Continental Airlines Corp. v. American General Corp.

• Decision Date: 06 September 1989
• Citation: 575 A.2d 1160
• Parties: Fed. Sec. L. Rep. P 95,360 CONTINENTAL AIRLINES CORPORATION, Continental Airlines, Inc., and Texas Air Corporation, Delaware Corporations; Defendants Below, Appellants, v. AMERICAN GENERAL CORPORATION and American General Life Insurance Company, Texas Corporations; Plaintiffs Below, Appellees. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 1160

575 A.2d 1160

Fed. Sec. L. Rep. P 95,360

CONTINENTAL AIRLINES CORPORATION, Continental Airlines Inc., and Texas Air Corporation, Delaware Corporations; Defendants Below, Appellants, v. AMERICAN GENERAL CORPORATION and American General Life Insurance Company, Texas Corporations; Plaintiffs Below, Appellees.

Supreme Court of Delaware.

Submitted: Sept. 6, 1989.

Decided: June 5, 1990.

Rehearing Denied June 25, 1990.

Paul P. Welsh (argued), Palmer L. Whisenant, Matthew B. Lehr of Morris, Nichols, Arsht & Tunnell, Wilmington, and Mark Powers, Houston, Tex., for appellants.

E. Norman Veasey, Jesse A. Finkelstein, James C. Strum of Richards, Layton & Finger, Wilmington, Harry M. Reasoner (argued), David T. Harvin, Allan Van Fleet, Karen B. Jewel of Vinson & Elkins, and Kurt Schreiber, Houston, Tex., for appellees.

Before CHRISTIE, C.J., MOORE, J., DUFFY, Retired Justice (sitting by designation pursuant to Del. Const. Art. IV, § 38), BIFFERATO and TAYLOR, Judges (sitting by designation pursuant to Delaware Const. art. IV, § 12), constituting the Court en banc.

MOORE, Justice, for the majority:

Continental Airlines, Inc. ("Continental") and Texas Air Corporation ("Texas Air") appeal a decision of the Court of Chancery granting summary judgment against them and in favor of American General Corporation and American General Life Insurance Company (collectively "American General") on cross-motions for summary judgment. This case arises from a dispute over whether a contractual right possessed by American General, a former minority shareholder of Continental, entitles it to the same option to purchase shares of Texas Air as the employee-shareholders of Continental received relating to a going-private merger in which Continental was merged into a subsidiary of Texas Air.

The Court of Chancery held that American General acquired its contractual rights from a loan agreement which provided that American General would receive, upon a merger, the same merger consideration received by other Continental shareholders. American General was found to be entitled to the same options granted to the Continental employee-stockholders in the merger because those options were property "issued or payable with respect to or in exchange for" outstanding Continental stock. We agree and, accordingly, affirm.

I.

On June 10, 1983, American General and Continental executed an agreement (the "Loan Agreement") designed to satisfy Continental's need for operating funds which had developed as a result of substantial financial losses that Continental had sustained in previous years. Under the terms of the Loan Agreement, ¹ American General loaned $40 million to Continental by purchasing 10 four million dollar 11% senior Continental notes due in 1988, which were secured by a separate written guaranty by Continental and also by certain Continental real estate. American General also received the following additional consideration: (a) Continental warrants ("Warrants") valid for five years, enabling American General to purchase up to five million shares of common stock at $8.50 per share; (b) an option (the "AG Option") entitling American General to buy up to 25% of new issues of Continental stock at the issue price for ten years; the AG Option thus protected the warrants or the stock that might be acquired by exercising those warrants from possible dilution; (c) the right under § 3.8 of the Warrants, to receive the same consideration received by other Continental shareholders in the event of a merger involving Continental; and (d) the right to veto any prospective proposed merger or restructuring of Continental.

The Loan Agreement was followed by continued poor operating results and a major strike. Continental eventually filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. By early 1985, Continental had begun to turn things around. Continental and Texas Air offered the employees various incentives including a profit sharing program that resulted in some employee ownership of stock.

In July, 1985, prior to the time that Continental emerged from the bankruptcy proceedings, Texas Air, the parent corporation and then 72% owner of Continental, proposed a going-private merger with Continental. Although this initial proposal was unsuccessful, Texas Air's desire to merge continued. In December, 1985, American General bought 1,000 shares of Texas Air. In December of 1986, Texas Air and Continental finally agreed on terms for a going-private merger. Pursuant to the terms of this transaction Continental's minority shareholders were to receive $16.50 per share in a cash out merger. Continental would then become a wholly owned subsidiary of Texas Air.

Prior to the merger Texas Air announced a related proposal in which Continental employees who held Continental stock would receive, in addition to the $16.50 per share, an option to exchange their shares of stock in Continental for Texas Air stock at a 1 to .8 ratio, which reflected the then-market prices of the two stocks. ² Soon thereafter, American General filed a motion in the Court of Chancery to enjoin the merger on the ground that it discriminated among Continental's minority shareholders. The motion also sought to preserve American General's "contractual right to acquire an interest in Continental or Texas Air." Although American General's suit was not a class action, other Continental minority shareholders did file three separate class actions seeking to enjoin the merger on behalf of the class of Continental minority shareholders other than American General.

Apparently after realizing the possible legal consequences of the option offered to the Continental employee-shareholders, Texas Air withdrew it and attempted to recast it as a transaction separate from the merger of Continental and Texas Air (the "Employee Option"). Under the Employee Option, in addition to the $16.50 per share received by every shareholder, qualifying Continental employee-shareholders would receive options to purchase Texas Air common stock at the ratio of 8/10 of a share of Texas Air for each former Continental share, exercisable eighteen months after the merger. This Employee Option, however, was not set forth in the merger agreement ("Merger Agreement").

The Court of Chancery denied American General's motion for a preliminary injunction on the grounds that American General had failed to show irreparable harm. American Gen. Corp. v. Texas Air Corp., Del.Ch. C.A. Nos. 8390, 8406, 8650 and 8805, slip op. at 14, Hartnett, V.C. (Feb. 5, 1986). Essentially, the trial court held that even if the merger would breach American General's rights under the Warrants ³ and was otherwise procedurally unfair, remedies for these breaches existed following the merger. Id. On February 6, 1987, one day following the denial of the preliminary injunction, Texas Air completed a going-private merger with Continental through a wholly owned subsidiary of Texas Air formed for the purpose of merging with Continental. Continental then no longer had any shares publicly outstanding.

On March 3, 1987, American General moved for partial summary judgment arguing essentially that under § 3.8 of the Warrants, it was entitled to receive, upon exercise, the same opportunity to exchange its Continental shares purchasable under the Warrants for 8/10 of a share of Texas Air that the Continental employee-shareholders received by way of the Employee Option. Texas Air responded in two ways. First, it moved for summary judgment claiming that the merger did not violate any term in the Warrant contract and that American General lacked standing as a stockholder to maintain unfair price and dealing claims. Second, the Texas Air Board unilaterally amended the Employee Option so that it would become void if American General obtained a ruling that it was entitled, under the Warrants, to receive the same consideration given to the Continental employee-shareholders. ⁴ American General contends that, contrary to Texas Air's assertions, the Employee Options were in fact issued, but with a condition subsequent attached causing them to fail if this Court rules in favor of American General. On March 13, 1987, while the cross-motions for summary judgment were pending, the minority shareholders other than American General settled their class action suits. They received an additional $3.75 per share (on top of the original $16.50). The settlement agreement did, however, provide that the stockholder-employees of Continental could not receive the additional $3.75 per share if they chose to exercise their options. The Court of Chancery approved this settlement.

In his opinion on the cross-motions for summary judgment, the Vice Chancellor held that the merger violated American General's contract rights under the Warrants. American Gen. Corp. v. Continental Airlines Corp., Del.Ch., C.A. No. 8390, Hartnett, V.C., 1988 WL 7393 (Jan. 26, 1988). The basis for this finding was the conclusion that § 3.8 of the Warrants gave American General the absolute right to receive the same consideration that any other Continental stockholder had received in the merger. The court held that the Employee Option as instituted and implemented was a part of the total merger consideration paid by Texas Air to the Continental employee-stockholders and therefore, under § 3.8 of the Warrants, American General was entitled to $16.50 cash plus an option to purchase Texas Air stock, the same merger consideration given to the stockholder-employees.

The court also held that American General had standing as a stockholder to pursue its claims of breach of fiduciary duty against Texas Air. The court rested this holding on the simple fact that it was undisputed that American General was a Texas Air shareholder before and during the alleged breaches of duty.

The court held, however, that the defendants had not violated any implied obligation of good faith and fair...