Warehime v. Warehime

OPINION OF THE COURT

FLAHERTY, Chief Justice.

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 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, Snyder’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 adopted and, as a result, John Warehime was able to exercise the voting trust shares to elect all of the board members.

In 1996, a body known as the “Independent Directors Committee” was formed by several members of the board. It was formed for the purpose of considering strategic alternatives for HFC in light of the impending expiration of the voting trusts and the dissention among members of the Warehime family. The family had not been able to set aside their differences to plan for the future of HFC. John Warehime, Michael Warehime, and Sally Warehime Yelland had engaged in very little communication with each other in recent years. The decision to form the committee was made solely by board members without advice or input from counsel or John Warehime. The committee’s independence was reflected in the trial court’s findings that the board rejected proposals made by John Warehime on numerous occasions and that the board would only continue to support John Warehime as chairman of HFC if he continued.to perform well.

The committee commissioned various consulting firms to conduct a review of HFC. The review determined that HFC was equal or superior to its competition but that it would need approximately $30 million in new capital to sustain its competitive position. Uncertainty over HFC’s future, arising from the impending 1998 expiration of the voting trusts, would make it difficult to raise this capital. The review cautioned that if uncertainty over the company’s future persisted there would be a deterioration in HFC’s business prospects and that the long-term interests of the company would be harmed.

In light of this situation, the committee considered various strategic alternatives. These included doing nothing and allow the voting trust to expire, with the result that HFC’s prospects would meanwhile deteriorate. Also considered was the possibility of selling the company. The option that the committee decided upon, however, was to recommend adoption of amendments to HFC’s articles of incorporation to provide a stable governance structure.

The proposed amendments permitted the issuance of 10,000 shares of Series C Convertible Preferred Stock to the HFC 401(k) plan, provided that the majority of the trustees of that plan are “disinterested directors” as defined in the Business Corporation Law, 15 Pa.C.S. § 1715(e). The amendments also provided a method for resolution of disputes among members of the Warehime family as to the management of HFC. Specifically, the amendments provided that in the event of a dispute among family members regarding the election of directors or other related matters during the five years after the issuance of the stock, the Series C would be entitled to 35 votes per share, and, if there is no such dispute, the Series C shares would remain non-voting. Thus, the amendments place directors serving as fiduciaries of the 401(k) plan in a position to resolve disputes over the management of HFC through exercise of their voting rights in Class C shares. John Warehime has no voting rights with regard to those shares. Because John Warehime as voting trustee of the Class B shares has control over election of the board of directors, however, the amendments have the effect of prolonging the period in which directors elected by him will have a measure of control over the company.

The shareholders of HFC were given formal notice of the proposed amendments. Soon thereafter, Michael Warehime and several other shareholders filed an action seeking a •preliminary injunction to prohibit John Warehime from voting shares in the trusts in favor of the 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 were, 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:

[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 least 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 actions 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. § 1768(a) (emphasis added). Nothing in this provision or elsewhere in the Business 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....

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 judgment 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 In re Flagg’s 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.

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 § 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

Justice SAYLOR files a concurring opinion. Justice NIGRO files a dissenting opinion in which Justice CASTILLE joins.

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 . 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. § 1511 (1967) (repealed 1988). See also Christopher v. Richardson, 394 Pa. 425, 147 A.2d 375 (1959) (previous ten-year statutoiy 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 . 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.