Chokel v. First Nat. Supermarkets, Inc.

• Decision Date: 08 January 1996
• Citation: 421 Mass. 631,660 N.E.2d 644
• Parties: Jeffrey D. CHOKEL v. FIRST NATIONAL SUPERMARKETS, INC.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 644

660 N.E.2d 644

421 Mass. 631

Jeffrey D. CHOKEL v. FIRST NATIONAL SUPERMARKETS, INC.

Supreme Judicial Court of Massachusetts Suffolk.

Argued Oct. 3, 1995.

Decided Jan. 8, 1996.

Edward Kancler, Cleveland, Ohio (Joel Z. Eigerman with him), for defendant.

Joseph L. Kociubes (Mark W. Batten with him), Boston, for plaintiff.

Before LIACOS, C.J., and ABRAMS, LYNCH, GREANEY and FRIED, JJ.

ABRAMS, Justice.

The defendant, First National Supermarkets, Inc. (First National), appeals from the judgment in a stock appraisal action filed pursuant to G.L. c. 156B, §§ 86-98 (1994 ed.), in which the plaintiff, Jeffrey D. Chokel, dissatisfied with the price offered in the merger-leveraged buy-out of First National, sought appraisal of 16,997 shares. The judge appraised the value of Chokel's shares at $29.78 per share and awarded him prejudgment interest at the rate of twelve per cent per annum, compounded annually. First National appeals alleging that the trial judge erred: (1) in allowing Chokel's action to proceed; (2) in the valuation of Chokel's shares; and (3) in awarding prejudgment interest at a rate of twelve per cent per annum, compounded annually. First National filed an application for direct appellate review which we allowed. We affirm.

1. Facts. On June 6, 1985, the board of directors of First National (board) approved, subject to shareholder approval, management's offer to acquire First National for $24.25 per share ¹ and issued a press release. Prior to the merger, First National stock was traded actively and listed on the National Association of Securities Dealers Automated Quotation system (NASDAQ) market. During the period from January, 1984, to August, 1985, the market price per share ranged from $7.75 to $23.75. On June 5, 1985, the day before First National's public announcement of the anticipated merger, the closing market price for First National's stock was $19.75 per share.

On August 12, 1985, First National mailed a ninety-three page proxy statement to all registered owners of stock as of the record date, August 8, 1985, announcing a September 12, 1985, shareholder meeting to vote on the merger. As of the record date, Chokel was beneficial owner of 28,000 shares of stock held in "street name." ² Of these, 100 shares were held directly by Chokel's broker, Merrill Lynch Pierce Fenner & Smith Inc. (Merrill Lynch) and 16,897 were held for Chokel by Merrill Lynch through its nominee, the Philadelphia Depository Trust Company (Philadep). ³

On review of the proxy material, Chokel decided to vote against the merger. Both Chokel and Merrill Lynch presented First National with letters objecting to the proposed merger on Chokel's behalf and stating their intention to demand separate payment for 28,000 shares registered in the name of Philadep but beneficially owned by Chokel. Chokel then sought and obtained a revocable proxy, dated August 27, 1985, from Merrill Lynch authorizing Chokel to vote 28,000 shares of stock registered in the name of Philadep. ⁴ He presented the proxy at the meeting and voted 28,000 Philadep shares against the merger. The proxy was not challenged. ⁵ Despite Chokel's dissent, the merger was approved by 90.4% of the outstanding stock.

Chokel received notice on September 17, 1985, confirming that the merger became effective on September 13, 1985. By letter dated September 27, 1985, Chokel made demand on First National for the fair value of 28,000 shares, which he determined to be $40 per share. Merrill Lynch additionally made demand on behalf of Chokel on October 3, 1985. ⁶

On learning of Chokel's intent to dissent in September, 1985, Merrill Lynch attempted physically to segregate 28,000 shares (Chokel shares). Merrill Lynch asked Philadep to segregate its shares and send them to Merrill Lynch. Philadep complied, releasing all shares it held for Merrill Lynch including the Chokel shares. It still held First National shares, including 16,897 of the shares in dispute, for other brokers. Merrill Lynch later sent the Chokel shares back to Philadep who forwarded them to AmeriTrust Co., First National's transfer agent, where they were redeemed. ⁷ Chokel had not authorized this redemption and was unaware until several years later that it had occurred.

Despite Merrill Lynch's knowledge of Chokel's dissent, Chokel received a form letter from Merrill Lynch, dated September 30, 1985, informing him that his shares would be redeemed at the merger price of $24.25. Chokel's statement for the period from August 31, 1985, through September 27, 1985, indicated that his shares had been redeemed for $679,000 in cash. ⁸ This transaction was later reversed by Merrill Lynch. Chokel's October statement represented that he still owned 28,000 shares of First National stock. Until 1991, Chokel's statements continued to evidence ownership of 28,000 shares of First National stock. In 1991, the parties learned for the first time that Merrill Lynch actually only held 16,997 unredeemed shares of First National stock for the benefit of Chokel--100 shares in Merrill Lynch's street name ⁹ and 16,897 registered to Philadep but held through Merrill Lynch.

2. Chokel's statutory right to appraisal. Chokel seeks appraisal of 16,997 shares of First National stock. In order for Chokel's shares to be eligible for appraisal, Chokel must have fulfilled the requirements of G.L. c. 156B, § 86 (1994 ed.). General Laws c. 156B, § 86, requires that "no stockholder shall have such right [to demand payment for his shares and an appraisal thereof] unless (1) he files with the corporation before the taking of the vote of the shareholders on such corporate action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) his shares are not voted in favor of the proposed action." "[T]he statutory requirements are to be liberally construed for the protection of dissenting stockholders within the limits of orderly corporate procedures and consistent with the purpose of the requirements." Tabbi v. Pollution Control Indus., Inc., 508 A.2d 867, 869 (Del.Ch.1986), citing Raab v. Villager Indus., Inc., 355 A.2d 888 (Del.), cert. denied sub nom. Mitchell v. Villager Indus., Inc., 429 U.S. 853, 97 S.Ct. 147, 50 L.Ed.2d 129 (1976). See Sarrouf v. New England Patriots Football Club, Inc., 397 Mass. 542, 552, 492 N.E.2d 1122 (1986). In re Fair Value of Shares of Bank of Ripley, 184 W.Va. 96, 100, 399 S.E.2d 678 (1990) (dissenter's rights statutes are construed favorably toward the shareholder and given a reasonable construction rather than a rigid and technical one). It is not disputed that Chokel met the statutory requirements. What is disputed is whether the 16,997 shares now held by Merrill Lynch for Chokel's benefit are the same shares that Chokel voted against the merger. ¹⁰ The burden is on Chokel to show compliance with the statute. See G.L. c. 156B, § 86. See also Tabbi v. Pollution Control Indus., supra at 869 ("the party seeking appraisal bears the burden of proving compliance with the requirements of [the appraisal statute]").

Chokel argues that he voted 28,000 shares held for his benefit through Merrill Lynch and registered to Philadep and now is indisputably the beneficial owner of 16,997 shares held for his benefit by Merrill Lynch. Chokel contends that this is sufficient to show continued ownership of 16,997 shares and to entitle him to appraisal thereof. He asserts that the shares were held in a fungible mass and therefore it is both unnecessary and impossible to determine whether the particular shares voted against the action are the same shares he now holds. The trial judge agreed, holding that "[f]or purposes of the present action this Court ignores whatever intermediary transactions may have occurred in the processing of the Chokel shares for which Merrill Lynch was responsible. What is determinative is that taking into account all the shares that had been redeemed, whether intentionally or inadvertently, Merrill Lynch finally held only 16,997 shares of [First National] for Mr. Chokel."

First National disagrees with the judge's ruling, arguing that the 16,997 shares for which Chokel claims appraisal are not the same shares he voted against the action. First National relies on evidence of redemption of shares which Philadep segregated and sent to Merrill Lynch in preparation for Chokel's appraisal demand. First National contends that these are the "only shares that Chokel can claim to have owned on the date of the Merger [and that they] were submitted for redemption by his agent, Merrill [Lynch], and were redeemed " (emphasis in original).

Chokel does not dispute that 28,000 shares held by Philadep were redeemed. Rather he disputes whether these anonymous shares can be attributed to him. He claims that they cannot. He is not claiming an ownership interest in nor seeking appraisal of those shares. Cf. Sornberger v. Chesapeake & Ohio Ry., 81 Md.App. 14, 566 A.2d 503 (1989) (plaintiff, on discovery of the erroneous tender by his broker, attempted to return the funds to the company and repudiate the surrender of shares; the company refused; the case was dismissed). Chokel is instead seeking appraisal of the 16,997 shares registered to Philadep and Merrill Lynch which Merrill Lynch currently holds for his benefit. It is undisputed that these shares were held by Philadep or Merrill Lynch prior to the merger and that they have not been redeemed. Cf. Graves v. Pittsburgh Consolidation Coal Co., 355 Pa. 224, 49 A.2d 344 (1946) (registered owner of shares bought shares after merger then sold pre-merger shares; held, plaintiff cannot substitute shares bought after merger for those owned before). The issue, which is an issue of first impression in this Commonwealth, is whether shares held by a depository clearing house, such as Philadep, are fungible and as such, it is immaterial that some shares were segregated for a particular purpose (to be...