Palda v. General Dynamics Corp.

• Citation: 47 F.3d 872
• Decision Date: 05 April 1995
• Docket Number: No. 94-1724,94-1724
• Parties: Fed. Sec. L. Rep. P 98,680 John E. PALDA, Sr., Plaintiff-Appellant, v. GENERAL DYNAMICS CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 872

47 F.3d 872

Fed. Sec. L. Rep. P 98,680

John E. PALDA, Sr., Plaintiff-Appellant, v. GENERAL DYNAMICS CORPORATION, Defendant-Appellee.

No. 94-1724.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 2, 1994.

Decided Feb. 10, 1995.

Rehearing and Suggestion for Rehearing In Banc Denied April 5, 1995.

Michael T. Hannafan, William E. Blais, Hannafan & Associates, Chicago, IL, Norman J. Lerum (argued), Chicago, IL, for plaintiff-appellant.

Kathryn S. Matkov (argued), Robert A. Carson, Gould & Ratner, Chicago, IL, for defendant-appellee.

Before FLAUM, GARZA, ^* and ROVNER, Circuit Judges.

FLAUM, Circuit Judge.

Plaintiff John E. Palda, Sr. instituted this diversity action seeking recovery against General Dynamics Corporation under both an employment agreement and a stock option agreement entered into between General Dynamics and himself. The district court dismissed the First Amended complaint pursuant to Fed.R.Civ.P. 12(b)(6). Palda appealed this dismissal. We affirm.

I.

General Dynamics employed John Palda as a Senior Vice President of Administration at its Material Services division located in Chicago, Illinois. Palda signed an employment agreement, dated August 28, 1989, with General Dynamics. This agreement, essentially a "golden parachute" arrangement, provided that in the event of certain triggering circumstances leading to Palda's termination, including a "change of control" in corporate ownership as defined in the agreement, Palda would be entitled to severance benefits. Palda also entered into a stock option agreement, dated March 10, 1992, with General Dynamics which, under certain circumstances, allowed him to exercise an option to purchase company stock.

On May 24, 1993, General Dynamics terminated Palda's employment. Palda then filed a complaint seeking compensation under both his employment contract and his stock option agreement. Palda contended in Count I of his complaint that he was entitled to severance benefits under the change of control agreement because he was terminated as a result of a reorganization that constituted a "change of control" as defined in the agreement. The gravamen of Count I was that this "golden parachute" agreement was triggered when General Dynamics underwent certain corporate changes which resulted in his termination. Specifically, Palda alleged that between 1990 and 1992, General Dynamics changed the composition of its board of directors and top management, sold portions of its manufacturing business and other major holdings, attempted to sell other portions of its business, and altered the shareholder makeup of the corporation. In Count II, Palda maintained that he was entitled to exercise his options to purchase 600 shares of General Dynamics common stock under the stock option agreement. ¹

This action, originally filed in the Circuit Court of Cook County, Illinois, was removed by the defendant to the Northern District of Illinois. Pursuant to General Dynamics' motion, the district court dismissed both of the unsettled counts, concluding that Palda failed to state a claim upon which relief could be granted. As to Count I, the district court determined that Palda had not alleged a "change of control" because he had not set out the specific elements that defined such a change in the agreement. After allowing Palda to amend his complaint, the district court again dismissed both counts. The district court concluded that Palda again failed to allege facts showing a breach of the agreement under Count I because he alleged only colloquial and not any of the explicit contractual definitions of "change of control." The court dismissed Count II because Palda did not properly exercise his options within three months of his termination as required by the stock option agreement. Palda now appeals the district court's dismissal of the First Amended Complaint for failure to state a claim for breach of the employment contract and stock option agreement.

II.

The sole issue on appeal is whether the district court erred in dismissing both counts of Palda's First Amended Complaint. We review a dismissal under 12(b)(6) de novo. Hoosier Energy Rural Elec. Co-op., Inc. v. Amoco Tax Leasing Corp., 34 F.3d 1310, 1317 (7th Cir.1994); Dehainaut v. Pena, 32 F.3d 1066, 1070 (7th Cir.1994), cert. denied, --- U.S. ----, 115 S.Ct. 1427, 131 L.Ed.2d 309 (1995); Vicom, Inc. v. Harbridge Merchant Servs., Inc., 20 F.3d 771, 775 (7th Cir.1994). We accept as true the well pleaded allegations of the complaint and the inferences that may be reasonably drawn from those allegations. Dausch v. Ryske, No. 93-1459, slip op. at 3 (7th Cir. Dec. 16, 1994); Wilson v. Ugo Formigoni, 42 F.3d 1060, 1064 (7th Cir.1994); Triad Associates, Inc. v. Robinson, 10 F.3d 492, 495 (7th Cir.1993); Dowlatshahi v. Motorola, Inc., 970 F.2d 289, 290 (7th Cir.1992); Perkins v. Silverstein, 939 F.2d 463, 466 (7th Cir.1991). Complaints are to be read liberally, see Conley v. Gibson, 355 U.S. 41, 47-48, 78 S.Ct. 99, 102-03, 2 L.Ed.2d 80 (1957); Fed.R.Civ.P. 8, and the district court may grant a 12(b)(6) motion only if "it is beyond doubt that the non-movant can plead no facts that would support his claim for relief." Conley, 355 U.S. at 45-46, 78 S.Ct. at 102.

A.

Palda first argues that the district court erred in dismissing his claim alleging a breach of the "change of control" employment contract. He maintains that this agreement entitles him to compensation and benefits upon his termination. In determining whether Palda stated a sufficient claim we do not look beyond the language of the agreement itself if the contract is unambiguous, because in that situation "no need exists to resort to other means of interpretation, and the effect must be given to the parties' intent as indicated in the language itself." Hoosier Energy, 34 F.3d at 1318, n. 4 (quoting Samuels v. Wilder, 871 F.2d 1346, 1351 (7th Cir.1989)).

The agreement, which provides for compensation and benefits upon termination resulting from a "change of control" of General Dynamics, treats "change of control" as a term of art and expressly defines it, limiting its application to the occurrence of one of four specific events. The First Amended Complaint relies exclusively on the third definition of change of control provided in paragraph 2(iii) of the Agreement. The relevant portion of the agreement reads:

2. Change of control. For the purposes of this Agreement a "Change of Control" shall mean:

. . . . .

(iii) Approval by the stockholders of the Company of a reorganization merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or a complete liquidation or dissolution of the Company or of the sale or other disposition of all or substantially all of the assets of the Company.

To state a claim for breach of the contract pursuant to paragraph 2(iii) of the agreement, Palda must plead sufficient facts and allege the existence of three elements: (1) the occurrence of a corporate "reorganization"; (2) shareholder approval of this reorganization; and (3) a shift in ownership of the shares where substantially all of those who held shares before the reorganization no longer hold 80% of the shares outstanding after the reorganization. Palda must plead all three elements; the failure to plead the existence of any of these elements renders his complaint deficient.

Palda failed to sufficiently plead the requisite shareholder approval of the reorganization required under the agreement. In his First Amended Complaint, Palda failed to plead any facts relating to this shareholder approval. For example, under Delaware law, which governs General Dynamics' corporate actions, shareholders generally act through a vote at a duly called meeting, or by written consent. See Delaware General Corporation Law, 8 Del.C. Secs. 211, 228. While we do not intend to pass on the nuances of Delaware corporate law, we note that Palda did not...