Rubinstein v. Catacosinos

• Decision Date: 22 February 1983
• Citation: Rubinstein v. Catacosinos, 91 A.D.2d 445, 459 N.Y.S.2d 286 (N.Y. App. Div. 1983)
• Parties: Dianne RUBINSTEIN, Plaintiff-Respondent, v. William J. CATACOSINOS, Robert A. Degan, Richard M. Kaufman, Edward J. Gunnigle, Leon Meshel, Michael J. Needham, George J. Sideris, Leeam Weathers-Lowin, Donald C. Webster, Helix Investments Limited and Applied Digital Data Systems, Inc., Defendants-Appellants.
• Court: New York Supreme Court — Appellate Division

Page 286

459 N.Y.S.2d 286

91 A.D.2d 445

Dianne RUBINSTEIN, Plaintiff-Respondent, v.William J. CATACOSINOS, Robert A. Degan, Richard M. KaufmanEdward J. Gunnigle, Leon Meshel, Michael J. Needham, George J. Sideris, Leeam Weathers-Lowin, Donald C. Webster, Helix Investments Limited and Applied Digital Data Systems, Inc.Defendants-Appellants.

Supreme Court, Appellate Division First Department.

Feb. 22, 1983.

Franklyn D. Kimball, New York City, of counsel(W. Foster Wollen, New York City with him on the brief, Shearman & Sterling, New York City, attorneys), for defendant-appellantApplied Digital Data Systems, Inc.

Alan R. Wentzel, New York City, of counsel(Stephen J. King, with him on the brief, Lane & Mittendorf, New York City, attorneys), for defendants-appellants other than Applied Digital Data.

Irving Bizar, New York City, of counsel(Pincus, Ohrenstein, Bizar, D'Allesandro & Solomon, New York City, attorneys), for plaintiff-respondent.

Before ROSS, J.P., and SILVERMAN, FEIN and ALEXANDER, JJ.

SILVERMAN, Justice.

These are appeals from an order of the Supreme Court, Special Term, which inter alia denied defendants' motions to dismiss the complaint pursuant to CPLR § 3211(a)(3) for lack of legal capacity to sue.The chief issue is whether a stockholder, who has instituted a derivative action on behalf of the corporation, continues to have the right to prosecute the action after there has been a merger under Delaware Corporation Law§ 253, as a result of which the plaintiff's stock was converted into the right only to receive a fixed sum in cash from the surviving corporation.We hold that she does not.

This is a stockholder's derivative action brought on behalf of defendant-appellantApplied Digital Data Systems, Inc.("ADDS") complaining of sales by directors of stock in the company on the basis of inside information regarding adverse developments, and demanding an accounting to ADDS for the profits resulting therefrom.

The action was begun in July 1980.Between September 3, 1980 and November 6, 1980, a wholly owned subsidiary of NCR Corporation("NCR"), pursuant to a public tender offer, purchased over 92% of the outstanding common stock and over 92% of the outstanding preferred stock of ADDS.On November 7, 1980 a short form merger under Delaware Corporation Law§ 253 became effective whereby ADDS merged with NCR's subsidiary.The surviving corporation of the merger is ADDS, which is now a wholly owned subsidiary of NCR.Under the terms of the merger each share of common stock was forthwith converted into the right to receive $12 in cash from the surviving corporation, and each share of preferred stock into the right to receive $27 in cash, and the holders of certificates representing outstanding shares of common and preferred stock of ADDS ceased to have any rights as shareholders of ADDS except the right to receive the specified amount of cash, or the right under Delaware Corporation Law to have their stock appraised on demand within 20 days.Plaintiff has failed to make a demand for such appraisal within the required period and thus plaintiff, as the former holder of 100 shares of common stock of ADDS, has ceased to be a shareholder of ADDS and is entitled only to receive $12 a share in cash for her stock.None of the foregoing is disputed.

It is settled law that a plaintiff stockholder in a stockholder's derivative action loses his right to continue to prosecute the action if he ceases to be a stockholder.Tenney v. Rosenthal, 6 N.Y.2d 204, 210, 189 N.Y.S.2d 158, 160 N.E.2d 463;Bernstein v. Polo Fashions, Inc., 55 A.D.2d 530, 389 N.Y.S.2d 368.This rule has been applied where the stockholder ceases to be a stockholder by reason of his tendering shares to secure statutory appraisal.Pikor v. Cinerama Productions Corp., 25 F.R.D. 92(S.D.N.Y.).

It makes particular sense to apply this rule to the present case where as a result of the merger plaintiff is entitled only to a specified amount of money, thus becoming more like a creditor than a stockholder.There is no allegation that NCR is guilty of any wrongdoing, either in connection with the merger or the alleged insider sales of stock by directors of ADDS.If the action should result in a judgment against the defendants, that judgment will be in favor of ADDS.ADDS is not interested in pursuing this case; it is in fact moving to dismiss the...