disinterested, then the amendments cannot be viewed as a neutral dispute
resolution procedure, but rather, would have to be viewed, as they are by Mr.
Justice Nigro and Superior Court majority, as a mechanism effectuating an
improper entrenchment of current controlling interests. Thus, resolution of this
aspect of the appeal in the Superior Court is necessary before, ultimately, the
parties' rights and interests in relation to the amendments can be finally
determined.
11
