Roland Intern. Corp. v. Najjar

• Citation: 407 A.2d 1032
• Parties: ROLAND INTERNATIONAL CORPORATION, Landro Corporation, and Hyatt Corporation, Defendants, Appellants, v. Thomas C. NAJJAR, Jr., Plaintiff, Appellee.
• Decision Date: 31 October 1979
• Court: United States State Supreme Court of Delaware

Page 1032

407 A.2d 1032

ROLAND INTERNATIONAL CORPORATION, Landro Corporation, and Hyatt Corporation, Defendants, Appellants, v. Thomas C. NAJJAR, Jr., Plaintiff, Appellee.

Supreme Court of Delaware.

Submitted Dec. 19, 1978.

Decided Aug. 6, 1979.

Rehearing Denied Oct. 31, 1979.

Upon appeal from the Court of Chancery. Affirmed.

Charles S. Crompton, Jr., Robert K. Payson and James F. Burnett, of Potter Anderson & Corroon, Wilmington, and Robert L. Laufer and Helen Davis Chaitman, of Paul, Weiss, Rifkind, Wharton & Garrison, New York City, of counsel, for defendants, appellants.

Steven J. Rothschild, George H. Seitz, III, and Steven M. Gevarter, of Prickett, Ward, Burt & Sanders, Wilmington, and Charles L. Denaburg, of Denaburg, Schoel, Meyerson & Ogle, Birmingham, Ala., of counsel, for plaintiff, appellee.

Before HERRMANN, C. J., DUFFY, McNEILLY, QUILLEN and HORSEY, JJ., constituting the Court en Banc.

DUFFY, Justice(for the majority):

In this appeal, we consider whether the rule announced in Singer v. Magnavox Co., Del.Supr., 380 A.2d 969 (1977), applies to a short-form merger under the Delaware Corporation Law, 8 Del.C. § 253. We hold that it does.

I

This is a class action brought by a minority stockholder of Roland International Corporation (Roland), a Delaware corporation, for money damages allegedly resulting from a breach of fiduciary duty owed to minority stockholders in connection with a merger between Roland and Landro Corporation (Landro), also a Delaware corporation. There was no prayer for other relief.

The pertinent facts are these: ¹

Hyatt Corporation, the individual defendants, Joel Friedland and Gerald Robins (neither of whom has been served with process), and others collectively owned 97.6% Of the outstanding shares of Roland. They caused Landro to be chartered for the purpose of merging with Roland. On May 9, 1977, the Hyatt Corporation, Friedland, Robins and the other owners of the 97.6% Block of Roland common contributed their shares to Landro in exchange for a like number of shares of Landro common. As a result of that exchange, the contributing shareholders held all outstanding Landro shares. The Landro directors are also the directors of Roland.

Thereafter, the Delaware statutory formalities for a short-form merger were fulfilled. The Board of Directors of Landro and its stockholders approved a resolution authorizing the merger and providing that, on the effective date of the merger, each share of Roland common, other than the shares owned by Landro, would be converted into a right to receive $5.25 in cash. This "cash-out" affected all 329 public shareholders of Roland (who owned a total of 76,659 shares), leaving them with no further participation rights in Roland or in Landro, this being the sole purpose of the merger. The public shareholders were informed that they could either accept the $5.25 in cash offered for each Roland share held, or seek an appraisal under 8 Del.C. § 262.

Plaintiff then filed this action in the Court of Chancery, and Roland and Hyatt joined in a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. The Court denied the motion, 387 A.2d 709 (Del.Ch.1978), and this appeal followed. ²

In analyzing the issues, the Court of Chancery focused on Singer and its progeny, ³ and denied the motion for three reasons: first, the Vice Chancellor found language in Singer directly applicable to a § 253 merger; second, in Kemp the Court of Chancery had applied Singer principles to a § 253 merger; and, third, the Vice Chancellor interpreted this Court's decisions in Singer And Tanzer as making a complaint like this one "virtually immune from a motion to dismiss for failure to state a cause of action . . . ." 387 A.2d at 713.

II

We begin our review by returning to Singer. In that case, this Court reaffirmed the long settled Delaware law of fiduciary duty which governs the relationship between majority and minority shareholders and, applying it to a merger under 8 Del.C. § 251, we said:

"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. In such a situation, if it is alleged that the purpose is improper because of the fiduciary obligation owed to the minority, the Court is duty-bound to closely examine that allegation even when all of the relevant statutory formalities have been satisfied."

380 A.2d at 979.

The unmistakable focus in Singer was on the law of fiduciary duty. See 380 A.2d at 976. Such a duty is owed by the majority stockholders (who have the power to control corporate property and, indeed, corporate destiny) to the minority stockholders of the corporation when dealing with the latter's property. It may not be circumvented by full compliance with the procedures permitted under and required by the corporation statutes, nor is it discharged by remitting minority shareholders to a statutory appraisal remedy (often based upon the status of the market and the elements of an appraisal), the timing of which is entirely within the control of the majority. The fiduciary duty is violated when those who control a corporation's voting machinery use that power to "cash out" minority shareholders, that is, to exclude them from continued participation in the corporate life, for no reason other than to eliminate them. ⁴

In Tanzer, we held that even when a parent corporation has a Bona fide purpose for merging with its subsidiary, the minority shareholders of the subsidiary are entitled to a judicial review for "entire fairness" as to all aspects of the transaction. 379 A.2d at 1125. In other words, the fiduciary duty exists even if the majority has a Bona fide purpose for eliminating the minority: in that case, the duty of the majority is to treat the minority fairly.

A.

In this appeal, defendants contend that § 253 presumes a proper purpose for the merger, thus obviating the need for judicial examination as to purpose. In addition, they contend that the sole issue in the litigation is the value of plaintiff's shares, and, as to that, the appraisal remedy, 8 Del.C. § 262, is available, adequate and exclusive, thus eliminating any need for judicial examination as to fairness.

It is clear to us that defendants' contentions reduce to a single question: are the principles announced in Singer (and Tanzer ) with respect to § 251 mergers to be applied to § 253 mergers? ⁵

B.

We first consider whether there are such differences between § 251 and § 253 as to require the application of a different rule of law when a § 253 merger is accomplished. For a pre-Singer discussion of the short-form merger statute, see Folk, The Delaware General Corporation Law, at 351-354.

Defendants contend that § 253 differs from § 251 substantively as well as procedurally. ⁶ Specifically, defendants say that under Singer, a parent corporation must show a Bona fide purpose for effecting a long-form merger with a subsidiary, but that § 253 conclusively presumes a proper purpose for a short-form merger. Any further inquiry by the courts, defendants continue, is unwarranted. ⁷

That argument misses the point of Singer. The law of fiduciary duty, on which Singer is based, arises not from the operation of § 251 but independent of it. Indeed, Singer presupposes full compliance with the terms of § 251, and its impact begins at that point. As we have attempted to make plain, the duty arises from long-standing principles of equity and is superimposed on many sections of the Corporation Law, including, we think, § 253. Differences between § 251 and § 253, in terminology or in procedure, do not alter the duty which exists apart from the procedures permitted by the Statutes.

The short form permitted by § 253 does simplify the steps necessary to effect a merger, and does give a parent corporation some certainty as to result and control as to timing. But, we find nothing magic about a 90% Ownership of outstanding shares which would eliminate the fiduciary duty owed by the majority to the minority. That duty existed in Singer, when the parent corporation owned about 84% Of the target corporation's stock. Clearly, the same rule would have applied if the parent had held 89% Of the shares. And surely it does not make sense to say that the duty is reduced or is non-existent because a parent corporation owns an additional one or two percent of the outstanding shares, that is, 90% Or more. In fact, the need to recognize and enforce such equitable principles is probably greater when the size of the minority is smaller. To state it another way, the short cut to merger afforded by § 253 may not be used to short-circuit the law of fiduciary duty. Cf. 46 Geo.Wash.L.Rev. supra at 892. The duty of the majority is not diluted as control is strengthened nor is the right of the minority determined by how small it is. Thus the fiduciary obligation owed in the context of a merger, be it long or short, is singular, and falls alike on those who control "at least 90% Of the outstanding shares," § 253, and those who control a majority but less than 90%, § 251.

C.

Defendants also argue that, by eliminating participation by stockholders and/or directors of a corporation, of which at least 90% Is owned by another, § 253 also eliminates the right of minority stockholders to exercise any view on the merger. Citing Stauffer v. Standard Brands, Inc., 41 Del.Ch. 7, 187 A.2d 78 (1962), defendants say that the very purpose of § 253 is to give the 90% Owner a tool for eliminating the minority interest in the enterprise.

As to Stauffer, we agree that the purpose of § 253 is to provide the parent with a means of eliminating minority shareholders in the subsidiary but, as we observed in Singer, we did "not read the decision (Stauffer ) as approving a merger accomplished solely to freeze-out the minority without a valid business purpose." 380 A.2d at 978. We...