business trust

In 1928 E.C. Barton formed E.C. Barton & Co. The corporation is a non-public closely-held Delaware corporation headquartered in Arkansas. It is engaged in the business of selling wholesale and retail lumber in the Mississippi Delta. The corporation issued two classes of common stock consisting of Class A voting shares and Class B non-voting shares. Substantially all of the corporation's stock was held by Mr. Barton at the time of his death in 1967. Mr. Barton was survived by his second wife Martha K. Barton who died in 1985 and by his daughter and granddaughter from his first marriage. Pursuant to Mr. Barton's testamentary plan 49 percent of the Class A voting stock was bequeathed outright to eight of his loyal employees. The remaining 51 percent of Class A along with 14 percent of Class B was placed into an independently managed 15-year trust for the same eight people. Sixty-one percent of the Class B non-voting stock was bequeathed outright to Mrs. Barton. Mr. Barton's daughter and granddaughter received 21 percent of the Class B stock in trust. The non-voting Class B shares Mr. Barton bequeathed to his family represented 75 percent of the corporation's total equity. Mrs. Barton gave certain shares of Class B non-voting stock to her three children Guy C. Blackwell Owen G. Blackwell and Martha G. Hestand. In 1973 the corporation purchased all of the Class B stock held in trust for Mr. Barton's daughter and granddaughter at a price of $45 per share. Mrs. Barton sold the remainder of her Class B shares to the corporation in January 1975 at a price of $45 per share. These transactions left Mrs. Barton's three children collectively with 30 percent of the outstanding Class B non-voting stock. The children have no voting rights despite their substantial equity interest in the corporation. The children are also the only non-employee Class B stockholders. The corporation made repeated self-tender offers to repurchase the children's Class B shares. The corporation first offered to repurchase the children's stock at $45 per share shortly after they acquired it from Mrs. Barton. The children rejected the offer and the stock subsequently split 25-for-1 in 1976. A second unsuccessful repurchase offer was made in 1977 at $8.22 per share. In 1979 the corporation again approached the children and offered to repurchase their stock at a price of $15 per share. Martha Hestand accepted the offer and tendered her shares to the corporation. Guy and Owen Blackwell however refused to sell their shares at that price. The corporation made no further repurchase offers until May 1985 when the ESOP undertook a tender offer to repurchase 48,000 shares of Class B stock concurrently with a tender offer by the corporation for 39,000 Class A and 100,000 Class B shares at a price of $25 per share. The book value of the Class A stock and the Class B stock at that time was $38.39 and $26.35 respectively. The remaining children and the other plaintiffs in the present action refused to sell. In November 1975 the corporation established an ESOP designed to hold Class B non-voting stock for the benefit of eligible employees of the corporation. The ESOP is a tax-qualified profit-sharing plan whereby employees of the corporation are allocated a share of the assets held by the plan in proportion to their annual compensation subject to certain vesting requirements. The ESOP is funded by annual cash contributions from the corporation. Under the plan terminating and retiring employees are entitled to receive their interest in the ESOP by taking Class B stock or cash in lieu of stock. It appears from the record that most terminating employees and retirees elect to receive cash in lieu of stock. The corporation commissions an annual appraisal of the corporation to determine the value of its stock for ESOP purposes. Thus the ESOP provides employee Class B stockholders with a substantial measure of liquidity not available to non-employee stockholders. Beginning in 1982 the corporation purchased additional key man life insurance policies in connection with agreements entered into between the corporation and nine key officers and directors. In 1985 the corporation purchased eight $300,000 keyman life insurance policies. In the five-year period 1985 to 1989 the corporation paid approximately $450,000 in net key man premiums. The premiums exceeded the corporation's declared dividends in 1986 and 1989 even after the earnings on the policies were deducted. Plaintiffs are 14 minority stockholders of Class B non-voting stock of the corporation. The individual defendants are the members of the board of directors. The corporation is also a defendant. Plaintiffs collectively own only Class B stock and own no Class A stock. Their total holdings comprise approximately 25 percent of all the common stock outstanding as of the end of fiscal year 1989. At all relevant times the board consisted of ten individuals who either are currently employed or were once employed by the corporation. At the time this suit was filed these directors collectively owned approximately 47.5 percent of all the outstanding Class A shares. After a five-day trial that included live witness testimony, depositions, and documents, the Vice Chancellor held that the corporation's low-dividend policy was within the bounds of business judgment. The Vice Chancellor also held that the executive compensation levels were not excessive. The Vice Chancellor ruled in favor of defendants on these issues. The Vice Chancellor further held, however, that the defendant directors had breached their fiduciary duties to the minority. The basis for this ruling was that it was inherently unfair for the defendants to establish the ESOP. The basis for this ruling was also that it was inherently unfair for the defendants to purchase key man life insurance to provide liquidity for themselves while providing no comparable method by which the non-employee Class B stockholders may liquidate their stock at fair value. The trial court entered judgment requiring use of all key man premiums plus interest to repurchase Class B stock from non-employee holders at an independent appraisal price. The judgment also included a requirement that future repurchases offer equal terms to those stockholders. The Supreme Court of Delaware reviewed the decision of the Court of Chancery.

Mass. Gen. Laws Ann., ch. 55, § 8 prohibits banks and business corporations from making contributions or expenditures for the purpose of influencing the vote on any referendum question other than one materially affecting the corporation's property, business, or assets. The statute also specifies that no question solely concerning the taxation of individuals would be deemed to have such an effect. Appellants, the First National Bank of Boston, New England Merchants National Bank, the Gillette Company, Digital Equipment Corporation, and Wyman-Gordon Company, wished to spend corporate funds to publicize their opposition to a proposed constitutional amendment authorizing the legislature to impose a graduated personal income tax. That amendment was scheduled for submission to voters on November 2, 1976. Appellants brought suit in the Supreme Judicial Court of Massachusetts seeking a declaration that the statute was unconstitutional as applied to their proposed expenditures. The case was submitted on an expedited basis upon agreed facts to a single justice of that court, who referred the matter to the full bench the same day. The statement of agreed facts reflected disagreement among economists on whether a graduated personal income tax would affect corporate business or assets. Appellants' management nevertheless believed the tax would have a significant effect on their businesses. The Supreme Judicial Court upheld the statute in a 1973 decision. After the United States Supreme Court vacated the judgment and remanded for further consideration in light of Buckley v. Valeo, the Massachusetts court again upheld the statute in a February 1977 opinion. It construed the law to bar the proposed corporate expenditures on the individual-tax referendum. Although the November 1976 referendum was held and the amendment defeated, the United States Supreme Court addressed the merits. The controversy fell within the class of cases capable of repetition yet evading review. Similar graduated-income-tax amendments had been submitted to voters four times in recent years. The interval between legislative authorization and election was only about eighteen months. The statute prescribed a maximum fine of $50,000 for a violating corporation. It also prescribed a maximum fine of $10,000 or imprisonment for up to one year, or both, for a violating corporate officer, director, or agent.