Colt Industries Shareholder Litigation, In re

• Decision Date: 03 April 1990
• Citation: 553 N.Y.S.2d 138,155 A.D.2d 154
• Parties: In re COLT INDUSTRIES SHAREHOLDER LITIGATION. Karen WOODROW, et al., Plaintiffs-Respondents, v. COLT INDUSTRIES, INC., et al., Defendants-Respondents, The James S. Merritt Company, Appellant.
• Court: New York Supreme Court — Appellate Division

Page 138

553 N.Y.S.2d 138

155 A.D.2d 154

In re COLT INDUSTRIES SHAREHOLDER LITIGATION Karen WOODROW, et al., Plaintiffs-Respondents, v. COLT INDUSTRIES, INC., et al., Defendants-Respondents The James S. Merritt Company, Appellant.

Supreme Court, Appellate Division First Department.

April 3, 1990.

Robert L. Beerman, New York City, of counsel (Charles W. German, W. Perry Brandt and John J. Miller, Brooklyn, with him, on the brief; Beerman & Wadler and Stinson, Mag & Fizzell, attorneys), for appellant.

Seth M. Schwartz, of counsel (Skadden, Arps, Slate, Meagher & Flom, New York City, attorneys), for defendants-respondents.

Before MURPHY, P.J., and SULLIVAN, ROSS, ROSENBERGER and ELLERIN, JJ.

ROSS, Justice.

The primary issue to be resolved on this appeal is, under what circumstances, can an out-of-state resident, who has no contacts with New York State, opt out of a New York class action, which seeks equitable and monetary relief.

Colt Industries, Inc. (Colt) is a Pennsylvania corporation, with offices located in New York County, and, same is engaged in the business of manufacturing firearms and parts for machines, jet engines and automobiles.

In October 1986, Colt, with the advice and assistance of Morgan, Stanley & Co. Incorporated (Morgan Stanley), which, inter alia, was engaged in the investment banking business, undertook a major recapitalization, which resulted in Colt incurring over $1.5 billion in debt, and, reducing its equity capital, by the repurchase of over 30 million shares of Colt's outstanding common stock from public shareholders, for $85.00 per share and one new share.

On or about January 29, 1988, Morgan Stanley informed Colt that it desired to formulate a proposal to acquire Colt. As a result of that interest, a special committee was formed, by Colt's seven member Board of Directors, which consisted of the four outside or non-management Directors, to negotiate with Morgan Stanley. Those negotiations resulted in the special committee, upon the advice of Colt's investment advisor, the First Boston Corporation, recommending the approval of a merger transaction with Morgan Stanley.

In substance, the terms of the March 9, 1988 agreement, and, Plan of Merger provided that an affiliate of Morgan Stanley, Colt Holdings, Inc. (Holdings), which had been created solely for that purpose, was to make a tender offer to purchase each outstanding Colt share of common stock for $17.00, and, that was to be followed by the merger. After the merger, all the remaining Colt shareholders of common stock would receive the same $17.00 per share, mentioned supra.

On or about March 16, 1988, the tender offer of Holdings was publicly announced, and, as of that date, Colt had approximately 32 million shares of common stock outstanding, and, had approximately 16,300 shareholders of record. Further, at that time, Colt common stock was traded on the New York, Midwest, and, Pacific stock exchanges.

Shortly after that announcement, owners of Colt common stock (plaintiffs) commenced fifteen separate class actions against Colt and others (defendants), in State Courts in New York and Pennsylvania. Subsequently, those actions were consolidated for all purposes in the Supreme Court, New York County, under the caption: In Re Colt Industries Shareholder Litigation.

Thereafter, counsel for plaintiffs served and filed a first amended consolidated class action complaint, which sought equitable and monetary relief (see, for a copy of the consolidated class action complaint, Appendix on Appeal of the Defendants-Respondents (RA), at RA 17-32). This consolidated complaint alleged, inter alia, that the defendants had breached their fiduciary duty, by seeking to benefit themselves financially, as result of the merger at the expense of the plaintiff class, the consideration of $17.00 per share contained in the tender offer of Holdings was grossly inadequate, and, the Colt Board of Directors had improperly failed to seek higher merger bids.

Following the joinder of issue, the parties' counsel agreed to an expedited discovery schedule. While that discovery was underway, and, before the date, on which it was contemplated that a preliminary hearing to enjoin the merger would be held, the parties executed a Memorandum of Understanding (Memorandum), dated April 11, 1988, to settle the consolidated class action. By order, dated April 12, 1988, the IAS Court granted the parties' application to certify the consolidated class action for settlement purposes.

Less than a month later, the parties replaced the Memorandum with an executed document, dated April 29, 1988, which was entitled: Stipulation and Agreement of Compromise and Settlement (Settlement Agreement).

The terms of the Settlement Agreement provided, inter alia, as follows: (1) Holdings agreed to reduce, from $12 million to $10 million, the maximum amount of expenses, which same would be entitled to receive as reimbursement, under the merger agreement, (2) defendants agreed not to oppose plaintiffs' counsel's application to the Court for an award of $425,000.00 for fees and expenses, which would be paid by Holdings, and, (3) plaintiffs agreed to dismiss the consolidated class action with prejudice, release all claims, which arose out of the transaction, such as those concerning the Colt recapitalization and merger, and, which were alleged in the consolidated complaint, other than appraisal right claims under the Pennsylvania Business Corporation Law. Thereafter, pursuant to CPLR Article 9, the parties submitted the Settlement Agreement to the Court for approval.

By amended order (see, for a copy, at RA 225-232), dated May 10, 1988, the IAS Court, inter alia, defined the subject class, as all shareholders of Colt's common stock, on or after March 1, 1988, scheduled for June 15, 1988 a CPLR rule 908 hearing to determine the fairness of the Settlement Agreement, stated "all members of the Class will be bound by any judgment in this action and shall not be excluded from the Class" (see, at RA 227), and, approved the form, content, and, method of notice to the class. Pursuant to that order, such notice, which was entitled: Notice of Pendency Of Action, Class Action Determination, Proposed Settlement Of Class Action And Settlement Hearing, was published on May 17, 1988, in the national editions of the Wall Street Journal and New York Times (see, for copies of those publications, Appendix on Appeal of Appellant (A), at A29, and, RA 233).

The James S. Merritt Company (Merritt) is a Missouri corporation, and, as of March 1988, it owned 62,000 shares of Colt common stock. Sometime after the public announcement of Holdings' tender offer for Colt common stock, Merritt learned that a class action had been filed in the IAS Court, which was in the process of being settled. Subsequently, Merritt, which is not a New York resident, with no New York contacts, and, which had not participated in any way in the class actions, which resulted in the consolidated class action, sent a letter (see, for a copy, at A32-33), dated May 27, 1988, to the IAS Court, which requested that Court to exclude Merritt from the subject class action.

On June 9, 1988, Merritt commenced a separate action against Colt and others (defendants) to recover damages, in the United States District Court for the Western District of Missouri, Western Division (Federal action). This Federal action complaint alleges, in substance, that the defendants breached their fiduciary duty to Colt shareholders, by their conduct in arranging the, recapitalization, tender offer, and, merger. At this time, the Merritt Federal action is still pending.

Prior to the IAS Court hearing on the fairness of the Settlement Agreement, as a result of the tender offer, Holdings had obtained control of Colt. Therefore, on June 10, 1988, Colt shareholders approved the merger.

On June 15, 1988, after a hearing, at which Merritt did not appear, the IAS Court, inter alia, approved the Settlement Agreement, and, denied Merritt's request to be excluded from it.

Thereafter, orders and judgments were entered on June 16, 17, and 21, 1988, which carried into effect the IAS Court decision of June 15th, and, Merritt (appellant) appeals from so much of those orders and judgments as denied its request to be excluded from the consolidated class action, binds it to the terms of the Settlement Agreement, and, precludes it from asserting its own damage claims against the defendants and others, which arose from the merger transaction.

Although the use of the class action device is governed by Statute (see CPLR Article 9) in this State, the class action had its origins in "English Chancery practice, as far back as the 17th century ..." (Homburger, Private Suits In the Public Interest In the United States of America, 23 Buffalo L.Rev. 343, 347 (1974)). Equity invented the class action "to enable it to proceed to a decree in suits where the number of those interested in the subject of the litigation is so great that their joinder as parties in conformity to the usual rules of procedure is impracticable ..." (Hansberry v. Lee, 311 U.S. 32, 41, 61 S.Ct. 115, 118, 85 L.Ed. 22 (1940)).

In 1975, when then Governor Hugh L. Carey signed the present class action Statute (Article 9) into law, he stated that it was designed "to cope with contemporary problems" (see, McKinney's N.Y.Sess.Laws, 1975, p. 1748).

Our examination of CPLR Article 9 indicates that it is very similar to Rule 23 of the Federal Rules of Civil Procedure, 28 U.S.C.A. which governs the bringing of class actions in the Federal Court system, and, we have said "[t]he policy of ... rule [23] ... is to favor the maintenance of class actions and for a liberal interpretation ..." (Brandon v. Chefetz, 106 A.D.2d 162, 168, 485 N.Y.S.2d 55 (1st Dept.1985) [material in brackets added]. Also, Appellate Courts in this State have repeatedly stated that the provisions of the class action Statute should be...