Beechwood Securities Corp. v. Associated Oil Co.

• Decision Date: 08 June 1939
• Docket Number: No. 8759.,8759.
• Citation: 104 F.2d 537
• Parties: BEECHWOOD SECURITIES CORPORATION, Inc., v. ASSOCIATED OIL CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

104 F.2d 537 (1939)

BEECHWOOD SECURITIES CORPORATION, Inc., v. ASSOCIATED OIL CO. et al.

No. 8759.

Circuit Court of Appeals, Ninth Circuit.

June 8, 1939.

Harry W. Dudley and E. Walter Guthrie, both of Los Angeles, Cal., and Percival E. Jackson, of New York City, for appellant.

Robert M. Searls, Clifford J. MacMillan, and John Parks Davis, all of San Francisco, Cal., for appellee.

Henry W. Ballantine, of Berkeley, Cal., and Graham Lee Sterling, Jr., of Los Angeles, Cal., amici curiæ.

Before GARRECHT, DENMAN, and MATHEWS, Circuit Judges.

DENMAN, Circuit Judge.

Appellant, hereafter called Beechwood, holder of common stock of Associated Oil Company, a California corporation, hereafter called Associated, appeals from a decree dismissing, without right to amend, its bill for setting aside and nullifying the proceedings for the latter corporation's consolidation with Tide Water Oil Company, a Delaware corporation, hereafter called Tide Water, into a Delaware corporation, Tide Water Associated Oil Company, hereafter called Tide Water Associated. The proceedings sought to be nullified had been taken under the provisions of sections 361, 361a, and 369 of the Civil Code of California.¹

It was admitted that the requirements of the Civil Code were complied with by the two corporations seeking consolidation. The pertinent code provisions require the board of directors of each corporation to approve an agreement setting forth the terms and condition of the proposed consolidation, "and the mode of carrying the same into effect, as well as the manner and basis of converting the shares of the constituent corporations into the shares of the consolidated or surviving corporation."

The agreements and a notice of at least 20 days of a meeting of stockholders of each constituent corporation to consider and vote on its approval must be mailed to the stockholders. All classes of stockholders have equal voting rights on the approval of the agreement, whether or not they have other voting rights. The approval must be voted by two-thirds the existing and outstanding shares of each class.

If two-thirds of the outstanding shares vote for the approval of the consolidation, a shareholder not approving may make, within 30 days of mailing of the notice of approval to him, a written demand for the fair market value of his shares as of the day before the vote of approval of the consolidation, and request the corporation's statement of its claim of the amount of such fair market value. The shareholder within such 30 days must submit his certificate to the corporation or its transfer agent. Within 5 days the corporation must deliver or mail to the shareholder an offer of a price which it estimates is the fair maket value. If the shareholder declines the offer he may sue for the fair market value in a California superior court and have the value established there.

The case was argued below and here on the theory that paragraph (17) of section 369 of the Civil Code (set forth in the preceding footnote) gave no right at law or in equity to the non-assenting shareholder other than to accept the corporation's offer or sue for the fair market value, save that he could contest the consent or approval of the necessary two-thirds of the shareholders to the proposed consolidation agreement.

In effect, Beechwood contends that a state cannot so organize its corporations that a shareholder, not assenting to such a consolidation, may not show, in equity, that the proposal for exchange of his shares for those in the consolidated corporation is made with intent to defraud and will defraud him. Here it is claimed the proposal of Associated's board of directors is unfair in that the amount of new stock offered is of less value than the Beechwood shares to be surrendered, — whereby the majority shareholders, having a large interest in Tide Water, will, by their vote, gain in their stock interest in Tide Water Associated, what the Beechwood shares lose — and hence there is a violation of the duty of the directors to the corporation's shareholders amounting to fraud, with its consequent gain to the voting majority.

The bill attempting to allege such fraudulent conduct, known to and motivating the majority of the Associated's shareholders voting for the consolidation, is attacked on the ground that its allegations amount to no more than a disagreement in valuation. Beechwood at the hearing offered to amend to make more certain the allegations of fraud, as set forth in its brief. Since the motion to dismiss is equivalent to sustaining a demurrer, and was granted without leave to amend, we consider whether — if permitted the amendment — the bill warrants the relief prayed for. Cf. Schindler v. Spackman, 8 Cir., 16 F.2d 45, 49.

In effect, these code sections, as construed by both parties, say to a shareholder, "When you buy stock in a California corporation you are advised that your associate shareholders holding two-thirds of the shares may consolidate your corporation with another into a third corporation, offer you what they please of its shares in exchange for those you hold, and, if you do not like the offer, may buy out your shares at their fair market value at the time they vote the consolidation".

The corporation and its shareholders' rights are mere creations of the state of incorporation and we can see no reason why such incidents of a shareholder's interest as provided in the pertinent sections of the corporate law of California are beyond its legislative power. Beechwood has cited no case denying such power in a state legislature in giving form to its corporate creature. There is no underlying "natural right" of a shareholder in a corporation to follow his investment into a consolidated corporation. May v. Midwest Refining Co., D.C. Me., 25 F.Supp. 560, 564. The legislature may terminate a shareholder's investment on payment of its then face value, if it so choose.

No fraud warranting the setting aside of a consolidation is committed on the shareholder when he receives the exact treatment the statute advised him was his due when he invested in the shares. Mayfield v. Alton Ry., etc., Co., 198 Ill. 528, 65 N.E. 100, 101; Kirby v. Saginaw Hotels Co., 253 Mich. 308, 235 N.W. 153. Hence there is no denial of an equitable remedy. Since the shareholder has no underlying legal right to pursue his investment, he has no ground upon which relief in equity can be granted. Cf. Union Pacific R. Co. v. Board of Commissioners, 8 Cir., 222 F. 651, 654, 659.

There is no relevance in the holdings in cases cited by Beechwood such as Payne v. Hook, 7 Wall. 425, 74 U.S. 425, 19 L.Ed. 260, where it was claimed a state statute gave exclusive jurisdiction to its probate courts, though the disputed issue was between a citizen of another state and one of the state of the probate court. In that case there was an attempt to deny federal jurisdiction of the dispute of a claim of right, while here we hold Beechwood's allegations disclose no right which was violated. Similarly in Standard Oil Co. v. Howe, 9 Cir., 257 F. 481, 487; Pacific Tel. & Tel. Co. v. Kuykendall, 265 U.S. 196, 44 S.Ct. 553, 68 L.Ed. 975; Denver & R. G. W. Ry. Co. v. Linck, 10 Cir., 56 F.2d 957, 960, there existed rights between citizens of different states for which equitable relief sought in the federal courts could not be prevented by state legislation.

Other states permit corporate consolidation, with the duty of the majority to offer stock in the consolidated or merged corporations, and provide for the appraisal of the shares, if the offer is not accepted, without limiting the refusing shareholder's right to a payment of...