Cede & Co. v. Technicolor, Inc.

• Decision Date: 14 October 1987
• Citation: Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1987)
• Parties: CEDE & CO. and Cinerama, Inc., Petitioners Below, Appellants, v. TECHNICOLOR, INC., Respondent Below, Appellee. CINERAMA, INC., a New York Corporation, Plaintiff Below, Appellant and Cross-Appellee, v. TECHNICOLOR, INC., a Delaware Corporation, Morton Kamerman, Arthur N. Ryan, Fred R. Sullivan, Guy M. Bjorkman, George Lewis, Richard M. Blanco, Jonathan T. Isham, MacAndrews & Forbes Group, Incorporated, a Delaware Corporation, Macanfor Corporation, a Delaware Corporation, and Ronald O. Perelman, Defendants Below, Appellees and Cross-Appellants. . Submitted:
• Court: Supreme Court of Delaware

Page 1182

542 A.2d 1182

57 USLW 2017

CEDE & CO. and Cinerama, Inc., Petitioners Below, Appellants, v.TECHNICOLOR, INC., Respondent Below, Appellee.

CINERAMA, INC., a New York Corporation, Plaintiff Below, Appellant and Cross-Appellee, v.TECHNICOLOR, INC., a Delaware Corporation, Morton Kamerman,Arthur N. Ryan, Fred R. Sullivan, Guy M. Bjorkman, George

Lewis, Richard M. Blanco, Jonathan T. Isham, MacAndrews &

Forbes Group, Incorporated, a Delaware Corporation, Macanfor

Corporation, a Delaware Corporation, and Ronald O. Perelman,

Defendants Below, Appellees and Cross-Appellants.

Supreme Court of Delaware.

Submitted: Oct. 14, 1987.

Decided: June 10, 1988.

Gary J. Greenberg(argued), of counsel, New York City, Charles S. Crompton, Jr., Peter M. Sieglaff, Arthur L. Dent, of Potter Anderson & Corroon, Wilmington, for appellantsCede & Co. and appellant-cross-appelleeCinerama, Inc.

Thomas J. Allingham II(argued) of Skadden, Arps, Slate, Meagher & Flom, Wilmington, R. Franklin Balotti of Richards, Layton & Finger, Wilmington, for appellee and cross-appellantsTechnicolor, Inc.

Before HORSEY, MOORE and HOLLAND, JJ.

HORSEY, Justice:

We accepted this interlocutory appeal from the Court of Chancery to address a question of first impression in this Court: the standing and right of a minority shareholder who has dissented from a cash-out merger and commenced an appraisal proceeding under 8 Del.C. § 262 to assert and pursue a later-discovered individual claim of fraud in the merger through an action for rescissory damages against the participants for breach of fiduciary duty to the shareholder.This issue arises from a cash-out merger of the minority shareholders of Technicolor Incorporated("Technicolor"), a Delaware corporation, accomplished by MacAndrews & Forbes Group Incorporated("MAF") through the merger of its wholly-owned subsidiary, Macanfor Corporation("Macanfor"), into Technicolor, following approval by a majority of Technicolor's shareholders.

The appeal encompasses two suits, a first-filed statutory appraisal proceeding (the "appraisal action") and a later-filed shareholders' individual suit for damages for alleged fraud, conspiracy, self-dealing and waste of corporate assets (the "fraud action").The plaintiffs are Cinerama, Incorporated, a beneficial owner of 201,200 shares of Technicolor common stock, approximately 4.5% of the total issued and outstanding common stock, and Cede & Company, the record owner of the shares of Technicolor owned beneficially by Cinerama.¹Cinerama seeks to proceed to trial on both its appraisal remedy and its equitable claim against the several defendants, individual and corporate, for breach of fiduciary duty occurring in the merger.

The sole defendant in the appraisal action is Technicolor, the surviving corporation of the merger.The several individual and corporate defendants in the fraud action include Technicolor, all but two of the members of Technicolor's Board of Directors at the time of the merger, ² and the chief architects of the merger, MAF, Macanfor, and Ronald O. Perelman, controlling shareholder and Chairman of MAF.³

Cinerama instituted its appraisal action pursuant to 8 Del.C. § 262 after voting against the merger.Approximately two years later, in the course of appraisal discovery, Cinerama came upon evidence of wrongdoing by Technicolor management associated with the merger.Cinerama then filed in the Court of Chancery its fraud action, charging the above-described defendants with conspiracy, fraud, breach of fiduciary duty, and other wrongdoing in the merger.

Defendants moved to dismiss the fraud action, asserting that Cinerama lacked standing to institute a fraud action after electing appraisal relief under section 262.Cinerama countered by moving the Court for alternative relief: (1) to amend its appraisal complaint to include its fraud and unfair dealing claims asserted in its fraud action; or (2) to consolidate for discovery and trial its appraisal and its fraud actions.Technicolor opposed both motions, and all defendants moved to dismiss Cinerama's fraud action on the grounds previously stated.

By opinion and interlocutory order dated January 13, 1987, the Court of Chancery, in an unreported decision, denied all three motions.While the effect of its rulings was to permit Cinerama to pursue independently both its appraisal and its fraud actions, the Court then ruled that Cinerama, after completing discovery, would be required to elect which of its two suits to bring to trial and which suit to abandon.

Both parties appeal the Court's several rulings.Cinerama appeals: (1)the Court's denial of its motion to amend its appraisal action; (2)the Court's ruling requiring Cinerama to make a binding election before trial between its appraisal remedy and its rescissory claim for damages; and (3)the Court's denial of Cinerama's motion to consolidate its appraisal and fraud suits.The defendants cross-appeal from the Court's denial of their motion to dismiss Cinerama's fraud action as barred by loss of standing through election of its appraisal remedy.Defendants also cross-appeal from the Court's election of remedy ruling, contending that Cinerama's election should be required to be made immediately and not deferred until Cinerama announces itself ready for trial.

We affirm the Chancellor's ruling declining to dismiss Cinerama's fraud action, but we reverse the Court's ruling declining to consolidate Cinerama's appraisal and fraud actions, requiring Cinerama to make a binding election of remedies before trial.Under the facts as alleged, Cinerama should not be put to an election of such disparate remedies; rather, the actions should be consolidated for trial.If Cinerama prevails, the Court will determine the appropriate remedies warranted by its findings.

I

The issues presented at this stage of the proceedings are purely legal; thus, only a brief sketch of the background facts is appropriate, simply to place the legal issues in a factual context.The litigation results from a cash-out merger of MAF's subsidiary, Macanfor, into Technicolor, which purportedly became effective on January 24, 1983, following a special meeting of the shareholders of Technicolor and their approval of the proposed merger.Prior to the shareholder vote on the merger, the Technicolor directors, purportedly by unanimous vote, waived Technicolor's charter requirement mandating a supermajority shareholder vote of 95% to effect a merger.The waiver by the directors of the supermajority requirements of the Technicolor charter, along with the merger itself, needed the approval of the Technicolor shareholders before becoming effective.The amendment to Technicolor's charter and the merger both received more than the required vote for approval, two-thirds of Technicolor's outstanding stock, with approximately 82% of Technicolor's shares being held by MAF/Macanfor at this time.⁴

Cinerama previously rejected Macanfor's tender offer of $23 per share for its shares and voted against the merger.Several days before the merger's effective date, Cinerama made demand upon Technicolor for appraisal of their shares pursuant to 8 Del.C. § 262(d)(1), and later within the required 120 days Cinerama commenced its appraisal action under 8 Del.C. § 262(e), requesting the Court of Chancery to determine the fair value of their Technicolor holdings.Cinerama alleges that it did not then seek to enjoin or otherwise attack the merger because it relied on Technicolor's representations made in connection with the tender offer and accompanying merger and, thus, had no basis for believing that any claim lay against defendants for fraud or unfair dealing in connection with the merger.After filing its appraisal action in March 1983, the Court of Chancery, in June 1983, entered an order declaring that Cinerama had perfected its appraisal rights and was entitled to then proceed with pretrial discovery pursuant to 8 Del.C. § 262(g) and (h).

Document discovery was essentially completed by Cinerama in mid-1985; thereafter, Cinerama began deposing the various Technicolor officers and directors.In the course of those depositions, Cinerama discovered facts that suggested fraud, illegality, and unfair dealing by Technicolor and the MAF and Macanfor architects of the merger.Specifically, Cinerama, in December 1985, discovered in deposing Charles S. Simone, a former director of Technicolor, that Simone had not voted with the other directors in purportedly waiving the 95% supermajority shareholder vote requirement of Technicolor's charter and had opposed and voted against the merger with Macanfor.As a consequence, Cinerama alleges in its fraud action that Technicolor's shareholder vote was legally insufficient for approval of the merger, causing the merger to be "void"ab initio.⁵

As a result of the Simone deposition and other facts learned in the course of discovery in the appraisal action, Cinerama filed a second suit in the Court of Chancery in January 1986, alleging fraud in the merger and unfair dealing on the part of defendants.As noted, Cinerama's fraud action charges Technicolor and the other defendants with multiple acts of wrongdoing and breaches of fiduciary duty in the merger, including: waste of assets, self-dealing, intentional and negligent misrepresentation, unfair dealing, accepting a grossly unfair price for Technicolor stock, and carrying out an unlawful merger in violation of Technicolor's certificate of incorporation.Through its fraud action, Cinerama seeks a judgment rescinding the merger or, alternatively, an award of rescissory damages and damages for all losses resulting from defendants' wrongdoing.Prior to answering, all of the defendants, in March 1986, moved to dismiss Cinerama's fraud action on grounds previously outlined--that Cinerama, having elected to file an appraisal petition, could not simultaneously pursue a fraud action arising out of the same merger.

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