Opinion ID: 440317
Heading Depth: 1
Heading Rank: 1

Heading: standard of review

Text: 17 In reviewing a grant of summary judgment our task is identical to that of the trial court. We must view the evidence and inferences therefrom in the light most favorable to the party opposing the motion for summary judgment. Twentieth Century-Fox Film Corp. v. MCA, Inc., 715 F.2d 1327, 1328-29 (9th Cir.1983); British Airways Board v. Boeing Co., 585 F.2d 946, 951 (9th Cir.1978) cert. denied, 440 U.S. 981, 99 S.Ct. 1790, 60 L.Ed.2d 241 (1979). We then determine whether, on the basis of the pleadings, affidavits, depositions and other evidence available at the time the motion was made, there is any genuine issue of fact in dispute and whether the moving party is entitled to judgment as a matter of law. M/V American Queen v. San Diego Marine Const. Corp., 708 F.2d 1483, 1487 (9th Cir.1983). We review the district court's construction of California law de novo. In re William McLinn, 739 F.2d 1395 (9th Cir.1984). 18 II. The Role of the Board of Directors in a Negotiated Merger Transaction Under the California Corporate Code 19 The district court rejected plaintiff's claim that defendant Northwest tortiously induced Pay Less to breach its merger agreement with Jewel on the ground, inter alia, that the Jewel-Pay Less agreement was not a valid contract. The district court ruled that under California law, a merger agreement entered into by the boards of directors of two corporations has no legal effect prior to shareholder approval. 20 The view of negotiated merger transactions expressed by the district court is at odds with the provisions of the California Corporate Code. According to the district court's ruling, the board of directors of a corporation may never bind itself in a merger agreement to exert its best efforts to obtain the requisite shareholders' approval or to forbear from entering into a competing arrangement with another firm pending approval or rejection by the shareholders. In so ruling, the district court has circumscribed the role of corporate boards of directors in a manner which contravenes their traditional management function and which is contrary to the law of California. 21 The California Corporate Code provides in the broadest terms that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board. Cal.Corp. Code Sec. 300(a) (West Supp.1984). Accordingly, directors routinely exercise their business judgment to determine whether or not to enter into contracts or to embark on new business ventures. Lewis v. Anderson 615 F.2d 778, 781-82 (9th Cir.1979) cert. denied, 449 U.S. 869, 101 S.Ct. 206, 66 L.Ed.2d 89 (1980); 2 W. Fletcher, Cyclopedia of the Law of Private Corporations, Sec. 505 (1981). 5 22 The role of the board of directors of a corporation embroiled in a corporate control controversy is not different. Courts have uniformly held that when faced with a hostile takeover bid, corporate directors must exercise their business judgment in accordance with their function as the managers of the firm and with their role as fiduciaries to all of the corporation's shareholders. E.g., Klaus v. Hi-Shear Corp., 528 F.2d 225, 233-34 (9th Cir.1975); Panter v. Marshall Field & Co., 646 F.2d 271, 288 (7th Cir.1981). Similarly, the initial decision as to whether to enter into a negotiated merger transaction is one which should be made in accordance with the business judgment of the board. While the actions of a board of directors in a corporate control transaction may be subject to special scrutiny under both the business judgment rule and the fairness test, see, Jones v. H.F. Ahmanson & Co., 1 Cal.3d 93, 108, 81 Cal.Rptr. 592, 460 P.2d 464 (1969); H. Henn & John Alexander Laws of Corporations, 637-644, 656-663, 986 (3d ed. 1983); Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan.L.Rev. 819, 821-31 (1981), there is nothing so unique about a negotiated merger transaction as to warrant the extraordinary step of sterilizing the directors in favor of direct and exclusive action by the shareholders. See Lipton, Takeover Bids in the Target's Boardroom, 35 Bus.Law 101, 104 (1979); Cal.Corp. Code Sec. 1100 (West 1977). Cf. Cheff v. Mathes, 41 Del.Ch. 494, 199 A.2d 548 (1964) (directors actions in averting takeover will be upheld by court if reasonable and taken in good faith). 23 Far from diminishing the role of the board in negotiated merger transactions, the California Corporate Code confers considerable latitude on the directors. The Code explicitly provides that the board has broad authority to determine whether to merge its firm, to select a merger partner, and to negotiate the terms on which such a transaction is to take place. To this end, section 1101 of the Code specifically states that a merger agreement embodying these decisions must be negotiated and signed by the two boards prior to consummation of the transaction. 6 24 Other provisions of California's Corporate Code strongly indicate that merger agreements contemplated by section 1101 are considered binding contracts between the two boards. Section 1200 of the California Corporate Code requires that all corporate reorganizations, a definition which includes negotiated merger transactions pursuant to Chapter 11 of the Code, must be approved by the board of each corporation which will either acquire or divest itself of property or assets in a non-cash merger. 7 But where consummation of such a transaction requires shareholder approval, the shareholders need only approve the principal terms of a reorganization. Cal.Corp. Code Sec. 1201(a) (West Supp.1984). Moreover, section 1201(f) further provides that [A]ny [shareholder] approval required by this section may be given before or after the approval by the board. 8 25 We therefore conclude that the California Corporate Code contemplates that the boards of two corporations seeking merger or reorganization under Chapters 11 and 12 of the California Corporate Code may enter into a binding merger agreement governing the conduct of the parties pending submission of the agreement to the shareholders for approval. The critical issue in the appeal before us then becomes whether such a merger agreement can be exclusive, i.e., whether the board may lawfully agree in such a merger agreement to forbear from entering into competing and inconsistent agreements until the shareholders' vote occurs. 26 In considering the question whether a board of a California corporation is precluded from entering into an exclusive merger agreement, we are aware that some commentators have advocated the theory that in a hostile takeover battle the board should remain passive and not engage in defensive tactics. See e.g., Easterbrook and Fishel, Takeover Bids, Defensive Tactics and Shareholders' Welfare 36 Bus.Law 1733 (1981); Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan.L.Rev. 819 (1981). Recently, some of these commentators have proposed that even in a negotiated merger transaction the board's role should be limited to the role of auctioneer, i.e., the board should neither express preferences among potential merger partners nor actively negotiate, but should simply solicit bids and pass them on to the shareholders. See Bebchuck, The Case for Facilitating Competing Tender Offers: A Reply and Extension, 35 Stan.L.Rev. 23, 25, (1984) (The auctioneering rule has an important and desirable effect not only on unsolicited takeovers, but also on negotiated acquisitions ... because such acquisitions take place against the background of a possible unfriendly tender offer by the acquirer or by a competing potential buyer.); Gilson, Seeking Competitive Bids Versus Pure Passivity in Tender Offer Defense, 35 Stan.L.Rev. 51, 66 n. 36 (if defensive tactics in hostile takeovers were prohibited, then managers' incentives in negotiated merger transactions would more closely parallel those of the shareholders: Get the best price (including management perquisites) possible.). 27 While we express no view on the policy merits of that proposal, we are convinced, after examining California law, that the Corporate Code of California does not adopt the auction model in regulating negotiated acquisitions. To the contrary, California's regulatory scheme for negotiated merger transactions is predicated on the idea that the board of directors of each merging entity will deliberate upon a decision and then negotiate and execute a merger agreement of the type that it, in its business judgment, deems best for the shareholders. See California Corporate Code Chapters 11 and 12 (West Supp.1984). 28 In light of California's statutory scheme preserving the board's traditional management function in the case of corporate control transactions, we see no reason to conclude that the drafters of the Corporate Code intended to deprive a corporate board of the authority to agree to refrain from negotiating or accepting competing offers until the shareholders have considered an initial offer. That there is no statutory intent to prohibit a board from entering an exclusive merger contract can be readily inferred from the provisions of the California Corporate Code relating to merger agreements that we have previously discussed. These provisions reinforce, and in some circumstances, serve to augment the board's basic discretion as authorized in section 300 of that Code. They seem to us to provide for a proper devolution of responsibility in a negotiated merger transaction: Full initial discretion regarding the terms of the agreement lies with the board, the ultimate determination with the shareholders. 29 The Code's provision for abandonment of a merger by the board is an example of the broad discretion conferred on boards of directors. That section provides that [t]he board may, in its discretion, abandon a merger, subject to the contractual rights, if any, of third parties, including other constituent corporations, without further approval by the outstanding shares (Section 152), at any time before the merger is effective. California Corporate Code Sec. 1105 (West 1977). 9 The legislative committee report accompanying the latest revision of the California Corporate Code makes it clear that the provision is intended to extend the board's authority to act on behalf of its corporation beyond the time at which the shareholders have considered a transaction. Report of the Assembly Select Committee on the Revision of the California Corporate Code. 10 30 We do, of course, recognize that a board may not lawfully divest itself of its fiduciary obligations in a contract. See Great Western Producers Cooperative v. Great Western United Corp., 200 Colo. 180, 613 P.2d 873 (1980); Trumbo v. Bank of Berkeley, 77 Cal.App.2d 704, 176 P.2d 376 (1947) (contract in which corporate director attempts to bind his discretionary vote violates public policy and is void); Chapin v. Benwood Foundation, Inc., 402 A.2d 1205, 1210 (Del.Ch.1979) aff'd, Harrison v. Chapin, 415 A.2d 1068 (Del.1980) (a board of directors cannot legally bind itself in advance to appoint designated persons to fill vacancies on the board). However, to permit a board of directors to decide that a proposed merger transaction is in the best interests of its shareholders at a given point in time, and to agree to refrain from entering into competing contracts until the shareholders consider the proposal, does not conflict in any way with the board's fiduciary obligation. Cf. Belden Corp. v. InterNorth, Inc., 90 Ill.App.3d 547, 45 Ill.Dec. 165, 413 N.E.2d 98, 102 (1980) (in refusing to enjoin a tender offer which the plaintiff alleged constituted tortious interference with the merger agreement the court stated that the merger agreement gives Belden [acquiring firm] an unequivocal right to receive the performance of Crouse's [target firm] management, i.e., Belden's entitled to have the merger presented and recommended to Crouse's shareholders ... Belden therefore has an enforceable expectation with regard to the performance of Crouse's management, but has a mere expectancy with respect to consummation of the merger.); Pennzoil Co. v. Getty Oil Co., No. 7425 slip op. (Del.Ch. Feb. 6, 1984). 31 An exclusive board-negotiated merger agreement may confer considerable benefits upon the shareholders of a firm. A potential merger partner may be reluctant to agree to a merger unless it is confident that its offer will not be used by the board simply to trigger an auction for the firm's assets. Therefore, an exclusive merger agreement may be necessary to secure the best offer for the shareholders of a firm. Cf. Grossman & Hart, Disclosure Laws and Takeover Bids, 35 J.Fin. (1980) (competition in takeovers may deter firms from investing in research on potential target and from making initial bid). An exclusive merger agreement may also be the least costly means of merging the firm. It increases the likelihood that the firm can be merged without expensive litigation or proxy battles. 32 It is true that in certain situations the shareholders may suffer a lost opportunity as a result of the board's entering into an exclusive merger agreement. As the district court took great pains to point out, subsequent to a contractual commitment unanticipated business opportunities and exigencies of the marketplace may render a proposed merger less desirable than when originally bargained for. But all contracts are formed at a single point in time and are based on the information available at that moment. The pursuit of competitive advantage has never been recognized at law as a sufficient reason to render void, or voidable, an otherwise valid contract, and in our view, it was not the intention of the drafters of California's Corporate Code to make this any less true of negotiated merger agreements. See Restatement (Second) of Torts, Sec. 768(2) (1979). 33 Moreover, in many ways shareholders have more safeguards from market losses in board negotiated transactions than in others. Even after the merger agreement is signed a board may not, consistent with its fiduciary obligations to its shareholders, withhold information regarding a potentially more attractive competing offer. See, e.g., U.S. Smelting, Refining and Mining Co. v. Clevite Corp., (1969-70 Transfer Binder) Fed.Sec.L.Rep. (CCH) Sec. 192, 691 (N.D.Ohio 1968); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1295 (2d Cir.1973). While the board can bind itself to exert its best efforts to consummate the merger under California law, 11 it can only bind the corporation temporarily, and in limited areas, 12 pending shareholder approval. The shareholders retain the ultimate control over the corporation's assets. They remain free to accept or reject the merger proposal presented by the board, to respond to a merger proposal or tender offer made by another firm subsequent to the board's execution of exclusive merger agreement, or to hold out for a better offer. Given the benefits that may accrue to shareholders from an exclusive merger agreement, we fail to see how such an agreement would compromise their legal rights. 34 There are, no doubt, advantages to both exclusive and nonexclusive merger agreements. Determination of the best contract for a given transaction will depend on the particular corporations involved, the intentions of their respective boards, and the preferences for risk and return of both the board and the shareholders. Our role is not to pronounce on general matters of corporate strategic planning. It is, however, our duty to point out that the fears expressed by the district court that exclusive merger agreements are anticompetitive and contrary to public policy because they subvert the welfare of shareholders are without merit. 35 We therefore hold that the district court erred in ruling that a merger agreement between boards of directors is of no legal effect prior to shareholder approval. To the contrary, we hold that under California law a corporate board of directors may lawfully bind itself in a merger agreement to forbear from negotiating or accepting competing offers until the shareholders have had an opportunity to consider the initial proposal. 13 36