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Timestamp: 2016-12-10 20:48:09
Document Index: 240121535

Matched Legal Cases: ['§ 515', '§ 515', '§ 515', '§ 1', '§ 672', '§ 1921']

| JONES & LAUGHLIN STEEL CORPORATION (02/07/79)
JONES & LAUGHLIN STEEL CORPORATION (02/07/79)
No. 703 April Term 1977, APPEAL FROM AN ORDER DATED MARCH 29, 1977 OF THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY, PA.; CIVIL DIV. at No. GD75-3858.
Watkins, President Judge, and Jacobs, Hoffman, Cercone, Price, Van der Voort and Spaeth, JJ. Jacobs and Watkins, former President Judges, and Hoffman, J., did not participate in the consideration or decision in this case.
[ 263 Pa. Super. Page 380]This is an appeal from an order entered in a dissenting shareholder appraisal action under sections 515 and 908 of the Pennsylvania Business Corporation Law.*fn1
The action arose as a result of the merger of the Jones & Laughlin Steel Corporation (J & L Steel) into Jones & Laughlin Industries, Inc., II (JLI-II), a wholly owned subsidiary of Jones & Laughlin Industries, Inc. (JLI). The corporate parent of JLI, LTV Corporation, began its investment
[ 263 Pa. Super. Page 381] in J & L Steel in 1968 with a tender offer to purchase J & L Steel common stock. LTV then transferred its stock in J & L Steel to its wholly owned subsidiary JLI. By March of 1969, JLI held approximately 63 percent of the J & L Steel common stock. Thereafter, JLI increased its ownership to 81 percent. By an Agreement and Plan of Merger dated October 22, 1974, it was proposed that J & L Steel be merged into JLI-II, thereby becoming a wholly owned subsidiary of JLI, with the common shareholders of J & L Steel receiving $29 per share in exchange for their stock. A proxy statement containing the terms of the plan was sent to the shareholders, and on November 22, 1974, after approval by the Board of Directors and a majority of the shareholders, the plan became effective. The following diagram may be helpful in understanding the relationship of the corporations both before and after the plan took effect:
The plan was filed with the Department of State, which awarded a certificate of merger.*fn2 Some 122 shareholders,
[ 263 Pa. Super. Page 382] representing approximately 25,365*fn3 of 15,905,716 outstanding shares of J & L Steel common stock, objected to the merger. After a motion in Federal court for an injunction preventing the merger failed,*fn4 these shareholders dissented to the merger at the shareholder meeting.*fn5
On December 20, 1975, J & L Steel sent a letter to each of the dissenters in which it offered them $29 per share for each share of common stock held by them*fn6 -- the same amount offered under the plan of merger. This offer was refused, and on February 21, 1975, J & L Steel filed a
[ 263 Pa. Super. Page 383] petition in the Court of Common Pleas of Allegheny County seeking an appraisal and forced sale of the shares held by the dissenters.*fn7 Several dissenters filed an answer to the petition, with "New Matter".*fn8 Typically,*fn9 the new matter alleged:
(a) The public minority stockholders are accorded different, discriminatory treatment from The LTV Corporation through its wholly owned subsidiary JLI as the record owner of an 81% majority of the same class of stock by being forced to relinquish their interest in J & L Steel at a set price while The LTV Corporation receives all the common stock of J & L Steel;
(b) JLI-II was a paper corporation newly formed as a wholly owned subsidiary of JLI for the sole purpose of being a party to the purported merger, without any business operations or assets (except for the nominal sum of $1,000);
(c) The purported merger was not designed to, (by the Proxy Statement dated October 25, 1974 circulated by J & L Steel to all shareholders, including Respondents) did not claim to, and in fact did not accomplish any bona fide or legitimate business purpose of J & L Steel;
(d) The alleged merger was not designed to, according to the said Proxy Statement did not purport to, and in fact did not effect any change in the management, capital
[ 263 Pa. Super. Page 384]
structure, business, Articles of Incorporation, By-laws, debt structure, preferred stock, directors or officers of J & L Steel;
(e) The purposes of the purported merger were:
(1) to forcibly freeze out the public minority common shareholders of J & L Steel for only the cash payment of $29 per common share which price was unilaterally determined in a self-dealing non-arm's length transaction of JLI (owner of 81% of the common stock of J & L Steel) and its parent, The LTV Corporation;
(2) to acquire 100% of the beneficial interest of the common stock of J & L Steel in The LTV Corporation merely by voting the 100% interest of JLI-II held by its wholly owned subsidiary JLI and the 81% interest in J & L Steel also held by JLI in favor of the Merger Agreement;
(f) The fair value of J & L Steel common stock on November 21, 1974 (without regard to any depreciation or appreciation of the common stock in the consequence of the alleged merger) was substantially in excess of $29 per share.
12. Respondents are entitled to and seek a finding and determination by this Honorable Court under the plenary and exclusive jurisdiction enumerated in § 515 F of the Business Corporation Law, that the Merger Agreement is invalid and ineffective to accomplish any purpose including the purported transformation of the rights of public minority common stockholders of J & L Steel from the rights of stockholders to the rights of Dissenters under §§ 515, 908 of the Pennsylvania Business Corporation Law and that the stockholders' rights of such public minority stockholders are
[ 263 Pa. Super. Page 385] retained by them despite the provisions of the Merger Agreement.
C. Find and determine the fair value of the shares of common stock of J & L Steel held by the public minority stockholders, on November 21, 1974 (without regard to any depreciation or appreciation in consequence of the action taken) as directed under § 515 of the Pennsylvania Business Corporation [Law] . . . .*fn10 J & L Steel filed a reply to new matter, challenging the jurisdiction of the appraisal court to consider the matters alleged in new matter. The dissenters argued that the court did have jurisdiction on the theory that the appraisal action could not proceed unless the appraisal court first determined that there had been a valid merger. The court accepted this argument, and on March 29, 1977, entered an order and an accompanying opinion. In its opinion the court explained that the "precursive issue . . . is whether there was a valid merger." By its order the court directed:
[ 263 Pa. Super. Page 386]That a hearing be held on May 2, 1977 . . . limited to the issue of whether there was a valid merger . . . at which time all parties concerned may present evidence, arguments and briefs . . . .
J & L Steel filed this appeal pursuant to the Act of March 5, 1925, P.L. 23, § 1; 12 P.S. § 672, which affords an appeal from an order involving a question of jurisdiction.*fn11 See generally McCrory Corp. v. Girard Rubber Corp., 225 Pa. Super. 45, 307 A.2d 435 (1973) aff'd 459 Pa. 57, 327 A.2d 8 (1974).
Before examining the jurisdictional issue it is important to note just what the allegations in the dissenters' new matter say. They do not allege a defense to the action for appraisal and forced sale, which would represent a request that the status quo be maintained;*fn12 rather, they assert a claim that the appraisal court should find the merger invalid because of conduct akin to fraud ("to forcibly freeze out" the dissenters at an unfair price), and ask the court to grant relief either in the form of rescission of the merger or in damages. J & L Steel's objection thus is that in an appraisal action under sections 515 and 908 of the Business Corporation Law, the
[ 263 Pa. Super. Page 387] court lacks jurisdiction over a cause of action for rescission of a merger or damages.
In Zerbe Township School District v. Thomas, 353 Pa. 162, 44 A.2d 566, we stated principles which are here applicable, namely that even though a plaintiff have no standing to bring his action, even though his complaint be demurrable, even though he fail to establish its allegations, even though the court should finally conclude that the relief he seeks should not be granted, not any or all of these circumstances would enter into, much less determine, the question whether the court had jurisdiction of the litigation. We there pointed out that the test of jurisdiction was the competency of the court to determine controversies of the general class to which the case presented for its consideration belonged, -- whether the court had power to enter upon the inquiry, not whether it might ultimately decide that it was unable to grant the relief sought in the particular case ; that the Act of 1925 was not intended to furnish a short cut to a determination of the issues of law or fact raised by the pleadings and that it was not
[ 263 Pa. Super. Page 388] concerned with matters going to the right of the plaintiff to recover on his cause of action but only with his right to have his cause of action heard and determined.
Witney v. Lebanon City, supra, 369 Pa. at 311-12, 85 A.2d at 108.
The question before this court, therefore, is whether by use of the phrase, "the rights and remedies prescribed by this section shall be exclusive", the legislature intended to limit the power of the appraisal court to "enter upon the inquiry" here demanded by the dissenters, i. e., whether the merger was valid.
In answering this question we must adhere to the established principle that any act of the legislature said to limit the jurisdiction of a court must be strictly construed. See 1 Pa.C.S. § 1921; Commonwealth v. Barfod, 160 Pa. Super. 59, 50 A.2d 36 (1946); Kohn v. Philadelphia, 156 Pa. Super. 112, 39 A.2d 531 (1944). In other words, if the legislature's intention to limit jurisdiction is not clear, we should construe the act in question as imposing no limitation. Conversely, however, if the legislature's intention to limit jurisdiction is clear, we should construe the act in question as imposing the limitation, for it is our duty to give effect to legislative intent. See Casey v. Pennsylvania State University, 463 Pa. 606, 345 A.2d 695 (1975).
The phrase, "the rights and remedies prescribed by this section shall be exclusive," shows beyond reasonable question that the legislature intended that a dissenter's rights should some how be limited. As an initial proposition -- that is, on the basis of reading only the Business Corporation Law -- two possible conclusions might be reached regarding the nature of the intended limitation: either that the legislature intended to limit a dissenter's right to require the court to enter upon the inquiry, whether the merger was valid; or that the legislature was satisfied to have the court enter upon that inquiry, and intended that if the court
[ 263 Pa. Super. Page 389] decided that the merger was invalid, its power to grant relief should be limited to ordering an appraisal of the value of the dissenter's stock. The first limitation would be of jurisdiction, the second, not. Witney v. Lebanon City, supra.
Before the enactment of modern corporation statutes such as the Business Corporation Law, the unanimous consent of all shareholders was necessary to authorize fundamental corporate changes such as mergers or consolidations. The possibility for abuse was manifest, for "any small shareholder, regardless of motive, could thwart the will of all the rest and object to changes merely to be bought off at his nuisance value." Ballantine & Sterling, Upsetting Mergers and Consolidations: Alternative Remedies of Dissenting Shareholders in California, 27 Cal.L.Rev. 644 (1939). Strike suits and other actions to prevent mergers were common. Note, 34 Col.L.Rev. 1308 (1934). With the recognition that mergers and other fundamental corporate changes were often in the corporation's interest, and sometimes were even necessary for its survival, corporation statutes were enacted providing that a merger could be authorized by a majority of the shareholders. While permitting the will of the majority to control the corporate decision, the statutes provided a dissenting shareholder with the opportunity to remove himself from a fundamental corporate change he did not wish to be subject to, by electing to withdraw from the corporation and receive the value of his shares as determined by an appraisal. See Ballantine & Sterling, supra ; Lattin, Remedies of Dissenting Stockholders Under Appraisal Statutes, 45 Harv.L.Rev. 233, 234-44 (1931).
Statutes granting the appraisal remedy, however, did not prevent some dissenters from attempting to frustrate the majority's desire for merger, for in some early cases the courts interpreted the statutory appraisal remedy as an alternative rather than exclusive remedy, thus permitting an action to rescind a merger on the grounds of unfairness or fraud. See Ballantine & Sterling, supra. While in fact
[ 263 Pa. Super. Page 390] rescission was rarely granted, since the court tended to hold that if possible, an agreement should not be rescinded, the mere allowance or possibility of an action for rescission in practical effect tended to frustrate the will of the majority because it placed the plan of merger in doubt and delayed its final execution. In addition, allowance of the action tended to frustrate the desires of those who sought only the appraisal remedy because the decision to grant that remedy was delayed until the court rendered a decision on the merits of the action for rescission. See Ballantine & Sterling, supra.
When viewed against this background, the meaning of section 515 K of the Business Corporation Law becomes clear. By providing that the appraisal remedy "shall be exclusive" the legislature must have intended to avoid the difficulties -- as it saw them to be -- that would be experienced if the remedy was regarded as only an alternative to an action for rescission. The legislature's expectation, or hope, must have been that if it did not allow the court to entertain an action for rescission -- in other words, if it limited the court's power of inquiry, i. e., its jurisdiction, to making an appraisal -- it would achieve the objective of preventing dissenting shareholders who objected to a merger from frustrating or impeding the will of both the majority, who wanted the merger, and of other dissenters, who wanted an appraisal.
The correctness of this analysis may be demonstrated by considering the only possible alternative construction of the section 515 K -- i. e., that the legislature was satisfied to have the court enter upon the inquiry into whether the merger was valid, and intended only that if the court found the merger invalid, its power to grant relief should be limited to ordering an appraisal of the value of a dissenter's stock. It is difficult to imagine why the legislature should have such an intention. An inquiry into whether a merger is valid may be a prolonged and expensive proceeding. Why should
[ 263 Pa. Super. Page 391] the legislature say to a dissenter: "We will permit you to require the court to enter upon the inquiry into whether a merger is valid, but at the end of the inquiry, the most we will allow you to hope for is an order directing an appraisal of the value of your stock -- which is the same order you would have gotten if you had never gone to the expense of requiring the court to inquire into the validity of the merger." To attribute to the legislature the intention of offering a dissenter such a choice may not be absurd, but it is close to absurd.*fn13 We must therefore refrain from the attribution, specially when we have available an alternative construction of the statute, which, especially in view of the historical background, makes much more sense. See Schaefer v. Hilton, 473 Pa. 237, 373 A.2d 1350 (1977); Commonwealth v. Kates, 452 Pa. 102, 305 A.2d 701 (1973).*fn14
We recognize that the doctrine of exclusiveness has been subjected to some severe criticism by the commentators. [ 263 Pa. Super. Page 392]See e. g. Lattin, Remedies of Dissenting Stockholders Under Appraisal Statutes, 45 Harv.L.Rev. 233 (1931); Vorenberg, Exclusiveness of the Dissenting Stockholder's Appraisal Right, 77 Harv.L.Rev. 1189 (1964). Moreover, recently in Singer v. Magnovox Co., Del., 380 A.2d 969 (1977), the Supreme Court of Delaware reversed its prior case law and held that appraisal was not the exclusive remedy of dissenters to a merger. If the doctrine of exclusiveness were a product of our case law we might be inclined to re-examine the policy supporting it in light of the criticism directed against it. However, the question is one upon which our legislature has spoken; it has enacted the doctrine of exclusiveness, and has not been persuaded to abandon it. In these circumstances we must follow the legislature's directive, "for the enunciation of matters of public policy is fundamentally within the power of the legislature . . . [and] [i]t is not for us to legislate." Lurie v. Republican Alliance, 412 Pa. 61, 65, 192 A.2d 367, 370 (1963) quoting Commonwealth ex rel. Fox v. Swing, 409 Pa. 241, 186 A.2d 24 (1962).*fn15