Hynson v. Drummond Coal Co., Inc.

• Decision Date: 07 June 1991
• Docket Number: No. 7904,7904
• Citation: 601 A.2d 570
• Parties: Richard HYNSON, Jr., et al., Plaintiffs, v. DRUMMOND COAL COMPANY, INC., et al., Defendants. . Submitted:
• Court: Court of Chancery of Delaware

Page 570

601 A.2d 570

60 USLW 2031

Richard HYNSON, Jr., et al., Plaintiffs, v. DRUMMOND COAL COMPANY, INC., et al., Defendants.

Civ. A. No. 7904.

Court of Chancery of Delaware,

New Castle County.

Submitted: June 7, 1991.

Decided: June 14, 1991.

Norman M. Monhait, of Morris, Rosenthal, Monhait & Gross, P.A., Wilmington, Lowey, Dannenberg, Bemporad & Selinger, P.C., New York City, for plaintiffs.

Richard L. Sutton, of Morris, Nichols, Arsht & Tunnell, Wilmington, Dennis G. Lyons, Hadrian R. Katz, Brendan Collins, and Michael E. Korens, of Arnold & Porter, Washington, D.C., for moving defendants.

OPINION

ALLEN, Chancellor.

Defendants in this stockholders' class action have moved, pursuant to Rule 60(b)(3) and Rule 23, for an order confirming (1) that they are guilty of no fraud or deception that taints the final judgment in this matter entered on February 1, 1990, and (2) that this case was properly certified as a class action under Rule 23(b)(1) and (2). Two factors occasion this motion. First, the certification of this action as a class action under Rule 23(b)(1) and (2) was stipulated by the parties and, after notice and hearing, the court entered the stipulated order without addressing in writing the question whether it was constitutionally permissible, in the circumstances, to bind absent class members to a final judgment without affording them the opportunity to opt-out of the action. The second factor occasioning the motion is the filing by certain class members in the Circuit Court of Jefferson County, Alabama of civil actions against the defendants herein charging them with the same wrongs as those apparently settled and discharged by the final judgment in this case. The apparent premises of those actions are the assertions (1) that, in the absence of an opt-out opportunity, the Alabama plaintiffs are not bound by the final judgment in this class action because there existed, they say, no minimal contact among themselves, the litigation and this jurisdiction that would satisfy traditional notions of fair play and substantial justice and (2) that defendants were guilty of fraud in this action (explained below) that eviscerates the effectiveness of the judgment.

The defendants claim here, and in these newly filed Alabama actions, that this court's final judgment is valid and binding on all members of the class. That final judgment is, they say, entitled to full faith and credit, and as such is a complete bar to any further liability arising from the tender offer-merger transaction from which this case and the Alabama litigation arise. Whether defendants' assertion is sound or not is ultimately a question of federal law that is to be answered in the first instance by the courts of the State of Alabama. But these claims cast a shadow upon this court's processes and since neither of these matters has been addressed in writing by this court, and since it may be helpful to later courts to have this court's view, I take up this procedurally unusual motion.

The central question raised by this motion is of general importance. It is whether a single jurisdiction with in personam jurisdiction over the corporation and all of its directors may, in a single action, conclusively adjudicate ¹ whether a corporation's directors have satisfied their fiduciary duties to the corporation and its shareholders in the context of a corporate merger or other corporate transaction. See Nottingham Partners v. Dana, Del.Supr., 564 A.2d 1089 (1989); In the Matter of Colt Indus. Shareholders' Litig., 77 N.Y.2d 185, 565 N.Y.S.2d 755, 566 N.E.2d 1160 (1991).

This question was left unanswered by the Supreme Court of the United States in Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985). In Shutts the Supreme Court held that, so long as class members are afforded an opportunity to "opt-out" of the action, the due process clause does not require that all members of a plaintiff class have such "minimal contacts" with the forum jurisdiction as would sustain in personam jurisdiction over each class member under the analysis of International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). See Shutts, 472 U.S. at 812, 105 S.Ct. at 2974. The court noted its holding was "limited to those class actions concerning claims wholly or predominately for money judgments. We [the Supreme Court] intimate no view concerning other types of actions, such as those seeking equitable relief." Shutts, 472 U.S. at 811 n. 3, 105 S.Ct. at 2974 n. 3.

In this action, absent plaintiff class members were afforded no right to opt-out. This case therefore raises the question that the presence of such a right eliminated in Shutts: whether, in order to be preclusively bound by a judgment in a properly conducted Rule 23(b)(1) or (b)(2) action (in which no opt-out option is provided), a member of the class must have a sufficient nexus with the rendering jurisdiction as to make permissible exercise of in personam jurisdiction over that person, with respect to the claims in issue? The question as it arises here is, of course, not so general as that. This case involves a particular class of litigation: stockholder action against corporate fiduciaries. That fact supplies important context for addressing the subsidiary question: whether ownership of corporate stock itself constitutes such a relationship with the corporate domiciliary jurisdiction that it is fair to subject the holder of stock to that jurisdiction for the purpose of adjudicating the existence or contours of corporate rights that attach to stock ownership.

For the reasons set forth below, considerations both of efficiency and fairness in our federal system, in my opinion, require that a single adjudication be available in which charges of breach of a director's or controlling shareholder's duty to a corporation and its shareholders may be conclusively determined and all holders of stock bound. It is further my view, as explained below, that where the issue is whether a plaintiff class may be bound to an adjudication of the equitable duty of loyalty created by the law of the incorporating state, that the purchase (or merely holding) of the shares of a corporation of that state itself creates a sufficient relationship with that jurisdiction to permit that jurisdiction to be one in which rights attaching to stock of the corporation may be conclusively adjudicated.

I. Procedural Background of the Present Motions

This stockholders' class action challenged the propriety of a two-step transaction in which Drummond Coal Company, Inc., ("Drummond") then the majority shareholder of Alabama By-Products, Corp., a Delaware corporation, ("ABC") acquired (through a subsidiary) all of the common stock of ABC. The first leg of this transaction was a December 5, 1984 cash tender offer extended by the subsidiary for up to all of the publicly held ABC shares at $75 per share. The concluding step was an August 1985 cash-out merger at the same $75 per share price, eliminating those shares that had not been previously tendered. At the time of the first of these transactions, Drummond owned, directly and indirectly, approximately 68% of ABC's Class A common stock--the only class of ABC's stock with voting power--and about 45% of ABC's equity.

This action was filed on January 4, 1985. Plaintiff was a holder of Class A and Class B Common Stock. He asserted a class action on behalf of himself and all owners of ABC Common Stock. Defendants were Drummond, its subsidiary that had actually extended the offer, and all of ABC's directors.

The complaint alleged that Drummond, the controlling shareholder, violated the fiduciary duty it owed to the ABC stockholders by structuring a coercive tender offer and issuing a false and misleading offering circular and that the ABC directors had breached their fiduciary duties to the ABC stockholders by causing ABC (i) not to oppose the tender offer, taking instead a neutral position, and (ii) to otherwise fail to protect the interests of ABC's stockholders. The complaint sought to enjoin the tender offer and/or rescind the tender offer. Plaintiff also sought an accounting, and compensatory and/or rescissory damages. ²

No motion for preliminary injunction was presented. Upon the closing of the tender offer Drummond's direct and indirect ownership of ABC was increased to over 90% of each class of ABC stock.

On August 13, 1985, ABC was merged into a Delaware subsidiary of Drummond under 8 Del.C. § 253. The shares of ABC common stock not then owned by Drummond or its subsidiary were in the merger converted into the right to receive $75.60 per share in cash, subject to the rights of dissent and appraisal set forth in 8 Del.C. § 262.

On December 3, 1985, certain shareholders of ABC who had neither tendered their shares nor voted for the merger instituted a judicial appraisal of the fair value of their stock in this court. See Neal v. Alabama By-Products Corp., Del.Ch., C.A. No. 8282, 1990 WL 109243, Chandler, V.C. (Aug. 1, 1990).

Thereafter, the complaint in this action was amended on February 21, 1985, and again on September 11, 1986, after the consummation of the merger. As amended through the Second Amended Complaint, the action presented essentially the same structure as that of the original complaint. Additional details of the alleged breaches of fiduciary duty were pleaded; a second named plaintiff was added; the merger was mentioned; and an allegation was made that the meeting of the board of directors of ABC that considered ABC's position with respect to the tender offer was invalidly called and held. Rescission of the tender offer and merger was sought, together with an accounting and damages. The class alleged was identical to that of the original complaint, and the gravamen of the amended complaint was still the alleged breach of fiduciary duty by the individual defendants constituting the board of ABC and by Drummond as...