Kramer v. Western Pacific Industries, Inc.

• Decision Date: 29 March 1988
• Citation: 546 A.2d 348
• Parties: Larry KRAMER, Plaintiff Below, Appellant, v. WESTERN PACIFIC INDUSTRIES, INC., Howard A. Newman and William C. Scott, Defendants Below, Appellees. . Submitted:
• Court: Supreme Court of Delaware

Page 348

546 A.2d 348

57 USLW 2178

Larry KRAMER, Plaintiff Below, Appellant, v. WESTERN PACIFIC INDUSTRIES, INC., Howard A. Newman and William C. Scott, Defendants Below, Appellees.

Supreme Court of Delaware.

Submitted: March 29, 1988.

Decided: Aug. 22, 1988.

Sidney B. Silverman (argued), Pro Hac Vice, and Harold B. Obstfeld, of counsel, of Silverman and Harnes, New York, and Pamela S. Tikellis of Greenfield & Chimicles, Wilmington, for appellant.

David A. Drexler (argued) and Kenneth J. Nachbar of Morris, Nichols, Arsht & Tunnell, Wilmington, for appellees.

Before HORSEY, MOORE and WALSH, JJ.

HORSEY, Justice:

In this corporate matter we consider once again the consequences of a cash-out merger upon the standing of a shareholder to pursue a claim of wrongdoing against management. Plaintiff, Larry Kramer, owner of 200 shares of common stock of defendant, Western Pacific Industries, Incorporated ("Western Pacific"), prior to a merger of Western Pacific into Danaher Corporation ("Danaher"), appeals the Court of Chancery's dismissal of his pre-merger suit for loss of standing and the Court's grant of summary judgment for Western Pacific. Kramer v. Western Pacific Ind., Inc., Del.Ch., C.A. No. 8675, Hartnett, V.C. (Sept. 11, 1987).

In 1986, following a "bidding war," Danaher acquired Western Pacific pursuant to a tender offer followed by a cash-out merger at a price of $163.00 per share. Prior to the merger's consummation, Kramer filed suit against Western Pacific and the individual defendants, charging that the defendants, in connection with the merger, diverted funds to the individual defendants in the form of stock options and termination agreements and to third parties in the form of excessive fees and expense payments relating to the merger.

The Court of Chancery ruled that this Court's decision in Lewis v. Anderson, Del.Supr., 477 A.2d 1040 (1984), required dismissal of Kramer's suit for loss of standing to continue to pursue claims which it found to be derivative rather than individual. Kramer seeks reversal, asserting that the merger did not deprive the Western Pacific shareholders of standing because the amended complaint should be construed as directly attacking the fairness of the merger terms as well as alleging wrongs affecting the individual contractual rights of the Western Pacific shareholders rather than wrongs to the corporation.

Finding Lewis v. Anderson to be controlling, we affirm the Court of Chancery's grant of summary judgment for Western Pacific. We construe the claims stated in Kramer's amended complaint to be essentially derivative in nature and not to come within either of Lewis' two exceptions. Hence, Kramer, having ceased to be a shareholder of Western Pacific, lacks standing to pursue the derivative claims asserted by his amended complaint.

I

In June 1985, Western Pacific's board of directors, acting through its ten non-management directors, adopted without dissent certain stock options which Kramer challenges as excessive. Individual defendants, Howard A. Newman and William C. Scott, Western Pacific's Chairman and President, respectively, the grantees of the stock options, did not participate in the portion of the board meeting at which the options were discussed. Issuance of the stock options was conditioned upon shareholder approval, but to avoid the expense of convening a special shareholder meeting management placed consideration of the stock options on the agenda for the 1986 annual meeting. In March 1986, the board issued a proxy statement, soliciting shareholder approval of the stock options, and Western Pacific's shareholders approved the stock options on May 6, 1986.

One month earlier, Western Pacific's accountant informed Scott that Edward Trump, on behalf of the Trump Group, was interested in acquiring Western Pacific. Newman delegated Scott to explore the matter with Trump. Although Scott and Trump met for the first time on the day of the annual meeting, the shareholders were not informed at the annual meeting of Trump's interest in acquiring Western Pacific. Scott again met with Trump on May 19, and on May 21, 1986, both Scott and Newman met with Trump.

By mid-June 1986, the Trump group, after making further investigations decided it was not interested in acquiring Western Pacific. In the words of Edward Trump, the decision not to proceed "wasn't a question of the few dollars. It [Western Pacific] was not a business that we wanted to own."

On June 23, 1986, Chairman Newman informed Western Pacific's board that even though the negotiations with the Trump Group had terminated, the investment community was now aware that Western Pacific was "for sale." Newman recommended, and the board authorized, the investment banking firm of Bear Stearns & Company ("Bear Stearns") to search for a suitable buyer. At the same meeting, the Compensation Committee (acting through two nonemployee directors) recommended that the Company enter into termination agreements ("golden parachutes") with two principal executives, Chairman Newman and President Scott. The Committee's recorded reason for doing so was to protect management in the event of a change of control and to ensure that management would be in a position to respond to acquisition proposals that were in the best interest of the shareholders. Thereupon Western Pacific's board, with Messrs. Scott and Newman not participating in the vote, unanimously approved the golden parachutes for Newman and Scott.

In either August or September, 1986, Bear Stearns produced a second buyer for Western Pacific, Gibbons, Green, Van Amerongen ("Gibbons, Green"). ¹ Gibbons, Green offered to buy Western Pacific for a price of $155.00 per share. Western Pacific's board reviewed the Gibbons, Green offer, obtained a favorable fairness opinion from Bear Stearns (acting as Western Pacific's independent financial advisor) and approved the offer. On September 17, 1986, Western Pacific and Gibbons, Green entered into an agreement for the acquisition of Western Pacific at a price of $155.00 per share, and the parties issued a press release. The announcement of the agreement precipitated a "bidding war" for Western Pacific involving several new contenders, including Danaher. The bidding ended on October 3, 1986, when Danaher and the board agreed upon Western Pacific's acquisition pursuant to a tender offer for the previously mentioned tender offer price of $163.00 per share followed by a cash-out merger at the same price.

On October 9, 1986, Western Pacific and a wholly-owned subsidiary of Danaher commenced a joint $163.00 per share cash tender offer for all of Western Pacific's stock, to be followed by a cash-out merger at the same price. As a consequence of the response to the tender offer, Danaher became the owner of more than 90% of the stock of Western Pacific.

On October 10, 1986, Kramer filed this suit, styled as a class action. Kramer alleges that he is suing both individually and representatively on behalf of the common stockholders of Western Pacific. Kramer's complaint, as amended, charges defendants Newman and Scott with breach of their fiduciary duty to Western Pacific. Defendants' breach of duty is cast in terms of claims of waste of corporate assets. The two defendants alone, of a board comprised of at least twelve directors, are charged with diverting to themselves eleven million dollars of the Danaher sale proceeds through their receipt of stock options and golden parachutes and with incurring eighteen million dollars of excessive or unnecessary fees and expenses in connection with the sale of Western Pacific. ²

On December 31, 1986, pursuant to 8 Del.C. § 253, the merger was consummated. As a result, by operation of law, Kramer and the remaining Western Pacific stockholders who had not tendered their shares ceased to be shareholders in exchange for the right to receive $163.00 per share in cash, subject to a right of appraisal under 8 Del.C. § 262.

On January 14, 1987, defendants moved to dismiss Kramer's amended complaint. Defendants asserted that as a consequence of the consummated merger, Kramer ceased to be a shareholder of Western Pacific and lost standing to maintain this action under the principles enunciated in Lewis v. Anderson, Del.Supr., 477 A.2d 1040 (1984). On September 11, 1987, the Court of Chancery granted defendants' motion, treating it as one for summary judgment. The Court stated, "Well-settled Delaware case law clearly indicates that, as a result of the cash-out merger and plaintiff's failure to challenge the fairness of the underlying merger itself, the plaintiff is without standing to pursue his ... stockholder derivative claims."

On appeal Kramer contends that the Court of Chancery erred as a matter of law in misinterpreting both the amended complaint and the controlling law. Kramer makes two contentions in this appeal: (a) Kramer asserts that the amended complaint alleges wrongs against the contractual rights of the individual shareholders rather than wrongs against the corporate entity; and, alternatively, (b) Kramer argues that the amended complaint's charges against management of acts of waste associated with the sale of the company are tantamount to direct attacks upon the fairness of the merger terms. Hence, Kramer maintains that the cashed-out shareholders of Western Pacific have standing to pursue their claims in individual or class suits, and that the Trial Court erred in ruling to the contrary. We cannot agree.

II

A. Nature of Claims Stated

The distinction between derivative and individual actions rests upon the party being directly injured by the alleged wrongdoing.

The common law countries have devised one of the most interesting and ingenious of accountability mechanisms for large formal organizations: the shareholder's derivative suit. In such a suit, the shareholder sues on behalf of the corporation for harm done to it. Ordinarily, therefore, any damages recovered in the suit are...