Stepak v. American Tel & Tel. Co.

• Decision Date: 21 October 1986
• Court: California Court of Appeals Court of Appeals
• Parties: Barnett STEPAK, Plaintiff and Appellant, v. AMERICAN TELEPHONE AND TELEGRAPH CO. et al., Defendants and Respondents. A020363.

Page 37

231 Cal.Rptr. 37

186 Cal.App.3d 633

Barnett STEPAK, Plaintiff and Appellant, v. AMERICAN TELEPHONE AND TELEGRAPH CO. et al., Defendants and Respondents.

A020363.

Court of Appeal, First District, Division 2, California.

Oct. 21, 1986.

As Modified on Denial of Rehearing Nov. 20, 1986.

Review Denied Jan. 14, 1987.

David B. Flinn, Leland, Parachini, Steinberg, Flinn, Matzger & Melnick, San Francisco, Stanley Nemser, Michael P. Fuchs, Wolf, Popper, Ross, Wolf & Jones, Harvey Greenfield, New York City, for plaintiff and appellant.

Pillsbury, Madison & Sutro, Robert M. Westberg, Richard W. Odgers, James B. Young, Kevin M. Fong, Robert V.R. Dalenberg, Gerald H. Genard, Steven D. Rathfon, San Francisco, for defendants and respondents.

SMITH, Associate Justice.

We will hold that Public Utilities Commission (commission) approval of a proposed merger between an American Telephone and Telegraph Company (AT & T) subsidiary and Pacific Telephone and Telegraph Company (PT & T) did not divest the superior court of jurisdiction to entertain a class action suit brought against the utilities by minority shareholders of PT & T, even though the commission in approving the merger, made findings that the proposed transaction was fair to minority shareholders. We will further hold that the commission's findings do not create a res judicata or collateral estoppel bar to litigating those issues in the class action. Accordingly, we reverse a judgment dismissing the class action suit of appellant Barnett Stepak.

BACKGROUND

At all times relevant to this case, AT & T, a New York corporation, was the parent company of the Bell System. PT & T, a California corporation and utility subject to commission jurisdiction, was a member of the Bell System. Prior to the proposed merger, AT & T owned over 90 percent of the voting shares of PT & T. That ownership consisted of over 91 percent of PT & T's common shares and 78 percent of its voting preferred shares; the remaining shares were publicly owned. Appellant Stepak, a New Jersey resident, owned some of the roughly 19 million outstanding shares of PT & T common stock.

In November 1981, PT & T applied to the commission for approval of a plan which would eliminate all PT & T minority voting power through a merger of PT & T with Pacific Transition Corporation (PTC), a wholly owned subsidiary of AT & T created (as a California corporation) especially for the merger. Under an agreement requiring majority approval by all holders of PT & T's common and preferred voting shares, PTC would merge with PT & T, the surviving corporation, with minority common shareholders receiving .35 shares of AT & T common stock for every share of PT & T common stock; AT & T would buy out all voting preferred shares at $60 per share. ¹ The net effect of the merger would be to place complete voting control with AT & T.

The commission initially heard the matter on December 23 and 24, 1981, and the matter stood conditionally submitted. Then, in early January 1982, AT & T and the United States Department of Justice announced that they had reached settlement in ongoing civil antitrust litigation in federal court. A consent decree entered later that month called for divestiture of AT & T. (United States v. American Tel. and Tel. Co. (D.D.C.1982) 552 F.Supp. 131, 226 [modifying the consent decree], affd. (1983) 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472.)

In light of the pending divestiture, the commission reopened the proceedings and ordered PT & T to file briefing on the effect of the federal court action on the application. The commission asked in particular for an analysis of "whether the continued existence of minority shareholders better ensures protection of the interests of both PT & T and its ratepayers" and "whether the settlement will adversely affect the rights and privileges of minority PT & T shareholders." PT & T filed its response, and the commission ordered a further hearing, to start February 22.

Meanwhile, appellant, who had not had notice of the commission proceedings, learned of them through a notice and proxy statement distributed to PT & T shareholders for a special shareholders' meeting, set for February 26, at which the merger agreement would be voted on.

The hearing resumed, as scheduled, on February 22. Appellant appeared and participated thereafter, through counsel, as an interested party. The matter was resubmitted subject to further briefing. Before the close of the hearing on March 1, PT & T's shareholders had approved the merger agreement. ²

Appellant filed a post-hearing brief in which he argued that the merger was not in the best interests of PT & T, its customers or its minority stockholders in that there was no legitimate corporate purpose for the merger, potential regulatory and tax changes had created uncertainty, PT & T's directors had a conflict of interest, ³ and the directors had not acquired sufficient knowledge of the divestiture and subsequent restructuring to make an informed decision. He argued that the interests of consumers and minority shareholders coincided and also that, for a number of reasons, the merger would be unfair to minority shareholders.

On the same day as the commission hearing resumed, appellant filed the instant action, on behalf of himself and all other minority holders of PT & T common stock, against AT & T, PTC, and PT & T and its directors. The complaint, framed in a single cause of action, alleges conflicts of interest and breaches of fiduciary duties in the form of overreaching, unfair dealing and nondisclosure. Particular allegations are that there was no legitimate purpose for the merger, that PT & T's directors failed to disclose that an initial proposed exchange ratio of .305 shares of AT & T The commission issued its decision ((1982) 9 Cal.P.U.C.2d 101) on May 4, 1982. Exercising jurisdiction under Public Utilities Code sections 854 and 818, ⁴ the commission approved the merger. On the subject of PT & T's minority shareholders, the commission concluded with "great reluctance" that, although the minority's interests could parallel those of ratepayers, particularly during eventual divestiture of PT & T from AT & T, the circumstances as a whole did not warrant retaining their influence. (Id., at pp. 122-123, 129.)

stock per PT & T share was found to be unfair by a firm PT & T's directors had consulted, that the exchange ratio now being offered was unfair or "grossly unfair", and that AT & T (as majority owner of PT & T common stock) improperly diluted the class's shares and increased its own percentage of common stock ownership through two stock offerings just prior to the merger. The prayer asks for declaratory relief and injunction against the merger agreement or, should the merger agreement be consummated, equitable relief (including rescission) and damages.

As an independent factor bearing on whether the merger might prove "adverse to the public interest," the commission considered whether the merger was "fair to minority shareholders." ⁵ After reviewing arguments of appellant and the commission's own staff (whose brief supported appellant's position), the commission concluded: "These [arguments], if valid, tend to show that a higher price for publicly held common shares could be substantiated. However, the exchange offer is not so low as to be unfair to the minority shareholders. In our view there is a range of reasonableness in measuring the fairness of the exchange offer, within which the exchange offer falls. PT & T's outside directors acted reasonably in relying upon Dillon Read's fairness opinion ⁶ and the data supplied in its support. Based on the analyses supplied in the Dillon Read report, the exchange offer is fair, although it may not produce the dollars desired by some of the minority shareholders." (Id., at pp. 125-126.)

The commission's formal findings included these: "[t]he proposed merger is for legitimate corporate purposes"; "[t]he Dillon Read report and fairness letter provide a competent basis for testing the reasonableness of the exchange offer"; "[t]he exchange offer is fair and reasonable"; "[t]he interests of minority shareholders will not be adversely affected by approval of the merger"; "[d]isapproval of the merger would deny minority shareholders tangible benefits...." (Id., at pp. 128-129.) The commission also made formal conclusions of law that the merger was "for legitimate corporate purposes" and would not "adversely affect minority shareholders." ((Id., at p. 129.)

The commission decision became final--no petition for reconsideration or petition for Supreme Court review having been filed--and the merger was consummated. Class action defendants (respondents herein) then filed a supplemental answer in which they asserted, as affirmative defenses, that (1) the commission's decision acted as a res judicata and collateral estoppel bar (§ 1709), and (2) the court lacked jurisdiction of the subject matter (§ 1759).

Respondents raised the same two arguments in support of a motion to dismiss. The motion was granted, and this appeal from the judgment of dismissal followed.

APPEAL

I

We first address the question of jurisdiction, which depends in part on the interrelation of two provisions of the Public Utilities Code. Section 1759, relied on by respondents, deprives the superior court of jurisdiction to "reverse, correct, or annul" any order or decision of the commission or to "enjoin, restrain or interfere with" the commission's performance of its official duties. ⁷ Section 2106, relied on by appellant, vests the superior court with jurisdiction to award damages--including exemplary damages in a proper case--against any public utility that acts unlawfully or fails to act as required by law. ⁸ "[I]n order to resolve the potential conflict between sections 1759 and 2106, the latter section must be construed as limited to those situations in which an award of damages would not hinder or frustrate...