Najjar v. Roland Intern. Corp.

• Decision Date: 08 May 1978
• Citation: 387 A.2d 709
• Parties: Thomas C. NAJJAR, Jr., Plaintiff, v. ROLAND INTERNATIONAL CORPORATION, a Delaware Corporation, Landro Corporation, a Delaware Corporation, Hyatt Corporation, a Delaware Corporation, Joel Friedland and Gerald Robins, Defendants.
• Court: Court of Chancery of Delaware

Page 709

387 A.2d 709

Thomas C. NAJJAR, Jr., Plaintiff, v. ROLAND INTERNATIONAL CORPORATION, a Delaware Corporation Landro Corporation, a Delaware Corporation, Hyatt Corporation, a Delaware Corporation Joel Friedland and Gerald Robins, Defendants.

Court of Chancery of Delaware,New Castle County.

Submitted April 26, 1978.

Decided May 8, 1978.

Upon the motion of defendants to dismiss. Motion denied.

George H. Seitz, III, and Steven M. Gevarter of Prickett, Ward, Burt & Sanders, Wilmington, for plaintiff.

Robert K. Payson of Potter, Anderson & Corroon, Wilmington, for defendants.

BROWN, Vice Chancellor.

Defendants have moved to dismiss the complaint in this suit for failure to state a cause of action. Alternatively, as I view it, they have moved for summary judgment based upon a supporting factual affidavit. By agreement of counsel, this ruling deals only with the motion to dismiss, the consideration of which requires that the well-pleaded allegations of the complaint must be accepted as true for this limited purpose. Danby v. Osteopathic Hospital Ass'n of Delaware, Del.Ch., 101 A.2d 308 (1953), aff'd, Del.Supr., 104 A.2d 903 (1954).

The motion to dismiss is either premised upon or necessarily involves the recent decisions of our Supreme Court in Singer v. Magnavox Co., Del.Supr., 380 A.2d 969 (1977) and Tanzer v. International General Industries, Inc., Del.Supr., 379 A.2d 1121 (1977) as well as the decision of this Court in Kemp v. Angel, Del.Ch., 381 A.2d 241 (1977) and the earlier decisions in Stauffer v. Standard Brands Incorporated, Del.Ch., 178 A.2d 311 (1962) aff'd, Del.Supr., 187 A.2d 78 (1962). As a starting point it seems appropriate to note that it is the teaching of Singer that Stauffer is still good law except to the extent that it conflicts with Singer. See 380 A.2d 979 wherein it is stated that "(a)ccordingly, those cases (including Stauffer ) are inapposite. Any statement therein which seems to be in conflict with what is said herein must be deemed overruled."

As made clear at the outset of Tanzer, the Singer decision "held that a merger of a Delaware corporation caused by a majority stockholder solely for the purpose of cashing-out minority stockholders is a violation of a fiduciary duty owed by the former to the latter." 379 A.2d 1122. In Singer the Supreme Court also approved the following principle of law at 380 A.2d 979 and did so in the context of reviewing a motion to dismiss for failure to state a cause of action:

"First, it is within the responsibility of an equity court to scrutinize a corporate act when it is alleged that its purpose violates the fiduciary duty owed to minority stockholders; . . ." (Emphasis added.)

In Tanzer the Supreme Court held that the Chancellor had been correct in denying a preliminary injunction where the allegations of the complaint charged that it was impermissible under Delaware law for a majority shareholder to freeze-out, or cash-out, the minority shareholders solely for the purpose of benefiting the separate corporate interests of the majority shareholder. In fact the Supreme Court specifically found at 379 A.2d 1125 that

". . . no violation of the rule of Singer has been shown, and that (the majority shareholder) has established a bona fide purpose for the (cash-out) merger."

Nonetheless, the opinion continued with the following statement:

"This ruling, however, does not terminate the litigation because, given the fiduciary duty owed in any event by IGI (the majority shareholder) to the minority stockholders of Kliklok, the latter are entitled to a fairness hearing under Singer. The Chancellor's opinion, announced at the preliminary injunction stage of this proceeding, discussed fairness only in terms of the price offered for the stock, but that was too restrictive. The test required by Singer, which applied the rule of Sterling, involves judicial scrutiny for 'entire fairness' as to all aspects of the transaction." (Emphasis added.)

In Kemp v. Angel, supra, Chancellor Marvel also referred to this latter statement in Tanzer and accepted what appears to be its obvious meaning "it being only at trial that the Court can give the careful scrutiny" to a merger under attack by a complaint which charges that the majority shareholder, in causing the merger, has violated a fiduciary duty owed to the minority. In Kemp a preliminary injunction was entered to prevent implementation of the merger pending such a hearing.

Before passing finally to the Stauffer decisions, this appears to be an appropriate point at which to note that in both Singer and Tanzer the merger in question was sought to be effected under 8 Del.C. § 251, or the long-form merger statute which requires approval by the boards of directors of the merging corporations, advance notification to all shareholders, and a vote of shareholders thereon. In Stauffer and Kemp, as well as here, the merger mechanism utilized was that of 8 Del.C. § 253, or the short-form merger statute, which provides that a parent corporation owning 90 per cent or more of the outstanding stock of a subsidiary may bring about a merger of the two by simply certifying and filing a resolution of its board of directors to that effect with the appropriate governmental authority, and without prior notice to minority shareholders and without any right in the minority to vote on the matter.

In the Stauffer decision in this Court § 253 was analyzed and held to be a legislative enactment designed to permit "the holder of more than ninety per cent of the outstanding stock of a subsidiary . . . the right to pay minority stockholders the value of their shares and thereby eliminate them from continuing participation." 178 A.2d 314. The complaint in that action alleged no fraud by the defendants. Rather it alleged only a breach of fiduciary obligation on the part of the 90 per cent shareholder in failing to determine and offer a fair price for the shares. Under these circumstances it was held that an appraisal under 8 Del.C. § 262 was the exclusive remedy.

On appeal this decision was affirmed, the Supreme Court adding as follows at 187 A.2d 80:

"Indeed it is difficult to imagine a case under the short merger statute in which there could be such actual fraud as would entitle a minority to set aside the merger. This is so because the very purpose of the statute is to provide the parent corporation with a means of eliminating the minority shareholder's interest in the enterprise. Thereafter the former stockholder has only a monetary claim."

To complete the precedential picture, the opinion in Singer was careful to note at several places that the Supreme Court was dealing with a § 251 merger. In particular, at 380 A.2d 980 it was stated that:

"Any statement in Stauffer inconsistent herewith is held inapplicable to a § 251 merger."

What, then, is the significance of the foregoing with regard to the present motion?

Plaintiff takes the position, with considerable logic, that although there are procedural differences between § 251 and a § 253 merger, the fiduciary duties owed by a majority shareholder to the minority are nonetheless the same. In other words, the degree and extent of the fiduciary obligation imposed on a majority shareholder cannot and should not be made to depend on whether majority's ownership is more or less than 90 per cent of the outstanding shares. By comparison, both § 251 (as was the situation in Singer ) and § 253 permit cash consideration to be paid to the minority in return for their stock interests. Both sections are silent on the question of whether the merger can only be accomplished for a valid purpose. Nonetheless Singer said that a merger involving a payment of cash to the minority under § 251 was not proper where its sole purpose was to eliminate the minority shareholders, and that a complaint which alleged this to be the sole purpose stated a cause of action which required a fairness hearing. The language employed in Singer is broad indeed. Again at 380 A.2d 979 the Supreme Court stated that:

"We hold the law to be that a Delaware Court will not be indifferent to the purpose of a merger when a freeze-out of minority stockholders on a cash-out basis is alleged to be its sole purpose." (Emphasis added.)

It is urged that this statement applies with equal force to a § 253 merger, and that Kemp v. Angel has already so held.

Defendants' position also reveals the presence of logical deduction. They say that it is ludicrous to suggest that the same...