Lipton v. News Intern., Plc
| Decision Date | 29 October 1985 |
| Citation | 514 A.2d 1075 |
| Parties | Barbara K. LIPTON and Michael Ceasar, Applicants for Intervention Below, Appellants, v. NEWS INTERNATIONAL, Plc, an English Company, Plaintiff Below, Appellee, v. WARNER COMMUNICATIONS, INC., a Delaware corporation, Steven J. Ross, Emanuel Gerard, David H. Horowitz, Deane F. Johnson, Bert W. Wasserman, Caesar P. Kimmel, Martin D. Payson, Ted Ashley, Allan B. Ecker, Chris-Craft Industries, Inc., a Delaware corporation, Herbert J. Siegel, and BHC, Inc., a Delaware corporation, Defendants Below, Appellees. . Submitted: |
| Court | Supreme Court of Delaware |
Joseph A. Rosenthal and Norman M. Monhait of Morris and Rosenthal, P.A., Wilmington, Stanley Nemser (argued), I. Stephen Rabin and Patricia I. Avery of Wolf Popper Ross Wolf & Jones, Bruce E. Gerstein and Scott W. Fisher of Garwin, Bronzaft & Gerstein, New York City, of counsel, and Stuart H. Savett and Barbara A. Podell of Kohn, Savett, Marion & Graf, P.C., Philadelphia, of counsel, for applicants for intervention below, appellants.
Martin P. Tully of Morris, Nichols, Arsht & Tunnell, Wilmington, Neal M. Goldman (argued) of Squadron, Ellenoff, Plesent & Lehrer, New York City, of counsel, for plaintiff below-appellee.
Rodman Ward, Jr. and Anthony W. Clark (argued) of Skadden, Arps, Slate, Meagher & Flom, Wilmington, for Warner Communications, Inc. and the Warner Director defendants, defendants below-appellees.
Charles S. Crompton, Jr. and James F. Burnett of Potter, Anderson & Corroon, Wilmington, for Chris-Craft Industries, Inc., BHC, Inc., and Herbert J. Siegel, defendants below-appellees.
Before McNEILLY, HORSEY and MOORE, JJ.
McNEILLY, Justice joined by HORSEY, Justice:
The case before us represents the efforts of two shareholders of Warner Communications, Inc. ("Warner") to vacate a stipulation of dismissal in an action against Warner by News International, plc ("News"), an English company controlled by K. Rupert Murdoch and formerly Warner's largest shareholder. The two shareholders ("Proposed Intervenors") contend that the action by News was derivative in nature, and that therefore the stipulation of dismissal was improper because the parties to it failed to comply with the notice and court approval provisions of Chancery Court Rule 23.1. 1 Thus, we must now determine whether News brought suit against Warner in its derivative or, as News contends, in its individual capacity.
I.
In October 1983, News began purchasing shares of Warner common stock on the open market. On December 1, 1983, News filed a Schedule 13D with the Securities and Exchange Commission disclosing that it had acquired a 6.7% interest in Warner, thereby making News Warner's largest stockholder. By December 7, News had increased its holdings to approximately 7%.
By the end of December, and apparently in response to News' increased holdings in it, Warner had finalized an exchange agreement with Chris-Craft Industries, Inc. ("Chris-Craft") and BHC, Inc. ("BHC"), a wholly-owned subsidiary of Chris-Craft, pursuant to which Warner would exchange a 19% interest in its stock for a stock interest in BHC. Because Warner has in place an 80% supermajority voting requirement for certain shareholder actions, including the removal of directors, this 19% interest, if combined with those shares owned or controlled by Warner's management, would, in effect, give Chris-Craft a veto power over a change in Warner management or over other shareholder actions subject to the supermajority voting requirement.
In response to the Warner/Chris-Craft exchange agreement, News instituted the underlying action against Warner and certain members of its Board of Directors Approximately two months later, the parties resolved their differences and, on March 16, 1984, entered into an agreement pursuant to which Warner purchased all Warner stock owned by News. On March 19, 1984, in accordance with their agreement, the parties filed a stipulation of dismissal in the action by News pursuant to Chancery Court Rule 41(a)(1). 2 The parties made no attempt to comply with the notice and court approval provisions of Chancery Court Rule 23.1.
Chris-Craft and its president, and BHC. News alleged that the agreement deprived News of its voting rights, wasted corporate assets, and was designed to entrench management. Initially, News sought to enjoin the consummation of the exchange agreement. The Court of Chancery refused to grant injunctive relief, noting that because Chris-Craft apparently had no obligation to vote its Warner shares with Warner management, the exchange agreement would not "deprive the plaintiff of any voting right or position which it now has." News International plc v. Warner Communications, Inc., et al., Del.Ch., C.A. No. 7420, slip op. at 3 (Brown, C.) (January 12, 1984) (letter opinion)
Three days after the stipulation of dismissal was filed, the Proposed Intervenors moved both to vacate the dismissal for failing to comply with Rule 23.1 and to intervene in the action under Chancery Court Rule 24. 3 The original parties opposed the motion to vacate, claiming first that because News brought, or intended to bring, an individual and not a derivative action, Rule 23.1 did not apply, and second that there was no independent basis for intervention.
Shortly thereafter, the Proposed Intervenors and several other Warner shareholders commenced new actions in the Court of Chancery and in courts of New York and California challenging both the Warner/Chris-Craft exchange agreement and the Warner/News settlement agreement. In these actions, News was designated as a defendant, along with Warner, Chris-Craft, and BHC, on the ground that it conspired with Warner in Warner's breach of fiduciary duty.
In response to the Proposed Intervenors' motion to intervene and vacate the stipulation of dismissal, the Court of Chancery found that while News' complaint supports derivative as well as individual causes of action, News could and did proceed with its individual action only, noting that the complaint alleges "special injury" to News' contractual voting rights in Warner. The Court accordingly concluded that dismissal of News' suit was not subject to the notice and court approval provisions of Rule 23.1,
and it denied the Proposed Intervenors' motion. See News International, plc v. Warner Communications, Inc., et al., Del.Ch., C.A. No. 7420, slip op. at 5-9 (Walsh, V.C.) (April 10, 1985) (unreported decision).
II.
To determine whether a complaint states a derivative or an individual cause of action, we must look to the nature of the wrongs alleged in the body of the complaint, not to the plaintiff's designation or stated intention. Elster v. American Airlines, Inc., 34 Del.Ch. 94, 100 A.2d 219, 223 (1953); Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059, 1069-70 (1985). In Elster, the Court of Chancery established that a stockholder can maintain an individual action against the corporation if he has sustained a "special injury," which the Court impliedly defined as "a wrong inflicted upon him alone or a wrong affecting any particular right which he is asserting,--such as his preemptive rights as a stockholder, rights involving the control of the corporation, or a wrong affecting the stockholders and not the corporation." 100 A.2d at 222.
In Moran, the Court of Chancery set forth a test to determine whether a plaintiff has established an individual action:
To set out an individual action, the plaintiff must allege either "an injury which is separate and distinct from that suffered by other shareholders," ... or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of any right of the corporation.
490 A.2d at 1070 (quoting 12B Fletcher Cyclopedia Corps. § 5921, at 452 (Perm.Ed.1984)) (citations omitted).
In comparing the two-pronged test of Moran with the definition of the term "special injury" in Elster, it appears that the term encompasses both prongs of the Moran test. That is, a plaintiff alleges a special injury and may maintain an individual action if he complains of an injury distinct from that suffered by other shareholders or a wrong involving one of his contractual rights as a shareholder. Moreover, while Moran serves as a quite useful guide, the case should not be construed as establishing the only test for determining whether a claim is derivative or individual in nature. Rather, as was established in Elster, we must look ultimately to whether the plaintiff has alleged "special" injury, in whatever form.
The plaintiffs in Moran alleged, inter alia, that a majority of the corporation's directors had "manipulated the corporate machinery to entrench themselves in office by restricting the shareholders' right to make use of the proxy machinery to gain control of" the corporation. 490 A.2d at 1070. The Court of Chancery found that because the plaintiffs were not engaged in a proxy battle, they suffered no injury distinct from that suffered by other shareholders. In addition, the Court found that while the plaintiff corporation was the defendant corporation's largest shareholder, holding approximately 5% of the latter's stock, it did not suffer any unique harm merely by virtue of its holdings because it had alleged no intent to use its block position to gain control of the defendant corporation. The Court, therefore, required that the claim be brought derivatively. Id.
A review of the allegations in News' complaint in the case now before us reveals that the complaint clearly supports individual as well as derivative causes of action. News alleges that the Warner/Chris-Craft exchange agreement: (1) was designed to entrench management; (2) constituted a gross waste of corporate assets; (3) undermined Warner shareholders', and in particular News', voting and other fundamental shareholder rights; and (4) was specifically...
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