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Patents Management Corporation v. O'Connor

Court of Chancery of Delaware
Jun 10, 1985
C.A. No. 7110 (Del. Ch. Jun. 10, 1985)

Opinion

C.A. No. 7110.

Decided June 10, 1985.

Edward T. Ciconte, Esq., D'Angelo, Ciconte Roseman, 1300 King Street, Wilmington, DE 19801.

I. Walton Bader, Esq., Bader and Bader, 65 Court Street, White Plains, N Y 10601.

Michael D. Goldman, Esq., Potter Anderson Corroon, 350 Delaware Trust Building, Wilmington, DE 19899.


UNREPORTED OPINION


This suit arises out of a cash-out merger in which five director-shareholders of Capital Food Industries, Inc. ("CFI") merged that company into their own corporation's wholly-owned subsidiary, Vinco Subsidiary, Inc. The plaintiff, Patents Management Corp. ("Patents"), a shareholder of CFI, alleges that the defendants omitted and misrepresented material information in the proxy statement and that the cash-out price offered to the CFI shareholders was inadequate. After the effective date of the merger, but prior to the filing of the complaint, the Delaware Supreme Court announced its decision in Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701 (1983), which significantly altered the remedy available to shareholders challenging cash-out mergers. Relying upon Weinberger, the defendants move to dismiss the complaint on the grounds that it no longer states a claim and that the plaintiff is not entitled to the "quasi-appraisal" remedy established in Weinberger.

To prevail on their motion to dismiss, the defendants must demonstrate that under no set of facts which could be proven in support of its claim would the plaintiff be entitled to relief. Del. State Troopers Lodge No. 6 v. O'Rourke, Del. Ch., 403 A.2d 1109 (1979). The defendants have attached a copy of the proxy statement to their moving papers, and contend that the sufficiency of the plaintiff's alleged proxy violations should be measured against that document. Generally, matters outside the pleadings must be excluded by the Court in considering a motion to dismiss. Chancery Rule 12(b)(6). Nevertheless, the federal courts, in ruling upon motions to dismiss under the Federal Rule of Civil Procedure 12(b)(6), have taken into account documents, such as proxy statements, where the complaint relies on such documents. Docker v. Massey-Ferguson, LTD., 681 F.2d 111 (2d Cir. 1982). Because the federal judiciary's interpretations of parallel court rules are given substantial weight in this court, Canaday v. Superior Court in and for New Castle County, Del. Supr., 119 A.2d 347 (1955), I will treat the proxy statement as part of the pleadings for purposes of this motion to dismiss.

The record thus lends itself to the following factual statements. On September 9, 1982, five CFI directors (the "Interested Directors"), who together held over 40 percent of the common stock of CFI, proposed a leveraged buyout of CFI whereby it would be merged into Vinco Subsidiary, Inc., a subsidiary of Vinco-CFI, Inc. ("Vinco"), which were formed solely for the purpose of effectuating the merger. The Interested Directors transferred common stock of CFI and cash into Vinco, and took back 67.8% of the Vinco common stock. The merger proposal provided that the CFI common shareholders, other than Vinco, would be cashed-out at $4.75 per share, while the preferred shareholders would receive $5.00 per share. Subsequently, the per-share price offered to preferred shareholders was increased to $6.25.

The merger plan was submitted to a Special Committee, consisting of an outside, uninterested director and an executive officer of CFI. The Special Committee approved the terms of the merger as fair to the CFI shareholders. In addition, CFI's financial advisors, Duff and Phelps, Inc., rendered an opinion that the cash-out prices offered for the common anc preferred stock were fair. On October 25, 1982, the CFI board of directors formally approved the merger agreement, which was then executed on November 17. A special stockholder meeting was noticed for January 21, 1983, to permit a shareholder vote on the proposed merger. Approval of the merger plan required a majority vote of uninterested shareholders. The proxy statement was mailed to CFI shareholders on December 21, 1982. At the meeting the merger was approved by CFI shareholders and became effective on that day.

The plaintiff now seeks to rescind the merger or to obtain rescissory damages essentially on three grounds: first, the shareholders were not given sufficient time to review the proxy materials; second, the proxy statement failed to disclose, or inadequately disclosed, material information; and finally, the cash-out price offered to CFI shareholders was inadequate.

In Weinberger, the Supreme Court designated appraisal as the sole financial remedy for aggrieved shareholders challenging a cash-out merger, and specifically relegated claims of unfair dealing as well as unfair price to the new, liberalized appraisal proceeding. At the same time, the Weinberger court recognized that an appraisal would not always provide shareholders with an adequate remedy, especially in situations where fraud, self-dealing and misrepresentation were involved. For this reason, the Court did not diminish "the historic powers of the Chancellor to grant such other relief as the facts of a particular case may dictate." Weinberger, supra, at 714. Nevertheless, because unfair dealing may be remedied in an appraisal proceeding, absent unusual circumstances dissenting shareholders will be limited to the appraisal remedy. Rabkin v. Philip A. Hunt Chemical Corp., Del. Ch., 480 A.2d 655, 660 (1984); Wilen v. Pollution Control Industries, Inc., Del. Ch., C.A. No. 7254 slip op at 6, Hartnett, V.C. (October 15, 1984). To survive a motion dismiss a claim challenging a cash-out merger, outside an appraisal action, not only must a plaintiff allege specific acts demonstrating the unfairness of the merger terms to the minority, but also its allegations must demonstrate that an appraisal would not adequately remedy that misconduct. Rabkin, supra.

Patents has not demonstrated that an appraisal would be an inadequate remedy in the present case. Although it seeks rescission of the merger, this is not a feasible remedy given the length of time that has elapsed since the merger. Thus, despite its allegations of unfair delaing, the essence of plaintiff's claim is for monetary damages and must be addressed, if at all, in an appraisal proceeding. Although the plaintiff has not perfected its right to statutory appraisal under 8 Del. C. § 262, the Weinberger court established a quasi-appraisal proceeding, which is identical to the expanded appraisal approach, for five categories of cases including "any case challenging a cash-out merger, the effective date of which is on or before February 1, 1983." Id. at 714. Because the effective date of the present cash-out merger was January 21, 1983, the plaintiff is therefore entitled to the quasi-appraisal remedy established in Weinberger.

The defendants, however, contend that the applicability of the quasi-appraisal remedy should not extend to a plaintiff who fails to comply with any of 8 Del. C. § 262's requirements after February 1, 1983, the date of the Weinberger decision. Such plaintiffs, argue defendants, were afforded notice that the exclusive financial remedy for shareholders challenging cash-out mergers was a 8 Del. C. § 262 appraisal. In this regard, the defendants note that the plaintiff failed to file suit within 120 days of the effective date of the merger, as is required by 8 Del. C. § 262(e), even though this statutory filing deadline was months after the Weinberger decision. Because the Supreme Court's motivation in fashioning the quasi-appraisal remedy was undoubtedly aimed at avoiding the harsh results to shareholders who had not perfected their appraisal rights prior to the change in the law, and were not able to do so, there is some appeal to the defendants' argument. However, in establishing the quasi-appraisal remedy, the Supreme Court did not envision a case-by-case examination of whether a particular plaintiff had notice of the change in the law at the time he failed to comply with 8 Del. C. § 262's statutory requirements. Rather, the Weinberger court adopted an approach that afforded a limited number of plaintiffs a remedy that provided the liberalized appraisal proceeding without regard to its procedural requirements. Therefore, Patents is entitled to the quasi-appraisal remedy notwithstanding its failure to follow the statutory requirements for perfecting appraisal.

Any monetary award which the plaintiff may secure under the quasi-appraisal remedy is based upon the two part fairness standard — fair price and fair dealings. Weinberger supra, at 714. With respect to fair dealing, the plaintiff alleges that (1) the shareholders were not given sufficient time to review the proxy materials prior to the shareholder vote, (2) the CFI shareholders were not adequately informed as to their appraisal rights, (3) the future prospects of CFI were not disclosed in the proxy, and finally (4) the proxy did not include the details of the transaction and the negotiations. The defendant seeks to dismiss these claims on the grounds that they are conclusory and clearly contradicted by the proxy statement.

Because the appraisal remedy seeks to value stock independently of any price actually offered to the shareholder-plaintiff, he is not required to plead unfairness of price to maintain his appraisal action. To support a claim for unfair dealing, however, in an appraisal action or otherwise, the plaintiff must allege specific acts of fraud, misrepresentation, or other items of misconduct to demonstrate the unfair dealings. See Weinberger, supra, at 703.This is true for quasi-appraisal as well. The plaintiff's allegations are insufficient to support its complaint as to unfair dealings. First, the proxy statement was mailed to CFI shareholders 31 days prior to the January 21, 1983, shareholder meeting. This is in accordance with 8 Del. C. 8 Del. C. § 251 which requires that notice of the meeting be mailed at least 20 days prior to the meeting. Second, the plaintiff's remaining allegations are merely conclusory and fail to set forth any specific acts of misconduct by the defendants. The proxy clearly shows that each of the remaining areas challenged by the plaintiff were in fact discussed in the proxy. Without any specific allegations as to the insufficiency of these disclosures, the complaint fails to state a claim as to unfair dealing. Accordingly, the defendant's motion to dismiss plaintiff's claims of unfair dealing must be granted.

The plaintiff, at oral argument and in its brief in opposition to the motion to dismiss, did not defend its allegations of unfairness. Rather, in tacit recognition of the frailty of its complaint, plaintiff argued different areas of nondisclosure and misrepresentation which do not appear in its complaint. At oral argument, the plaintiff expressed a willingness to amend its complaint, although it has not formally done so. The defendants vigorously oppose allowing the plaintiff to amend its complaint arguing that the new alleged proxy violations are also insufficient to support its claim. Generally, motions to amend may be denied where the insufficiency of the amendment is obvious on its face. Rabkin, supra, at 662; Iteck Corp. v. Chicago Aerial Industries, Inc., Del. Super., 257 A.2d 232 (1969). Although I have serious doubts as to the sufficiency of the additional alleged proxy violations projected by plaintiff, it would be premature to rule upon any proposed amendment to the complaint before a motion to amend is properly before the Court.

In sum, the plaintiff is entitled to the quasi-appraisal remedy established in Weinberger to establish a fair value of his shares. The fair value is based upon the entire fairness standards of fair price and fair dealing. The plaintiff's allegations of unfair dealing are insufficient and must be dismissed.

IT IS SO ORDERED.


Summaries of

Patents Management Corporation v. O'Connor

Court of Chancery of Delaware
Jun 10, 1985
C.A. No. 7110 (Del. Ch. Jun. 10, 1985)
Case details for

Patents Management Corporation v. O'Connor

Case Details

Full title:Patents Management Corporation v. John K. O'Connor, et al

Court:Court of Chancery of Delaware

Date published: Jun 10, 1985

Citations

C.A. No. 7110 (Del. Ch. Jun. 10, 1985)

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