Grimes v. Vitalink Communications Corp.

Decision Date06 April 1994
Docket NumberNo. 93-1268,93-1268
Parties, Fed. Sec. L. Rep. P 98,109 C.L. GRIMES and G.W. Holbrook, on their own behalf and on behalf of all persons similarly situated, Appellants v. VITALINK COMMUNICATIONS CORPORATION; Network Systems Corporation; Leslie G. Denend; J. Daniel McCranie; Charles J. Abbe; Harry T. Rein; Lyle D. Altman.
CourtU.S. Court of Appeals — Third Circuit

Thaddeus Holt (argued), Kittredge, Donley, Elson, Fullem & Embrick, Philadelphia, PA, counsel for appellants C.L. Grimes and G.W. Holbrook.

Steven J. Rothschild (argued), Skadden, Arps, Slate, Meagher & Flom, Wilmington, DE, counsel for appellees Vitalink Communications Corporation, Network Systems Corporation, Leslie G. Denend, J. Daniel McCranie, Charles J. Abbe, Harry T. Rein, Lyle D. Altman.

Before: HUTCHINSON, COWEN and NYGAARD Circuit Judges.

OPINION OF THE COURT

COWEN, Circuit Judge.

This case presents the question whether a state court has the power to allow parties as part of a comprehensive court-approved settlement to release exclusive federal securities law claims arising from the same transaction or occurrence as the state law matters before it, even though the state court would not have jurisdiction to hear the federal claims in the first instance. A subsidiary issue presented is whether a non-resident owner of corporate stock who tendered his shares to the Delaware corporation in response to a proxy offer following a merger transaction had sufficient minimum contacts to be bound by the settlement and release entered into on behalf of the plaintiff class of shareholders by a Delaware state court. Answering both questions in the affirmative, we will affirm the district court.

I.

The complicated background giving rise to this lawsuit in federal court started with a merger agreement between two Delaware corporations. Vitalink Communications Corporation ("Vitalink") was a manufacturer of computer internetworking products known as wide area bridges. Network Systems Corporation ("Network"), a manufacturer of data communications equipment which connects mainframe computers, minicomputers, and computer networks, entered into a merger agreement on May 6, 1991, by which it would acquire the stock of Vitalink. It is not necessary for purposes of this opinion to lay out precisely the intricate details of the merger negotiations and the final agreement, other than to note that Network ultimately agreed to pay $10.50 in cash for each share of outstanding Vitalink stock.

On May 13, 1991, Leslie G. Denend, President of Vitalink, sent a letter to all stockholders stating that the Vitalink Board of Directors had unanimously approved the merger, indicating that the Board of Directors believed the terms of the merger were fair, and recommending that the stockholders accept the offer. The plaintiffs in this action, C.L. Grimes, a Pennsylvania resident, and G.W. Holbrook, a Connecticut resident, were among the Vitalink stockholders.

Shortly after the merger agreement was announced seven state law actions were commenced, four in Delaware and three in California. The plaintiffs in these cases alleged that the Vitalink defendants breached their fiduciary duties and that the Network defendants aided and abetted the Vitalink defendants The merger was completed on July 1, 1991, when Vitalink became a wholly owned subsidiary of Network. Vitalink shares that were not tendered were converted into the right to receive $10.50 per share or to seek appraisal. A notice of the completed merger was sent by Vitalink to all shareholders on July 11, 1991. In that letter, stockholders were given the option of surrendering their shares to the paying agent in exchange for $10.50 in cash per share, or to seek appraisal of the shares pursuant to Delaware corporation law. Mr. Holbrook tendered his shares in response to the letter from Vitalink, while Mr. Grimes did not do so.

in doing so. The Delaware cases were consolidated and the parties engaged in expedited discovery. Within several days of commencing discovery, the parties agreed to a settlement. The California and Delaware plaintiffs entered into a Stipulation and Agreement of Compromise, Settlement and Release on June 13, 1991. They agreed to settle the dispute and release all claims arising from the merger transaction 1 in exchange for a ten-day extension of the merger offer, a reduction in the amount payable to Network under a stock option agreement if a third party made an offer for Vitalink, and for an amendment limiting the reimbursement of Network's fees by Vitalink in the event the merger agreement was terminated. In addition, the defendants agreed not to oppose an application by plaintiffs' counsel for an award of attorneys' fees not to exceed $275,000, and expenses not greater than $25,000.

On July 18, 1991, the Delaware Court of Chancery certified the Vitalink stockholders as a non-opt-out settlement class pursuant to Court of Chancery Rule 23(b)(1) and (2). 2 This class, consisting of all persons who owned Vitalink common stock between May 6, 1991 and July 1, 1991, included plaintiffs Grimes and Holbrook. A notification letter was sent to all class members discussing the pending class action litigation, describing the settlement benefits to the class, indicating that all class members had an opportunity to oppose settlement, and notifying the class of the date of the settlement hearing. Upon receiving written notice, a group of stockholders including Grimes filed objections to the settlement and presented argument at the subsequent hearing. Mr. Grimes and the other objectors argued that the interests of the stockholders were not adequately represented by the class representatives and that the settlement agreement did not result in any material benefits for the class. Mr. Holbrook did not enter an appearance in the Delaware state court proceedings and never opposed settlement of the class action claims.

The Delaware Court of Chancery approved the settlement by memorandum opinion issued on November 8, 1991. See In re Vitalink Communications Corp. Shareholders Litig., [1991-92 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 96,585, 1991 WL 238816 (Del.Ch. Nov. 8, 1991). Mr. Grimes and the other objectors appealed this decision to the Delaware Supreme Court, which affirmed the Court of Chancery in an unpublished disposition without opinion. See Grimes v. John P. McCarthy Profit Sharing Plan, 610 A.2d 725 (Del.1992) (table). In a petition for certiorari, Mr. Grimes argued that the Delaware court proceedings violated due process because the court did not develop a sufficient record to consider whether absent class members were adequately represented. The Supreme Court denied this petition on October 5, 1992. Grimes v. John P. McCarthy Profit Sharing Plan, --- U.S. ----, 113 S.Ct. 179, 121 L.Ed.2d 124 (1992).

Prior to the disposition of the writ of certiorari, Grimes and Holbrook filed the present action in the U.S. District Court for the Eastern District of Pennsylvania. In this case, the plaintiffs alleged that the defendants violated their duty of disclosure pursuant to sections 10(b) and 14(e) of the Securities Exchange Act of 1934. See 15 U.S.C. Secs. 78j & 78n(e) (1988). Federal courts have exclusive jurisdiction over suits alleging violations of these securities law provisions. 15 U.S.C. Sec. 78aa (1988); 3 Cramer v. General Tel. & Elecs. Corp., 582 F.2d 259, 270 n. 15 (3d Cir.1978), cert. denied, 439 U.S. 1129, 99 S.Ct. 1048, 59 L.Ed.2d 90 (1979). In addition, the plaintiffs complained that the procedures employed by the state courts in resolving the Delaware action denied them due process of law.

Vitalink, Network, and the other defendants moved the district court to dismiss the federal action based on the judgment in the Delaware action. In essence, they argued that the state court approved a release of all claims arising from the merger, including exclusive federal claims, and that the federal court was required to adhere to that judgment consistent with full faith and credit. 4 Grimes and Holbrook opposed dismissal of their suit and requested the district court to treat the motion as one for summary judgment. Likewise, they moved the district court for partial summary judgment and submitted several supporting documents to the court.

In a memorandum opinion dated February 27, 1993, the district court denied plaintiffs' partial motion for summary judgment and granted defendants' motion for summary judgment. Grimes v. Vitalink Communications Corp., No. 92-2722, 1993 WL 56032 (E.D.Pa. Feb. 27, 1993). The district court ruled that the legal doctrines of collateral estoppel and release bar the federal court from considering the alleged violations of federal securities law stemming from the merger. Id. at *2-5 First, the district court found that the plaintiffs in this case were members of the non-opt-out state court class who were bound by the broad release approved by the Delaware Court of Chancery. Id. at *2-4 Second, and alternatively, the district court held that this federal securities case is barred by the collateral estoppel effect of the Delaware judgment because the predicate facts that underlie the federal case, which primarily involve issues of nondisclosure, overlap significantly with facts conclusively established in the state court proceeding. Id. at *4-5 Finally, the district court also examined the federal plaintiffs' allegation that they were denied due process in the state court proceedings and concluded that this claim was not meritorious. Id. at * 5-6.

II.

The district court had jurisdiction over this case pursuant to section 27 of the Securities Exchange Act of 1934. 15 U.S.C. Sec. 78aa. By granting the defendants' motion for summary judgment, the district court ordered the case dismissed. We have appellate jurisdiction pursuant to 28 U.S.C. Sec. 1291 as plaintiffs have...

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