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Matched Legal Cases: ['§ 5500', '§ 5066', '§ 5068', '§ 10', '§ 78', '§ 4100', '§ 4300', '§ 4306', '§ 4607', '§ 16720', '§ 16726', '§ 16720', '§ 16756', '§ 904', '§ 963', '§ 19']

Jones v. H.F. Ahmanson Co, 1 Cal.3d 93 | Casetext
Jones v. H.F. Ahmanson Co.
1 Cal.3d 93 (Cal. 1969)
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Jonesv.H.F. Ahmanson Co.
Supreme Court of CaliforniaNov 7, 1969
Neuburger v. San Fran. Network, Inc.
1, p. 2-5, italics omitted.) "As stated in Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108 [(Jones)],…
Short v. Ware
The trial court rejected Appellants' claims that Ware, as a controlling majority member, acted wrongfully and…
holding "majority shareholders . . . have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner"
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Appeal from Superior Court of Los Angeles County, Stevens Fargo, Judge.
Darling, Mack, Hall Call and W. John Kennedy for Plaintiff and Respondent.
Edward M. Raskin, Gerald E. Lichtig, Mitchell, Silberberg Knupp and Howard S. Smith for Defendants and Respondents.
United Savings and Loan Association of California is a California chartered savings and loan association that first issued stock on April 5, 1956. Theretofore it had been owned by its depositors, who, with borrowing members, elected the board of directors. No one depositor had sufficient voting power to control the Association.
A California savings and loan association may be incorporated with shares, or stock, or both. (Fin. Code, §§ 5500, 6400.) Thus investors in California associations are identified as shareholders, i.e., holders of withdrawable shares of the association (Fin. Code, §§ 5066, 5067) or stockholders, i.e., holders of guarantee stock of the association (Fin. Code, §§ 5068, 5069). The principal distinctions between stock and shares of a savings and loan association are described in In re Pacific Coast Bldg.-Loan Assn. of Los Angeles, 15 Cal.2d 134, 142 [ 99 P.2d 251].
The Association has retained the major part of its earnings in tax-free reserves with the result that the book value of the outstanding shares has increased substantially. The shares were not actively traded. This inactivity is attributed to the high book value, the closely held nature of the Association, and the failure of the management to provide investment information and assistance to shareholders, brokers, or the public. Transactions in the stock that did occur were primarily among existing stockholders. Fourteen of the nineteen defendants comprised 95 percent of the market for Association shares prior to 1959.
Between 1959 and 1966 the book value of each share increased from $1,131 to $4,143.70.
H.F. Ahmanson Co. acquired a majority of the shares in May 1958. On May 14, 1959, the company owned 4,171 of the outstanding shares.
In 1958 investor interest in shares of savings and loan associations and holding companies increased. Savings and loan stocks that were publicly marketed enjoyed a steady increase in market price thereafter until June 1962, but the stock of United Savings and Loan Association was not among them. Defendants determined to create a mechanism by which they could participate in the profit taking by attracting investor interest in the Association. They did not, however, undertake to render the Association shares more readily marketable. Instead, the United Financial Corporation of California was incorporated in Delaware by all of the other defendants except defendant Thatcher on May 8, 1959. On May 14, 1959, pursuant to a prior agreement, certain Association stockholders who among them owned a majority of the Association stock exchanged their shares for those of United Financial, receiving a "derived block" of 250 United Financial shares for each Association share.
The number of shares in these derived blocks of United Financial stock was later modified by pro-rata surrenders and stock dividends in a series of transactions not pertinent here.
After the exchange, United Financial held 85 percent of the outstanding Association stock. More than 85 percent of United Financial's consolidated earnings and book value of its shares reflected its ownership of this Association stock. The former majority stockholders of the Association had become the majority shareholders of United Financial and continued to control the Association through the holding company. They did not offer the minority stockholders of the Association an opportunity to exchange their shares.
The balance reflected United Financial's ownership of three insurance agencies and stock in a fourth.
The first public offering of United Financial stock was made in June 1960. To attract investor interest, 60,000 units were offered, each of which comprised two shares of United Financial stock and one $100, 5 percent interest-bearing, subordinated, convertible debenture bond. The offering provided that of the $7,200,000 return from the sale of these units, $6,200,000 would be distributed immediately as a return of capital to the original shareholders of United Financial, i.e., the former majority stockholders of the Association. To obtain a permit from the California Corporations Commissioner for the sale, United Financial represented that the financial reserve requirement for debenture repayment established by Commissioner's Rules 480 subdivision (a) and 486 would be met by causing the Association to liquidate or encumber its income producing assets for cash that the Association would then distribute to United Financial to service and retire the bonds.
This distribution was equivalent to a $927.50 return of capital on each derived block of shares.
Rule 480 then provided: "Debentures, Notes and Evidences of Indebtedness, Unsecured. Ordinarily an application for a permit to sell and issue unsecured notes, evidences of indebtedness or debentures by a new or comparatively inactive company will be considered with disfavor:
Plaintiff alleges at Paragraph V(C)(3) of her complaint that United Financial represented to the Corporations Commissioner that: "The financial reserves for debentures repayment required by the Commissioner's Rules 480(a) and 486 would be satisfied by having United Financial exercise its control to cause the ASSOCIATION to liquidate or encumber its income producing assets for cash and then cause the ASSOCIATION to distribute the cash to United Financial in order to service and retire the debentures." Defendants dispute plaintiff's interpretation of United Financial's representations. They claim that United Financial did no more than promise to liquidate its own assets, i.e., the Association stock that it owned, and distribute those assets to service the debt. On appeal from a judgment entered after a demurrer has been sustained, a reviewing court must accept all properly pleaded allegations not inconsistent with other allegations as true. ( Stigall v. City of Taft, 58 Cal.2d 565, 567 [ 27 Cal.Rptr. 441, 375 P.2d 289]; Katenkamp v. Union Realty Co., 6 Cal.2d 765, 769 [ 59 P.2d 473].) No dispute can exist as to the interpretation of the allegation of the complaint here in question.
Defendants then proposed an exchange of United Financial shares for Association stock. Under this proposal each minority stockholder would have received approximately 51 United Financial shares of a total value of $2,400 for each Association share. When the application for a permit was filed with the California Corporations Commissioner on August 28, 1961, the value of the derived blocks of United Financial shares received by defendants in the initial exchange had risen to approximately $8,800. The book value of the Association stock was in excess of $1,700 per share, and the shares were earning at an annual rate of $615 per share. Each block of 51 United Financial shares had a book value of only $210 and earnings of $134 per year, 85 percent of which reflected Association earnings. At the hearings held on the application by the Commissioner, representatives of United Financial justified the higher valuation of United Financial shares on the ground that they were highly marketable, whereas Association stock was unmarketable and poor collateral for loans. Plaintiff and other minority stockholders objected to the proposed exchange, contending that the plan was not fair, just, and equitable. Defendants then asked the Commissioner to abandon the application without ruling on it.
The derived block sold for as much as $13,127.41 during 1960-1961. On January 30, 1962, the date upon which plaintiff commenced this action, the mean value was $9,116.08.
We are faced at the outset with defendants' contention that if a cause of action is stated, it is derivative in nature since any injury suffered is common to all minority stockholders of the Association. Therefore, defendants urge, plaintiff may not sue in an individual capacity or on behalf of a class made up of stockholders excluded from the United Financial exchange, and in any case may not maintain a derivative action without complying with Financial Code section 7616 Defendants invoke Shaw v. Empire Sav. Loan Assn., 186 Cal.App.2d 401 [ 9 Cal.Rptr. 204]. There the defendant majority stockholder, who controlled the board of directors, had the bylaws amended to delete a provision granting preemptive rights and thereafter caused the Association to issue shares to himself at less than market or book value, thus diluting plaintiff minority stockholder's interest. Plaintiff sought a declaration that he was entitled to maintain his proportionate interest in the Association either through purchase of a proportionate number of shares from the buyer or issuance of a proportionate number of additional shares to him by the Association on the same terms. The Court of Appeal concluded that inasmuch as the injury to the plaintiff was no different from that caused other minority stockholders, relief was available only in a derivative action.
Section 7616 provides: "No action may be instituted or maintained in the right of any association by any shareholder or certificate holder, as such. Such action may not be instituted or maintained by a stockholder of any association, unless all of the following conditions exist:
Analysis of the nature and purpose of a shareholder's derivative suit will demonstrate that the test, adopted in the Shaw case does not properly distinguish the cases in which an individual cause of action lies. (1) A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act. (2) Thus, "the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets." ( Gagnon Co., Inc. v. Nevada Desert Inn, Inc. 45 Cal.2d 448, 453 [ 289 P.2d 466]; Sutter v. General Petroleum Corp., 28 Cal.2d 525, 530 [ 170 P.2d 898, 167 A.L.R. 271]; see Ballantine Sterling, California Corporation Laws (4th ed. 1968) 168B.) (3) "A stockholder's derivative suit is brought to enforce a cause of action which the corporation itself possesses against some third party, a suit to recompense the corporation for injuries which it has suffered as a result of the acts of third parties. (4) The management owes to the stockholders a duty to take proper steps to enforce all claims which the corporation may have. When it fails to perform this duty, the stockholders have a right to do so. Thus, although the corporation is made a defendant in a derivative suit, the corporation nevertheless is the real plaintiff and it alone benefits from the decree; the stockholders derive no benefit therefrom except the indirect benefit resulting from a realization upon the corporation's assets. (5a) The stockholder's individual suit, on the other hand, is a suit to enforce a right against the corporation which the stockholder possesses as an individual." (Rules of Civ. Proc. for U.S. District Courts, Advisory Committee Notes (1966) H.R. Doc. No. 391, 89th Cong., 2d Sess. 40.)
In Shaw v. Empire Sav. Loan Assn., supra, 186 Cal.App.2d 401, the court noted the "well-established general rule that a stockholder of a corporation has no personal or individual right of action against third persons, including the corporation's officers and directors, for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the wrong thus suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike." ( 186 Cal.App.2d 401, 407.) From this the court reasoned that a minority shareholder could not maintain an individual action unless he could demonstrate the injury to him was somehow different from that suffered by other minority shareholders. ( 186 Cal.App.2d 401, 408.) In so concluding the court erred. (5b) The individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a substantial number of shareholders. If the injury is not incidential to an injury to the corporation, an individual cause of action exists. To the extent that Shaw v. Empire Sav. Loan Assn. is inconsistent with the opinion expressed herein, it is disapproved.
See Note, 49 Cal.L.Rev. 561, criticizing the result in Shaw and pointing out that the rule espoused by the Court of Appeal would leave the shareholder whose injury was not unique without a remedy if the corporation was not also injured by the same wrongful conduct.
Defendants take the position that as shareholders they owe no fiduciary obligation to other shareholders, absent reliance on inside information, use of corporate assets, or fraud. This view has long been repudiated in California. The Courts of Appeal have often recognized that majority shareholders, either singly or acting in concert to accomplish a joint purpose, have a fiduciary responsibility to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. (7) Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation's business. ( Brown v. Halbert, 271 Cal.App.2d 252 [ 76 Cal.Rptr. 781]; Burt v. Irvine Co., 237 Cal.App.2d 828 [ 47 Cal.Rptr. 392]; Efron v. Kalmanovitz, 226 Cal.App.2d 546 [ 38 Cal.Rptr. 148]; Remillard Brick Co. v. Remillard-Dandini Co., 109 Cal.App.2d 405 [ 241 P.2d 66].)
The extensive reach of the duty of controlling shareholders and directors to the corporation and its other shareholders was described by the Court of Appeal in Remillard Brick Co. v. Remillard-Dandini Co., supra, 109 Cal.App.2d 405, where, quoting from the opinion of the United States Supreme Court in Pepper v. Litton, 308 U.S. 295 [84 L.Ed. 281, 60 S.Ct. 238], the court held: (8) "`A director is a fiduciary . . . So is a dominant or controlling stockholder or group of stockholders . . . Their powers are powers of trust . . . (9) Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein . . . (10) The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain. If it does not, equity will set it aside.' (11) Referring directly to the duties of a director the court stated . . .: `He who is in such a fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency and honesty. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. He cannot by the use of the corporate device avail himself of privileges normally permitted outsiders in a race of creditors. He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. (12) For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. Where there is a violation of these principles, equity will undo the wrong or intervene to prevent its consummation.' This is the law of California." ( 109 Cal.App.2d 405, 420-421.) In Remillard the Court of Appeal clearly indicated that the fiduciary obligations of directors and shareholders are neither limited to specific statutory duties and avoidance of fraudulent practices nor are they owed solely to the corporation to the exclusion of other shareholders.
(13) Defendants would have us retreat from a position demanding equitable treatment of all shareholders by those exercising control over a corporation to a philosophy much criticized by commentators and modified by courts in other jurisdictions as well as our own. In essence defendants suggest that we reaffirm the so-called "majority" rule reflected in our early decisions. This rule, exemplified by the decision in Ryder v. Bamberger, 172 Cal. 791 [ 158 P. 753], but since severely limited, recognized the "perfect right [of majority shareholders] to dispose of their stock . . . without the slightest regard to the wishes and desires or knowledge of the minority stockholders; . . ." (p. 806) and held that such fiduciary duty as did exist in officers and directors was to the corporation only. The duty of shareholders as such was not recognized unless they, like officers and directors, by virtue of their position were possessed of information relative to the value of the corporation's shares that was not available to outside shareholders. In such case the existence of special facts permitted a finding that a fiduciary relationship to the corporation and other shareholders existed. ( Hobart v. Hobart Estate Co., 26 Cal.2d 412 [ 159 P.2d 958].)
We had occasion to review these theories as well as the "minority rule" that directors and officers have an obligation to shareholders individually not to profit from their official position at the shareholders' expense in American Trust Co. v. California etc. Ins. Co., 15 Cal.2d 42 [ 98 P.2d 497]. Each of the traditional rules has been applied under proper circumstances to enforce the fiduciary obligations of corporate officers and directors to their cestuis. ( Lawrence v. I.N. Parlier Estate Co., 15 Cal.2d 220 [ 100 P.2d 765] [directors may not engage in any transaction that will conflict with their duty to the shareholders or make use of their power or of the corporate property for their own advantage]; Hobart v. Hobart Estate Co., supra, 26 Cal.2d 412 [officer must disclose knowledge of corporate business to shareholder in transaction involving transfer of stock]; In re Security Finance Co., 49 Cal.2d 370 [ 317 P.2d 1] [majority shareholders' statutory powers subject to equitable limitation of good faith and inherent fairness to minority].) The rule that has developed in California is a comprehensive rule of "inherent fairness from the viewpoint of the corporation and those interested therein." ( Remillard Brick Co. v. Remillard-Dandini Co., supra, 109 Cal.App.2d 405, 420. See also, In re Security Finance Co., supra, 49 Cal.2d 370; Brown v. Halbert, supra, 271 Cal.App.2d 252; Burt v. Irvine Co., supra, 237 Cal.App.2d 828; Efron v. Kalmanovitz, supra, 226 Cal.App.2d 546.) The rule applies alike to officers, directors, and controlling shareholders in the exercise of powers that are theirs by virtue of their position and to transactions wherein controlling shareholders seek to gain an advantage in the sale or transfer or use of their controlling block of shares. Thus we held in In re Security Finance Co., supra, 49 Cal.2d 370, that majority shareholders do not have an absolute right to dissolve a corporation, although ostensibly permitted to do so by Corporations Code section 4600, because their statutory power is subject to equitable limitations in favor of the minority. We recognized that the majority had the right to dissolve the corporation to protect their investment if no alternative means were available and no advantage was secured over other shareholders, and noted that "[t]here is nothing sacred in the life of a corporation that transcends the interests of its shareholders, but because dissolution falls with such finality on those interests, above all corporate powers it is subject to equitable limitations." ( 49 Cal.2d 370, 377.)
The extension of fiduciary obligations to controlling shareholders in their exercise of corporate powers and dealings with their shares is not a recent development. The Circuit Court for the Southern District of New York said in 1886 that "[w]hen a number of stockholders combine to constitute themselves a majority in order to control the corporation as they see fit, they become for all practical purposes the corporation itself, and assume the trust relation occupied by the corporation towards its stockholders." ( Ervin v. Oregon Ry. Nav. Co. (S.D.N.Y. 1886) 27 F. 625, 631.) Professor Lattin has suggested that "the power to control, or rather its use, should be considered in no lesser light than that of a trustee to deal with the trust estate and with the beneficiary. Self-dealing in whatever form it occurs should be handled with rough hands for what it is — dishonest dealing. And while it is often difficult to discover self-dealing in mergers, consolidations, sale of all the assets or dissolution and liquidation, the difficulty makes it even more imperative that the search be thorough and relentless." (Lattin, Corporations (1959) 565.)
The increasingly complex transactions of the business and financial communities demonstrate the inadequacy of the traditional theories of fiduciary obligation as tests of majority shareholder responsibility to the minority. These theories have failed to afford adequate protection to minority shareholders and particularly to those in closely held corporations whose disadvantageous and often precarious position renders them particularly vulnerable to the vagaries of the majority. Although courts have recognized the potential for abuse or unfair advantage when a controlling shareholder sells his shares at a premium over investment value ( Perlman v. Feldmann, 219 F.2d 173 [50 A.L.R.2d 1134] [premium paid for control over allocation of production in time of shortage]; Gerdes v. Reynolds, 28 N YS.2d 622 [sale of control to looters or incompetents]; Porter v. Healy, 244 Pa. 427 [91 A. 428]; Brown v. Halbert, supra, 271 Cal.App.2d 252 [sale of only controlling shareholder's shares to purchaser offering to buy assets of corporation or all shares]) or in a controlling shareholder's use of control to avoid equitable distribution of corporate assets ( Zahn v. Transamerica Corp. (3rd Cir. 1946) 162 F.2d 36 [172 A.L.R. 495] [use of control to cause subsidiary to redeem stock prior to liquidation and distribution of assets]), no comprehensive rule has emerged in other jurisdictions. Nor have most commentators approached the problem from a perspective other than that of the advantage gained in the sale of control. Some have suggested that the price paid for control shares over their investment value be treated as an asset belonging to the corporation itself (Berle and Means, The Modern Corporation and Private Property (1932) p. 243), or as an asset that should be shared proportionately with all shareholders through a general offer (Jennings, Trading in Corporate Control (1956) 44 Cal.L.Rev. 1, 39), and another contends that the sale of control at a premium is always evil (Bayne, The Sale-of-Control Premium: the Intrinsic Illegitimacy (1969) 47 Texas L.Rev. 215).
The additional potential for injury to minority shareholders from majority dealings in its control power apart from sale has not gone unrecognized, however. The ramifications of defendants' actions here are not unlike those described by Professor Gower as occurring when control of one corporation is acquired by another through purchase of less than all of the shares of the latter: "The [acquired] company's existence is not affected, nor need its constitution be altered; all that occurs is that its shareholders change. From the legal viewpoint this methodological distinction is formidable, but commercially the two things may be almost identical. If . . . a controlling interest is acquired, the [acquired] company . . . will become a subsidiary of the acquiring company . . . and cease, in fact though not in law, to be an independent entity.
"This may produce the situation in which a small number of dissentient members are left as a minority in a company intended to be operated as a member of a group. As such, their position is likely to be unhappy, for the parent company will wish to operate the subsidiary for the benefit of the group as a whole and not necessarily for the benefit of that particular subsidiary." (Gower, The Principles of Modern Company Law (2d ed. 1957) p. 561.) Professor Eisenberg notes that as the purchasing corporation's proportionate interest in the acquired corporation approaches 100 percent, the market for the latter's stock disappears, a problem that is aggravated if the acquiring corporation for its own business purposes reduces or elminates dividends. (Eisenberg, The Legal Role of Shareholders and Management in Modern Corporate Decision-Making (1969) 57 Cal.L.Rev. 1, 132. See also, O'Neal and Derwin, Expulsion or Oppression of Business Associates (1961) passim; Leech, Transactions in Corporate Control (1956) 104 U.Pa.L.Rev. 725, 728; Comment, The Fiduciary Relation of the Dominant Shareholder to the Minority Shareholders (1958) 9 Hastings L.J. 306, 314.) The case before us, in which no sale or transfer of actual control is directly involved, demonstrates that the injury anticipated by these authors can be inflicted with impunity under the traditional rules and supports our conclusion that the comprehensive rule of good faith and inherent fairness to the minority in any transaction where control of the corporation is material properly governs controlling shareholders in this state.
Contrary to defendants' suggestion that Christophides v. Porco (S.D.N.Y. 1968) 289 F. Supp. 403 provides support for their argument that they owe no fiduciary duty to the minority and may act with impunity to cause a dimunition in the value of minority shares, the district court noted that although such conduct did not violate the Securities and Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b), the charge might have significance "in respect of some sort of a state-created claim for fiduciary breach" over which that court lacked jurisdiction. (289 F. Supp. at p. 407.)
The second course was that taken by defendants. A new corporation was formed whose major asset was to be the control block of Association stock owned by defendants, but from which minority shareholders were to be excluded. The unmarketable Association stock held by the majority was transferred to the newly formed corporation at an exchange rate equivalent to a 250 for 1 stock split. The new corporation thereupon set out to create a market for its own shares. Association stock constituted 85 percent of the holding company's assets and produced an equivalent proportion of its income. The same individuals controlled both corporations. It appears therefrom that the market created by defendants for United Financial shares was a market that would have been available for Association stock had defendants taken the first course of action.
The situation of minority stockholders and the difficulties they faced in attempting to market their savings and loan stock were described in The Savings and Loan Industry in California, a report prepared by the Stanford Research Institute for the California Savings and Loan Commissioner, and published by the Commissioner in 1960. The attractiveness of the holding company as a device to enhance liquidity was recognized: "The majority and minority stockholders in the original associations often found that they had difficulties in selling their shares at a price approximating their book value. Their main difficulties arose from the fact that book values and prices of shares often ran into many thousands of dollars, a price not generally suitable for wide public sale. These shares were usually owned by a relatively small number of stockholders. When one of them, or his heirs, wished to sell his shares, he had to negotiate with a buyer in this small group or attempt to find an outside purchaser. Minority stockholders had a special problem, because they could not sell control with their stock.
After United Financial shares became available to the public it became a virtual certainty that no equivalent market could or would be created for Association stock. United Financial had become the controlling stockholder and neither it nor the other defendants would benefit from public trading in Association stock in competition with United Financial shares. Investors afforded an opportunity to acquire United Financial shares would not be likely to choose the less marketable and expensive Association stock in preference. Thus defendants chose a course of action in which they used their control of the Association to obtain an advantage not made available to all stockholders. They did so without regard to the resulting detriment to the minority stockholders and in the absence of any compelling business purpose. Such conduct is not consistent with their duty of good faith and inherent fairness to the minority stockholders. Had defendants afforded the minority an opportunity to exchange their stock on the same basis or offered to purchase them at a price arrived at by independent appraisal, their burden of establishing good faith and inherent fairness would have been much less. At the trial they may present evidence tending to show such good faith or compelling business purpose that would render their action fair under the circumstances. On appeal from the judgment of dismissal after the defendants' demurrer was sustained we decide only that the complaint states a cause of action entitling plaintiff to relief.
(15) Defendants gained an additional advantage for themselves through their use of control of the Association when they pledged that control over the Association's assets and earnings to secure the holding company's debt, a debt that had been incurred for their own benefit. In so doing the defendants breached their fiduciary obligation to the minority once again and caused United Financial and its controlling shareholders to become inextricably wedded to a conflict of interest between the minority stockholders of each corporation. Alternatives were available to them that would have benefited all stockholders proportionately. The course they chose affected the minority stockholders with no less finality than does dissolution ( In re Security Finance Co., supra, 49 Cal.2d 370) and demands no less concern for minority interests.
Should it become necessary to encumber or liquidate Association assets to service this debt or to depart from a dividend policy consistent with the business needs of the Association, damage to the Association itself may occur. We need not resolve here, but note with some concern, the problem facing United Financial, which owes the same fiduciary duty to its own shareholders as to those of the Association. Any decision regarding use of Association assets and earnings to service the holding company debt must be made in the context of these potentially conflicting interests.
Plaintiff contends that she should have been afforded the opportunity to exchange her stock for United Financial shares at the time of and on the same basis as the majority exchange. She therefore proposes that upon tender of her Association stock to the defendants she be awarded the fair market value of a derived block of United Financial shares during 1960-1962 plus interest from the date of her action as well as a return of capital of $927.50 plus interest from the date the same was made to the former majority shareholders. In addition she seeks exemplary damages and other relief.
From the perspective of the minority stockholders of the Association, the transfer of control under these circumstances to another corporation and the resulting impact on their position as minority stockholders accomplished a fundamental corporate change as to them. Control of a closely held savings and loan association, the major portion of whose earnings had been retained over a long period while its stockholders remained stable, became an asset of a publicly held holding company. The position of the minority shareholder was drastically changed thereby. His practical ability to influence corporate decisionmaking was diminished substantially when control was transferred to a publicly held corporation that was in turn controlled by the owners of more than 750,000 shares. The future business goals of the Association could reasonably be expected to reflect the needs and interest of the holding company rather than the aims of the Association stockholders thereafter. In short, the enterprise into which the minority stockholders were now locked was not that in which they had invested.
Although the H.F. Ahmanson Co. owned a majority of the Association stock prior to the exchange, it appears that this company was privately held for the benefit of the Ahmanson family.
(18) The more familiar fundamental corporate changes, merger, consolidation, and dissolution, are accompanied by statutory and judicial safeguards established to protect minority shareholders. (Corp. Code, §§ 4100-4124, 4600-4693.) Shareholders dissenting from a merger of their corporation into another may demand that the corporation purchase their shares at the fair market value. (Corp. Code, § 4300.) If the shareholders and the corporation fail to agree on that value, the shareholders may call upon the court, which may in turn appoint independent appraisers to assist in evaluating the shares. (Corp. Code, §§ 4306, 4308, 4310.) This procedure makes possible determination of value unaffected by any market distortion caused by the merger ( Gallois v. West End Chemical Co., 185 Cal.App.2d 765 [ 8 Cal.Rptr. 596]) and enables stockholders in a closely held corporation whose shares are not publicly marketed to obtain an independent judgment as to the value of their shares. Protection of shareholder interests is achieved in voluntary corporate dissolution by judicial supervision to assure equitable settlement of the corporation's affairs. (Corp. Code, § 4607; In re Security Finance Co., supra, 49 Cal.2d 370.)
Judicial protection has also been afforded the shareholder who is the victim of a "de-facto merger" to which he objects. In Farris v. Glen Alden Corp., 393 Pa. 427 [ 143 A.2d 25], the Supreme Court of Pennsylvania extended the right theretofore given to shareholders dissenting from a merger to the shareholders of a corporation that had agreed to acquire all of the assets of another corporation in exchange for stock. The court noted that while shareholders were not entitled under the Pennsylvania Business Corporation Law to dissent if the corporation acquired the assets of another corporation without more, where the transaction had the effect of a merger the shareholders should have been given the rights of dissent and appraisal.
(20) Although a controlling shareholder who sells or exchanges his shares is not under an obligation to obtain for the minority the consideration that he receives in all cases, when he does sell or exchange his shares the transaction is subject to close scrutiny. When the majority receives a premium over market value for its shares, the consideration for which that premium is paid will be examined. If it reflects payment for that which is properly a corporate asset all shareholders may demand to share proportionately. ( Perlman v. Feldmann, supra, 219 F.2d 173 [50 A.L.R.2d 1134].) (19b) Here the exchange was an integral part of a scheme that the defendants could reasonably foresee would have as an incidental effect the destruction of the potential public market for Association stock. The remaining stockholders would thus be deprived of the opportunity to realize a profit from those intangible characteristics that attach to publicly marketed stock and enhance its value above book value. Receipt of an appraised value reflecting book value and earnings alone could not compensate the minority shareholders for the loss of this potential. Since the damage is real, although the amount is speculative, equity demands that the minority stockholders be placed in a position at least as favorable as that the majority created for themselves.
(21a) Plaintiff contends that the stipulated facts and the allegations of the complaint also state a cause of action for restraint of trade in violation of the Cartwright Act. (Bus Prof. Code, §§ 16720-16758.) That Act makes unlawful any "trust" (Bus. Prof. Code, § 16726), defined as a "combination of capital, skill or acts by two or more persons for [inter alia] the following purposes: (a) To create or carry out restrictions in trade or commerce . . . (c) To prevent competition in . . . purchase of . . . any commodity." (Bus. Prof. Code, § 16720.) Defendants do not contend that shares of stock are not a commodity within the contemplation of the Legislature when it adopted the Cartwright Act. We assume arguendo that the Cartwright Act applies to transactions in corporate shares.
Plaintiff has alleged that "the Delaware Exchange comprised an agreement to combine and a combination of the participants' capital and interest in Association guarantee stock which prevented and precluded free and unrestricted competition among themselves in the purchase of a commodity to wit: ASSOCIATION guarantee stock." (Complaint, par. III.) Read in conjunction with the further allegation that defendants comprised 95 percent of the market for guarantee stock the complaint thus alleges in substance that the effect of the defendants' action was to prevent competition in the only existing market for Association stock. The complaint does not allege, however, that this was a purpose of the defendants' actions or that defendants agreed among themselves not to purchase further shares of Association stock from the minority stockholders. Even accorded the liberal construction of pleadings required by section 452 of the Code of Civil Procedure, the allegations of the complaint when read in their entirety fail to supply the necessary element of purpose. (22) A cause of action for restraint of trade under the Cartwright Act or common law principles must allege both a purpose to restrain trade and injury to the business of the plaintiff traceable to actions in furtherance of that purpose. (Bus. Prof. Code, § 16756; Speegle v. Board of Fire Underwriters, 29 Cal.2d 34, 41 [ 172 P.2d 867]; Willis v. Santa Ana etc. Hospital Assn., 58 Cal.2d 806, 810 [ 26 Cal.Rptr. 640, 376 P.2d 568].)
(21b) Although it may be sufficient in some instances to allege solely the effect of such combination from which a purpose to eliminate competition may be inferred, when, as here, the defendant is alleged to have become the sole market for shares of stock of a single, closely held corporation and a purpose unrelated to eliminaton or reduction of competition affirmatively appears on the face of the complaint no such inference will be drawn. Failure of the plaintiff to allege either an agreement among the defendants not to purchase shares of Association stock for their own accounts or that this was a purpose of the transfer of their shares to United Financial renders the complaint insufficient insofar as it purports to state a cause of action for relief under the Cartwright Act. The lack of factual allegations of specific conduct directed toward furtherance of a conspiracy to eliminate or reduce competition in the trading of Association stock renders the complaint insufficient. ( Chicago Title Ins. Co. v. Great Western Financial Corp., 69 Cal.2d 305, 327 [ 70 Cal.Rptr. 849, 444 P.2d 481].)
(23) Defendants appeal from the judgment "only with respect to the overruling by the court of the . . . specifications of" the demurrer based on laches, uncertainty in designation of the identity and number of persons constituting the class plaintiff purports to represent, and failure to separately state multiple causes of action. An order overruling a demurrer is not appealable. (Code Civ. Proc., § 904.1 [formerly § 963]. See 3 Witkin, Cal. Procedure (1954) Appeal, § 19(a).) Although the judgment from which defendants appeal recites the order overruling the demurrer, the order remains interlocutory and nonappealable.
(24a) The exchange of Association stock for United Financial stock by defendants occurred on May 14, 1959. The first public offering of United Financial stock and sale of the debentures followed on or about June 10, 1960. United Financial's offer to the minority stockholders to purchase their stock was made in September 1960. The application for a permit to exchange United Financial shares for Association stock held by the minority stockholders was filed on August 21, 1961, and the hearings thereon were held on September 29 and October 11, 1961. United Financial's request that the application be withdrawn followed. The plaintiff commenced this action on January 30, 1962.
The delay in initiating this action was not so long as to be unreasonable and to constitute laches as a matter of law. (25) It is well established that mere lapse of time without showing of prejudice to the defendant does not constitute laches. ( Gerhard v. Stephens, 68 Cal.2d 864, 904 [ 69 Cal.Rptr. 612, 442 P.2d 692]; Beverage v. Canton Placer Min. Co., 43 Cal.2d 769, 777 [ 278 P.2d 694]; Maguire v. Hibernia Sav. Loan Soc., 23 Cal.2d 719, 746 [ 146 P.2d 673, 151 A.L.R. 1062]; McGibbon v. Schmidt, 172 Cal. 70 [ 155 P. 460].) (24b) Since prejudice to the defendants does not appear from the complaint and stipulated facts, the order of the trial court overruling the demurrer on that ground was proper.
Defendants' reliance on that case is misplaced. Plaintiff here designates the class as the minority stockholders of the Association. Those similarly situated are easily identified as all of those persons who continued to hold Association stock subsequent to the defendants' exchange of shares for United Financial shares. There is no suggestion that the class is limited to persons who agree with the plaintiff. The further identification of the class as those persons who agree to share in plaintiff's litigation expense does no more than state the applicable rule with regard to equitable apportionment of the litigation expenses incurred by a plaintiff who successfully prosecutes an action on behalf of a class. ( Sprague v. Ticonic Nat. Bank, 307 U.S. 161, 166 [83 L.Ed. 1184, 1186, 59 S.Ct. 777]; Estate of Reade, 31 Cal.2d 669, 672 [ 191 P.2d 745]; Farmers etc. Nat. Bank v. Peterson, 5 Cal.2d 601, 607 [ 55 P.2d 867].)
The rule of this jurisdiction with respect to class actions is found in section 382 of the Code of Civil Procedure, which provides in relevant part: ". . . when the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all." We have held that the two requisites of a class action under this section are an "ascertainable class . . . and . . . a well defined community of interest in the questions of law and fact involved affecting the parties to be represented." ( Daar v. Yellow Cab Co., 67 Cal.2d 695, 704 [ 63 Cal.Rptr. 724, 433 P.2d 732].) It is apparent that the requisite community of interest exists among the minority shareholders of the Association and that the class is readily ascertainable. The demurrer was properly overruled.
I dissent. I would affirm the judgment in favor of defendants for the reasons expressed by Mr. Justice Shinn and Mr. Justice Moss in the opinions prepared by them for the Court of Appeal in Jones v. H.F. Ahmanson Co., (Cal.App.) 76 Cal.Rptr. 293.
The petition of the defendants and appellants for a rehearing was denied December 10, 1969, and the opinion was modified to read as printed above. Coughlin, J. pro tem., sat in place of Mosk, J., who deemed himself disqualified. McComb, J., was of the opinion that the petition should be granted.