Opinion ID: 1927508
Heading Depth: 1
Heading Rank: 3

Heading: Direct Liability of Bancorp

Text: Plaintiff seeks relief against the corporate defendants on a theory of conversion, claiming that they wrongfully exercised control over his Bancorp stock by way of a merger which failed to comply with Delaware law. Plaintiff first contends that the Court of Chancery misconstrued the prima facie elements of conversion by requiring that the plaintiff retain a property right in the stock after the conversion. Although the plaintiff expends considerable effort in support of this argument, the Court of Chancery never stated such a requirement. It held: To establish conversion, Plaintiff must show that he has a post-merger property right to the stock of Bancorp and that [Bank of Boston] holds that stock in contravention of his property right. See Drug, Inc. [ v. Hunt, Del.Supr.] 168 A. [87] at 93 [(1933)]. Plaintiff's conversion claim turns on whether Plaintiff retains a post-merger property interest in the stock of Bancorp. Arnold v. Society for Sav. Bancorp, Inc., Del.Ch., C.A. No. 12883, mem. op. at 5, 1995 WL 376919 (June 15, 1995) ( Arnold II ) (emphasis added). This is a correct statement of the law. Plaintiff correctly asserts that a claim of conversion requires that, at the time of the alleged conversion: (a) plaintiff held a property interest in the stock; (b) plaintiff had a right to possession of the stock; and (c) the defendant converted plaintiff's stock. Drug, Inc. v. Hunt, Del.Supr., 168 A. 87, 93-94 (1933). The Court of Chancery did not require that plaintiff have a property right after the conversion, but rather, after the merger. The distinction is important. Conversion is an act of dominion wrongfully exerted over the property of another, in denial of his right, or inconsistent with it. Drug, Inc., 168 A. at 93. A stockholder's shares are converted by `any act of control or dominion ... without the [stockholder's] authority or consent, and in disregard, violation, or denial of his rights as a stockholder of the company.' Id. (quoting Layman v. F.F. Slocomb & Co., Del.Supr., 76 A. 1094, 1095 (1909)). By requiring plaintiff to prove that he has a post-merger property right in the stock of Bancorp, the Court of Chancery was simply giving effect to the requirement that, to be actionable, the exercise of control must be wrongful. One can assume that a merger results in the exercise of control and dominion over a stockholder's shares since they become, by operation of law, shares of the surviving company. [5] This exercise of control is not in derogation of a stockholder's rights, however, if the merger is given legal effect. A stockholder simply has no right to shares in a disappearing corporation after an effective merger. If the merger divested Arnold of his right to hold Bancorp shares, he has no right to possession, and his shares were not converted. Thus, to establish conversion, plaintiff must show that the merger did not effectively exchange his Bancorp shares for those of Bank of Boston. Plaintiff asserts two flaws by which the merger is alleged to constitute wrongful exercise of control over his shares. First, he argues that the merger was not properly authorized since the merger agreement submitted to Bancorp's stockholders conditioned the merger on the approval of stockholders in compliance with applicable law. Because the stockholders received misleading information in the proxy statement, the stockholder vote was not taken in accordance with applicable law. Accordingly, the argument continues, a condition precedent to the merger was not satisfied and the merger was wrongful. Second, plaintiff argues that, since the stockholders voted for the merger based on material omissions from the proxy statement, the vote in favor of the merger did not satisfy the requirements of 8 Del.C. §§ 251 and 252. In either case, plaintiff argues, the corporate defendants wrongfully exercised control over his Bancorp stock. Both arguments rely on the premise that the merger statutes, in and of themselves, contain a duty of disclosure (equivalent in law, for example, to the express statutory duty to secure a majority vote of the outstanding stock) and that a violation of such disclosure duty renders the merger void ab initio. Plaintiff argues that, as a consequence, the corporate defendants had no power to convert his shares to shares of the surviving corporation at the time the certificate of merger was filed. The corporate defendants, however, complied with all of the express statutory requirements for the merger. [6] The merger statutes do not explicitly require the company to inform stockholders of all material facts. [7] The duty of disclosure is a judicially imposed fiduciary duty which applies as a corollary to the statutory requirements. Stroud v. Grace, Del.Supr., 606 A.2d 75, 87 (1992). [8] See also Cinerama, Inc. v. Technicolor, Inc., Del.Supr., 663 A.2d 1156, 1163 (1995). Plaintiff argues by analogy from Smith v. Van Gorkom, Del.Supr., 488 A.2d 858 (1985), that an uninformed stockholder vote does not satisfy the requirement in Section 251(c) of a stockholder vote. This Court held in Van Gorkom that: a director has a duty under 8 Del.C. § 251(b), along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Id. at 873. The argument is a non sequitur. The duty to act in an informed and deliberate manner when following the statutory procedure arises out of the fiduciary duties imposed upon directors by decisional law. Hence, the argument that the disclosure violation renders the statutory merger void must fail. Finally, the principle asserted by plaintiff would create uncertainty for third parties dealing with Delaware corporations. To assure themselves that the corporation is validly existing, third parties that transact business with the surviving corporation are obliged to investigate only the specific steps explicitly required under the merger statutes. If a disclosure violation committed in good faith renders a merger void, third parties would be required to consider whether constituent corporations had disclosed all material facts in connection with the proxy solicitation leading to the merger vote. It is an understatement to note that this is a significant burden and would create uncertainty about the validity of mergers. Since the corporate defendants had the legal power to file the certificate of merger once they complied with the statutory requirements, plaintiff has not established the elements of conversion. A good faith violation of the common law duty of disclosure may give rise, in certain circumstances, to equitable relief or to directorial liability. [9] But such a violation does not render void ab initio a merger which complies with the statutory requirements. [10]
Plaintiff contends that he is entitled to a quasi-appraisal remedy against Bancorp because: (1) it conceded that the Court of Chancery could impose such a remedy if the director defendants were found to have violated the duty of disclosure, and (2) such a remedy is appropriate where corporate defendants consummated a merger by way of a misleading proxy statement in violation of sections 251 and 252.
Plaintiff points to three instances in which he alleges that Bancorp conceded that a quasi-appraisal remedy could be imposed against it for disclosure violations by the director defendants. Plaintiff first points to the reply brief of Bancorp on the motion for a preliminary injunction, where it stated: This Court has directly rejected such arguments, holding that even in the context of an exchange offer, the courts may fashion a non-statutory quasi-appraisal remedy... [for] tendering shareholders if they are proven correct with respect to their non-disclosure or other fiduciary duty claims. In re Ocean Drilling & Exploration Co. Shareholders Litig., Del.Ch. [17 Del.J.Corp.L. 326, 341, 1991 WL 70028 (1991)]. While such a remedy involves a significant expenditure in terms of time and legal fees, the irreparability of any harm caused by the defendants' conduct is limited to a large extent by the availability of the quasi-appraisal remedy. Second, plaintiff claims that a statement by defense counsel during oral argument before the Court of Chancery on the preliminary injunction is a concession. This is the same statement which plaintiff claimed, in the first appeal, constituted a waiver of the Section 102(b)(7) protection of the director defendants. Arnold I, 650 A.2d at 1288-1289. There, counsel for all defendants stated: I believe the Court could attempt to determine the value of non-disclosures, so to speak, or determine a quasi-appraisal remedy. Id. at 1289. This Court held that this statement hardly constitutes the unequivocal facts necessary to find a voluntary, intentional relinquishment of the protection of Section 102(b)(7). Id. Plaintiff also asserts that Bancorp again conceded a quasi-appraisal remedy on appeal to this Court in Arnold I. In the Supplemental Answering Brief of all defendants, it was stated: Importantly, defendants noted in their briefs that the trial court could fashion appropriate quasi-appraisal or other remedies in the event plaintiff proved its case, but simultaneously stated that Section 102(b)(7) protected the directors from monetary damages. Contrary to plaintiff's contention, these positions are not inconsistent, since if plaintiff were to prove the proper elements of a cause of action (which he has not done), the remedies may run against the corporate defendants. Gaffin v. Teledyne, Inc., Del.Supr., 611 A.2d 467, 472 (1992) (relied upon by plaintiff recognizing that a corporation may be liable for disclosure violations if the elements of equitable or legal fraud are established); In Re [re] Ocean Drilling & Exploration Co. Sh. Litig. [17 Del.J.Corp.L. 326] (the case cited by defendants at oral argument and in briefs below, noting the availability of quasi-appraisal remedy against the corporate tender offeror). The Court of Chancery concluded that the corporate defendants consistently characterized quasi-appraisal as a remedy, not a cause of action. Arnold II, mem. op. at 11. The corporate defendants, according to the Court of Chancery, were merely asserting that, if there were a disclosure violation by the corporate defendants or a bad faith breach by the directors of their fiduciary duties, these wrongs could be remedied by a quasi-appraisal. Since the corporate defendants have not yet been found to have committed a disclosure violation and the directors' disclosure violation was a good faith omission, the concession is not applicable.
Plaintiff claims that quasi-appraisal is the appropriate remedy for a violation by the corporate defendants of sections 251 and 252. This is the same argument which plaintiff put forth to support his conversion claim. For the same reasons, a good faith disclosure violation by the directors does not violate the merger statutes.
Plaintiff has not cited a single case in which Delaware courts have held a corporation directly liable for breach of the fiduciary duty of disclosure. Fiduciary duties are owed by the directors and officers to the corporation and its stockholders. This Court has stated: The only defendant is the corporate entity ... so there are no fiduciary duty claims. [11] Plaintiffs cite only a single line of dictum from a 1993 Court of Chancery case, [12] and Federal Rule 14a-9 cases under section 14(a) of the 1934 Act. [13] In order to have standing under section 14(a), the plaintiff must have been a stockholder at the time of the alleged misstatement. [14] Hazen, 2 Securities Regulation § 11.3 at 223 (3rd ed. 1995). There is no purchase or sale standing requirement as in section 10(b) cases. Id. Section 14(a) and Rule 14a-9 make it unlawful for any person ... to solicit any proxy by way of a materially misleading proxy statement. Gould v. American Hawaiian Steamship Co., D.Del., 331 F.Supp. 981, 998 (1971). The corporation, as the issuer of the proxy statement, is directly liable under the statute and the rule. Id. Liability can be imposed against a corporation for negligently preparing a proxy statement. Gerstle v. Gamble-Skogmo, Inc., 2d Cir., 478 F.2d 1281 (1973). Individual directors can also be liable personally if they participated sufficiently in the drafting. See Salit v. Stanley Works, D.Conn., 802 F.Supp. 728, 733 (1992); Wilson v. Great Am. Indus., Inc., 2d Cir., 855 F.2d 987, 995 (1988). We see no legitimate basis to create a new cause of action which would replicate, by state decisional law, the provisions of section 14 of the 1934 Act. Such a result would represent a significant change to the existing matrix of duties which governs the relationship among stockholders, directors and corporations. If such a change is to be, it is best left to the General Assembly.