Bronzaft v. Caporali

• Decision Date: 24 August 1994
• Citation: Bronzaft v. Caporali, 616 N.Y.S.2d 863, 162 Misc.2d 281 (N.Y. Sup. Ct. 1994)
• Parties: Arline L. BRONZAFT, derivatively and on behalf of Grumman Corporation, Plaintiff(s), v. Renso L. CAPORALI, John O'Brien, Robert J. Myers, J. Robert Anderson, Lucy Wilson Benson, Richard Dulude, James F. Orr, III, Kenneth S. Axelson, Charles Marshall, John T. Sargent, Victor Hao Li, Ellis L. Phillips, Jr., Archie E. Albright and William H. Gary, III, Defendant(s), and Grumman Corporation, Nominal Defendant. Harry LEWIS, derivatively and on behalf of Grumman Corporation, Plaintiff(s), v. Renso L. CAPORALI, John O'Brien, Robert J. Myers, J. Robert Anderson, Lucy Wilson Benson, Richard Dulude, James F. Orr, III, Kenneth S. Axelson, Charles Marshall, John T. Sargent, Victor Hao Li, and Ellis L. Phillips, Jr., Archie E. Albright, William H. Gray, III, Defendant(s), and Grumman Corporation, Nominal Defendant.
• Court: New York Supreme Court

Page 863

616 N.Y.S.2d 863

162 Misc.2d 281

Arline L. BRONZAFT, derivatively and on behalf of Grumman

Corporation, Plaintiff(s), v.Renso L. CAPORALI, John O'Brien, Robert J. Myers, J. Robert

Anderson, Lucy Wilson Benson, Richard Dulude, James F. Orr,

III, Kenneth S. Axelson, Charles Marshall, John T. Sargent,

Victor Hao Li, Ellis L. Phillips, Jr., Archie E. Albright

and William H. Gary, III, Defendant(s),

and

Grumman Corporation, Nominal Defendant.

Harry LEWIS, derivatively and on behalf of Grumman

Corporation, Plaintiff(s), v.Renso L. CAPORALI, John O'Brien, Robert J. Myers, J. Robert

Anderson, Lucy Wilson Benson, Richard Dulude, James F. Orr,

III, Kenneth S. Axelson, Charles Marshall, John T. Sargent,

Victor Hao Li, and Ellis L. Phillips, Jr., Archie E.

Albright, William H. Gray, III, Defendant(s),

and

Grumman Corporation, Nominal Defendant.

Supreme Court, New York County IAS Part 49.

Aug. 24, 1994.

Wechsler, Skirnick, Harwood, Halebian, & Feffer(Robert I. Harwood, of counsel), and Goodkind, Labaton, Rudoff & Suchrow, New York City(Ira Schochet, of counsel), for Arline L. Bronzaft and Harry Lewis.

Sidley & Austin(Francis J. O'Toole, P. David Richardson, Steven Bierman, Robert J. Conlan, Jr., of counsel), and Debevoise & Plimpton, New York City (Andrew C. Hartzell, Jr., John S. Kiernan, and (Carl Oberdier, of counsel), for The Grumman Corp. as well as Renso L. Caporali, Robert J. Myers, J. Robert Anderson, Lucy Wilson Benson, Richard DuLude, James F. Orr, III, Kenneth S. Axelson, Charles Marshall, John T. Sargent, Victor Hao Li, Ellis L. Phillips, Jr., Archie E. Albright, and William H. Gary, III.

Gordon, Altman, Butowsky, Weitzen, Shalov & Wein, New York City(Lawrence J. Zweifach, of counsel), and Williams & Connolly, Washington, DC (John J. Buckley, Jr., of counsel), for defendantJohn O'Brien.

HERMAN CAHN, Justice.

Motion sequence numbers 001, 002, and 003 of action bearing IndexNo. 120435/93 and motion sequence numbers 001, 002 and 003 of action bearing IndexNo. 117218/93 are consolidated for disposition.

These two shareholder derivative actions are brought against the Grumman Corporation("Grumman") and certain of its current and former directors and officers.Briefly stated, the plaintiffs allege intentional and negligent breach of fiduciary duty by defendants resulting from their failure to prevent certain illegal conduct, including bribery and padded billing in the procurement of certain United States government contracts.Plaintiffs assert that such activity has already resulted in substantial penalties to Grumman and the possible future loss of significant business.

The corporate and individual defendants have moved to dismiss the complaints pursuant to CPLR § 3211(a)(3) and (7) as well as BCL § 626 based upon plaintiff's failure to make a demand upon the Grumman Board of Directors before commencing suit.

At oral argument on the motions, the court was advised that the Northrop Corporation had offered to purchase all the stock of Grumman in order to accomplish a "cash-out" merger.The court then directed counsel to address the issue of what effect, if any, such a merger would have on plaintiff's standing to maintain these actions.

The threshold issue is whether pursuant to New York Law a derivative action can be maintained by a (former) shareholder, after a cash-out merger.

Pursuant to the merger agreement with Grumman, the stock of every Grumman shareholder was to be acquired by Northrop for cash or converted into the right to receive a fixed sum in cash from the surviving corporation upon tender of Grumman stock to Northrop.Alternatively, any shareholder may participate in an appraisal proceeding pursuant to BCL § 623.

Following completion of the tender offer Grumman will be merged into a wholly owned subsidiary of Northrop known as Northrop Acquisition, Inc. and the surviving corporation will itself be a wholly owned subsidiary of Northrop.The court believes that the merger has been consummated on the said terms.

Defendants maintain that the cash-out merger divests the plaintiffs, who are now former shareholders of all rights (other than to collect the sum agreed upon for purchase of their stock), including standing to maintain a derivative action on behalf of Grumman or the surviving corporation.Plaintiffs maintain that a shareholder's standing to assert a derivative claim subsequent to a cash-out merger survives, and is preserved by BCL § 906(b)(3).

BCL § 626 in addressing shareholder status in derivative actions provides in relevant part:

(a) An action may be brought in the right of a domestic ... corporation to procure a judgment in its favor, by a holder of shares ... of the corporation ...

(b) In any such action it shall be made to appear that the plaintiff is such a holder [of shares] at the time of bringing the action and that he was such a holder [of shares] at the time of the transaction of which he complains ...

This section has been interpreted as requiring a plaintiff in a shareholder derivative action to not only have been a shareholder at the time of the transaction complained of as well as at the time of the commencement of the action, but also that the plaintiff maintain its shareholder status throughout the pendency of the action without interruption.(Independent Investor Protective League v. Time, Inc., 50 N.Y.2d 259, 428 N.Y.S.2d 671, 406 N.E.2d 486;Karfunkel v. USLIFE Corp., 116 Misc.2d 841, 455 N.Y.S.2d 937aff'd98 A.D.2d 628, 469 N.Y.S.2d 1020;Sorin v. Shahmoon Industries, Inc., 30 Misc.2d 408, 220 N.Y.S.2d 760;Snyder v. Pleasant Valley Fishing Co. Inc., 756 F.Supp. 725[S.D.N.Y.1990].If the plaintiff's shares are disposed of during the pendency of the action, the action abates (Id., see alsoAmella v. Con. Edison, 73 N.Y.S.2d 263, aff'd273 App.Div. 755, 75 N.Y.S.2d 513;Hayman v. Morris, 46 N.Y.S.2d 482).Furthermore, New York courts have generally held that the pursuit of an appraisal proceeding constitutes a dissenting shareholder's exclusive remedy (BCL § 623[c];Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 567, 483 N.Y.S.2d 667, 473 N.E.2d 19) unless the merger itself is challenged (see, Miller v. Steinbach, 268 F.Supp. 255[S.D.N.Y.1967].

Various courts outside this jurisdiction, particularly courts interpreting Delaware's similar statute, have applied this rule and dismissed the cause of action where the stock of plaintiff shareholders had been acquired through a cash-out merger.(Scattergood v. Perelman, 945 F.2d 618, 626[3rd Cir.1991];Blasband v. Rales, 971 F.2d 1034, 1041[3rd Cir.1992];Friedman v. Mohasco Corp., 929 F.2d 77, 79[2nd Cir.1991];Lewis v. Anderson, 477 A.2d 1040, 1044 n. 3(Del.Supr.1984).The rationale applied in these cases is that a plaintiff who ceases to be a shareholder by reason of merger has no rights in the surviving corporation predating the merger, and, therefore, has no standing to assert derivative claims on behalf of the surviving corporation.

Both parties rely heavily on Rubinstein v. Catacosinos, 91 A.D.2d 445, 459 N.Y.S.2d 286, aff'd60 N.Y.2d 890, 470 N.Y.S.2d 570, 458 N.E.2d 1247.In Rubinstein, Applied Digital Data Systems, (ADDS) was acquired through a cash-out merger several months after plaintiff therein had initiated a derivative action on behalf of ADDS.Pursuant to the terms of the merger, the surviving corporation became a wholly owned subsidiary of NCR Corporation(NCR) and each share of the acquired corporation's stock was converted into the right to receive cash or to have the stock valued at a statutory appraisal proceeding pursuant to Delaware law.(91 A.D.2d at 445-446, 459 N.Y.S.2d 286).The defendants in Rubinstein, moved to dismiss the action on the grounds that the merger divested the plaintiff of her shareholder status and therefore, precluded plaintiff from maintaining a derivative action on behalf of the acquiring corporation.

The Appellate Division stated in relevant part, at page 446, 459 N.Y.S.2d 286:

It is settled law that a plaintiff stockholder in a stockholder's derivative action loses his right to continue to prosecute the action if he ceases to be a stockholder.(Tenney v. Rosenthal, 6 N.Y.2d 204, 210[189 N.Y.S.2d 158, 160 N.E.2d 463];Bernstein v. Polo Fashions, 55 A.D.2d 530[389 N.Y.S.2d 368].This rule has been applied where the stockholder ceases to be a stockholder by reason of his tendering shares to secure statutory appraisal.(Pikor v. Cinerama Products, Corp., 25 F.R.D. 92[S.D.N.Y.].

It makes particular sense to apply this rule to the present case, where as a result of the merger plaintiff is entitled only to a specified amount of money, thus becoming more like a creditor than a stockholder ... ADDS' sole stockholder is NCR and it has not indicated any desire to prosecute the case; nor has any stockholder of NCR.Plaintiff will get no benefit from the judgment.There is no reason to permit plaintiff, who has no interest in the case, to force upon ADDS and its stockholders, direct or indirect, a lawsuit for their supported benefit in which they are not interested.

Section 906 (subd [b], par [3] of the Business Corporation Law, which permits the continuation of a shareholder's action on behalf of a merged corporation, should fairly be construed to mean the continuation of the claim on behalf of the corporation but not to preserve standing of a now nonstockholder to enforce that claim on behalf of the corporation against that corporation's will.(91 A.D.2d at 446-447, 459 N.Y.S.2d 286).(emphasis added).

In affirming the Appellate Division's decisionthe Court of Appeals stated in relevant part, 60 N.Y.2d at page 892, 470 N.Y.S.2d 570, 458 N.E.2d 1247:

In so ruling, we deem it necessary to add the following comments.First, section 906 of the Business Corporation Law is not one of the enumerated laws specifically applicable to foreign corporations doing business in New York (Business Corporation Law, § 1319, subd [a].

Since ADDS...