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finding that "[p]articipation by stockholders dispersed over nine different states throughout the country would be exceedingly difficult."
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Civil Action No. 15442.
Date Submitted: June 26, 2000.
Date Decided: September 29, 2000.
Craig B. Smith David A, Jenkins Smith, Katzenstein Furlow P.O. Box 410, Wilmington, DE. 19899.
Daniel A. Dreisbach Srinivas M. Raju Richards, Layton Finger P.O. Box 551, Wilmington, DE. 19899.
Dear Counsel:
Pending before the Court is plaintiff Roger B. Smith's motion to certify this lawsuit as a class action under Court of Chancery Rule 23. Defendants oppose Smith's motion, contending they have a unique defense against Smith that renders his claim atypical and makes him an inadequate class representative. For reasons I set Forth more fully below, 1 conclude that Smith's claim is typical of the class and that he will make a fair and adequate class representative.
The following procedural background and factual history are helpful to understanding the pending motion. Andrew E. Shapiro, formerly the named plaintiff, filed this action on December 20, 1996, against defendants Nu-West Industries, Inc., Agrium U.S., Inc., Agrium, Inc., Dale W. Massie, Dorothy E. A. Bower and Larry A. Collins. In count I of the complaint, Shapiro sought damages on behalf of the former holders of class A preferred stock of Nu-West in connection with Nu-West's failure to pay the proper redemption price when it redeemed all outstanding shares of the preferred stock on December 13, 1996. A second count, alleging breaches of fiduciary duty, was voluntarily dismissed in early 1998. As count I presented a purely legal issue — the proper calculation of the redemption price for the Class A preferred stock pursuant to Nu-West's certificate of incorporation — Shapiro moved promptly for summary judgment. Defendants sought to strike the motion for summary judgment, arguing that it was premature because the action had not been certified as a class action. In response to this tactic, Shapiro moved to certify count I, the only remaining count of the complaint, as a class action on behalf of all beneficial owners of the Class A preferred whose shares were redeemed on December 13, 1996. Nu-West then sought broad discovery from Shapiro, purportedly in order to determine whether he was a proper class representative. For the following year, the litigation was embroiled in various discovery disputes. After this Court ruled on the discovery issues, Shapiro decided that he could no longer serve as class representative because to do so would have required him to disclose the identity of certain of his clients and their investments.
See. e.g., Shapiro v. Nu-West, et. al., Del. Ch., C.A. No. 15442, Steele, \".C. (Oct. 1, 1996).
In early 1999, Smith replaced Shapiro as the representative plaintiff in this action. Smith provided responses to the same discovery as Shapiro, together with supplemental interrogatorics, requests for production and a deposition. Although defendants agreed by stipulation on January 28, 2000, to Smith's substitution as the named plaintiff, they reserved the right to assert that he was not a proper representative of the putative shareholder class.
Defendant Nu-West is a Delaware corporation. Before the December 13, 1996, redemption of its Class A preferred stock, Nu-West had issued and outstanding about 290,000 shares of Class A preferred. About 100,000 shares of the Class A preferred were publicly held, while Nu-West's controlling stockholder, Agrium U.S., held the other 190,000 Class A preferred shares. According to Nu-West's certificate of incorporation, Nu-West has the right to redeem its Class A preferred at a redemption price of $100 per share plus (according to the complaint) an amount equal to all accrued and unpaid dividends to the date of redemption.
On December 13, 1996, Nu-West redeemed its Class A preferred at a price of $100 per share plus accrued and unpaid dividends of $71.50 per share for a total of $171.50 per share. It is undisputed that dividends on Nu-West Class A preferred accumulated at the annual rate of $11 per share. To calculate the redemption price, Nu-West included $66 per share for dividends accrued during each of the six fiscal years ending June 30, 1990, through June 30, 1995, together with $5.50 per share for dividends accrued during the last six months of calendar year 1995. The redemption price did not include any payment for the dividend allegedly accrued during the period from January 1, 1996, through December 13, 1996.
On the redemption date, former plaintiff Shapiro was the record and beneficial owner of 1,126 shares of Class A preferred. When he received notice of Nu-West's intent to redeem the Class A preferred at $171.50, Shapiro questioned Nu-West as to its failure to include in the redemption price dividends accrued from January 1, 1996, through December 13, 1996. Nu-West responded that dividends do not accrue daily, but accrue only at the end of each fill fiscal year according to its interpretation of its certificate of incorporation. Shapiro believed that the redemption price should have included an additional $10.43 per share to account for the dividends accruing from January 1, 1996, through the date of redemption, December 13, 1996. In his complaint, Shapiro asked that the Court award all owners of Class A preferred as of December 13, 1996, an additional amount equal to $10.43 per share [or each redeemed share. Ultimately, as mentioned earlier, Smith was substituted for Shapiro as the named plaintiff It is uncontroverted that Smith has no business or social relationship with any of the defendants and has no known conflicts with any members of the class. Smith is the beneficial owner of 18,500 Class A preferred shares as of the redemption date.
The time period in question amounts to 347 out of the 366 days of 1996. $10.43 per share is computed by multiplying the annual dividend rate of $11 by .948 (the fraction resulting from dividing 347 by 366).
The 100,000 publicly held Class A shares outstanding on December 13, 1996 were held by fifteen holders of record (exclusive of Agrium U.S., Nu-West's controlling stocicholder) located in nine different states — New York, New Jersey, Maryland, Nevada, Ohio, Pennsylvania, Florida, Connecticut and California. In addition, two of the record holders are depository companies, together holding 90,371 shares, which suggests that a large number of beneficial owners exist whose identities and locations are unknown to plaintiff.
With this procedural history and factual background in mind, I turn to Smith's pending certification motion. To be certified as a class action, the action must satisfy all of the requirements of Rule 23(a) and must qualify under one of the Rule 23(b) categories. Rule 23(a) requires that (1) the class be so numerous that joinder of all members is impractical, (2) there exists questions of law and fact common to the class, (3) the claims of the representative parties be typical of the claims of the class, and (4) the representative parties be able to fairly and adequately protect the interests of the class.
Nottingham Partners v. Dana, Del. Supr., 564 A.2d 1089, 1094-95 (1989).
Smith clearly meets all four requirements or Chancery Rule 23(a). First, the class is so numerous that joinder would be impractical. Here, the class will consist of those persons who owned the almost 100,000 shares of Class A preferred that were publicly held on the redemption date. This includes not only the fifteen record holders of such shares, but also the beneficial owners of such shares. According to Nu-West's stock list, approximately 90,371 shares were held in the name of two depository companies. Smith does not know the identities of the beneficial owners for whom these shares were held, But based on the sheer number of such shares, it seems highly likely that there are numerous beneficial owners who qualify for membership in the class.
See, generally, 2 Herbert B. Newberg Alba Conte, Newberg on class Actions, § 3.03 (3d ed. 1992); Foster v. Bechtel Power Corp., 89 F.R.D. 624, 626 (E.D. Ark, 1981) (finding numerosity requirements satisfied when plaintiff identified approximately twenty persons who had been discriminated against, as well as other potential unidentified persons).
In addition to the number of class members, the geographical dispersion of members of the class is another factor under Rule 23(a). In this case, the geographical dispersement of the class members makes joinder impractical even if the Court considers only the fifteen record holders of Nu-West as of the redemption date. Here, as noted above, the record holders live in New York, New Jersey, Maryland, Nevada, Pennsylvania, Ohio, Connecticut, California and Florida. Participation by stockholders dispersed over nine different states throughout the country would be exceedingly difficult.
See Meeker v. Bryant Del. Ch., C.A. No, 6245, Hartnett, V.C. (Nov. 30, 1981) (certifying a class of twenty-three on the grounds that the class members were geographically dispersed throughout the eastern United States and certification would avoid multiple claims by similarly situated claimants).
As for the second Rule 23(a) requirement, the complaint now includes only one claim — that Nu-West improperly calculated the redemption price paid to the holders of Class A preferred stock on December 13, 1996 — resolution of which turns on one legal issue: whether Nu-West's certificate of incorporation provides that dividends on the Class A preferred accrued during the period January 1, 1996, through December 13, 1996. A determination whether Class A preferred stockholders should be paid dividends that may have accrued during this period will not involve issues unique to individual class members. This determination will apply to all class members equally. Thus, a single issue remaining for decision in this case solely involves common questions of law and fact.
As for the third and fourth Rule 23(a) requirements — whether the claims or defenses of the representative party are typical for the class and whether the representative party will adequately protect the class' interest— defendants insist that Smith cannot meet them. They argue that Smith both has an atypical claim and cannot represent fairly the interests of the putative class because of a statement he made during a deposition. In his deposition, defendants' attorneys asked Smith, "Do you find within Article IV any langi.iage that indicates that dividends with regard to that stock [Class A preferred] is [sic] to accrue daily as opposed to annually?" Smith answered this question, "No." Defendants insist that this "admission" gives them a unique defense against Smith, making his claim atypical and also making him incapable of fairly representing the other potential class members.
Defs.' Ans. Br., Ex. B (Smith dep. at 54).
This argument is unpersuasive. Smith testified in his deposition that he did not see any language in Article IV of Nu-West's certificate of incorporation that indicates that preferred stock dividends shall accrue daily us opposed to annually. But this is not an admission by Smith that gives rise to a unique defense to his claim. Even the question is limited in scope, since the question itself recognizes that Article IV deals only "in part" with the certificate's description of Class A preferred stock. The point (as made clear in plaintiff's now pending summary judgment motion) is that reading Article IV of the certificate in its entirety and giving effect to all of its provisions, particularly those relating to the amounts owed to holders of Class A preferred stock upon redemption, exchange or liquidation, can be read to provide that dividends were to accrue on a daily basis. Thus, Smith's answer to an isolated question in his deposition does not give rise to a conflict between his interests and those of the putative class. Actually, Smith's statement that he did not find any express language in Article IV governing whether dividends accrue daily or annually is an accurate observation concerning the certificate's language. But it is not a binding admission that limits the Court's power to determine the purely legal question posed by the complaint — does the certificate, read as a whole, provide for daily or annual accrual of dividends? Thus, Smith's deposition testimony has not created a unique defense, applicable only to him, that "might skew the focus of the litigation."
Defs.' Ans. Br. at 7.
Nothing in this record reasonably suggests that Smith cannot represent the class of preferred stockholders adequately and fairly. Smith is neither an expert nor a lawyer. It is well settled that class representatives are not required to articulate the legal theories supporting their underlying claims. That is the role of plaintiff's counsel. It is counsel for the class representative, not the named parties, who direct and manage class actions. As the beneficial holder of 18,500 preferred shares at the time of redemption, Smith has more than sufficient incentive to prosecute this action vigorously on behalf of the class.
See Surowitz v. Hilton Hotels, Inc., 383 U.S. 363 (1966) (holding that where, in an oral examination by respondents' counsel, petitioner, an immigrant with practically no formal education and limitcd knowledge of the English language, showed that she did not understand the complaint, Fed.R.Civ.P. 23(b) did not justify dismissal of petitioner's case merely because petitioner was uneducated about the nature of the lawsuit).
Defendants point to no other conflict between Smith and the class members. Smith has retained able counsel to undertake representation of the class on a contingent basis. He has responded to two Sets of interrogatories and request for production, as well as giving testimony at his deposition, all of which demonstrates that he can fairly and adequately protect the interests of the class.
Finally, I turn to the categories under Rule 23(b). Here, certification is proper under Rule 23(b)(1)(B), which authorizes class certification where an adjudication with respect to individual members of the class would be dispositive as a practical matter of the interests of the other members not parties to the adjudication or would substantially impair or impede their ability to protect their interests. Rule 23(b)(1)(B) thus permits class certification where the risk exists that adjudication of a single shareholder's claim may have res judicata effect on the claims of other absent shareholders, thereby prejudicing those absent shareholders if the class is not certified. That risk is present here, as the sole claim of the complaint is whether, under Nu-West's certificate of incorporation, dividends accrued for the period from January 1, 1996, through December 13, 1996 and, accordingly, should have been included in the redemption price. If this Court agrees with defendants that Nu-West's certificate precludes daily accrual of dividends during 1996, this determination would effectively preclude holders of Class A preferred stock who are not parties to this action from pressing claims that they are entitled to payment of dividends for 1996. Class certification thus serves judicial efficiency since it allows a single court to determine claims involving one set of actions by defendants that have a uniform effect upon a class of identically situated shareholders.
See, e.g. Wacht v. Continental Hosts, Ltd., Del. Ch., CA. No. 7954, Chandler, V.C. (Sept. 16, 1994), morn. op. at 10. of course, class actions usually meet both subparagraphs of subsection (b)(1) of Rule 23 or neither of them. See Turner v. Bernstein, Del. Ch., C.A. No. 16190, Strine, V.C. (Aug. 11, 2000), Mem. op. at 20, citing C. A. Wright, A. R. Miller M. K. Kane, 7A Federal Practice Procedure § 1772, at 421-26 (1966) 71 (2000 Supp.). Certification is also appropriate in this case under Rule 23(b)(1)(A).
See Hynson v. Drummond Coal Co., Del. Ch., 601 A.2d 570, 576-79 (1991) (recognizing power of a court in a corporation's domiciliary state to determine conclusively the rights and obligations attached to corporate stock without joining all stockholders).
For all of the above reasons, I conclude that plaintiff Smith has satisfied the requirements of Rule 23(a) and defendants' arguments to the contrary must be rejected. In addition, I conclude that this action should be certified under Rule 23(b)(1)(13). Counsel shall confer and promptly submit an order in conformity with this decision. Oral argument on the pending motions for summary judgment is scheduled for Tuesday, October 3 at 11:00 a.m.
IT IS SO ORDERED.
Very truly yours, _________________________ William B. Chandler III
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