Steinberg v. Amplica, Inc.

• Decision Date: 31 December 1986
• Citation: 42 Cal.3d 1198,233 Cal.Rptr. 249,729 P.2d 683
• Court: California Supreme Court
• Parties: , 729 P.2d 683, 55 USLW 2411 David J. STEINBERG, Plaintiff and Appellant, v. AMPLICA, INC., et al., Defendants and Respondents. L.A. 32154.

Page 249

233 Cal.Rptr. 249

42 Cal.3d 1198, 729 P.2d 683, 55 USLW 2411

David J. STEINBERG, Plaintiff and Appellant, v. AMPLICA, INC., et al., Defendants and Respondents.

L.A. 32154.

Supreme Court of California In Bank.

Dec. 31, 1986.

As Modified Feb. 11, 1987.

William S. Lerach, Jan M. Adler, Steven W. Pepich, Milberg, Weiss, Bershad, Specthrie & Lerach, San Diego, Robert A. Swift, David H. Marion and Kohn, Savett, Marion & Graf, Philadelphia, Pa., for plaintiff and appellant.

Robert L. Dunn, Rebecca A. Thompson, Bancroft, Avery & McAlister, San Francisco, Michael A. Greene, Michael K. Collins, Greenberg, Glusker, Fields, Claman & Machtinger, Manuel S. Klausner, Kindel & Anderson, Harold Marsh, Jr., Paul T. Dye, Gregg A. Farley, Brobeck, Phleger & Harrison, Los Angeles, Douglas M. Schwab, Daniel E. Titelbaum and Heller, Ehrman, White & McAuliffe, San Francisco, for defendants and respondents.

MOSK, Justice.

The Corporations Code provides that the holder of shares in certain types of corporations may require the corporation to purchase his shares for fair market value if the corporation merges with another, and the shareholder dissents from the merger. (Corp.Code, §§ 1300, 1301.) ¹ The corporation must offer the dissenting shareholder a price which it determines to be fair market value for his shares (§ 1301, subd. (a)). In the event of a failure to agree on a price, he may file an action in the superior court to determine such value, and the court may either decide the issue or refer the matter to an appraiser to do so (§§ 1304, 1305).

Section 1312, subdivision (a) (hereinafter section 1312(a)), provides in relevant part, "No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded....." ² We are concerned in this case with whether under section 1312(a) appraisal is the exclusive remedy for a shareholder who alleges that his shares were undervalued because of fraud and breach of fiduciary duty by the majority stockholders and others in connection with the merger, and whether an action for compensatory and exemplary damages will lie for such purported misconduct. ³

Only one California case has considered the precise issue before us. In Sturgeon Petroleums, Ltd. v. Merchants Petroleum Co. (1983) 147 Cal.App.3d 134, 195 Cal.Rptr. 29, it was held that appraisal was the exclusive remedy of a dissenting shareholder even though he claimed fraud and breach of fiduciary duty by corporate directors and officers. Plaintiff claims that Sturgeon was wrongly decided.

Prior to July 22, 1981, defendant Amplica, Inc. (Amplica), was a privately held corporation. On that date, 1,150,000 shares of its stock were offered to the public. Plaintiff purchased 75 shares at $10 each, and he still held 50 shares at the time of the merger. Both before and after the public offering, the majority of Amplica's stock was held by several of the defendants in this action, some of whom were also officers and directors of the corporation.

On October 9, 1981, Amplica announced that it had entered into a merger agreement with defendant Communications Satellite Corp. (Comsat), another corporation, whereby a Comsat subsidiary would merge with Amplica, the result being that Amplica would become a wholly owned subsidiary. The announcement stated that the shares of Amplica's stockholders would be purchased at $13.50 each, which was 50 cents or $1 over the closing bid price on the stock market on the day before the announcement. The total offering price was $56 million. Amplica notified its shareholders that a stockholders' meeting would be held to vote on the merger on December 7 and that a majority of the shareholders had expressed their intention to vote in favor of the merger. The announcement was accompanied by a proxy statement which set forth the details of the proposed merger. Less than 1 percent of the shares voted against the merger. Plaintiff did not express his opposition, but turned in his shares and was paid the offered price, i.e., $13.50 per share or $3.50 per share more than he had paid for the stock less than 5 months earlier.

Following the merger in January 1982, plaintiff filed this action as a class action, on behalf of himself and stockholders who had purchased Amplica stock within 90 days of the first public offering and still held the stock at the time of the merger. ⁴ He joined as defendants, inter alia, Amplica, Comsat, and several of the directors and officers of Amplica who held a majority of its shares before the merger. ⁵

It was alleged that defendants had misrepresented the public offering of Amplica stock in the prospectus in that it did not reveal that Amplica was in the process of seeking a merger partner. Further, the prospectus stated that Amplica would use the proceeds of the stock sales to expand the company's plant and purchase equipment and for general corporate purposes, whereas defendants intended to and did use some of the proceeds to pay off Amplica's outstanding debts and accumulate a large amount of cash to make Amplica an attractive merger partner. The individual defendants who were officers or directors of Amplica received substantial financial benefits from the merger, such as employment contracts, stock options, the lifting of restrictions on Amplica stock, and preferential tax advantages, and the class members did not receive these benefits. In addition, several of Amplica's directors and officers agreed in advance with Comsat that they would not solicit or initiate discussions relating to other merger opportunities. The effect was to freeze out the public shareholders at a grossly inadequate price. The merger served no legitimate business purpose, but was a device by defendants to benefit themselves to the detriment of the class. These acts were alleged to constitute fraud, breach of fiduciary duty, and the accomplishment of a "freeze-out" in violation of California law. ⁶

Plaintiff prayed for a declaration that defendants had committed gross abuses of trust and breached their fiduciary duties, an award of compensatory and exemplary damages, and "the disgorgement of defendants' ill-gotten gains." ⁷

Defendants demurred to the complaint on the ground, among others, that under section 1312(a) appraisal was plaintiff's exclusive remedy. The court overruled the demurrers. Thereafter, following the decision in Sturgeon, supra, 147 Cal.App.3d 134, 195 Cal.Rptr. 29, defendants filed a motion for summary judgment based on the holding of that case. The motion was granted, and judgment entered in defendants' favor. ⁸ On appeal, the Court of Appeal affirmed, holding that Sturgeon was correctly decided, and that appraisal was plaintiff's exclusive remedy. ⁹

Every American state except West Virginia has an appraisal statute. At common law, consent of all stockholders of a corporation was necessary to accomplish basic changes in corporate structure. This was a severe impediment to the ability of the majority to effect reorganizations; a minority, by refusing to agree to a merger, or by demanding an unreasonable amount for their shares as a condition to agreement, could delay or thwart a merger altogether. To solve this problem, appraisal statutes were enacted, enabling the majority to effect a merger, but the minority were granted the right to receive fair cash value for their shares, with the remedy of appraisal in the event of a disagreement. Thus, the minority could not victimize the majority by failing to cooperate in the merger plan, but they were not at the mercy of the majority as to the value of the shares of the merged corporation. (See 1A Ballantine & Sterling, Cal. Corporation Laws (4th ed. 1986) § 262.05, pp. 12-75 to 12-76; 12B Fletcher, Cyc. Corp. (Perm.ed.) § 5906.1, pp. 342-343; 15 Fletcher, supra, § 7165, p. 297.)

In deciding whether plaintiff's sole remedy to challenge the alleged misconduct of defendants is appraisal, we turn to the language of section 1312(a). It provides, as we have seen, that if a shareholder has the right to demand that the corporation purchase his shares, he shall have no power "at law or in equity" to attack the validity of the merger or to have it set aside or rescinded. Plaintiff asserts that this provision prohibits only an action to set aside or unwind a merger, or one for damages where there is a good faith dispute as to the value of a minority shareholder's stock. According to plaintiff, where, as here, a shareholder alleges fraud or breach of fiduciary duty by those connected with the merger, he cannot obtain effective redress if he is confined to appraisal. Not surprisingly, defendants call for a different construction of the section. They claim plaintiff's action is barred because it amounts to an attack on the validity of the merger. This disagreement is reflected in the analysis of commentators who have considered the matter. (Compare 1A Ballantine & Sterling, supra, § 262.05(f), pp. 12-93 with 2 Marsh, Cal.Corp. Law (2d ed.) § 18.25, p. 532.1; Barton, General Corporation Law (1976) 9 Loyola L.Rev. 738, 798.)

We disagree with plaintiff's first contention that section 1312(a), by prohibiting an attack on the "validity" of a merger, only proscribes an action to set aside or rescind it. The difficulty with this claim is that it fails to give any meaning to the command of the section that an action may not be brought "at law" to challenge the validity of the merger. ¹⁰ It is an elementary rule of statutory construction that, if possible, every word and phrase of a statute should be given significance in order to effect the legislative intent. (People v. Black (1982) 32 Cal.3d 1, 5, 184 Cal.Rptr. 454, 648 P.2d 104.) While the scope of the prohibition stated in the section is not clear, it...