Rosenstein v. CMC Real Estate Corp.

• Decision Date: 11 March 1988
• Docket Number: No. 87-1584,87-1584
• Citation: 522 N.E.2d 221,168 Ill.App.3d 92,118 Ill.Dec. 766
• Parties: , 118 Ill.Dec. 766 David ROSENSTEIN and Beverly Rosenstein, Individually and as Representatives of the Class of Holders of Common Shares of CMC Real Estate Corporation, a Wisconsin Railroad Corporation (except Chicago Milwaukee Corporation, a Delaware Corporation), Plaintiffs-Appellants, v. CMC REAL ESTATE CORPORATION, a Wisconsin Railroad Corporation, Chicago Milwaukee Corporation, a Delaware Corporation, and CMCRE Merger Corporation, a Wisconsin Railroad Corporation, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 221

522 N.E.2d 221

168 Ill.App.3d 92, 118 Ill.Dec. 766

David ROSENSTEIN and Beverly Rosenstein, Individually and as Representatives of the Class of Holders of Common Shares of CMC Real Estate Corporation, a Wisconsin Railroad Corporation (except Chicago Milwaukee Corporation, a Delaware Corporation), Plaintiffs-Appellants, v. CMC REAL ESTATE CORPORATION, a Wisconsin Railroad Corporation, Chicago Milwaukee Corporation, a Delaware Corporation, and CMCRE Merger Corporation, a Wisconsin Railroad Corporation, Defendants-Appellees.

No. 87-1584.

Appellate Court of Illinois First District, Fifth Division.

March 11, 1988.

Richard James Stevens, Chicago, for plaintiffs-appellants.

Jerold S. Solovy, Joan M. Hall, Darryll M. Bradford, John J. Dunbar, Jenner & Block, Chicago, for defendants-appellees.

Justice SULLIVAN delivered the opinion of the court:

Plaintiffs, David Rosenstein and Beverly Rosenstein, appeal from an order dismissing their complaint against defendants, CMC Real Estate Corporation, Chicago Milwaukee Corporation and CMCRE Merger Corporation, for breach of fiduciary duty. Plaintiffs contend that the court erred in dismissing their complaint.

CMC Real Estate Corporation (CMCREC), formerly the Chicago, Milwaukee, St. Paul and Pacific Railroad Company, recently emerged from reorganization in bankruptcy. Chicago Milwaukee Corporation (CMC), a Delaware corporation, owned 2,092,720 shares of CMCREC's common stock, approximately 96% of all common shares outstanding; 483 other shareholders owned 87,172 shares, approximately 4% of the outstanding 2,179,892 shares. No other class of stock was outstanding. The directors of Chicago Milwaukee Corporation are also directors of CMC Real Estate Corporation.

To achieve various financial, legal and tax objectives, CMCREC and CMC decided that it would be in the best interests of both corporations for CMCREC to become a wholly owned subsidiary of CMC. CMCREC and CMC proposed this change to simplify their corporate structure, to increase their flexibility to plan for the future and to avoid the costs and filing requirements that resulted from the minority ownership in CMCREC.

To attain these objectives, CMCREC and CMC created CMCRE Merger Corporation (CMCRE), a wholly owned subsidiary of CMC. Pursuant to an Agreement and Plan of Merger (Agreement), CMCRE was merged with CMCREC. Following the merger, the surviving corporation, CMCREC, was solely owned by CMC and the minority shareholders in CMCREC exchanged their shares for certain consideration.

Under the Agreement, the minority shareholders were offered $120 in cash, plus a "deferred cash consideration right" for each share they owned, which entitled them to a proportional share of income, net of related taxes and expenses, from property the Regional Transportation Authority (RTA) had condemned in an eminent domain proceeding. ¹ Bear, Stearns & Co., Inc. (Bear Stearns), an independent financial advisor, evaluated the transaction and issued an opinion that the consideration paid to minority shareholders was fair. The Agreement advised minority shareholders of their right to a court appraisal of the fair value of their shares under the appraisal provision of the Wisconsin Business Corporation Law. Wis.Stat.Ann. Sec. 180.72.

CMC's Board of Directors approved the Agreement after determining that the terms of the merger were fair to minority shareholders. In making that determination, the Board emphasized that Bear Stearns had found that the consideration was fair, that minority shareholders would receive a deferred cash consideration right from the property the RTA had condemned and that the merger would give the minority shareholders the opportunity to take advantage of lower Federal income tax rates on long term capital gains applicable in 1986.

CMCREC scheduled a special shareholders' meeting for December 29, 1986, to consider the proposed merger. Because CMC favored the Agreement, approval of the merger was assured. Prior to the shareholders' meeting, CMCREC prepared and mailed to the shareholders a proxy statement describing past appraisals of the relevant properties and containing several financial statements. The proxy statement repeatedly advised minority shareholders of their appraisal rights under Wisconsin law.

On December 22, 1986, plaintiffs, owners of five shares of common stock in CMCREC, filed a class action in the circuit court of Cook County challenging the merger. Plaintiffs alleged that CMC, as a majority shareholder, owed a fiduciary duty to the minority shareholders not to benefit itself or take unfair advantage of the minority shareholders. Plaintiffs alleged further that CMC's approval of the merger constituted a breach of this duty because it was "unfair" to prevent their continued participation in CMCREC as shareholders, the consideration offered for each share was "grossly inadequate" and the right to a judicial determination of the fair value of their shares in a statutory appraisal proceeding was an inadequate remedy in that it was "virtually impossible" to value their shares.

Plaintiffs asked the court to certify the case as a class action and to modify the Agreement to give minority shareholders the right to retain their shares of stock in CMCREC. In the alternative, plaintiffs asked that the payment for each share be increased, that a constructive trust be placed on CMCREC's real estate, that shareholders receive any profits from real estate sales that exceeded the value used in setting the $120 per share figure and that CMCREC be enjoined from paying any dividends until the dispute was resolved.

On defendants' motion, plaintiffs' complaint was dismissed without prejudice. The court held that the Wisconsin statutory appraisal procedure was plaintiffs' exclusive remedy because the complaint contained "no allegations of wrongdoing or fraud." The court commented that appraisal was an adequate remedy, particularly in light of plaintiffs' admission in oral argument that the appraisal proceeding was similar "to the appraisal of a private corporation," a task that has "been done by the courts of the land on a fairly regular basis." The court also dismissed the complaint on the ground of forum non conveniens, finding "that the proper forum for this matter to be heard would be before the Wisconsin Courts [which] are familiar with the application of their own statutes." Plaintiffs elected to stand on their complaint and appealed the order of dismissal.

OPINION:

For purposes of this appeal we assume, without deciding, that Chicago Milwaukee Corporation, as the majority and controlling shareholder of CMC Real Estate Corporation, had a fiduciary duty to the minority shareholders of CMCREC not to use its control of CMCREC to benefit itself at their expense. (See Ziskin v. Thrall Car Mfg. Co. (1982), 106 Ill.App.3d 482, 486-87, 62 Ill.Dec. 255, 435 N.E.2d 1227; Robb v. Eastgate Hotel, Inc. (1952), 347 Ill.App. 261, 274-76, 106 N.E.2d 848.) Thus, the issue presented is whether the complaint stated a cause of action for breach of that duty. In our judgment, it did not.

Plaintiffs initially contend that they had a legal right to continue to own stock in CMCREC and that the merger, therefore, was not authorized by Wisconsin law. We disagree.

It is well established that corporations have the power to enter into merger agreements and thereby eliminate minority shareholders. Although at common law, no merger could take place without the unanimous consent of the shareholders, statutes in all jurisdictions now authorize mergers upon a vote of less than all of the shareholders. (Ziskin v. Thrall Car Mfg. Co. (1982), 106 Ill.App.3d 482, 485, 62 Ill.Dec. 255, 435 N.E.2d 1227, citing Rath v. Rath Packing Co. (1965), 257 Iowa 1277, 1287, 136 N.W.2d 410, 415.) These statutes empower a parent corporation to eliminate minority shareholders and such action, in and of itself, does not constitute breach of a fiduciary duty.

"[T]he very purpose of the [merger] 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. This power of the parent corporation to eliminate the minority is a complete answer to plaintiff's charge of breach of trust * * *." Stauffer v. Standard Brands, Inc. (Del.1962), 41 Del.Ch. 7, 10-11, 187 A.2d 78, 80. ²

Accord, Teschner v. Chicago Title & Trust Co. (1974), 59 Ill.2d 452, 456, 322 N.E.2d 54, appeal dismissed (1975), 422 U.S. 1002, 95 S.Ct. 2623, 45 L.Ed.2d 666 ("unless there is fraud, * * * interests of minority shareholders can be terminated" through merger).

The Wisconsin Business Corporation Law clearly authorizes three party mergers by which corporations can eliminate minority shareholders without their approval. (Wis.Stat.Ann. secs. 180.25(2)(a), 180.62, 180.64.) Section 180.62(2)(c) provides that when one or more corporations merge into another, shareholders may be required to convert their shares "into cash or other property." (See Domain Industries, Inc. v. Thomas (Wis.App.1984), 118 Wis.2d 99, 345 N.W.2d 516 (shares exchanged for cash); Pearson v. Clam Falls Cooperative Dairy Association (1943), 243 Wis. 369, 10 N.W.2d 132 (shares exchanged for stock in the newly formed corporation).) Thus, CMCREC was expressly authorized to eliminate plaintiffs' shares by converting them "into cash." ³

Plaintiffs, however, argue that the merger between CMCREC and CMCRE was improper because its essential purpose was to eliminate minority shareholders. Although the proxy materials indicate otherwise, the United States Court of Appeals for the Seventh Circuit has held that under Wisconsin law, even if the sole purpose of a merger is to eliminate minority shareholders, this does not make the merger itself improper. (Kademian v. Ladish Co. (7th Cir.1986), 792 F.2d 614, 629-30.) The court held that in the absence of fraud or other illegality...