Opinion ID: 2994681
Heading Depth: 2
Heading Rank: 1

Heading: Legality of Ownership Restructuring

Text: Plan The first issue raised in these appeals concerns the district court’s decision to allow Aetna Plywood to go forward with its proposed ownership restructuring plan. The class contends that the restructuring plan violates Delaware corporate law by giving away control of the company for less than fair market value. Specifically, the class alleges that, in adopting the restructuring plan, Aetna Plywood’s board of directors breached its fiduciary duty to maximize the value a corporation’s shareholders receive in a corporate control transaction./1 See Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34, 48 (Del. 1994). The district court rejected the class’s objections on the ground that the company’s stock belonged to Davis and he could do with it what he wanted. The district court’s conclusion rests on a faulty premise, however; Davis’s stock went to the class (and even then only after being sold to Aetna Plywood), while the stock given to the company’s attorneys and sold to the management group was newly-issued stock. On appeal, the Montgomery defendants attempt to defend the district court’s decision on the grounds that (1) the class lacks standing to challenge the restructuring plan under Delaware law; and (2) the proposed transaction did not trigger any fiduciary duty toward the class to maximize value received. We only discuss the first of these contentions, however, as it is dispositive. Delaware law requires that the plaintiff in a derivative suit (the form that the parties assume the class’s objections take) be a stockholder of the corporation at the time of the challenged transaction. 8 Del. Code sec. 327. To determine whether the class has standing under this rule, we must determine who is a stockholder and what is the time of the challenged transaction for purposes of 8 Del. Code sec. 327. Taking the second question first, a review of Delaware law reveals that the time of the challenged transaction depends on precisely what about the transaction is being challenged. Where the plaintiff complains of the terms, rather than the actual consummation, of a transaction, the time of the challenged transaction is when the terms of the transaction are established. 7547 Partners v. Beck, 682 A.2d 160, 161-63 (Del. 1996). For instance, in 7547 Partners, the Delaware Supreme Court considered a case involving a plaintiff that bought stock in an initial public offering at a price much higher than that paid by certain corporate executives to whom the corporation’s board of directors had decided to sell stock in a private placement accompanying the public offering. Id. at 161. The court determined that the plaintiff lacked standing because the challenged transaction was the decision to set the price for the private placement, a decision that took place before the plaintiff bought its stock. Id. at 162- 63. The court reasoned that because the plaintiff challenged only the terms of the private placement, rather than the technicality of its consummation, the challenged transaction took place when the terms of the private placement were established. Id. at 163. Here, the class complains only about one of the terms of the restructuring plan--the price at which the board of directors sold control of Aetna Plywood--a term that was announced (and therefore established) one month prior to final approval of the parties’ settlement agreement. Thus, the challenged transaction took place before the class came into actual possession of the Aetna Plywood stock promised to it. This conclusion brings into focus the question we have yet to answer--who, for standing purposes, is a stockholder. In light of our conclusion about when the transaction the class challenges took place, the class will have standing only if a prospective stockholder can be considered a stockholder for standing purposes. Unfortunately for the class, Delaware law treats actual stockholders and prospective stockholders quite differently. Most significantly, prospec tive stockholders are not owed fiduciary duties. Anadarko Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171, 1174-77 (Del. 1988). Fiduciary duties arise only after a stockholder comes into actual possession of stock, regardless of how certain the stockholder’s future ownership was when the challenged transaction took place. Id. For instance, in Anadarko Petroleum, the Delaware Supreme Court held that directors of a wholly-owned corporate subsidiary about to be spun off owed no fiduciary duties to the post-spin-off stockholders even though those stockholders had been identified and those holders’ future stock interests were being traded on the New York Stock Exchange. Id. The court reasoned that because the prospective stockholders did not acquire legal or equitable title over the stock of the subsidiary until the day the stock was distributed, they were not owed fiduciary duties until that day. Id. at 1176. That prospective stockholders are not owed fiduciary duties under Delaware law leads us to conclude that prospective stockholders would not be considered stockholders for standing purposes. Accordingly, we hold that the class was not a stockholder at the time of the transaction it challenges. In an effort to avoid the necessary implication of this conclusion--that it lacks standing to challenge the restructuring plan under Delaware law-- the class contends that ERISA and the settlement agreement itself grant the class standing. Certainly the settlement agreement and perhaps ERISA as well grant the class standing to challenge the restructuring plan, but, so far as we can tell, neither grants standing to raise a challenge under Delaware law that Delaware law itself would not permit. And, the class has not cited any legal authority to the contrary, nor has it articulated a theory that suggests we should rule otherwise. As the class only challenges the restructuring plan under Delaware law, it must satisfy the standing requirements of 8 Del. Code sec. 327./2 Because it was not a stockholder at the time of the challenged transaction, the class can not do so. Therefore, we must affirm the district court’s rejection of the class’s challenge to Aetna Plywood’s ownership restructuring plan.