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An attempt by the chairman of Hanover Foods Corp. to seize control of the Hanover, Pa.-based company from family members by changing the company charter was not a breach of the voting trustee’s fiduciary duty, because the move was also made in an effort to boost profits. In so ruling, the Pennsylvania Supreme Court reversed a divided superior court decision handed down last year ruling that John Warehime acted improperly because the charter change was a “radical structural transformation” actually designed to secure control from family members. The Supreme Court earlier this week said the superior court held the shareholder to too high a standard. “In short, the 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. . . . We do not agree,’ stated Chief Justice John P. Flaherty, in writing for the majority in Warehime v. Warehime. Justice Russell Nigro dissented. Joined by Justice Ronald D. Castille, Nigro stated that he believed that Warehime’s actions should have been held to a higher standard than that expressed by the majority. “I believe that while the majority opinion properly characterizes the broadness of the scope of a trustee’s powers, it does not adequately acknowledge the more constraining duty of absolute loyalty to the beneficiaries which must pervade any and all actions a trustee undertakes,” Nigro wrote. FAMILY TIES John Warehime, Hanover’s chairman, took charge of the York company as chairman, chief executive officer and the sole voting trustee for two trusts after patriarch Alan A. Warehime died in 1990. The two voting trusts were designed to expire in 1998, 10 years after their creation. The court noted that the 10-year term was required by statute. But that statutory requirement was subsequently repealed. “The provision limiting the trusts to a duration of 10 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,” Flaherty said. According to the court, in anticipation of the expiration of the voting trusts, Michael Warehime and Sally Warehime Yelland, John Warehime’s two siblings with interests in the company, made it known that they were not satisfied to have John running Hanover. Michael, who controls Snyder’s of Hanover, expressed an interest in becoming chairman of Hanover. However, neither Michael nor Sally developed any plans for the future of Hanover. “Uncertainty over the course that [Hanover] 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 [Hanover] to raise needed equity capital,” Flaherty wrote. Prior to the expiration of the voting trusts, John Warehime voted all the voting trust shares in favor of a proposal to eliminate cumulative voting in the election of Hanover’s directors. John then was able to exercise the voting trust shares to elect all of the board members. None of these actions was challenged. In 1996, several members of the board formed an “independent directors committee” for the purpose of considering strategic alternatives for Hanover in light of the impending expiration of the voting trusts and the dissension among members of the Warehime family. After hiring a consulting firm and considering various options, the committee decided to recommend adoption of amendments to Hanover’s articles of incorporation “to provide a stable governance structure,” the court said. The proposed amendments permitted the issuance of 10,000 shares of stock to the Hanover 401(k) plan and provided a method for resolution of disputes among members of the Warehime family as to the management of the company. Specifically, the amendments provided that in the event of a dispute among family members during the five years after the issuance of the stock, the new Series C stock would be entitled to 35 votes per share. If there were no dispute, the Series C shares would remain non-voting. “John Warehime has no voting rights with regard to those shares,” Flaherty said. “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.” Michael Warehime challenged the charter change as improper ‘vote-buying.’ The trial court disagreed, but the superior court reversed. But now, the Supreme Court has said the superior court should not have overturned the trial court’s decision. The high court said that it would be unfair to restrict John Warehime from taking action on behalf of the company, even if it served his personal interests, since he acted in a ‘good faith’ effort to boost profits. “The language of the [voting trust] agreements is clear and unambiguous,” Flaherty wrote. “The trustee must exercise his best judgment in voting the stock and act in good faith. . . . Other than those duties, there are no limitations set forth as to the manner in which the trustee’s voting powers can be exercised.” The court noted that if the parties intended to limit the trustee’s authority to vote the shares, they could have included a provision in the agreement. “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 . . .,” Flaherty said. “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 trial court found that John Warehime acted in good faith for the benefit of the corporation and its shareholders and that his actions as trustee were not taken for his own benefit, the Supreme Court said. “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,” Flaherty wrote. SELF-DEALING In his dissent, Nigro said he believed John Warehime’s actions constituted a breach of his fiduciary duty as trustee, which Nigro defined as one of “absolute” loyalty. “I fail to see how John Warehime’s actions, which effectively disenfranchised the beneficiaries of their right to assume voting control of their shares upon the natural expiration of the trusts, can be reconciled with the absolute duty of loyalty imposed on all trustees,” Nigro wrote. “The whole effort to retain control of the voting trusts beyond their expiration dates was a glaring example of self-dealing involving an impermissible clash between John Warehime’s private interests and the interests of the beneficiaries.”

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