Denver Area Meat Cutters v. Clayton

• Decision Date: 03 September 2003
• Docket Number: No. E2003-02035-COA-R10-CV.,E2003-02035-COA-R10-CV.
• Parties: DENVER AREA MEAT CUTTERS AND EMPLOYERS PENSION PLAN, derivatively on behalf of Clayton Homes, Inc. v. James L. CLAYTON, et al.
• Court: Tennessee Court of Appeals

120 S.W.3d 841

DENVER AREA MEAT CUTTERS AND EMPLOYERS PENSION PLAN, derivatively on behalf of Clayton Homes, Inc. v. James L. CLAYTON, et al.

No. E2003-02035-COA-R10-CV.

Court of Appeals of Tennessee, Eastern Section, at Knoxville.

August 27, 2003 Session.

September 3, 2003.

Application for Permission to Appeal Denied by Supreme Court September 24, 2003.

Permission to Appeal Denied by Supreme Court September 29, 2003.

John A. Lucas and John G. Brock, Knoxville, Tennessee; Edward J. Fuhr, Stacy M. Colvin, Eric H. Feiler, and Terence J. Rasmussen, Richmond, Virginia; Gregory P. Williams, Wilmington, Delaware; and Jerry G. Cunningham, Maryville, Tennessee, for the appellants, James L. Clayton, Kevin T. Clayton, C. Warren Neel, B. Joe Clayton, Steven G. Davis, Dan W. Evins, Wilma H. Jordan, Thomas N. McAdams, and Clayton Homes, Inc.

George E. Barrett, Douglas S. Johnston, Jr., Timothy L. Miles, James G. Stranch, III, and C. Dewey Branstetter, Nashville, Tennessee; Darren J. Robbins, Randall J. Baron, A. Rick Atwood, Jr., and Mary K. Blasy, San Diego, California; and David R. Duggan, Maryville, Tennessee, for the appellees, Denver Area Meat Cutters and Employers Pension Plan.

CHARLES D. SUSANO, JR., J., delivered the opinion of the court, in which HOUSTON M. GODDARD, P.J., and D. MICHAEL SWINEY, J., joined.

OPINION

The focus of this litigation is on the merger of (1) Clayton Homes, Inc., a Delaware corporation, which, pre-merger, was a publicly-owned corporation whose stock was traded on the New York Stock Exchange, with (2) B Merger Sub Inc., also a Delaware corporation. Before the merger, B Merger Sub Inc. was a wholly-owned subsidiary of Berkshire Hathaway, Inc. The latter company is a publicly-owned Delaware corporation; its stock is traded on the New York Stock Exchange. We granted an extraordinary appeal to the defendant Clayton Homes, Inc., and the individual defendants, all of whom were members of that corporation's pre-merger board of directors, in order to review the trial court's order of August 18, 2003, attached as Appendix A to this opinion. The defendants' application for review—filed pursuant to the provisions of Tenn. R.App. P. 10—asks us to determine "(1) whether the [trial court] properly granted Plaintiff's request for a [temporary restraining order]; (2) whether the [trial court] properly found that Plaintiff retained standing to maintain its derivative claims [;] and[ ](3) whether the [trial court] properly lifted the stay previously issued in this action." We hold (1) that the trial court's "status quo" order—essentially a temporary injunction—was erroneously issued and, accordingly, we vacate that order; (2) that the plaintiff lacks standing to pursue its stockholders' derivative claims, and, consequently, we vacate the trial court's order denying the defendants' motion to stay as to those claims; (3) that the trial court should dismiss the plaintiff's stockholders' derivative claims upon the filing of an appropriate motion to dismiss; and (4) that the trial court did not err in permitting, at this time, the plaintiff's putative class action lawsuit for damages to proceed forward in the court below. The trial court's order is vacated in part and affirmed in part and this case is remanded to the trial court with instructions. We direct that the order issued pursuant to this opinion will be stayed until 4:30 p.m. EDT, September 8, 2003, in order to afford each of the parties an opportunity to request further appellate review by the Supreme Court.

I. Background

A. The Merger

On April 1, 2003, Clayton Homes, Inc. ("Old Clayton Homes"), B Merger Sub Inc., and Berkshire Hathaway, Inc. ("Berkshire") entered into an agreement entitled "Agreement and Plan of Merger" ("the merger agreement"), by the terms of which B Merger Sub Inc. would be merged into Old Clayton Homes with the latter being "the successor or surviving corporation in the Merger ... under the name of `Clayton Homes, Inc.'" ("New Clayton Homes"). According to the terms of the merger agreement, "upon completion of the merger, [each stockholder in Old Clayton Homes would] be entitled to receive $12.50 in cash for each share of [Old] Clayton Homes common stock that [the stockholder] own[ed]," and New Clayton Homes would be a wholly-owned subsidiary of Berkshire. The merger agreement was publicly announced on April 1, 2003. The merger contemplated a total payment of approximately $1.7 billion to the stockholders of Old Clayton Homes of record at the close of business on June 2, 2003.136,210,180 shares of common stock were then outstanding.

On or about June 16, 2003, Old Clayton Homes sent a letter to its stockholders formally advising them of the proposed merger. The letter transmitted (1) a proxy statement with a copy of the merger agreement and (2) a notice of a special stockholders' meeting to be held in Knoxville on July 16, 2003, at 11:00 a.m. EDT to vote on the proposed merger "as the merger agreement may be amended from time to time." The letter to the stockholders advised them that the board of directors of Old Clayton Homes, "by a unanimous vote," had "(1) determined that the merger is advisable and that the terms of the merger are fair to, and in the best interests of, Clayton Homes and our stockholders, (2) approved the merger agreement and the transactions contemplated thereby, including the merger, and (3) recommended that our stockholders approve and adopt the merger agreement and the transactions contemplated thereby, including the merger."

As would later become significant, the proxy statement recited that

[t]he persons you name as proxies may propose and vote for one or more adjournments or postponements of the special meeting, including adjournments or postponements to permit further solicitations of proxies. No proxy voted against the proposal to adopt the merger agreement will be voted in favor of any adjournment or postponement.

B. The Meeting

The special meeting of the stockholders was convened on July 16, 2003. Following discussion, including a question and answer period, the meeting was adjourned to July 30, 2003. No formal vote on the proposed merger was taken at the July 16, 2003, meeting.

Proxies under the control of Kevin T. Clayton, the Chief Executive Officer of Old Clayton Homes, and James L. Clayton, Chairman of the Board of Directors of Old Clayton Homes, were voted at the July 16, 2003, meeting in favor of the adjournment motion. The announced purpose of the adjournment was to afford Cerberus Capital Management L.P. ("Cerberus")—a potential competing suitor for ownership of Old Clayton Homes—an opportunity to determine whether it wanted to submit a bid to buy the company. In order to secure Berkshire's agreement to the postponement, Old Clayton Homes agreed to pay Berkshire $5 million.

Following a due diligence study of Old Clayton Homes, Cerberus, by letter to Kevin T. Clayton dated July 28, 2003, advised Old Clayton Homes that Cerberus "ha[d] determined to terminate discussions regarding a possible transaction and not make any offer for Clayton Homes."

On July 30, 2003, the adjourned meeting of the stockholders of Old Clayton Homes was held as specified in the July 16, 2003, adjournment motion. The holders of 115,712,882 shares of the common stock of Old Clayton Homes were represented in person or by proxy at the adjourned meeting. A motion was duly made to approve the proposed merger pursuant to the merger agreement. It passed with the following later-certified vote:

                     For           71,309,699
                     Against       44,035,083
                     Abstain          368,100
                

The numbers represent a vote in favor of the proposed merger by a margin of approximately 52.35% to 47.65%.¹ Since 50% of the total shares of common stock plus one share amounts to 68,105,091 shares, the margin of the vote for the proposed merger was 3,204,608 shares.

C. The Delaware Litigation

Prior to the stockholders' meeting of July 16, 2003, a stockholder of Old Clayton Homes—Mark Blosser—filed suit in the Court of Chancery of the State of Delaware (New Castle County) challenging the legality and propriety of the proposed merger. His complaint was filed on May 16, 2003. For convenience, this litigation will be referred to in this opinion as "the Blosser Delaware litigation." Blosser sought an order of the Delaware court that his "action may be maintained as a Class Action and certifying [him] as the Class Representative." The Blosser Delaware litigation named the same defendants as those sued in the case at bar. The Blosser Delaware complaint claimed (1) that the individual defendants² were guilty of breach of their fiduciary duty "under Revlon"³ (emphasis added); (2) that they were guilty of other breaches of their fiduciary duty; and (3) that they violated 8 Del. C. § 141⁴ by agreeing to the merger agreement in which they allegedly "surrendered any ability to fulfill [their] statutory duties to Clayton Homes, and its stockholders" and by taking a "series of deliberate actions which effectively disable the Director Defendants from managing the business and affairs of Clayton Homes." In addition to other relief, the complaint in the Blosser Delaware litigation seeks an injunction against the defendants from proceeding with or completing the proposed merger. Alternatively, in the event the merger is consummated, the plaintiff in that case seeks damages.

On July 10, 2003, Orbis Investment Management, Ltd. ("Orbis"), also a stockholder of Old Clayton Homes, filed suit⁵ in the same Delaware Chancery Court. Its complaint is entitled "Complaint Pursuant to 8 Del. C. § 220 to Compel Inspection of Books and Records" ("the Orbis Delaware litigation"). Orbis sought information and documentation pertaining to the stockholders of Old Clayton Homes in order to communicate with them and urge them to join Orbis in opposing the proposed merger. Orbis sought a court order requiring Old Clayton Homes "to permit the requested inspection and...