Abercrombie v. Davies

Eleven investors, including several oil companies, organized American Independent Oil Company (American) to develop an oil concession in the Middle East. All received voting stock. No single stockholder owned a controlling majority. Effectively each stockholder could elect directors to a board of 15. Phillips Petroleum Company (Phillips) held the largest interest, about one-third of the stock. In 1950, president Ralph Davies and five other stockholders (defendants) who together held more than half the stock formed a coalition to keep Phillips from gaining control. The coalition entered an “Agents’ Agreement” that stated intent to gain voting control of American, transferred their stock into escrow, and gave irrevocable voting rights for 10 years to eight agents—the directors those stockholders elected, including Davies. Seven agents had to agree to vote the stock or could withdraw the stock from escrow and transform the agreement into a formal voting trust. A form voting trust attached as an exhibit paralleled the agreement except “agents” became “trustees” who registered stock as trustees and issued voting-trust certificates instead of receipts to stockholders to meet Delaware statutory requirements. Otherwise, the control schemes were identical. The coalition controlled American for nearly five years. In late 1954, two coalition directors switched sides and swung the board vote against the coalition, threatening its control. Coalition members sued for breach in California and obtained a preliminary injunction. Meanwhile, organizer James Abercrombie, Phillips, and another oil-company stockholder (plaintiffs) sued in Delaware and requested summary judgment, arguing the agreement was an illegal voting trust. The judge disagreed and denied summary judgment. Abercrombie and the other claimants appealed.