Stringer v. Car Data Systems, Inc.

• Jurisdiction: Oregon
• Court: Oregon Supreme Court
• Citation: 314 Or. 576,841 P.2d 1183
• Parties: Paul H. STRINGER and Timothy D. Schubert, Petitioners on Review, v. CAR DATA SYSTEMS, INC., an Oregon corporation; Consumer Data Systems, Inc., an Oregon corporation; James L. Adkisson; David W. Agnor; Sharon Agnor; James L. Agnor; Arlene L. Belanger; Peter G. Bock; Susan D. Ebner; Mark S. Boyd; Jeffrey Scott Carlson; Lawrence R. Custer; Stephen J. Ebner; William A. Henry; John H. Hodges, Sr.; Bernal Hug, Jr.; Virginia Hug; Celas A. Hug; Kent Hug; Cheryl Hug; Paul E. Johnson; Corleen Johnson; Mark Anthony Royal Kallenberger; David E. Lamb; Jacqueline C. Lamb; Steven D. Lee; Claudia J. Lee; Leslie R. Lock; Terry R. Lock; Steve P. Nagel; Henry B. Shafer; Bob Sievers, Jr.; Judy A. Sievers; Donald Smith; Richard M. Botteri and Weiss, Descamp & Botteri, a professional corporation, an Oregon professional corporation, Respondents on Review, and Elizabeth A. Perry; and James B. Kargman, Nominal Defendants. CC A8907-04022; CA A65113; SC S38792.
• Decision Date: 19 November 1992

Page 1183

841 P.2d 1183

314 Or. 576

Paul H. STRINGER and Timothy D. Schubert, Petitioners on Review, v. CAR DATA SYSTEMS, INC., an Oregon corporation; Consumer Data Systems, Inc., an Oregon corporation; James L Adkisson; David W. Agnor; Sharon Agnor; James L. Agnor Arlene L. Belanger; Peter G. Bock; Susan D. Ebner; Mark S. Boyd; Jeffrey Scott Carlson; Lawrence R. Custer Stephen J. Ebner; William A. Henry; John H. Hodges, Sr. Bernal Hug, Jr.; Virginia Hug; Celas A. Hug; Kent Hug; Cheryl Hug; Paul E. Johnson; Corleen Johnson; Mark Anthony Royal Kallenberger; David E. Lamb; Jacqueline C. Lamb; Steven D. Lee; Claudia J. Lee; Leslie R. Lock; Terry R. Lock; Steve P. Nagel; Henry B. Shafer; Bob Sievers, Jr.; Judy A. Sievers; Donald Smith; Richard M. Botteri and Weiss, Descamp & Botteri, a professional corporation, an Oregon professional corporation, Respondents on Review, and Elizabeth A. Perry; and James B. Kargman, Nominal Defendants.

CC A8907-04022; CA A65113; SC S38792.

Supreme Court of Oregon, In Banc.

Argued and Submitted May 5, 1992.

Decided Nov. 19, 1992.

Robert J. McGaughey, of McGaughey & Georgeff, Portland, argued the cause and filed the petition for petitioners on review.

Mark A. Turner, of Ater Wynn Hewitt Dodson & Skerritt, Portland; Carolyn E. Wells, of Miller Nash Wiener Hager & Carlsen, Portland; and Thomas W. Brown, of Cosgrave, Vergeer & Kester, Portland, argued the cause and filed a response to the petition for review on behalf of the following respondents on review: Mr. Turner, for Car Data Systems, Inc., James L. Adkisson, Celas A. Hug, Peter G. Bock, Mark S. Boyd, Kent Hug, and David E. Lamb; Ms. Wells, for Arlene Belanger, Jeffrey Scott Carlson, Lawrence R. Custer, William A. Henry, John H. Hodges, Sr., Mark Anthony Royal Kallenberger, Leslie R. Lock, Terry R. Lock, Steve P. Nagel, Bob Sievers, Jr., and Judy A. Sievers; and Mr. Brown, for Richard M. Botteri and Weiss, Descamp & Botteri.

Glen H. Downs, Portland, filed a brief on behalf of amicus curiae Oregon Trial Lawyers Ass'n.

PETERSON, Justice.

This case involves what courts and commentators have described as a "cash-out merger," a "squeeze-out merger," or a "freeze-out merger." In this opinion, we will use the term "cash-out merger." Under ORS 60.551 to 60.594, majority shareholders may eliminate minority shareholders of a corporation by merger procedures that allow dissenting minority shareholders to receive "fair value" for their shares.

Plaintiffs were minority shareholders in Consumer Data Systems, Inc. (CDS), an Oregon corporation. They filed this action, claiming a violation of various rights incident to a cash-out merger involving CDS and another corporation, Car Data Systems, Inc. (Car Data). Plaintiffs allege that other CDS shareholders and directors breached a fiduciary duty owed to plaintiffs as minority shareholders. They seek compensatory and punitive damages. ¹ The trial court dismissed their complaint for failure to state a claim, ORCP 21 A(8), and the Court of Appeals affirmed. Stringer v. Car Data Systems, Inc., 108 Or.App. 523, 816 P.2d 677, modified on reconsideration, 110 Or.App. 14, 821 P.2d 418 (1991). We affirm the decision of the Court of Appeals, but on different grounds.

Before turning to the facts, a brief summary of cash-out mergers is appropriate.

At common law, each shareholder of a corporation was considered to have a "vested right" in the corporation. As a result, the rule in many jurisdictions was that a single shareholder could veto a proposed business combination. See Annot, Valuation of Stock of Dissenting Shareholders in Case of Consolidation or Merger of Corporation, Sale of its Assets, or the Like, 48 ALR3d 430, 435 (1973); Chicago Corp. v. Munds, 20 Del.Ch. 142, 172 A. 452, 455 (1934).

Legislatures, courts, and commentators found that the right of a single shareholder to veto business transactions trammeled the concept of corporate democracy. The veto was therefore eliminated. The general rule today is that decision-making by the majority must take precedence over the objection of a lone dissenter. See Revised Model Business Corporation Act § 13.02 (1984) (the "Model Act"); ORS 60.554(1).

The rejection of a minority veto and the recognition of majority rule has not occurred without regard for the potential abuses of a majority's power directed against minority interests. The linchpin of a dissenter's protection in merger cases is found in the statutory appraisal remedy. This remedy is designed to provide statutory protection to those minority shareholders who do not concur with the decision of the majority shareholders.

One device commonly used to eliminate minority shareholders who disagree with the majority shareholders about corporate decision-making is the cash-out merger. A typical cash-out merger, and the appraisal remedy, are described in 1 F.H. O'Neal & R. Thompson, O'Neal's Oppression of Minority Shareholders 21-22, § 5:04 (2d ed):

"Controlling shareholders often utilize a statutory merger as an instrument for squeezing out minority shareholders or altering their rights and preferences. In every state the corporation statute provides a statutory procedure by which two or more corporations can be combined into a single corporation even though less than all shareholders approve. * * *

" * * * * *

"Under the typical procedure for merger, the directors of the combining companies adopt a plan of merger, which sets forth the terms and conditions of the merger, including the manner in which shares of each of the constituent corporations are to be converted into shares, obligations, or other securities of the surviving corporation, or into cash or other property. The board then submits the plan to the shareholders of each constituent corporation. Depending on the corporation statute in the particular jurisdiction, the plan must be approved by holders of a majority or another specified proportion of each company's shares or by holders of a majority or specified proportion of shares with voting rights. * * * If the plan receives the required approval, it is then filed in a specified public office. A shareholder who dissents from a merger can force the corporation in which he has held stock or the surviving corporation, depending upon the statute, to purchase his shares at their appraised value." (Footnotes omitted.)

Undeniably, such mergers have a coercive element.

"Freezeouts, by definition, are coercive: minority stockholders are bound by majority rule to accept cash or debt in exchange for their common shares, even though the price they receive may be less than the value they assign to those shares. But this alone does not render freezeouts objectionable. Majority rule always entails coercion. It is, nonetheless, an acceptable rule of governance if all members of the voting constituency share a common goal and if all will be identically affected by the outcome of the vote. In the ordinary arm's-length merger negotiated by the managements of two unrelated corporations, stockholders of the merged entity are properly viewed as having a common interest in maximizing the returns on their stock, whether through periodic dividends or through sale or liquidation of the firm. Once approved by a statutory majority, the terms of such a merger will apply equally to each of the merging company's stockholders, and the common decision will satisfy the principle that all members of the class be treated alike. Majority rule is thus an appropriate means of deciding whether an arm's-length merger should be allowed, and it is of course a universal feature of the corporate law. Despite the element of coercion, dissenters to such a merger are bound, or remitted to an appraisal proceeding, by vote of a majority of their class, because it is assumed that any disagreement among the stockholders involves nothing more than a practical judgment about the best way to achieve a common aim." Brudney & Chirelstein, A Restatement of Corporate Freezeouts, 87 Yale LJ 1354, 1357-58 (1978).

The Oregon statutes that permit cash-out mergers, ORS 60.481 to 60.501, contain procedural protections for minority shareholders. ORS 60.554 provides in part:

"(1) Subject to subsection (2) of this section, a shareholder is entitled to dissent from, and obtain payment of the fair value of the shareholder's shares in the event of, any of the following corporate acts:

"(a) Consummation of a plan of merger to which the corporation is a party if shareholder approval is required for the merger by ORS 60.487 or the articles of incorporation and the shareholder is entitled to vote on the merger or if the corporation is a subsidiary that is merged with its parent under ORS 60.491;

"(b) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan[.]"

Dissenters from a proposed merger have a right to demand payment for their shares. ORS 60.571. If they do so, the corporation is then required to pay each dissenter "the fair value of the shareholder's shares, plus accrued interest." ORS 60.577(1). If the parties do not agree as to fair value for the shares, the corporation "shall commence a proceeding * * * to determine the fair value of the shares and accrued interest." ORS 60.591(1). A court then determines the fair value of the shares. The appraisal procedure is the sole remedy for dissenting shareholders in the absence of "unlawful or fraudulent" conduct. ORS 60.554(2) provides:

"A shareholder entitled to dissent and obtain payment for the shareholder's shares under ORS 60.551 to 60.594 may not challenge the corporate action creating the shareholder's entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation."

Plaintiffs brought this action, claiming that defendants acted unlawfully incident to the transfer of CDS shares to Car Data, squeezing out pl...