Barrett v. Southern Connecticut Gas Co.

• Decision Date: 15 February 1977
• Citation: 172 Conn. 362,374 A.2d 1051
• Court: Connecticut Supreme Court
• Parties: John P. BARRETT v. SOUTHERN CONNECTICUT GAS COMPANY et al.

Page 1051

374 A.2d 1051

172 Conn. 362

John P. BARRETT v. SOUTHERN CONNECTICUT GAS COMPANY et al.

Supreme Court of Connecticut.

Argued Oct. 6, 1976.

Decided Feb. 15, 1977.

Alan Neigher, Bridgeport, for appellant (plaintiff).

Donald F. Keefe, New Haven, with whom, on the brief, was Karen S. Nash, New Haven, for appellee (named defendant).

Ralph C. Dixon, Hartford, with whom were Robert P. Knickerbocker, Jr., Hartford, and, on the brief, Americo R. Cinquegrana, West Hartford, for appellees (defendants Richard H. Bowerman et al.).

Edgar W. Bassick III, Bridgeport, for appellee (defendant A. George Lindquist).

Before HOUSE, C. J., and LOISELLE, BOGDANSKI, LONGO and MacDONALD, JJ.

MacDONALD, Associate Justice.

This action in the nature of a shareholders' derivative suit was brought by the plaintiff, John P. Barrett, against a corporate defendant, the Southern Connecticut Gas Company, hereinafter "Southern," and against certain individual defendants who, at relevant times, were officers or directors of Southern, seeking damages for alleged waste of corporate assets in pursuing a corporate merger between Southern and the Greenwich Gas Company, hereinafter "Greenwich." Upon stipulation by the parties that the matter be referred to a state referee pursuant to §§ 52-434 and 52-434a of the General Statutes, the Hon. John R. Thim, state trial referee, was appointed to hear the case, with all the powers of the Superior Court. The complaint, in summary, alleged that expenses incurred by Southern in pursuit of the proposed merger resulted in damage to the corporation on the ground that the merger, if approved, would have been unfavorable to Southern and its stockholders.

The defendants, in addition to denying the substantive allegations of the complaint, pleaded five special defenses directed to the standing and capacity of the plaintiff to initiate and maintain this action, as follows: (1) Barrett was not a shareholder at the time of the alleged wrong, i. e., when the formal agreement and plan of merger were executed; (2) Barrett failed to exhaust his corporate remedies by making a demand upon Southern shareholders before initiating this action; (3) the decision of the defendants to pursue the merger was ratified by Southern's shareholders at their special meeting of March 15, 1972; (4) the reelection of the incumbent directors at Southern's annual stockholders' meeting on April 17, 1973, constituted a further implied ratification of the defendants' actions regarding the merger since at that time the shareholders had been fully informed of such action; and (5) Barrett cannot adequately and fairly represent the interests of the corporation and its shareholders due to his interests adverse to the corporation and its shareholders, as evidenced by his opposition to Southern's rate increase application and by his simultaneous maintenance of a personal damage action against the corporation. Those five special defenses were, in turn, denied by Barrett, and the defendants then moved for summary judgment on each of the five special defenses on the ground that affidavits and other documentary proof submitted by them demonstrated that no genuine issue of material fact existed as to the plaintiff's lack of standing and capacity to bring a derivative action and that the defendants were, therefore, entitled to judgment as a matter of law.

The court granted summary judgment on the first, third, fourth and fifth special defenses but denied it on the second. The plaintiff's motion for reargument was denied and he then took this appeal, assigning as error the court's granting of summary judgment on the four special defenses, its determination of the issues raised by the third, fourth and fifth special defenses on a motion for summary judgment since those defenses involved contested issues of material fact, and its denial of his motion for reargument. The defendants filed a bill of exceptions to the denial of summary judgment on the second special defense.

In our view, the issues raised by the fifth special defense, challenging the adequacy and fairness of the plaintiff's representation of Southern shareholders, are dispositive of this appeal. We will, therefore, first discuss the unchallenged factual background of Barrett's relationship with Southern as disclosed by the record, and then the legal implications of that relationship.

I BACKGROUND OF THE PLAINTIFF'S RELATIONSHIP WITH SOUTHERN

The complaint, together with the affidavits and exhibits filed by both sides in connection with the summary judgment motions, reveals that this action arose out of the announcement by the boards of directors of Southern and Greenwich on July 12, 1971, of agreement on the terms of a proposed merger of the two utilities. Under the formal merger agreement and plan of merger executed by the two boards on December 22, 1971, Greenwich was to merge into Southern as the surviving corporation. Barrett purchased fifty shares of the common stock of Southern in early 1972, claiming, in his counter affidavit to the summary judgment motions, that he bought the shares upon the belief that the proposed merger made Southern a good investment. Approximately six weeks after becoming a Southern shareholder, Barrett voted against the merger proposal at a special meeting of Southern's shareholders held on March 15, 1972, for the purpose of explaining the details of the merger plan and securing stockholder approval. Ninety-seven percent of the common shares voted and 100 percent of the preferred shares voted endorsed Southern management's merger proposal at the special meeting.

Thereafter, the two companies requested approval of the merger in hearings before the public utilities commission, hereinafter the commission, as required under § 16-43 of the General Statutes. Barrett applied, through counsel, to the commission for permission to appear as a party at the hearings concerning the proposed merger. Permission was granted, and Barrett appeared personally and through counsel at the hearings, cross-examining witnesses, introducing evidence in opposition, and filing a detailed brief and proposed findings of fact, all in support of his claim that the merger would have a substantial adverse effect on Southern and its shareholders. After the hearings, Barrett explained his opposition to the merger in a letter addressed to the defendant directors and officers claiming that (1) the defendants had improperly concealed a $624,000 stock redemption item, required under the merger contract, in the proxy statement explaining the merger; (2) the defendants had falsely represented that Southern's bid for Greenwich was only slightly higher than the bid offered by another gas utility seeking to merge, when, in fact, Southern's bid was, on a dividend comparison basis, 54 percent higher; (3) the defendants had wrongly represented that substantial administrative savings would exceed the costs of the merger, when in fact, the alleged savings would not occur; and (4) the terms of the merger were highly unfavorable to the interests of Southern's shareholders.

The commission denied the application of Southern and Greenwich to merge on July 7, 1972. A transcript of the commission's decision was included in the record, and, while the decision did not discuss Barrett's opposition to the merger, it questioned the economics of the merger proposal on some of the same grounds as did Barrett.

Meanwhile, Southern, on June 5, 1972, filed a separate application with the commission requesting a rate increase on the ground that it was necessary to meet increased operating expenses and to ensure a fair return on equity to Southern shareholders. Barrett petitioned the commission to be designated as a party in opposition, claiming to believe that the application for a rate increase was in part an attempt by the defendants to conceal the increased costs to Southern which would result if the merger were approved. The chairman of the commission stated that as a stockholder Barrett should not be before the commission, but did permit him to intervene as a ratepayer. Subsequently, on December 29, 1972, the commission approved over 80 percent of Southern's voluntarily amended requested rate increase.

On December 14, 1972, five months after the commission had denied the merger, Barrett filed an individual damage action against Southern in the Superior Court for Fairfield County, alleging that the commission had denied the merger application as a direct result of Barrett's opposition to it, that Southern and its stockholders had benefited from his opposition to the merger, since denial of the merger saved Southern some $4,000,000 in increased costs, and that he was therefore entitled to $500,000 in personal damages. That action is still pending.

In the meantime, three months later, on March 6, 1973, Barrett brought this derivative action seeking $500,000 in damages on behalf of the corporation from the individual directors and officers for alleged waste of corporate assets in pursuing the aborted merger attempt. He included in his complaint substantially the same allegations he had made before the commission when he opposed the merger, including his claim that false and misleading statements made by the defendants to Southern shareholders about the terms and consequences of the proposed merger made the plan seem more attractive than it actually was. The waste of corporate assets allegedly consisted of unnecessary or wasteful legal and accounting fees, unnecessary or wasteful man-hours expended, printing, postage and registration fees and other expenses directly related to the proposed merger. As previously mentioned, the defendants answered Barrett's derivative complaint by denying its substantive allegations and by pleading five special defenses, each claiming that Barrett lacked either standing or capacity to maintain this action on behalf of the corporation and its other shareholders.

II ...