Pittsburgh Terminal Corp. v. Baltimore and Ohio R.R.
| Decision Date | 19 May 1989 |
| Docket Number | No. 87-3678,87-3678 |
| Citation | 875 F.2d 549 |
| Parties | PITTSBURGH TERMINAL CORPORATION, a Pennsylvania Corporation, derivatively for the Defendant The Baltimore and Ohio Railroad, a Maryland Corporation, Plaintiff-Appellant, v. BALTIMORE AND OHIO RAILROAD; Chesapeake and Ohio Railway; CSX Corporation; John T. Collinson; Alvin R. Carpenter; Roland W. Donnem; Paul A. Funkhouser; Paul R. Goodwin; Norman G. Halpern; Robert L. Hintz; John S. Lanahan; Kenneth C. Morriss; Richard G. Rayburn; Richard D. Sanborn; John W. Snow; Hays T. Watkins; Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Michael P. Malakoff, Ellen M. Doyle, Joseph F. McDonough (argued), Manion, McDonough & Lucas, Pittsburgh, Pa., Virginia L. Reichard, Gallagher Sharp Fulton & Norman, Cleveland, Ohio, for plaintiff-appellant.
Eben G. Crawford (argued), Squire, Sanders & Dempsey, Frances Floriano Goins, Robert F. Hochwarth, General Counsel, Chessie System Railroads, Cleveland, Ohio, for defendants-appellees.
Before: KEITH, MARTIN and RYAN, Circuit Judges.
The Pittsburgh Terminal Corporation, a minority shareholder of the Baltimore & Ohio Railroad, brought this derivative action on behalf of Baltimore & Ohio, a Maryland corporation, against defendants Baltimore & Ohio, Chesapeake & Ohio Railway, CSX Corporation, and individual officers and directors of Baltimore & Ohio and Chesapeake & Ohio, alleging a breach of fiduciary duty in Baltimore & Ohio's sale in 1983 of its stock in the Western Maryland Railway Company to Chesapeake & Ohio for a price that was too low. Following a trial before the district court, judgment was entered in favor of all defendants, and Pittsburgh Terminal's motion for injunctive relief was denied. We affirm the decision of the district court.
With the centralization of and the decline in usage of rail transportation, Baltimore & Ohio, Chesapeake & Ohio and Western Maryland, along with various affiliated rail companies and subsidiaries, were amalgamated into the Chessie System Railroads. The CSX Corporation was formed to acquire the shares of these railroads that comprise the Chessie System, as well as other railroads in the eastern United States. Prior to the challenged sale of Western Maryland stock in 1983, CSX owned 100% of Chesapeake & Ohio, which owned 98% of the common stock of Baltimore & Ohio; the remainder of Baltimore & Ohio's common stock was held by minority shareholders, including Pittsburgh Terminal. Baltimore & Ohio, in turn, owned approximately 66% of the stock of Western Maryland, with Chesapeake & Ohio owning an additional 20% of Western Maryland's stock. CSX, through its control of Chesapeake & Ohio, therefore controlled Baltimore & Ohio and Western Maryland at all times that are relevant. Moreover, the directors of Baltimore & Ohio were also directors of Chesapeake & Ohio and Western Maryland.
In January 1983, the First Boston Corporation prepared a study entitled "Materials for Discussion CSX Corporation," which compiled financial data for Western Maryland and compared other railroads with Western Maryland. Using the data gathered for this study, Paul Goodwin, senior vice president of finance for both Baltimore & Ohio and Chesapeake & Ohio, and his staff formulated an offering price for Western Maryland's stock of $55 per share.
Chessie, allegedly as part of a corporate simplification plan, then proposed a merger of Western Maryland and the Peakbay Corporation, another wholly-owned subsidiary of Chesapeake & Ohio. Under the merger plan, each share of Western Maryland common stock would be converted into the right to receive $55 cash or CSX common stock of substantially equivalent value. The Board of Directors of Chesapeake & Ohio approved the Western Maryland/Peakbay merger on February 8, 1983. On that same day, Baltimore & Ohio's Board of Directors, following a brief meeting, also resolved to vote in favor of the merger and elected to receive cash for its Western Maryland stock. Except for the limited involvement of First Boston, the Boards of Baltimore & Ohio and Chesapeake & Ohio approved the proposed merger without any independent examination of the merger by disinterested lawyers, accountants or financial advisors.
On March 18, 1983, Western Maryland issued a proxy statement concerning the merger. The proxy statement, which was sent to Baltimore & Ohio, Chesapeake & Ohio and all other shareholders of Western Maryland, included a letter from First Boston stating that the proposed price of $55 per share was fair to Western Maryland's shareholders other than Chesapeake & Ohio. The price of $55 per share was below the book value of $63.43 per share, but was considerably higher than the market price of the Western Maryland stock, which was traded in the over-the-counter market at a stipulated price of $31.50 per share on February 7, 1983. 1
The shareholders of Western Maryland approved the Peakbay merger on April 14, 1983. Baltimore & Ohio received $64,204,690 from Chesapeake & Ohio for the Western Maryland stock, which had a cost of $18,000,000.
Pittsburgh Terminal filed its complaint on April 13, 1984, alleging that Baltimore & Ohio's sale of its majority interest in Western Maryland to Peakbay, a wholly-owned subsidiary of Chesapeake & Ohio, was for the benefit of Chesapeake & Ohio and CSX, not for the benefit of Baltimore & Ohio. In addition, Pittsburgh Terminal alleged that the consideration paid by Chesapeake & Ohio to Baltimore & Ohio was inadequate and substantially less than Baltimore & Ohio would have received had it solicited bids for its controlling interest in Western Maryland from outside parties; more specifically, Pittsburgh Terminal claimed that Baltimore & Ohio received no premium from Chesapeake & Ohio for the sale of the majority interest in Western Maryland. Thus, Pittsburgh Terminal alleged that the defendants breached their fiduciary duty to Baltimore & Ohio and its minority shareholders by using their control over Baltimore & Ohio to compel it to engage in a disadvantageous financial transaction. For relief, Pittsburgh Terminal requested recision of the Western Maryland/Peakbay merger, recision of the sale of Baltimore & Ohio's stock in Western Maryland to Chesapeake & Ohio, and recisionary damages.
This case was tried in September 1986. Shortly thereafter, Baltimore & Ohio and Chesapeake & Ohio agreed to merge. On March 31, 1987, the district court entered judgment in favor of defendants, 662 F.Supp. 430 (N.D.Ohio 1987). On April 1, 1987, Pittsburgh Terminal filed a motion for injunctive relief to maintain the status quo and to restrain defendants from engaging in a merger without preserving Pittsburgh Terminal's derivative claims. On April 30, 1987, the district court filed its findings of fact and conclusions of law, and, on the same day, Baltimore & Ohio merged into Chesapeake & Ohio so that Baltimore & Ohio ceased to exist. The district court subsequently overruled Pittsburgh Terminal's motion for injunctive relief. Following Pittsburgh Terminal's appeal to this court, the defendants filed a motion to dismiss the appeal on the ground that Pittsburgh Terminal lacked standing to pursue its derivative action because Pittsburgh Terminal was no longer a shareholder of Baltimore & Ohio after Baltimore & Ohio merged into Chesapeake & Ohio.
In its findings of fact and conclusions of law, the district court, applying the Maryland statute that governs transactions between corporations with interlocking directorships, held that defendants did not breach their fiduciary duties to Baltimore & Ohio because defendants had met their burden of proving Baltimore & Ohio's sale of its Western Maryland stock for $55 per share to be fair and reasonable to Baltimore & Ohio. The district court did state that "the defendants' method of proceedings and attention to detail left a lot to be desired"; specifically, the court noted that the defendants relied too heavily on Goodwin's valuation of the Western Maryland stock and that a disinterested third party should have been involved in the transaction to ensure the protection of minority interests. The district court concluded, however, that the "substance, if not the form, of the transaction was fair and reasonable" because the price of $55 per share was fair and reasonable. The district court also concluded, contrary to the specific assertions of Pittsburgh Terminal, that:
(1) there had been an adequate analysis of information upon which to determine the fair market value of the Western Maryland stock;
(2) the railroads compared to Western Maryland when valuing the stock were in fact comparable;
(3) consideration was given to minority interests in determining fair market value of the Western Maryland stock;
(4) it was not necessary for Chesapeake & Ohio to pay a premium to Baltimore & Ohio for Baltimore & Ohio's sale of its stock in Western Maryland; and
(5) the price/earnings ratio for a five-year period, which was the method used by defendants to determine the fair market value of the Western Maryland stock, was a more appropriate method of valuation than the methods, such as asset value or book value of the stock, suggested by Pittsburgh Terminal.
On appeal, the parties agree that the law of Maryland, Baltimore & Ohio's state of incorporation, governs the resolution of this case. Based upon our interpretation of the applicable Maryland law and our review of the findings of the district court, we conclude that the district court did not err in granting judgment for the defendants.
In its appeal, Pittsburgh Terminal initially contended that the individual defendants failed to exercise due care, as required by Maryland law, in their approval of Baltimore & Ohio's sale of its Western Maryland stock for $55 per share. Maryland law requires a director to perform his duties in a manner he reasonably believes to be in the best interests...
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