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October 21, 1994



Murray, McNULTY, Cousins, Jr.

The opinion of the court was delivered by: Murray

PRESIDING JUSTICE MURRAY delivered the opinion of the court:

Plaintiffs, Richard D. Foley (Foley) and Robert L. Payne (Payne) brought an action against defendant, Santa Fe Pacific Corporation (Santa Fe) under the "corporate benefit rule" to recover costs and fees allegedly associated with their having inured a benefit to the defendant. Plaintiffs are two shareholders of defendant. Plaintiffs appeal the trial court's grant of judgment on the pleadings in favor of defendant.

On July 19, 1990, Foley and Payne filed a petition for an equitable award of fees and costs related to "their successful work regarding [Santa Fe's] poison pill and other shareholder proposals" which resulted in "a great benefit to Santa Fe shareholders." Plaintiffs alleged the following: With assistance from the American Employees Stock Ownership assistance from the American Employees Stock Ownership Association (AESOA), they completed and "were responsible for a significant amount of work in Santa Fe matters involving Santa Fe's adoption of a poison pill and other corporate resolutions which occurred around the time that various outside business and partnerships, including Henley Group and Olympia and York (O&Y) were making proposals to purchase Santa Fe in a tender offer situation." Plaintiffs caused a proxy battle to be waged at the 1988 annual meeting. At the May 1988 annual meeting Foley placed before the shareholders a resolution that the Santa Fe Board should redeem its previously adopted poison pill. The May 1988 shareholder proposal favored Santa Fe's redemption of its poison pill plan by a 59% majority of the votes cast and "as a result of this vote, in whole or in part, Santa Fe agreed to numerous changes in its poison pill plan."

On October 10, 1990, defendant filed its answer and affirmative defenses. Defendant alleged as affirmative defenses (1) that the petition failed to state a claim upon which relief can be granted, and (2) that plaintiffs lacked standing to assert the claims set forth in the petition. Defendant's prayer for relief requested that plaintiffs' petition be dismissed with prejudice.

Thereafter, Santa Fe filed requests for document production, notices of depositions and interrogatories. On July 2, 1992, defendant filed a motion for judgment on the pleadings pursuant to section 2-615(e) of the Code of Civil Procedure. Defendant asserted that the Delaware Supreme Court had made clear that approval by a majority of a corporations's board of directors or shareholders is an absolute prerequisite to a corporation's duty to reimburse a shareholder for proxy expenses. Defendant argued that plaintiffs failed to allege that a majority of either the board of directors or the shareholders of Santa Fe approved the expenditure of corporate funds to reimburse plaintiffs for their alleged fees and costs and that absent said allegation, the petition fails as a matter of law.

On July 16, 1992, plaintiffs filed a motion to strike defendant's motion for judgment on the pleadings asserting that Santa Fe's answer put material facts at issue and that Santa Fe had waived its right to pursue a judgment on the pleadings by waiting almost two years before bringing its motion.

Both defendant's motion for judgment on the pleadings and plaintiffs' motion to strike were fully briefed and then argued to the trial court on September 16, 1992. At the hearing on the motions, the trial court rejected plaintiffs' motion to strike, noting that "the defendant in this matter is accepting all well-pleaded facts as admitted and is adressing [sic] the sufficiency of the complaint." The court also rejected plaintiffs' argument that the filing of an answer by Santa Fe in some manner waived its right under section 2-615(e) to seek judgment on the pleadings.

On the section 2-615(e) motion, the court found the petition failed to include allegations essential to state a cause of action:

"The defendant has stated and it's unrebutted that the recovery of fees and costs for shareholder activity requires approval of the board [of directors] or/and shareholders and plaintiffs have not pled * * * those facts."

Citing to Grodetsky v. McCrory Corp. (1966), 49 Misc.2d 322, 267 N.Y.S.2d 356, the trial court noted that it is only under limited circumstances that expenses for proxy fights or other corporate policy contests may be reimbursed from corporate funds. In rejecting plaintiffs' argument for recovery under the "corporate benefit" doctrine, the trial court referred to Tandycrafts, Inc. v. Initio Partners (Del. 1989), 562 A.2d 1162 and Allied Artists Pictures Corp. v. Baron (Del. 1980), 413 A.2d 876, and stated:

"Again it is not approving the fees and costs -- the shift in the expenses of fees and costs to the corporation for the, quote, shareholder's activity in initiating the proxy fight, but it's shifting the fees and costs for the shareholder expenses in initiating the litigation specifically.

There is no 'corporate benefit' doctrine which authorizes reimbursement of shareholders for the expenses of their activities. The 'corporate benefit' doctrine authorized reimbursement of fees and costs of litigation brought ...

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