Lewis v. Knutson

• Decision Date: 28 February 1983
• Docket Number: No. 81-1463,81-1463
• Citation: 699 F.2d 230
• Parties: Harry LEWIS, Plaintiff-Appellant, v. Al KNUTSON, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 230

699 F.2d 230

Harry LEWIS, Plaintiff-Appellant, v. Al KNUTSON, et al., Defendants-Appellees.

No. 81-1463.

United States Court of Appeals Fifth Circuit.

Feb. 28, 1983.

Harry Lewis, pro se.

Jackson, Walker, Winstead, Cantwell & Miller, James L. Truitt, Dallas, Tex., for Contran, Inc.

Timothy A. Duffy, Allan Brent Diamond, Dallas, Tex., for Daco Industries, et al.

Kathleen K. Spear, Valerie A. Leopold, Roger L. Taylor, Chicago, Ill., for defendants-appellees excluding Maxfield.

Appeal from the United States District Court for the Northern District of Texas.

Before INGRAHAM, REAVLEY and POLITZ, Circuit Judges.

INGRAHAM, Circuit Judge:

This appeal arises from a shareholder derivative suit filed on behalf of Contran, Inc., alleging that the Inside Defendants--the officers and directors of Contran, the target company--breached a fiduciary duty by opposing a tender offer by Outside Defendants--the principals of Danco, Inc., the tender offeror--and that both the Inside and Outside Defendants breached a fiduciary duty by entering into a settlement agreement that wasted Contran assets. The district court determined that since a hostile tender offeror owed no fiduciary duty to a target company or its shareholders, Lewis failed to state a claim, and therefore summary judgment was granted for Outside Defendants. The court also granted Inside Defendants' motion to dismiss for lack of standing because Lewis failed to maintain his shareholder status throughout the pendency of the suit. After no Contran shareholder intervened in response to the court's notice of impending dismissal, the derivative suit was dismissed with prejudice. Lewis appeals a multiplicity of alleged errors. Finding no merit to any of these contentions, we affirm the judgment, 87 F.R.D. 478, of the district court.

THE PARTIES

Contran, Inc. is a Delaware corporation with its principal place of business in Dallas, Texas. Plaintiff-appellant, Harry Lewis, was a Contran shareholder. ¹ The district court categorized the defendants as Inside and Outside. The Inside Defendants were those associated with the target company, Contran, on behalf of which Lewis sued derivatively and the Outside Defendants were those associated with the hostile tender offeror, Danco, Inc. The named defendants that were treated as Inside Defendants were Contran; its directors and officers, Al Knutson, Phillip Hubbard, Harold Simmons, Douglas Simmons, Glenn Simmons, and Michael Snetzer; and its parent corporation and largest shareholder, Flight Proficiency Service, Inc. The defendants classified as Outside Defendants were Danco; its shareholders, James Ling, William Tinsley, Lewis Johnson, and Daco Industries, Inc.; and the shareholders of Daco, John Bertoglio, Robert Moore, Daniel Carney, and Daniel Taylor.

THE EVENTS

Owning 14.8% of the outstanding shares of Contran common stock, Danco embarked upon a tender offer on January 17, 1978, to purchase an additional 23.3% of the outstanding stock at $35 per share. The Inside Defendants opposed this offer and neither supported nor recommended it to the Contran shareholders. The offer prompted several lawsuits, which led to the challenged September settlement. When the tender offer was completed on April 27, 1978, Danco had accumulated an additional 20.0% of Contran's stock for a total ownership of approximately 34.8%. ² After management's nominees were reelected to Contran's Board of Directors at the annual stockholders' meeting on July 21, 1978, Danco decided to sell its Contran stock. In September 1978, Contran acquired all of Danco's Contran stock in exchange for 189,200 shares of Vornado, Inc., which is a Contran subsidiary, $1,000,000 cash, and an agreement to indemnify Outside Defendants against any claims arising from the transactions between them. ³

THE SUIT, THE SUBSEQUENT EVENTS, AND THE DISTRICT COURT DETERMINATIONS

On September 15, 1978, Lewis filed this shareholder derivative suit alleging that the Inside Defendants breached their fiduciary duty by opposing the tender offer for the sole purpose of preserving their management control. Lewis further charged that this was the same motivation for the proxy fight at the annual shareholders' meeting and for the purchase of Danco's Contran stock, both of which constituted waste of Contran assets. Lewis also alleged that Outside Defendants breached a fiduciary duty by participating in and benefiting from these acts of Inside Defendants. On November 15, 1979, the district court granted the Outside Defendants' 12(b)(6) motion to dismiss for failure to state a claim, which had been converted to a Rule 56 motion for summary judgment. The district court also granted plaintiff leave to file an amended complaint consistent with the summary judgment.

On November 29, 1979, Contran approved a one-for-thirty reverse stock split. ⁴ The split was structured so that the shareholders could choose to cash in their resulting fractional interest by selling it to the company or to round up to the next highest whole share of new common stock by purchasing fractional interests. ⁵ The Letter of Transmittal also informed the shareholders that they would be deemed to have elected to sell their fractional share interest if they did not respond to Contran by January 18, 1980. Although notice of the split was mailed to Lewis' address that appeared on Contran's shareholder list, which did not include a zip code, it was returned stamped "Addressee Unknown at Box Number." ⁶ Since Lewis did not respond to the round-up offer by January 18, he was deemed to have sold his fractional interest and ceased to be a Contran shareholder.

The derivative suit was set for trial on February 11, 1980. Although the case was dismissed when Lewis failed to appear for trial, it was reinstated on March 3 and the complaint was amended on March 25. Since Lewis had lost his shareholder status on January 18, Inside Defendants moved to dismiss for lack of standing. The district court converted the motion to a motion for summary judgment and ordered oral argument for July 29. After hearing oral argument and considering affidavits and other evidence outside the pleadings, the court granted summary judgment for Inside Defendants and ordered that the remaining shareholders be notified of the imminent dismissal of the derivative action unless a shareholder intervened and prosecuted the suit. Lewis' subsequent motions for reconsideration and leave to file a second amended complaint were denied, while a protective order was granted for Inside Defendants against further discovery. After no shareholder intervened, the district court entered judgment with prejudice on August 28, 1981, and awarded costs, but not attorneys' fees, to Inside Defendants. Lewis now appeals.

THE CONTENTIONS AND THEIR DISPOSITION

Lewis challenges virtually every action taken by the district court. For purposes of clarity, we address them in chronological order of the actions taken, dealing first with the Outside Defendants, then the Inside Defendants. In granting summary judgment for Outside Defendants, the court determined that a hostile tender offeror and its principals owed no fiduciary duty to a target company or its shareholders. Lewis contends that this determination is erroneous and that a fiduciary duty should be imposed on Outside Defendants because of their association with Inside Defendants, who owed a fiduciary duty to the minority shareholders.

For summary judgment, the movant must demonstrate "the absence of a genuine issue of material fact and the appropriateness of judgment as a matter of law." Union Planters National Leasing, Inc. v. Woods, 687 F.2d 117, 119 (5th Cir.1982). The existence of a fiduciary duty is a question of law, Harriman v. E.I. DuPont de Nemours & Co., 372 F.Supp. 101 (D.Del.1974), and as a substantive right in a shareholder derivative action, Blanchard v. Commonwealth Oil Co., 294 F.2d 834, 840 (5th Cir.1961), is determined according to the law of Delaware, the state of Contran's incorporation. Rogers v. Guaranty Trust Co. of New York, 288 U.S. 123, 53 S.Ct. 295, 77 L.Ed. 652 (1922). Typically a fiduciary duty is imposed upon persons that exercise control over the corporation's affairs: officers, directors, and controlling shareholders. E.g., Singer v. Magnavox Co., 380 A.2d 969, 976-77 (Del.1977). Since Lewis' complaint states that Inside Defendants comprise the officers and directors of Contran, we focus on whether the Outside Defendants were controlling shareholders under Delaware law.

Majority shareholders, those owning at least 50% of the outstanding stock, are controlling shareholders as a matter of Delaware law. See Polin v. Conductron Corp., 552 F.2d 797, 808 (8th Cir.1977). Outside Defendants, however, owned no more than 34.8% of Contran's stock. Nevertheless, if a shareholder exercises actual control and direction over corporate management, a fiduciary duty will be imposed. Harriman v. E.I. DuPont de Nemours & Co., 411 F.Supp. 133, 152 (D.Del.1975); Harriman v. E.I. DuPont de Nemours & Co., 372 F.Supp. 101, 105 (D.Del.1974); Judah v. Delaware Trust Co., 378 A.2d 624, 628 (Del.1977). Therefore, we inquire whether a genuine issue of fact existed. After the tender offer, Contran asserted its control over the corporation by reelecting management's nominees to the board of directors. Although Outside Defendants agreed to sell their Contran stock to the company, Lewis submitted no evidence indicating that Contran's decision to buy was controlled by Outside Defendants. In short, there was no evidence to suggest that Outside Defendants exercised any actual control over the corporation. Since there was no basis for imposing a fiduciary duty on Outside Defendants, the district court did not err in granting summary judgment.

With respect to the Inside Defendants, ⁷ Lewis first attacks the conversion of the motion to dismiss for lack of standing to a motion for summary judgment. ⁸ "[T]he standing doctrine...