Salomon Bros. Inc. v. Interstate Bakeries Corp.

• Decision Date: 08 August 1989
• Docket Number: No. 10,054,10,054
• Citation: 576 A.2d 650
• Parties: SALOMON BROTHERS INC., a Delaware corporation, Petitioner, v. INTERSTATE BAKERIES CORPORATION, a Delaware corporation, Respondent. Civ. A. . Submitted:
• Court: Court of Chancery of Delaware

Page 650

576 A.2d 650

SALOMON BROTHERS INC., a Delaware corporation, Petitioner, v. INTERSTATE BAKERIES CORPORATION, a Delaware corporation, Respondent.

Civ. A. No. 10,054.

Court of Chancery of Delaware,

New Castle County.

Submitted: Aug. 8, 1989.

Decided: Dec. 13, 1989.

Lawrence A. Hamermesh, and Alan J. Stone, of Morris, Nichols, Arsht & Tunnell, Wilmington, for petitioner.

R. Franklin Balotti, and James C. Strum, of Richards, Layton & Finger, Wilmington, of counsel: Shook, Hardy & Bacon, Kansas City, Mo., for respondent.

OPINION

BERGER, Vice Chancellor.

This is the decision on a motion for summary judgment brought by Interstate Bakeries Corporation ("IBC"), the respondent in an appraisal proceeding. Petitioner, Salomon Brothers Inc. ("Salomon"), the record and beneficial owner of 122,300 shares of IBC stock, seeks appraisal of those shares in connection with the April 29, 1988 merger of IBC with IBC Acquisition Corporation ("Acquisition"). In the course of discovery, IBC learned that Salomon began purchasing its IBC shares after the merger plans had been announced. Because of the timing of Salomon's purchases, IBC contends that Salomon has lost its right to seek appraisal.

The relevant facts are undisputed. On September 13, 1987, the IBC board approved a management leveraged buyout. The two step transaction included a tender offer at $40.50 per share and a follow up merger pursuant to which each IBC share was to be exchanged for 1.62 shares of $3.50 Cumulative Exchangeable Redeemable Preferred Stock of IBC (the "Preferred"). The tender offer was completed on October 26, 1987, at which time Acquisition purchased 88.9% of IBC's common stock.

Salomon began purchasing IBC common stock for its risk arbitrage account on November 11, 1987, and continued that purchasing through mid-January, 1988. During this time, Salomon knew about the planned merger and also knew that Acquisition had obtained sufficient shares to carry out the merger. On March 25, 1988, IBC issued the merger proxy statement. The record date was set at March 25, 1988, and the stockholders' meeting was held on April 29, 1988. Salomon delivered a timely demand for appraisal and satisfied the other requirements for perfection of appraisal rights as expressly contained in 8 Del.C. § 262.

IBC's primary argument is that the appraisal statute was not designed to protect those who wish to speculate on a judicial remedy and that Salomon acted in bad faith by purchasing shares with notice of the merger and then demanding appraisal. Alternatively, IBC argues that Salomon is estopped from demanding appraisal. For the reasons that follow, I conclude that Salomon has not forfeited this statutory right.

The judicial determination of fair value pursuant to § 262 is a "statutory right ... given the shareholder as compensation for the abrogation of the common law rule that a single shareholder could block a merger." Francis I. duPont & Co. v. Universal City Studios, Del.Ch., 343 A.2d 629, 634 (1975). That veto power at common law "made it possible for an arbitrary minority to establish a nuisance value for its shares by refusal to cooperate." Voeller v. Neilston Warehouse Co., 311 U.S. 531, 535, n. 6, 61 S.Ct. 376, 378, n. 6, 85 L.Ed. 322 (1941). Thus, at common law, the majority effectively had to buy out the minority at a price of the minority's choosing in order to proceed with a transaction. Anderson v. International Minerals & Chemical Corp., Ct.App., 295 N.Y. 343, 67 N.E.2d 573, 576 (1946). The ability of a dissenting stockholder to prevent a merger led to the enactment of statutes permitting fundamental corporate change upon some form of majority vote, see Schenley Indus. v. Curtis, Del.Supr., 152 A.2d 300, 301 (1959), and appraisal rights were provided as a "quid pro quo for the minority's loss of its veto power." In re Shore, 67 A.D.2d 526, 415 N.Y.S.2d 878, 882 (1979).

This history of our appraisal statute does not support IBC's argument that the statute was designed to protect only those stockholders who purchased their shares prior to the announcement of a merger. Rather, its purpose was to replace the stockholder's veto power with a means of withdrawing from the company at a judicially determined price. None of the Delaware cases cited by IBC suggests otherwise. Indeed, one of those cases, Felder v. Anderson, Clayton & Co., Del.Ch., 159 A.2d 278 (1960), noted that "a dissenting stockholder has an absolute right to an appraisal...." Id. at 286. The court there assessed whether the dissenting stockholder was acting in good faith only in connection with its discretionary decision on whether to allow interest pursuant to § 262(h). See also Meade v. Pacific Gamble Robinson Co., Del.Supr., 58 A.2d 415 (1948) (where the court considered the dissenting stockholders' good faith in connection with the allocation of costs).

In rejecting IBC's statutory purpose argument, I am aware that several New York courts have denied appraisal rights to dissenting stockholders on facts similar to those presented here. In Application of Stern, N.Y.Supr., 82 N.Y.S.2d 78, 82 (1948), the court found that stockholders who had bought shares "in spite of" a plan of merger were faced with "a choice of their own selection" and therefore were not entitled to appraisal. The court held that the term "stockholder" as used in the relevant statute must be held to mean "bona fide stockholder"--one who acquired his shares prior to the promulgation of a merger plan--in order to give effect to the purpose of the appraisal statute. The court explained its reasoning as follows:

It requires no extended argument to prove that the purpose and policy of [the appraisal statute] will be defeated if a petition for appraisal can be predicated on shares of stock acquired after a plan for merger has been adopted by the directors and fully publicized. [The appraisal statute] was intended to avoid impediments to corporate activities consented to by a large majority of the shareholders. It was not intended as an additional hazard, which is what it necessarily becomes if shares acquired after promulgation of the plan by directors retain the right of appraisal.

Id. See also Dynamics Corporation of America v. Abraham & Co., N.Y.Supr., 4 Misc.2d 50, 152 N.Y.S.2d 807, 812, modified, 1 A.D.2d 1005, 153 N.Y.S.2d 533 (1956); Flagg-Utica Corp. v. Baselice, N.Y.Supr., 14 Misc.2d 476, 178 N.Y.S.2d 860, 865 (1958).

I am not persuaded by the Stern ruling. If appraisal rights were granted as the quid pro quo for the loss of veto power, there is no apparent reason why all stockholders who formerly could have exercised that veto power should not now be able to exercise appraisal rights ¹. The common law veto power was exercisable without reference to the stockholder's motives and it seems reasonable to assume that appraisal rights, likewise, are not determined by reference to a stockholder's purpose.

IBC notes, in its argument, that Delaware courts have been willing to define the term "stockholder" as used in the appraisal statute to mean "record stockholder." See Salt Dome Oil Corp. v. Schenck, Del.Supr., 41 A.2d 583, 589 (1945). Thus, IBC suggests, it would be appropriate for this Court to further define the term "stockholder" to exclude one who purchases with notice of the contested transaction. As I see it, however, the same reasoning that prompted our courts to read "stockholder" as "record stockholder" requires that IBC's interpretation be rejected. Recently, in Enstar Corp. v. Senouf, Del.Supr., 535 A.2d 1351 (1987), the Delaware Supreme Court reaffirmed the principles it set out in Salt Dome Oil Corp., stating that the parties to a transaction that involves a change in the stockholders' relationship to the corporation,...