Tanzer v. International General Industries, Inc.

• Citation: 379 A.2d 1121
• Parties: Michael D. TANZER and Deborah Tanzer, as Trustees of Tanzer Economic Associates, Inc. Profit Sharing Plan, Plaintiffs below, Appellants, v. INTERNATIONAL GENERAL INDUSTRIES, INC., et al., Defendants below, Appellees.
• Decision Date: 18 October 1977
• Court: United States State Supreme Court of Delaware

Page 1121

379 A.2d 1121

Michael D. TANZER and Deborah Tanzer, as Trustees of Tanzer

Economic Associates, Inc. Profit Sharing Plan, Plaintiffs below, Appellants, v. INTERNATIONAL GENERAL INDUSTRIES, INC., et al., Defendants

below, Appellees.

Supreme Court of Delaware.

Submitted March 16, 1977.

Decided Oct. 18, 1977.

Upon appeal from the Court of Chancery. Affirmed in part and remanded.

Irving Morris and Joseph A. Rosenthal, of Morris & Rosenthal, Wilmington, and Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiffs-appellants.

Richard F. Corroon, Charles S. Crompton, Jr., and Robert K. Payson, of Potter, Anderson & Corroon, Wilmington, and Robert C. Hubbard and Henry J. Formon, Jr., of Satterlee & Stephens, New York City, for defendants-appellees.

Before HERRMANN, C. J., and DUFFY and McNEILLY, JJ.

DUFFY, Justice:

In Singer v. Magnavox Company et al., Del.Supr., 380 A.2d 969 (1977), we held that a merger of a Delaware corporation caused by a majority stockholder solely for the purpose of cashing-out minority stockholders is a violation of a fiduciary duty owed by the former to the latter. We reserved for another day the question of whether a merger made primarily to advance the business purpose of the majority stockholder is a violation of that duty. That question is now ready for decision in this appeal.

I

Briefly, the facts are these:

Plaintiffs are stockholders of Kliklok Corporation (Kliklok), a Delaware corporation. Defendants are International General Industries, Inc. (IGI), a Delaware corporation, and its directors. IGI owned eighty-one percent of Kliklok's outstanding common stock.

On September 30, 1975, IGI formed KLK Corporation (KLK), also a Delaware corporation, as part of a plan whereby IGI would acquire by merger all of Kliklok's common stock. Thereafter, the respective Boards of Directors of Kliklok, IGI and KLK approved a merger of KLK into Kliklok and the plan was given the requisite confirmation by vote of the stockholders in each of the latter corporations. See 8 Del.C. § 251.

Arguing that the merger should be enjoined because the sole purpose thereof was to serve the interest of the parent (IGI), plaintiffs sought a preliminary injunction; but the Court of Chancery refused to grant relief because a reasonable probability of ultimate success had not been demonstrated. The Court also declined to consider defendants' motion for summary judgment, after objection by plaintiffs on the ground that it had not been scheduled for hearing. But the Chancellor anticipated an ultimate judgment for defendants by saying that, "obviously the views expressed by the Court on the preliminary injunction application relate to the defendants' motion for summary judgment as well." This appeal followed.

II

Turning first to the procedural status of the case, plaintiffs argue that the order below is appealable now on the merits, while defendants contend that the Chancellor did not abuse his discretion in denying the preliminary injunction, and that is the full scope of review.

A summary judgment ruling by the Trial Court is not before us in a formal sense, though surely what is before us involves more than an exercise of the Chancellor's discretion. Whatever the form, the Court made significant findings and stated conclusions on the merits about plaintiffs' right to relief. These are repeated in more detail hereinafter but, at this time, we need only observe that, in our judgment, the Court determined a substantial issue and established a legal right between the parties to this controversy over a corporate merger. In short, the interlocutory order meets the test of appealability. C. v. C., Del.Supr., 320 A.2d 717, 720 (1974); Pepsico, Inc. v. Pepsi-Cola Bottling Co. of Asbury Park, Del.Supr., 261 A.2d 520, 521 (1969). And so we proceed to the contentions which undoubtedly brought the litigants into court in the first place.

III

Under the terms of the merger, IGI acquired all of the Kliklok stock and the minority holders of stock in that corporation were offered $11.00 per share. ¹ Dissenters, of course, have statutory appraisal rights, 8 Del.C. § 262.

Plaintiffs' argument amounts to this: a freeze-out merger imposed on a subsidiary corporation by a parent, and designed solely for the purpose of benefiting the parent, is impermissible under Delaware law. Defendants, on the other hand, contend that the merger was for a valid business reason and is permissible under § 251; in addition, they say that the price offered in connection with the merger is intrinsically fair.

As we observed at the outset, Singer determines that a cash-out of minority stockholders, when that is the sole purpose of a merger, is a violation of a fiduciary duty owed to them by a majority stockholder. In one sense, that may be said to be what is involved in the Kliklok merger because the minority were cashed out and it is not contended by defendants that Kliklok benefited from the merger. However, the real issue for decision centers around IGI's right to cause a merger "for a valid business reason" of its own, independent of any corporate interest of Kliklok. In short, the question is whether the parent may cause a merger to be made solely for its own benefit, or whether that is a violation of fiduciary duty and actionable under Delaware corporation law.

The parties, following the language of some of the cases, have analyzed the problem in terms of "business purpose" (or "business reason"), but it seems to us that that is not helpful because, at best, the phrase is ambiguous and, at worst, it states a result and not a right or duty. Again, as in Singer, the competing rights at stake in this controversy are basically those between majority and minority stockholders. Indeed, it is the power and right of IGI as a stockholder of Kliklok which is really under review. That is the status which is the foundation of its right in Kliklok, and it is in that status that IGI expresses its will in directing the affairs of Kliklok. It seems to us, therefore, that IGI is entitled to have its rights in dealing self-interestedly with Kliklok measured by reference to its status as stockholder. In other words, it would not be fair to IGI to examine only its director control of Kliklok which is a consequence of its power and not the source thereof.

While the focus here and in Singer has been on the rights of minority stockholders, we are well aware that a majority stockholder has its rights, too. And among these is exercising a fundamental right of a stockholder in a Delaware corporation; namely, the right to vote its shares. There are Delaware cases discussing such rights and to them we now turn.

The most recent case is Ringling Bros.-Barnum & Bailey Com. Shows v. Ringling, Del.Supr., 53 A.2d 441, 447 (1947), in which this Court stated the general rule governing the right of a stockholder to vote in his own interest; the Court said:

". . . Generally speaking, a shareholder may exercise wide liberality of judgment in the matter of voting, and it is not objectionable that his motives may be for personal profit, or determined by whims or caprice, so long as he violates no duty owed his fellow shareholders."

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