Alpert v. 28 Williams Street Corp.

• Court: New York Court of Appeals
• Writing for the Court: COOKE
• Citation: 483 N.Y.S.2d 667,63 N.Y.2d 557,473 N.E.2d 19
• Decision Date: 29 November 1984
• Parties: , 473 N.E.2d 19 Jack L. ALPERT et al., Appellants, v. 28 WILLIAMS ST. CORP. et al., Respondents.

Page 667

483 N.Y.S.2d 667 63 N.Y.2d 557, 473 N.E.2d 19 Jack L. ALPERT et al., Appellants,
v.
28 WILLIAMS ST. CORP. et al., Respondents. Court of Appeals of New York. Nov. 29, 1984.

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Hyman Bravin and Melvin Hirshowitz, New York City, for appellants.

Edward Brodsky, Thomas H. Sear and Emily J. Spitzer, New York City, for respondents.

OPINION OF THE COURT

COOKE, Chief Judge.

The subject of contention in this litigation is a valuable 17-story office building, located at 79 Madison Avenue in Manhattan. In dispute is the propriety of a complex series of transactions that had the net effect of permitting defendants, who were outside investors, to gain ownership of the property and to eliminate the ownership interests of plaintiffs, who were minority shareholders of the corporation that formerly owned the building. This was achieved through what is commonly known as a "two-step" merger: (1) an outside investor purchases control of the majority shares of the target corporation by tender offer or through private negotiations; (2) this newly acquired control is used to arrange for the target and a second corporation controlled by the outside investor to merge, with one condition being the "freeze-out" of the minority shareholders of the target corporation by the forced cancellation of their shares, generally through a cash purchase. This accomplishes the investor's original goal of complete ownership of the target corporation.

Since 1955, the office building was owned by 79 Realty Corporation (Realty Corporation), which had no other substantial assets. About two thirds of Realty Corporation's outstanding shares were held by two couples, the Kimmelmans and the Zauderers, who were also the company's sole directors and officers. Plaintiffs owned 26% of the outstanding shares. The remaining shares were owned by persons who are not parties to this litigation.

Defendants, a consortium of investors, formed a limited partnership, known as Madison 28 Associates (Madison Associates), for the purpose of purchasing the building. In March 1980, Madison Associates began negotiations with the Kimmelmans and the Zauderers to purchase the latter's controlling block of stock at a price equal to its proportion of the building's value, agreed in June 1980 to be $6,500,000. In addition, Madison Associates promised that it would also offer to purchase plaintiffs' stock under the same terms within four months of the closing of the stock purchase agreement in September 1980.

Madison Associates formed a separate, wholly owned company, 28 Williams Street Corporation (Williams Street), to act as the nominal purchaser and owner of the Kimmelman and Zauderer interests. The stock purchase agreement was actually signed by Williams Street and its principal asset was the newly acquired shares of Realty Corporation.

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Upon selling their shares, the Kimmelmans and the Zauderers resigned their positions with Realty Corporation and were replaced by four partners of Madison Associates. Now acting as the controlling directors of Realty Corporation on October 17, 1980, the partners of Madison Associates approved a plan to merge Realty Corporation with Williams Street, Realty Corporation being the surviving corporation. Together with a notice for a shareholders meeting to vote on the proposed merger, a statement of intent was sent to all shareholders of Realty Corporation, explaining the procedural and financial aspects of the merger, as well as defendants' conflict of interest and the intended exclusion of the minority shareholders from the newly constituted Realty Corporation through a cash buy-out. Defendants also disclosed that they planned to dissolve Realty Corporation after the merger and thereafter to operate the business as a partnership. The merger plan did not require approval by any of the minority shareholders.

The merger proposed by the directors was approved at the shareholders meeting, held on November 7, 1980. As a result, the office building was owned by the "new" Realty Corporation, which, in turn, was wholly owned by Madison Associates. In accordance with the merger plan, Realty Corporation was dissolved within a month of the merger and its principal asset, title to the building, devolved to Madison Associates.

From the outset, plaintiffs resisted their exclusion from Realty Corporation. First, they rejected overtures by Madison Associates to purchase their shares. Then they unsuccessfully sought to enjoin the sale of the Kimmelman and Zauderer interest to Madison Associates.

The plaintiffs instituted this action on October 31, 1980, initially seeking to enjoin the shareholders meeting called to approve the merger. Failing to temporarily enjoin the Realty Corporation's merger with Williams Street, plaintiffs later amended their complaint to include a request for equitable relief in the form of rescission of the merger.

The propriety of the merger was contested on several grounds. It was contended that the merger was unlawful because its sole purpose was to personally benefit the partners of Madison Associates and that the alleged purposes had no legitimate business benefit inuring to the corporation. Plaintiffs argue that the "business judgment" of the directors in assigning various purposes for the merger was indelibly tainted by a conflict of interest because they were committed to the merger prior to becoming directors and were on both sides of the merger transaction when consummated. Further, they assert that essential financial information was not disclosed and that the value offered for the minority's shares was understated and determined in an unfair manner.

After a trial, Supreme Court held that the merger had been unlawful. It determined that defendants, as directors and majority shareholders of Realty Corporation, had breached their fiduciary duty owed plaintiffs in approving and executing the merger agreement, largely because of defendants' failure to show a "strong and compelling legitimate business purpose" for the merger. The matter was set down for a hearing to determine an appropriate remedy.

The Appellate Division unanimously reversed, on the law and the facts, finding that the trial court's decision was "devoid of factual findings either as to the basis for the conclusion that the shareholders meeting was not lawfully conducted, or whether the entire transaction involved fraud, conflict of interest, or self-dealing" (91 A.D.2d 530, 531, 457 N.Y.S.2d 4). It rejected the legal standard applied by Supreme Court, holding that the proper standard was that the "will not interfere with the proper business judgment of directors in the absence of a showing of fraud, illegality, or self-dealing * * * so long as there is some proper corporate purpose for the merger other than the forced buy-out of the minority shares" (Id., at p. 531, 457

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N.Y.S.2d 4). The matter was remanded for a new trial. ¹

Upon retrial, Supreme Court denied plaintiffs' requested relief. It determined that plaintiffs had failed to demonstrate that the merger was not for a legitimate business purpose or that they had been dealt with unfairly and inequitably. The court found that the merger advanced several proper corporate business purposes. It provided a means by which the corporation could attract outside capital investment for extensive repairs and renovations of the building that were needed to produce maximum rents. Certain tax advantages and the distribution of mortgage proceeds would accrue upon the ultimate dissolution of the merged corporation and transfer of the building to the partnership.

The court recognized that because the merger would advance defendants' self-interest and plaintiffs' shares were to be eliminated, it would have been preferable for defendants to have had independent directors or appraisers evaluate whether the merger was fair to all parties. The failure to do so, however, was not deemed fatal to the transaction if, viewed as a whole, it was fair. Thus, the court undertook its own review considering the role that defendants' self-interest played in the merger decision, whether overreaching or bad faith were present, and the extent of disclosure of material information to plaintiffs. It also examined how the price for the minority's shares was established and determined that defendants' arrangement with the Kimmelmans and the Zauderers was arrived at through arm's length negotiations and that it reflected the fair market value of the building at the time. In addition, the court noted that the price offered plaintiffs was many times the amount plaintiffs paid for the stock and greatly exceeded the stock's book value and the corporation's past and present earnings. The court concluded that, as a whole, the transaction was fair. As the merger also served a legitimate business purpose and was not tainted by fraud or illegality, plaintiffs' request for rescission was denied. The Appellate Division, 97 A.D.2d 681, 468 N.Y.S.2d 289, affirmed the trial court's decision, without opinion.

On this appeal, the principal task facing this court is to prescribe a standard for evaluating the validity of a corporate transaction that forcibly eliminates minority shareholders ² by means of a two-step merger. ³ It is concluded that the analysis employed by the courts below was correct: the majority shareholders' exclusion of minority interests through a two-step merger does not violate the former's fiduciary obligations

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so long as the transaction viewed as a whole is fair to the minority shareholders and is justified by an independent corporate business purpose. Accordingly, this court now affirms.

(A)

In New York, two or more domestic corporations are authorized to "merge into a single corporation which shall be one of the constituent corporations", known as the "surviving corporation" (see Business Corporation Law, § 901). The statute does not delineate substantive justifications for...