Singer v. Magnavox Co.

• Decision Date: 26 October 1976
• Citation: 367 A.2d 1349
• Parties: Blue Sky L. Rep. P 71,312 Louis S. SINGER and Mollie Singer, Plaintiffs, v. The MAGNOVOX COMPANY et al., Defendants.
• Court: Court of Chancery of Delaware

Page 1349

367 A.2d 1349

Blue Sky L. Rep. P 71,312

Louis S. SINGER and Mollie Singer, Plaintiffs, v. The MAGNOVOX COMPANY et al., Defendants.

Court of Chancery of Delaware, New Castle County.

Submitted May 26, 1976.

Decided Oct. 26, 1976.

Steven J. Rothchild and David B. Ripsom of Prickett, Ward, Burt & Sanders, Wilmington, and Kohn, Savett, Marion & Graf, Philadelphia, Pa., for plaintiffs.

David A. Drexler, Richard L. Sutton and William C. Anderson of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendants.

BROWN, Vice Chancellor.

This suit was brought by two residents of Pennsylvania who claim to have been shareholders of the defendant, The Magnavox Company ('Magnavox'), at all relevant times up to the merger of Magnavox with a subsidiary corporation of the defendant North American Philips Corporation ('North American'). Their complaint asks that the merger be nullified and rescission directed as to all steps taken in furtherance or consummation thereof. Plaintiffs purport to bring their suit on their own behalf and as a class action on behalf of all persons other than the defendants who owned common stock of Magnavox on July 23, 1975, the day before the merger in issue. They also seek to recover on behalf of themselves and the aforesaid class of persons such damages as have been sustained together with costs and counsel fees.

Defendant have moved to dismiss the complaint on the grounds that it fails to state a claim upon which relief can be granted. They have also moved for alternative relief in the event the motion to dismiss is denied. The parties have supplemented the record by stipulating to certain facts which are to be considered encompassed within the allegations of the complaint. These facts together with the stated allegations of the complaint must therefore be accepted as true for the purpose of determining the issues presented by the motion to dismiss. In summary, the pertinent facts may be stated as follows.

Magnavox is a Delaware corporation as is North American. Magnavox is engaged in the manufacture and sale of consumer, defense and industrial products. In addition to its well-known position in the field of home entertainment products it also manufactures accessories for the mobile home and recreational vehicle industries, furniture, musical instruments, and government and industrial electronic products. The vast majority of the business of North American is comprised of the manufacture and sale of electronic products, including lighting and electrical products, electronic components, communication, information and data systems, home entertainment consumer electronic products, and home appliances.

The defendant North American Philips Development Corporation ('Development') was organized as a wholly-owned subsidiary of North American for the purpose of effecting a tender offer for the shares of Magnavox during August, September and October, 1974. Development has engaged in no business activities other than holding the shares of Magnavox thereafter acquired.

On August 28, 1974, Development tendered of All of the shares of common stock of Magnavox at a price of $8.00 per share. Among other things, Development's offer advised Magnavox shareholders as follows:

'Since (North American's) ultimate purpose is to acquire the entire equity interest in (Magnavox), in the event all Shares are not acquired pursuant to the Offer, after the expiration or termination of the Offer and depending upon the number of Shares it has purchased and the information it has received concerning (Magnavox), (North American) will consider whether to acquire the remaining Shares through open market purchases, through a tender or exchange offer, or by any other means deemed advisable by it or whether to propose A merger, a sale or exchange of assets, liquidation or some other transactions regarding (Magnavox). Any such purchases or transactions may be on terms different from those of this Offer and may include the payment of more or less cash or the exchange of securities.' (Emphasis added.)

The following day the Magnavox board of directors met and decided to oppose the tender offer. On August 30, 1974, Magnavox issued a letter to its shareholders advising that it was shocked at the inadequacy of the $8.00 per share offer in relationship to a book value in excess of $11.00 and at the fact that the offer was made unilaterally without benefit of negotiation.

During the first week of September 1974, the complaint continues, Magnavox, North American and Development, through the individual defendants and other representatives conspired to settle and compromise their differences for the benefit of the defendants and at the expense of Magnavox stockholders as a result of which (1) Development increased its tender offer to.$9.00 per share, (2) Magnavox, at the request of North American and Development, entered into two-year employment contracts at their then salaries with 16 officers of Magnavox, including certain of the individual defendants named herein, and (3) Magnavox withdrew its prior objections to the tender offer.

As a result of the then unopposed tender offer, Development proceeded to acquire 14,967,249 shares, or approximately 84.1% Of the outstanding stock of Magnavox. At the time, the per share tender price was several dollars above the market price for Magnavox stock. Subsequently, on May 8, 1975, North American, through Development, caused another Delaware corporation, T.M.C. Development Corp. ('T.M.C.'), to be organized as a wholly-owned subsidiary of Development. T.M.C. was organized for the sole purpose of merger with an into Magnavox.

The respective managements of Magnavox, North American and Development then agreed upon the merger of T.M.C. into Magnavox and, on or about June 27, 1975, caused a notice of a special meeting to be sent to the stockholders of Magnavox accompanied by a proxy statement advising, among other things, that upon consummation of the merger each shareholder other than the defendants would receive.$9.00 in cash for each share of Magnavox held and would thereafter possess no other interest or right as a shareholder of Magnavox; that only a majority vote was required to approve the merger and that Development, owning 84.1% Of the stock, would vote in favor of the merger thus assuring its approval; that the book value of Magnavox common on March 31, 1975 was $10.16; and that the public minority shareholders had the alternative of accepting the merger price offered or seeking payment of the appraised value of their shares pursuant to 8 Del.C. § 262.

On July 24, 1975, the special meeting of shareholders was held and the merger approved, with Development voting its shares in favor thereof.

As of the date on which the merger was proposed as well as voted upon, a working majority of Magnavox's nine-man board of directors consisted of four individuals (defendants Vink, Dettmer, Boling and Leinbach) who were also directors of North American and of three individuals (defendants DiScipio, Minahan and Schrey) who had entered into two-year employment contracts with Magnavox at the request of North American and Development and who each had received an option, effective on the date of the merger, to purchase 5,000 shares of the common stock of North American. Thus at the time Magnavox was controlled by directors who were controlled by Development and North American.

The proxy materials were prepared and mailed from New York City to some 25,000 Magnavox stockholders throughout the United States and abroad, including some 75 stockholders residing in Delaware. The proxy itself requested that it be returned to New York. The proxies so returned, however, were brought physically into Delaware for the July 24 shareholders' meeting. After the merger stockholders were requested to submit their certificates to New York for cancellation and payment checks were mailed from New York to the resident address of the stockholder.

Based upon these facts the relief requested by the complaint is premised on allegations which can be broken down into three categories. First, it is charged that the merger was not designed to serve any valid corporate purpose or compelling business need of Magnavox but rather it was intended solely to remove the public minority shareholders from equity participation in Magnavox at a grossly inadequate price so as to enable North American, through Development, to obtain sole ownership of the business and assets of Magnavox. As such, the merger is said to be fraudulent.

Second, based upon the verbatim allegations of the complaint set forth in the second section hereafter, it is charged that the defendants violated the anti-fraud-provisions of the Delaware Securities Act (specifically 6 Del.C. § 7303) by disseminating a false and misleading proxy statement in connection with the merger.

Third, it is charged that the defendants, as majority shareholders and directors, breached the fiduciary duty they owed to the minority shareholders by recommending approval of the merger at a cash price per share to the minority which they knew to be grossly inadequate. I will deal with each of these allegations in the order set forth.

I. The Allegation That The Merger Lacked Any Valid Purpose That Would Benefit Magnavox

The motion to dismiss concedes for the purpose of the present determination that the merger of T.M.C. into Magnavox served no corporate purpose of Magnavox and was accomplished solely to rid Development, and thus North American, of the minority shareholders of Magnavox. Defendants point out that what they have done is expressly authorized by 8 Del.C. § 251 and that they have fully complied with this merger statute in all respects. Indeed the complaint does not challenge compliance with the statute.

Plaintiffs charge, however, that under our precedents it is well established that directors and majority shareholders stand in a fiduciary relationship to minority...