Irving Bank Corp. v. Bank of New York Co., Inc.
| Decision Date | 27 June 1988 |
| Citation | 140 Misc.2d 363,530 N.Y.S.2d 757 |
| Parties | IRVING BANK CORPORATION, Plaintiff, v. The BANK OF NEW YORK COMPANY, INC., Defendant. |
| Court | New York Supreme Court |
Wachtell, Lipton, Rosen & Katz by Marc Wolinsky, New York City, for plaintiff.
Sullivan & Cromwell by John L. Warden, New York City, for defendant.
Irving Bank Corporation ("IBC") moves for summary judgment, or in the alternative for a preliminary injunction, to prevent Bank of New York ("BNY") from implementing its proposed plan of acquisition of IBC. IBC claims that the plan constitutes a de facto merger, and can only be implemented after approval by two-thirds of BNY's shareholders. BNY seeks dismissal of the complaint on the ground that it fails to state a cause of action. (C.P.L.R. 3211(a)(7)). The facts are not in dispute.
IBC and BNY are both bank holding companies incorporated in the State of New York. In September, 1987, BNY announced its intention to acquire IBC. At that time, BNY made an offer to the Board of Directors of IBC to acquire all of the outstanding shares of IBC, which offer was rejected. Over the following months, the proposed acquisition developed into a contested takeover offer, the Board of IBC having not approved the initial offer, nor any subsequent BNY offer. To the contrary, IBC has contested virtually every action taken by BNY in connection with this matter. As a result, several lawsuits are pending before this court involving the two companies and/or their shareholders.
The IBC Board of Directors has stated that it is now in the process of holding an "auction", in relation to this matter. The "auction" is not relevant to the decision of these motions.
BNY's plan of acquisition is basically a two-step process: (1) First, BNY seeks to acquire all or a majority of the outstanding shares of IBC; and (2) thereafter, BNY hopes to consummate a merger between IBC and either BNY or an affiliate of BNY.
The acquisition of IBC's shares would be in exchange for cash and shares of BNY. That is, BNY would pay a certain amount of cash plus between one and two BNY shares for each IBC share acquired.
An obstacle which might prevent or delay the subsequent merger even should BNY successfully achieve acquisition of a majority of the shares of IBC is posed by Business Corporation Law (BCL) Sec. 912.
BCL Sec. 912 would prevent a merger of IBC with BNY, or an affiliate thereof, for five years after the date of acquisition, unless the IBC Board approves such merger prior to the acquisition date. (BCL Sec. 912(b)). To date, IBC's Board has consistently refused such approval.
Furthermore, merging two giant banks is no easy task. The merger may well take some time, after all approvals have been obtained (if they ever are). BNY has indicated that it may well operate IBC as a subsidiary, for this reason, for some period
of time, after the shares of stock it seeks have been acquired.
IBC brings this action as a shareholder of BNY. It seeks a declaration that BNY's plan of acquisition constitutes a merger, within the meaning of BCL Sec. 903, 1 and thus requires a vote of two-thirds of BNY's shareholders to approve the transaction. It argues, that although the form of the plan of acquisition is not one of merger, the substance is that of a merger, and that the court should apply the "de facto merger doctrine", and treat the acquisition plan as a merger.
BNY disputes the existence of the de facto merger doctrine in New York, and furthermore claims that even where the doctrine is recognized, it would not be applicable in these circumstances.
BNY moves for dismissal on the ground that it has properly complied with the BCL provision which permits its Board to issue common shares for "such consideration, not less than par value thereof, as is fixed from time to time by the board." BCL Sec. 504(c). Therefore, BNY claims any exchange of its shares for IBC shares would be valid. Furthermore, it claims that it already has shareholder authority to issue the shares, since the certificate of incorporation authorizes the issuance of 125,000,000 shares, of which less than 40,000,000 have been issued. Issuance of the proposed 31,000,000 shares in the exchange offer, alleges BNY, has already been, in accordance with statutory requirements, approved by the shareholders of BNY. (BCL Sec. 801). 2
The shareholders of BNY have not approved any merger of IBC into BNY, or other proposed merger, by two-thirds vote. They did approve a corporate resolution authorizing the planned acquisition (which proposal was submitted to them pursuant to the Rules of the New York Stock Exchange), but by less than a two-thirds vote.
The New York Business Corporation Law affords certain rights to corporate shareholders when a merger of their corporation with another corporation is proposed. BCL Sec. 903(a)(2) requires a vote of approval by two thirds of all of the outstanding shares entitled to vote thereon, before the merger can be effected. Business Corporation Law Sec. 910 affords shareholders the right to receive payment for their shares upon merger or consolidation if any shareholders so choose.
The de facto merger doctrine has been used by some courts of equity to preserve shareholders' rights where the transaction involved, although not a classic merger, is, in essence a merger. The courts will look through the form of the transaction to its substance.
Under BCL 901(a)(1), a merger is defined as a transaction leading to the formation of a single surviving corporation. See: Danziger v. Kennecott Copper Corp., (Index No. 21941/1977, Sup.Ct., N.Y. County, Kirschenbaum, J.), aff'd. 60 A.D.2d 552, 400 N.Y.S.2d 724. The fact that the corporation whose shares are acquired continues to exist means that there is no requirement for shareholder approval under BCL 903(a)(2). Danziger v. Kennecott Copper Corp., supra. Effectively, said case stated that in circumstances similar to the instant case the de facto merger doctrine will not be applied. The de facto merger doctrine has been applied in this state, but only where it is apparent that the acquired corporation was quickly to be dissolved.
We need not discuss, at this time, extensively the requirements for a de facto merger. It is clear, however, that two factors are necessary: (1) The actual merger must take place soon after the initial transaction, and (2) the seller corporation must quickly cease to exist.
In Lirosi v. Elkins, 89 A.D.2d 903, 453 N.Y.S.2d 718 (2d Dep't 1982), the court held that a transfer of assets from one corporation to another, and the subsequent dissolution of the former corporation, constituted a de facto merger. In Gilbert v. Burnside, 197 N.Y.S.2d 623 (1959), rev'd 13 A.D.2d 982 (2d Dep't 1961) aff'd 11 N.Y.2d 960, 229 N.Y.S.2d 10, 183 N.E.2d 325, the court held a "reorganization agreement" to be a de facto merger where the agreement provided for the sale of all of the assets of a...
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