Opinion ID: 2103794
Heading Depth: 1
Heading Rank: 1

Heading: The 50,000 shares to Chesler and Schwebel.

Text: It is first contended that all the directors who authorized the transaction were interested, and that the ratification by the stockholders was ineffective because the notice was inadequate. Both these contentions are vigorously denied by the plaintiff and by the defendants. We do not pause to consider them, since we are satisfied that the record contains evidence tending to support the conclusions: (a) that Chesler and Schwebel were entitled to some compensation for their services in the acquisition of General (indeed, the objector's counsel seems to have admitted this below), and (b) that the amount seems to be reasonable in the light of the fact that the number of warrants and the unit price were fairly bargained for and of the fact that $500,000 had been offered Lake for services in the acquisition of Amtote. This conclusion disposes also of the next contention, viz., that the value of the warrants, fixed at $3, should have been determined by an independent appraisal. It is contended that because Chesler and Schwebel later transferred certain of the warrants to others, the warrants were issued in payment for services in connection with the acquisition of control of Universal. This is categorically denied, and the subsequent transfers are otherwise explained. Clearly, plaintiff's contention rests on a dubious premise. Finally, it is contended that the subsequent rise in the market price of the stock  apparently about ten times the value fixed in the warrant  has resulted, or will result, in a waste of corporate assets to the benefit of the warrant holders and of the optionees. The argument seems to be twofold. The first point is that the reward is so large as in itself to stamp the transaction as a waste of assets. Rogers v. Hill, 289 U.S. 582, 53 S.Ct. 731, 77 L.Ed. 1385 is cited. That case involved a by-law providing for specified percentages of net profits (exceeding a certain amount) as annual compensation to the president and five vice presidents. These payments constituted compensation in addition to fixed salaries for services during each year that the by-law was in effect. After eighteen years such annual compensation had increased to the extent that in the year 1930 the president received total compensation of over a million dollars. The Supreme Court held that payments had become so large as to require a review by the courts in the interest of the company. That case is obviously inapplicable here. It concerned the amount of compensation paid for services in each year. It was not an executed transaction, but a continuing one. Lieberman v. Becker, Del., 155 A.2d 596, also relied upon, involved phantom stock options, and is in some degree subject to the same distinction. In the instant case we are concerned with stock warrants, which have nothing to do with annual compensation. Moreover, the General Corporation Law explicitly authorizes the issuance of stock options and warrants limited or unlimited in duration. 8 Del.C. § 157; act of March 22, 1929; 36 Del.L. § 6. Whether the issuance of perpetual warrants represents a sound public policy is not for us to say. Cf. the article, Employee Stock Options, 66 Harv.L.Rev. 1403, at pp. 1426-1427. It is clear that the statute contemplates that the warrant holder or optionee may, at least under ordinary circumstances, lawfully expect to enjoy the advantages of any future increase in value of the shares, to the same extent as if he had invested in the stock itself. And the duration of the Chesler-Schwebel warrants is only five years. Indeed, the Rogers case is clearly inapplicable to the issuance of the Chesler-Schwebel warrants because this case is not the ordinary one of the issuance of warrants or options as incentive compensation, but involves merely a payment for an obligation theretofore incurred. If a creditor accepts stock or warrants in payment of the debt, is he not entitled to the benefit of his bargain? But the objector appears to argue that the three groups of options above referred to are also subject to attack under the rule of Rogers v. Hill. We do not think so, at least in the absence of special circumstances not here present. What becomes of the essential purpose of a stock warrant, or option, if the grantee may not take advantage of the increase in value? In the case of officers or employees, what would be left of the theory of incentive compensation if objector's contention were approved? The objector appears to concede that if the holder exercises the option and buys the stock, the stock cannot be canceled. This concession appears to be quite inconsistent with the theory of an ex post facto review of the reasonableness of the profit made. In any event we decline to approve a general rule in respect of stock warrants or options which would, as plaintiff's counsel correctly says, destroy the stability and value of warrants and options granted as incentive compensation. It is quite true that the recent and rapid increase in the issuance of stock options has presented the courts with some difficult problems. See this Court's opinion in Kerbs and Haney v. California Eastern Airways, Inc., 33 Del.Ch. 69, 90 A.2d 652; 33 Del.Ch. 174, 91 A.2d 62, 34 A.L.R.2d 839 and Gottlieb v. Heyden, Chemical Corp., 33 Del.Ch. 82, 90 A.2d 660; 33 Del. Ch. 177, 91 A.2d 57, as well as the opinion in the Beard case, infra, Sup.Ct.1960, 160 A.2d 731. See also Lieberman v. Becker, supra. And see the article Employee Stock Options, above cited. But the existence of these problems does not justify any such rule as objector urges. It is, of course, always possible that the warrants or options might be vulnerable to attack on the ground that at the time of issuance the directors and recipients had inside knowledge, withheld from the stockholders, which enabled them to foresee an extraordinary rise in the price of the stock. See again 66 Harv.L.Rev. 1427. This is the objector's second contention  that the directors who authorized these warrants and options could reasonably have foreseen the remarkable prosperity that lay in the future and concealed their knowledge from the stockholders. Plaintiff and defendants reply that there is nothing whatever in the record to justify such a finding. This seems to be correct. Moreover, as the Vice Chancellor pointed out, if the insiders were as prescient as the objector says, they would certainly have invested heavily in Universal stock; whereas they did not do so. We are of opinion that the plaintiff's case against the validity of the Chesler-Schwebel warrants rests on very insecure grounds.