Nottingham Partners v. Dana

• Decision Date: 14 March 1989
• Docket Number: TRANS-LUX
• Citation: 564 A.2d 1089
• Parties: , Fed. Sec. L. Rep. P 94,745 NOTTINGHAM PARTNERS and Deerfield Partners, Plaintiffs Below, Appellants, v. George W. DANA, Plaintiff Below, Appellee, v.CORPORATION, Richard Brandt, Bud Levy, Allan Fromme, Louis Credidio, Howard S. Modlin, Edward Meyer, Robert Greenes, Eugene Picker and Melvin Starr, Defendants Below, Appellees. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 1089

564 A.2d 1089

58 USLW 2226, Fed. Sec. L. Rep. P 94,745

NOTTINGHAM PARTNERS and Deerfield Partners, Plaintiffs Below, Appellants, v. George W. DANA, Plaintiff Below, Appellee, v. TRANS-LUX CORPORATION, Richard Brandt, Bud Levy, Allan

Fromme, Louis Credidio, Howard S. Modlin, Edward

Meyer, Robert Greenes, Eugene Picker and

Melvin Starr, Defendants

Below, Appellees.

Supreme Court of Delaware.

Submitted: March 14, 1989.

Decided: Aug. 29, 1989.

John C. Phillips, Jr., of Phillips & Snyder, P.A., Wilmington, and Carolyn Grace (argued), and Michelle H. Blauner, of Shapiro, Grace & Haber, Boston, Mass., for appellants.

Wayne N. Elliott, Michael Hanrahan, and Philip B. Obbard, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, and Richard S. Schiffrin (argued), and Michael D. Craig, of Schiffrin & Craig, Chicago, Ill., for appellee, George W. Dana.

P. Clarkson Collins, Jr. (argued), and Lewis H. Lazarus, of Morris, James, Hitchens & Williams, Wilmington, for appellees, Trans-Lux Corp., et al.

Before CHRISTIE, C.J., HORSEY, and HOLLAND, JJ.

HOLLAND, Justice:

This is an appeal from an order of the Court of Chancery, in and for New Castle County, approving an Agreement of Compromise and Settlement ("Settlement") in Dana v. Trans-Lux Corp. (the "Dana action"). The plaintiff-appellee, George W. Dana ("Dana"), filed an individual, class and derivative action on March 23, 1988. Dana's complaint against the defendant-appellee, Trans-Lux Corporation and the individual director defendants (collectively "Trans-Lux"), challenged, inter alia, a recapitalization plan to create a supervoting Class B Stock with a subsequent exchange-offer (the "Class B Recapitalization Plan") and certain related amendments to the Trans-Lux certificate of incorporation (the "Certificate Amendments"). The Dana action alleged that Trans-Lux's Board of Directors had engaged in an illegal scheme to keep control of the corporation, i.e., entrenchment. The Dana action further alleged that Trans-Lux had made misleading and incomplete disclosures in the March 27, 1986 Proxy Statement ("Proxy Statement") which outlined the Class B Recapitalization Plan and the Certificate Amendments for the Trans-Lux stockholders.

The appellants are Nottingham Partners and Deerfield Partners (collectively "Nottingham"), both Massachusetts limited partnerships and holders of record, respectively, of 31,090 and 21,286 shares of Class B Trans-Lux stock and 29,911 and 14,337 shares of Trans-Lux common stock. The appellants are also plaintiffs in an action pending in the United States District Court for the District of Massachusetts, Nottingham Partners and Deerfield Partners v. Trans-Lux Corp., C.A. No. 88-0591-Z (the "Nottingham action"). ¹ The Nottingham action, which is not a class action, was filed on March 10, 1988. It also challenged the Class B Recapitalization plan and Certificate Amendments on the basis of nondisclosure, seeking money damages under Federal Securities Law for a fraudulent and misleading proxy solicitation.

On June 21, 1988, the parties in the Dana action submitted the Settlement to the Court of Chancery for approval. Notice of the proposed Settlement was sent to all class members on June 27, 1988. Nottingham was the only class member to object to the Settlement. On August 4, 1988, immediately following the hearing on the Nottingham objections, the Court of Chancery announced its decision to certify the class pursuant to Delaware Chancery Court Rule 23(b)(2) and to approve the Settlement.

Nottingham has appealed from the decision to approve the Settlement and the certification of a Rule 23(b)(2) class on the following grounds: (1) the certification of a Rule 23(b)(2) class was improper because that section is not applicable to claims for money damages; (2) the certification of the Rule 23(b)(2) class, which deprives class members the opportunity to opt out, was invalid because the due process clause of the United States Constitution requires that absent class members with money damage claims be provided with an opportunity to opt out of the class; (3) the Court of Chancery abused its discretion in finding the Settlement fair and reasonable, because the class is being asked to relinquish meritorious claims without meaningful consideration; (4) the Settlement goes beyond the scope of the state court's authority, by purporting to preclude class members from prosecuting damage claims within the exclusive jurisdiction of the federal courts, thereby interfering with the jurisdiction of the federal courts and violating the Supremacy Clause of the United States Constitution. U.S. Const., art. VI, cl. 2; and (5) the Settlement impermissibly purports to release, settle, and resolve claims that were not alleged in the Dana action.

We have reviewed each of the Nottingham contentions. We do not find any of them to be meritorious. Therefore, the decision of the Court of Chancery is affirmed.

Facts

On March 27, 1986, Trans-Lux issued a Proxy Statement in conjunction with the annual meeting of its stockholders, which was to be held May 16, 1986. The Proxy Statement described the Class B stock Recapitalization Plan. Implementation of the plan required an amendment to the Trans-Lux certificate of incorporation, to authorize the issuance of supervoting Class B Stock (the "Class B Amendment"), and a subsequent exchange offer by Trans-Lux, in which holders of Trans-Lux common stock could exchange their shares for Class B Stock (the "Exchange Offer"). The Proxy Statement also described other proposed amendments to the Trans-Lux certificate of incorporation which, if approved, would eliminate the stockholders' rights: (a) to act by written consent; (b) to remove directors by a majority vote; and (c) to amend the corporation's bylaws.

The stockholders annual meeting was held as scheduled. Nottingham voted against the Class B Recapitalization Plan and the Certificate Amendments. Nevertheless, a majority of the Trans-Lux stockholders approved all of the proposals described in the Proxy Statement. The Certificate Amendments, including the Class B Amendment were duly filed in the office of the Delaware Secretary of State. See 8 Del.C. §§ 242, 103. The Exchange Offer was commenced and completed. No Trans-Lux stockholder filed a legal challenge to these actions at that time. ²

Approximately two years later, in March of 1988, the Nottingham action was filed in a United States District Court in Massachusetts and the Dana action was filed in the Delaware Court of Chancery. Both actions challenged the validity of the Class B Recapitalization Plan and the Certificate Amendments. Both actions alleged disclosure violations in the May 16, 1986 Proxy Statement and both actions seek equitable relief, although Nottingham also seeks money damages for violations of the Federal Securities Act. In this appeal, as in the Court of Chancery, Dana emphasizes the similarities between the lawsuits and Nottingham emphasizes the differences.

The Nottingham action contended, in part, that the Class B Recapitalization Plan was recommended by the named defendants and adopted by the shareholders as a deterrent to any hostile merger, tender offer, proxy contest, or assumption of control of Trans-Lux. The Nottingham amended complaint alleges that, as of the date of the Proxy Statement, the defendants knew, and did not disclose in the Proxy Statement or elsewhere, that Trans-Lux was negotiating with Gulf and Western, Inc. ("Gulf & Western") for the sale of twenty-four of the Trans-Lux chain of motion picture theatres for a cash price of $15 million. The Nottingham amended complaint alleges that because of this omission, the Proxy Statement was false and misleading with respect to facts material to the shareholders' vote on the matters set forth in the Proxy Statement; that it is probable that disclosure of the omitted facts ³ would have caused the shareholders to reject the proposals set forth in the Proxy Statement; and that the plaintiffs were damaged by an affirmative vote on the Class B Recapitalization Plan. The Nottingham action submits that the Trans-Lux shareholders are entitled to relief, including the rescission of the Certificate Amendments and money damages under federal securities laws as a result of the fraudulent and misleading statements made by Trans-Lux in connection with the Proxy Statement.

The Dana action, in the Court of Chancery, challenged the Certificate Amendments, the Class B Recapitalization Plan and other actions taken at the 1987 annual meeting, including the election of directors and the passage of a director liability amendment. The Dana complaint, as amended, alleged that the individual director defendants had engaged in an illegal scheme to maintain the control of Trans-Lux in its then current management, at the expense of the public stockholders. Dana described this as "the Brandt Entrenchment Plan."

Dana asserted several non-federal legal theories in support of its position. First, that the Class B Recapitalization Plan, Exchange Offer, and the Certificate Amendments were invalid and void under Delaware law. Second, that the approval of the Class B Recapitalization Plan and the Certificate Amendments was obtained by a misleading Proxy Statement. Third, that the defendants breached their fiduciary duties by adopting the Class B Recapitalization Plan and Certificate Amendments and using them to entrench themselves by discouraging efforts of prospective purchasers to purchase a controlling interest in Trans-Lux. Dana sought equitable relief, damages, and costs in the Court of Chancery.

On April 6, 1988, Dana filed a motion for summary judgment on its claims that the Certificate Amendments, Class B Recapitalization Plan, the 1987 director elections and the passage of the director liability amendment were invalid under Delaware law (Count I); that the Proxy Statement reflected a breach of the duty of candor and unlawful coercion (Count II); and...