Case Title: Telxon Corporation v. Meyerson et al.

Citation: 

Docket Number: 328, 2001

State: delaware

Court: Delaware Supreme Court

Date: 2002-06-07T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE
TELXON CORPORATION,
§
§
Plaintiff Below,
§
Appellant,
§
§ No. 328, 2001
v.
§
§ Court Below: Court of Chancery
ROBERT F. MEYERSON, DAN R. § of the State of Delaware in and for
WIPFF, ROBERT A. GOODMAN, § New Castle County
DR. RAJ REDDY and 
§ C.A. No. 13139
NORTON W. ROSE,
§
§
Defendants Below,
§
Appellees.
§
Submitted: January 16, 2002
Resubmitted Following Supplemental Briefing: April 4, 2002
Decided:
June 7, 2002
Before WALSH, HOLLAND, and BERGER, Justices.
Appeal from Court of Chancery.  REVERSED and REMANDED.
Joseph A. Rosenthal, Esquire and Carmella P. Keener, Esquire, Rosenthal,
Monhait, Gross & Goddess, P.A., Wilmington, Delaware.  Sidney B. Silverman,
Esquire (argued), New York, New York, for Appellant.
Steven J. Rothschild, Esquire (argued), Paul J. Lockwood, Esquire, and Sean
K. Hornbeck, Esquire, Skadden, Arps, Slate, Meagher & Flom, Wilmington,
Delaware, for Appellees Robert F. Meyerson, Dan R. Wipff, Dr. Raj Reddy and
Norton W. Rose.
Henry E. Gallagher, Jr., Esquire (argued), Connolly Bove Lodge & Hutz
LLP, Wilmington, Delaware.  Steven J. Miller, Esquire and Drew A. Carson,
Esquire, Goodman Weiss Miller LLP, Cleveland, Ohio, for Appellee Robert A.
Goodman.
WALSH, Justice:
2
In this appeal, we consider the propriety of the Court of Chancery’s decision
to grant summary judgment in a derivative action subsequently pursued by a
successor corporate entity against its former directors.  The complaint, originally
asserted as a stockholders’ derivative action, challenged the level of compensation
that Directors had been receiving as well as Directors’ decision for the corporation
to acquire a minority interest, and later 100%, of a company owned by the
corporation’s then-Board Chairman.  Following cross-motions for summary
judgment, the Court of Chancery granted judgment to the Directors on the excessive
compensation claims and the duty of loyalty claims, but denied summary judgment
as to two duty of care claims in which there were disputes of fact.  Because the
corporation’s charter contains an exculpation provision, the plaintiff chose to forego
prosecution of the duty of care claims in order to convert  the Court of Chancery’s
dismissal order into an appealable final judgment. 
Upon a full review of an enlarged record, we conclude that the unsettled
nature of that record does not permit resolution through summary judgment. 
Accordingly, we reverse the decision of the Court of Chancery granting summary
judgment and remand this case for further proceedings to resolve factual differences
apparent in the record. 
1    Meyo was dismissed as a defendant in this case in November, 1998.  That decision has
not been appealed.  
3
I
Telxon is a Delaware corporation that develops and markets portable hand-
held computers for retailers and wholesalers in various industries.  Between 1991
and 1993 (the time period relevant to this action), the Telxon board of directors
consisted of Raymond Meyo, Dan Wipff, Robert Meyerson, Raj Reddy, Norton
Rose and Robert Goodman.  Meyerson was also the CEO of Telxon from 1978 to
1985.  During the late 1980s and early 1990s, Meyerson continued to serve as the
Chairman of the Board, and provided part-time consulting services to Telxon.  The
parties continue to dispute whether Meyerson was an executive at this time, or
served as a non-executive Chairman.  
In 1985, Meyo succeeded Meyerson as CEO and continued as Telxon's CEO
until he resigned in October, 19921.  Director Wipff was Telxon's Chief Financial
Officer from December 1991 through January 1995.  Beginning in October 1992,
Wipff also served as its President and Chief Operating Officer.  Director Goodman
was the senior partner of Goodman Weiss Miller LLP, a Cleveland, Ohio law firm
that provided legal services to Telxon and, in the past, had also provided services
both to Meyerson personally and to another company that Meyerson owned.
Director Reddy was the Dean of the School of Computer Science at Carnegie Mellon
4
University and a well recognized leader in the field of computer science.  Director
Rose was the President and Principal/Owner of Norton W. Rose & Co., a
Cleveland, Ohio consulting firm.
Telxon began experiencing operational problems in 1989, and the board
decided that Meyerson should be engaged to assist Meyo in managing the
corporation.  To that end, Telxon entered into a consulting agreement with
Meyerson’s wholly-owned company, Accipiter Corporation ("Accipiter").  Under
the 1989 consulting agreement, Accipiter (through Meyerson) agreed to perform
technical and marketing services necessary for the planning and development of new
products.   The agreement further provided that Accipiter's work product, created
pursuant to the contract, would become the property of Telxon, and Accipiter could
not "render similar consulting services to any direct competitors of Telxon in the
PTC market." On March 6, 1992, Telxon entered into a new three-year consulting
agreement with Accipiter, under which Accipiter agreed to provide management
consulting, corporate and financial analysis, and marketing development services,
as requested by Telxon.  Specifically, Accipiter would provide Telxon with "140
eight hour days per year of consulting services, the majority to be provided by
Meyerson."  In return, Accipiter would receive $840,000 annually, plus $240,000
5
for general administrative and overhead costs, plus reimbursement for its travel and
other out-of-pocket expenses.
In August of 1991, Meyerson began to explore the possibility of developing
a product known as "pen based computers" ("PBCs").  The parties continue to
dispute whether Meyerson offered this opportunity to the Telxon board.  The Court
of Chancery determined that Meyerson did offer PBC technology to the Telxon
board, and the board decided that Telxon should not develop its own PBC product
directly, because of the expense involved, but should allow Meyerson to develop it
while retaining a stake in Meyerson’s work.  At oral argument before this Court,
Directors asserted that there are board minutes reflecting the consideration, and
rejection, by the board of a proposal by Meyerson for Telxon to develop PBCs.
Because the record developed in the Court of Chancery did not include such
minutes, and in view of Telxon’s strenuous argument that the minutes reflect no such
consideration by the board, Directors were required to supplement the record on
appeal to sustain their contentions.  Directors have been unable to produce any such
documentation,  but continue to allege that then-CEO Meyo considered and rejected
the opportunity for Telxon to develop PBCs. 
Despite the absence of supporting minutes, it is undisputed that in August or
September of 1991, Meyerson (who at that point was consulting for Telxon part-
2  Following oral argument, we allowed the parties to supplement the record with
previously redacted Telxon board minutes which reflect that the board considered buying
Teletransaction from Meyerson as early as September, 1991.
6
time) chose to pursue development of PBC technology on his own and formed
Teletransaction for that purpose.  At some point (the timing of which is disputed2),
the Telxon board decided that it should acquire some interest in Teletransaction.
The Court of Chancery found that, at a February 12, 1992 board meeting,  the board
approved a plan for Telxon to invest in Teletransaction in incremental steps.  First,
Telxon would acquire a 15% interest in Teletransaction.  Second, upon the
successful completion of a PBC prototype, Telxon would acquire an additional 30%
interest for $3 million, increasing its ownership interest to 45%.  Third, after
Teletransaction had PBC products that were ready for sale, Telxon would purchase
an additional 35% stock interest for $3.5 million, bringing its total ownership
interest in Teletransaction to 80%.   Although Telxon agrees that the board did seek
to acquire Teletransaction, it disputes the reasoning and timing attributed to the
board by the Court of Chancery.  The parties agree, however, that Meyerson
abstained from any discussions of the Teletransaction acquisition.
In March 1992, Telxon began its acquisition of Teletransaction by purchasing
15% of Teletransaction’s stock for $1.7 million, the bulk of which  was distributed
directly to  Meyerson and members of his family.  Again, it is unclear whether this
3  The parties dispute whether by this point Teletransaction had developed a working PBC
prototype.  Under the alleged three step plan, a working prototype was a pre-condition for Telxon
to invest any further in Teletransaction.  The trial court resolved this dispute in favor of Directors,
because four people testified by deposition to having seen the working prototype at a national trade
show called Scan Tech on October 6, 1992.  Telxon’s only evidence to the contrary is the negative
inference drawn by their expert, Dr. Portia Isaacson, from the fact that when she was evaluating
Teletransaction she asked to see the prototype and was refused.
7
transaction was part of a larger scheme to acquire Teletransaction incrementally.
Six months later, however, on October 14, 1992, Meyo suddenly resigned as CEO.
The Court of Chancery found that the Telxon board then concluded that the
emergency caused by Meyo's resignation made it advisable for Telxon to acquire
100% of Teletransaction, rather than 80% in three stages, so that Meyerson would
agree to resume his post as CEO of Telxon.  Accordingly, on October 20, 1992, the
board authorized Telxon to acquire an additional 30% of Teletransaction for $3
million3 "as a down payment and a part of the process of negotiation for the
acquisition of all, or substantially all of the stock of [Teletransaction], and as part
of the inducement to Mr. Meyerson to accept the role as full-time Chief Executive
Officer of Telxon . . .."
In November 1992, during negotiations between Meyerson and Telxon over
the terms of Meyerson's return to Telxon, Meyerson demanded an additional $5
million above the initially agreed price for Telxon's purchase of 80% of
Teletransaction.   Meyerson told the board that the additional $5 million would
compensate him for (i) his sale of the 20% residual equity in Teletransaction he had
8
originally intended to retain, and (ii) his commitment to become full-time CEO of
Telxon, rather than a part-time consultant.   After discussing Meyerson's proposal
and receiving a fairness opinion from an independent financial advisor, Unterberg
Harris, the board, without Meyerson present, approved that proposal subject to
certain conditions.  The total consideration for the 100% purchase of
Teletransaction, as consummated in 1993, would be $17.3 million.  
This action followed soon thereafter.  The complaint challenged the
acquisition of Teletransaction both at the point that the initial 15% interest was
acquired and when the purchase was consummated.  Telxon argues that since it
already owned all rights to the PBC developed by Meyerson under the consulting
agreement, the decision to later purchase Teletransaction, whose only asset was the
PBC technology, was a breach of the Directors’ fiduciary duties and, as to
Meyerson, a misappropriation of a corporate asset and usurpation of a corporate
opportunity.  
The complaint also challenged the compensation paid to Directors during this
time frame.  Directors Rose, Reddy, and Goodman, as non-executive directors,
received an annual retainer of $20,000 and a fee of $2,500 for each board meeting
and committee meeting attended in person and $1,250 for each meeting attended by
telephone.  During fiscal year 1993, the board met twenty-four times and committees
9
served on by Directors Rose, Reddy and Goodman met fourteen times.  The
compensation for each of these three directors was therefore approximately $90,000.
In addition, they were each retained as a consultant and paid $30,000, $25,000, and
$10,000, respectively.  Meyerson’s compensation under the consulting agreements
with Accipiter was also challenged as excessive.
The Court of Chancery granted summary judgment in favor of Directors on
the compensation claims and the duty of loyalty claims.  This appeal followed.
II
We review de novo the Court of Chancery’s decision on cross-motions for
summary judgment.  Stroud v. Grace, 606 A.2d 75, 81 (Del. 1992).  In evaluating
the record on a motion for summary judgment, a trial judge is not permitted to
weigh the evidence or resolve conflicts presented by the pretrial discovery.
Cerberus Intern., Ltd. v. Apollo Management, L.P., 794 A.2d 1141, 1149-50 (Del.
2002).  As we stated in Cerberus, “[t]he test is not whether the judge considering
summary judgment is skeptical that plaintiff will ultimately prevail,” but whether the
evidence, when viewed in the light most favorable to the nonmoving party, presents
any dispute of material fact.  Id. at 1150.  The trier of fact may weigh the evidence
and resolve disputes only after hearing all the evidence, including live witness
10
testimony.  Id. (noting that where a determination of credibility must be made,
summary judgment is inappropriate).  “This is an axiom of the judicial process and
applies unless the parties have stipulated that the paper record shall constitute the
trial record.”  Id. at 1149, citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
255 (1986)(noting that trial courts should act “with caution” in granting summary
judgment); Kennedy v. Silas Mason Co., 334 U.S. 249, 257 (1948)("We consider
it the part of good judicial administration to withhold decision ... until this or
another record shall present a more solid basis of findings based on litigation or on
a comprehensive statement of agreed facts.")  Cross-motions for summary judgment
are not the procedural equivalent of a stipulation for decision on a paper record.
Empire of Am. Relocation Servs., Inc. v. Commercial Credit Co., 551 A.2d 433,
435 (Del. 1988).
Initially, Telxon contends that it was entitled to have summary judgment
granted in its favor.  There is no "right" to a summary judgment.  Anglin v.
Bergold, 565 A.2d 279 (Del. 1989); Brunswick Corp. v. Bowl-Mor Co., Inc., 297
A.2d 67,69 (Del. 1972).  A trial court’s denial of summary judgment is entitled to
a high level of deference and is, therefore, rarely disturbed.  Id.  Additionally, we
have determined that the existence of factual disputes makes this case an
inappropriate one for summary judgment in favor of either party.  
11
III
Telxon alternatively argues that the Court of Chancery erred when it found,
as a matter of law, that Meyerson was free to develop PBC technology on his own.
It is unclear whether Telxon is urging a misappropriation theory or a corporate
opportunity theory, or both.  Directors argue that Telxon raised neither theory below
and are therefore barred from raising them on appeal.  See Supr. Ct. R. 8.  In its
complaint, however, Telxon did make a claim that Meyerson “misappropriated a
corporate asset,” and that issue was briefed in the trial court.  Accordingly,
although it was not addressed by the trial court in its decision, the issue was fairly
presented to that court and thus properly a subject of appeal. 
The corporate opportunity theory, too, was implicitly raised below, in the
argument that Meyerson breached his duty of loyalty by usurping an opportunity for
himself that rightfully belonged to Telxon.   As we have previously recognized, this
Court may rule on an issue fairly presented to the trial court, even if it was not
addressed by that court below.  Standard Distrib. Co. v. Nally, 630 A.2d 640, 647
(Del. 1993).  Furthermore, on this record we need not necessarily reach the merits
of either the misappropriation or the corporate opportunity claim, if we are satisfied
that facts bearing on the claims remain in dispute and should not have been the
subject of a summary judgment.
12
We agree with Telxon, however, that the Court of Chancery erred when it
found that Meyerson was free to develop PBC technology on his own because “the
Board made a business decision that Telxon should not develop directly its own PBC
product.”  Merchants’ Nat. Properties, Inc. v. Meyerson, 2000 WL 1041229, *2
(Del. Ch. 2000).  The question of whether Meyerson ever presented the opportunity
to develop PBCs to the Telxon board remains a hotly disputed one.  At oral
argument before this Court, we attempted to have the parties clarify their disparate
views reflected in their briefs.  Despite their claims of board participation, Directors
could not produce board minutes reflecting that Meyerson had presented the PBC
opportunity to the board.  Following supplemental briefing on the effect of this
omission, and an expanded record, Directors continue to argue that Meyo, as the
CEO, decided that Telxon should not pursue development of PBCs directly and that
the board deferred to Meyo’s judgment on the issue.  
While presentation of a purported corporate opportunity to a board of
directors, and the board’s refusal thereof, creates a safe harbor for an interested
director, that safe harbor does not extend to an opportunity presented only to the
corporation’s CEO.  See Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 157 (Del.
1996).  Rejection of a corporate opportunity by the CEO is not a valid substitute for
consideration by the full board of directors.  This proposition is aptly illustrated by
13
the record before us.  We do not know the basis of Meyo’s decision, if there was
such a decision, not to develop PBCs.  There is no record reflecting what
information Meyo may have relied on to make his decision, or who supplied that
information.  If Meyerson was Meyo’s source of information, his decision cannot
be considered an informed one. 
The expansion of the record to include previously redacted board minutes also
revealed that the board considered purchasing Teletransaction from Meyerson as
early as September of 1991, just one month after Meyerson created Teletransaction
to begin development of PBCs, leaving little time for the Telxon board to have
rejected the opportunity to develop PBCs directly.  This evidence sheds doubt on any
factual conclusion that Meyerson presented the opportunity to the Telxon board,
which it refused.  It surely precludes the grant of summary judgment premised on
the establishment of that fact.  Resolution of whether Meyerson offered Telxon the
opportunity to develop PBCs may well depend upon the testimony of various
witnesses.  Resolving conflicting testimony is the province of a fact finder at a trial,
not a judge on summary judgment.  Furthermore, the determination of "[w]hether
or not the director has appropriated for himself something that in fairness should
belong to his corporation is a factual question to be decided by reasonable inference
14
from objective facts." Johnston v. Greene, 121 A.2d 919, 923 (Del. 1956), citing
Guth v. Loft, 5 A.2d 503 (Del. 1939).
IV
Telxon also contends that there are disputed issues of material fact as to
whether Directors were independent, acted independently, and whether Meyerson
deceived the board.  Directors argue that the trial court properly found that a
majority of the Directors were independent, thereby ratifying the interested purchase
of Teletransaction from Meyerson.  The Court of Chancery found that four out of
five of the Directors were independent from Meyerson, but determined that it was
unnecessary to pass on the independence of Director Goodman.  Telxon also argues
that the Court of Chancery analyzed this claim under a business judgment standard
of review when it warranted an entire fairness analysis because Meyerson was
concededly interested in the transaction. 
Directors must not only be independent, but must act independently.  Kahn
v. Tremont Corp., 694 A.2d 422, 429 (Del. 1997).  As this Court has previously
stated in defining director independence: "[i]t is the care, attention and sense of
individual responsibility to the performance of one's duties ... that generally touches
on independence.”  Id. at 430, quoting Aronson v. Lewis, 473 A.2d 805, 816 (Del.
15
1984).  Where only one director has an interest in a transaction, however, a plaintiff
seeking to rebut the presumption of the business judgment rule under the duty of
loyalty must show that "the interested director controls or dominates the board as a
whole."  Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168 (Del. 1995). 
A party alleging domination and control of a company's board of directors
bears the burden of proving such control by showing a lack of independence on the
part of a majority of the directors.  Odyssey Partners, L.P v. Fleming Cos., Inc.,
735 A.2d 386, 407 (Del. Ch. 1999).   Theoretically, a director can be "controlled"
by another, for purposes of determining whether the director lacked the
independence necessary to consider the challenged transaction objectively.  A
controlled director is one who is dominated by another party, whether through close
personal or familial relationship or through force of will.  Orman v. Cullman, 794
A.2d 5, 25 n. 50 (Del. Ch. 2002). A director may also be deemed “controlled” if
he or she is beholden to the allegedly controlling entity, as when the entity has the
direct or indirect unilateral power to decide whether the director continues to receive
a benefit upon which the director is so dependent or is of such subjective material
importance that its threatened loss might create a reason to question whether the
director is able to consider the corporate merits of the challenged transaction
objectively.  Id.
4  Directors did not produce the August 19, 1992 board meeting minutes below, despite
discovery requests from plaintiff encompassing them.  Telxon obtained the minutes only after it
was re-aligned as plaintiff in November, 2000.  Telxon did not discover this omission until its
Notice of Appeal had been filed.  We agreed to enlarge the record to include these minutes in the
interest of justice, cognizant that the Court of Chancery will have the opportunity to decide their
import in the first instance.  See Stafford v. Sears, Roebuck & Company, 413 A.2d 1238, 1239
n.2 (Del. l980) (allowing record to be enlarged to include evidence not available below, “in the
interest of justice”).
16
It is undisputed that Meyerson, an obviously interested party, abstained from
voting on the Teletransaction matter.  Nonetheless, Telxon argues a majority of the
other Directors were beholden to Meyerson, as Telxon’s executive Chairman of the
Board and “most senior executive,” because he was in a position to affect their
livelihood.  Meyerson did play an integral role in Telxon’s management for many
years, both during and after his stint as CEO, and it is clear that the other Directors
respected his business acumen and often relied upon his counsel.  Additionally,
Director Goodman’s law firm derived a substantial portion of its revenue from
Meyerson and his businesses.  Given the state of the record, however, we cannot say
whether or not the other Directors acted independently or were beholden to
Meyerson such that they deferred to his will in the Teletransaction matter.
As previously noted, we allowed the record to be expanded to include
previously omitted board minutes showing that Meyerson headed the slate of new
corporate officers as Chairman of the Board.4  Telxon argues that these minutes
refute the conclusion reached by the Court of Chancery that Meyerson was merely
17
a non-executive Chairman with no control over the other officers.  It is unclear what
impact, if any, this revelation would have had on the trial court’s analysis, but we
believe that it represents a disputed fact that should be resolved only after a trial at
which all the facts are presented and the credibility of all the witnesses tested.  Only
after a full picture of Meyerson’s relationship with the other Directors is developed
can their independence be ascertained.
V
Finally, Telxon challenges the grant of summary judgment in favor of
Directors on the compensation claims.  The Court of Chancery granted Directors’
motion for summary judgment from the bench, stating only:  
In determining that there’s no triable issue of fact and that this claim –
that summary judgment should be granted in defendants’ favor on this
claim, I am not relying on the affidavit of defendants’ expert.  I’m
relying solely upon the other facts and the absence of any facts that
would indicate — that is, the absence of any other evidence from the
plaintiff’s side that would indicate that the level of compensation was
so high that the claim should be tried.  I cannot see what a trial would
accomplish in these circumstances. 
Merchants’ Nat. Properties, Inc. v. Meyerson, C.A. No. 13139, Jacobs, V.C. (Del.
Ch. Feb. 4, 2000).
18
Like any other interested transaction, directoral self-compensation decisions
lie outside the business judgment rule’s presumptive protection, so that, where
properly challenged, the receipt of self-determined benefits is subject to an
affirmative showing that the compensation arrangements are fair to the corporation.
Hall v. John S. Isaacs & Sons Farms, Inc., 146 A.2d 602, 610-11 (Del. Ch. 1958),
aff'd in part, 163 A.2d 288 (Del. 1960); Meiselman v. Eberstadt, 170 A.2d 720
(Del. Ch. 1961); Wilderman v. Wilderman, 315 A.2d 610 (Del. Ch. 1974).  As
former Chancellor Allen noted in an earlier stage of this case, director
compensation, fixed by the board, is contemplated by Section 141(h) of the
Delaware General Corporation Law.  The former Chancellor further explained that
there is “no single template for how corporations should be governed and no single
compensation scheme for corporate directors; amount alone is not the most salient
aspect of director compensation, but certainly $100,000 a year or more would not
be inappropriate where board service was demanding; and where the number of
other boards a director could serve on was carefully limited.”  Steiner v. Meyerson,
1995 WL 441999, *7 (Del. Ch. 1995).  The Chancellor refused, however, to
dismiss Telxon’s breach of loyalty claim with regard to the Directors’ compensation.
 Id.  Although “these amounts seem quite within a range that could be paid in good
faith by a company seeking to attract competent, committed directors,” the
19
Chancellor felt that Directors would likely be required to prove the reasonableness
of this compensation.
Here, the trial court seems to have imposed the burden on Telxon to produce
evidence that the Directors’ compensation was unreasonable.  Although the trial
court was unable to see “what a trial would accomplish” here, it would certainly
resolve the parties’ disputed evidence regarding the Directors’ contribution to the
corporation, which obviously bears on the question of whether or not their
compensation was reasonable.  Furthermore, the trial court did not consider the
interplay between the Directors’ compensation and the possible breach of their
fiduciary duties.  This claim, too, was decided prematurely. 
Accordingly, we reverse the judgment of the Court of Chancery and remand
for further proceedings consistent with this Opinion.