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[J-70-2000] IN THE SUPREME COURT OF PENNSYLVANIA MIDDLE DISTRICT

MICHAEL A. WAREHIME, Appellant at Nos. 252 and 254/ Appellee at Nos. 251 and 253

v.

JOHN A. WAREHIME, Appellee at Nos. 252 and 254/ Appellant at Nos. 251 and 253

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Nos. 251, 252, 253 and 254 M.D. Appeal Docket 1999 Appeals from the order of Superior Court entered 12/02/98 at Nos. 709 and 710 HBG 1997, reversing orders dated 06/24/97 and 07/08/97 and remanding to the Court of Common Pleas of York County, Civil Division, at Docket No. 95SU-00471-07

722 A.2d 1060 (Pa.Super. 1998) ARGUED: May 2, 2000

OPINION OF THE COURT

MR. CHIEF JUSTICE FLAHERTY

DECIDED: November 27, 2000

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

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.

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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

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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.

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