Court Opinion

ID: 9656245
Source: CourtListenerOpinion
Date Created: 2023-08-23 19:44:19.374973+00
Date Added: 2024-06-11T18:13:30.690744
License: Public Domain

White, J.,
dissenting.
The majority opinion ignores basic principles of contract law which, if properly integrated with statutory corporate law, would have resulted in a partial affirmance of the district court’s order. A “suitor” corporation now has no contractual rights with respect to actions by the board of a “target” corporation, despite agreements, as here, pledging only that the target’s board of directors will use its best efforts to promote the merger with its shareholders. Because I do not agree with the majority’s selective application of the law, I dissent.
At the height of negotiations between ConAgra and MBPXL, the latter proposed a “best efforts” clause for inclusion in the agreement. This clause reads:
The respective Boards of Directors and principal officers of each of ConAgra and MBPXL shall take all such further action as may be necessary or appropriate in order to effectuate the transactions contemplated hereby including recommending to their respective shareholders that the merger be approved; provided, however, nothing herein contained shall relieve either Board of Directors of their continuing duties to their respective shareholders.
*159(Emphasis supplied.)
The agreement also states:
The Board of Directors of MBPXL will duly call and use its best efforts to cause to be held a special meeting of the shareholders of MBPXL on December 15, 1978, or the earliest practicable date thereafter, and has directed that this Agreement and the Merger Agreement be submitted to a vote at such meeting, and will recommend that the shareholders of MBPXL vote in favor of approval of this Agreement and the Merger Agreement.
The MBPXL Corporation breached the promises contained in both paragraphs. The majority holds that the promisee is afforded no relief for those breaches. The majority mentions an inconsistency between the language before and after the proviso in the “best efforts” clause; however, a balanced application of contract and corporate law yields no inconsistency, and it respects the viability of both the business judgment rule and the duty of due care.
The language of the agreement allows the boards of both corporations seeking to merge or reorganize to enter into a binding contract governing the conduct of the parties pending submission of the agreement to the shareholders for approval. To view the language as the majority does circumscribes the role of corporate boards of directors in contravention of their traditional management function, the exercise of their business judgment. There is nothing unique about the decision to enter into a negotiated merger transaction that would warrant its removal from the realm of ordinary business affairs of the corporation, the management of which is entrusted to the board of directors. Indeed, consistent with its fiduciary duties, a board of directors is in the best position to provide guidance for shareholders of a corporation considering a buy-out or merger.
To adhere to the majority’s position also ignores principles of contract law. A contract of this sort is properly interpreted as a binding agreement indicating a present undertaking, with the parties contemplating the satisfaction of certain further conditions before a duty to perform arises. Mid-Continent Telephone Corp. v. Home Telephone Co., 319 f. Supp. 1176 *160(N.D. Miss. 1970). The critical distinction between this interpretation and that of the majority is the difference between a condition precedent which must be performed before the agreement of the parties becomes a binding contract and one which must be fulfilled before the duty to perform an existing contract arises. Mid-Continent, supra. See, also, Omaha Public Power Dist. v. Employers’ Fire Insurance Co., 327 F.2d 912 (8th Cir. 1964); Restatement (Second) of Contracts §§ 224-226 (1981).
The majority’s interpretation does not agree with the language of the agreement at issue. Paragraph 9 of the “Agreement and Plan of Reorganization and Merger” provides:
Conditions Precedent to Obligation of ConAgra. The obligation of ConAgra to perform and observe the covenants, agreements and conditions hereof to be performed and observed by ConAgra at or before the Effective Time of the Merger, and to effect the Merger, shall be subject to the satisfaction of the following conditions, which conditions may be waived in writing by ConAgra: ....
One of the conditions listed below this clause was the following: “MBPXL Shareholder Approval. . . . [T]he Merger Agreement shall have been approved by the shareholders of MBPXL as provided in the Delaware General Corporation Law.” I interpret the conditions precedent in this agreement to mean those conditions which must be satisfied before the duty to perform on an existing contract arises, and not as conditions which must be satisfied before a binding contract exists at all.
The majority relies on case law either quoted out of context or entirely inapposite to the facts and law at issue. The majority uses Gt. West.Prod. v. Gt. West.United, 200 Colo. 180, 613 P.2d 873 (1980), in support of the proposition that a corporate director must act in the best interests of shareholders and is obligated to the duties of “fidelity, good faith, and prudence with respect to the interests of security holders, as well as the duty to exercise independent judgment with respect to matters committed to the discretion of the board of directors and lying ‘at the heart of the management of the corporation.’ ” *161Gt. West.Prod., supra at 186, 613 P.2d at 878. The majority also relies on that case for the proposition that directors of a target company cannot agree to assist the suitor company by pledging their best efforts if by doing so the directors of the target company violate their legal duties to target’s stockholders. Finally, the majority asserts that Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), makes these duties applicable to a director’s acts in recommending a proposed merger.
In Gt. West.Prod., supra, the Supreme Court of Colorado was required to interpret the obligations imposed by a “best efforts” clause. Great Western Producers Co-operative had agreed to buy all the stock of Great Western Sugar Company, a wholly owned subsidiary of Great Western United Corporation. Pursuant to lengthy negotiations, United and the co-op executed a purchase agreement, which was unanimously approved by United’s board of directors. Because the sugar company was United’s major asset, Delaware law required that the sale be approved by the corporation’s stockholders. A clause in the agreement stated that “United will use its best efforts to obtain the approval of its shareholders and debentureholders whose approval is solicited.” Gt. West.Prod., supra at 182, 613 P.2d at 875.
During the interval between the execution of the agreement and the shareholders’ meeting, the price of sugar, the seller’s principal commodity, rose dramatically. Considering the effect of this price change on the value of the corporation, United’s board of directors informed its shareholders that it could no longer recommend the sale at the agreed price. The shareholders’ meeting was held, and the sale failed due to insufficient votes. The co-op then sued for breach of the “best efforts” clause.
The Colorado Supreme Court concluded that the parties
did not intend that the “best efforts” clause would impose on United’s board of directors any obligation which would conflict with the directors’ legal duties to the corporation’s security holders. These duties include fidelity, good faith, and prudence with respect to the interests of security holders, as well as the duty to exercise independent judgment with respect to matters committed to the *162discretion of the board of directors and lying “at the heart of the management of the corporation.”
(Citations omitted.) Gt. West.Prod. v. Gt. West.United, 200 Colo. 180, 186, 613 P.2d 873, 878 (1980). The court affirmed the decision of the state court of appeals, which had held:
(1) the purchase agreement required United to exercise only its “best lawful efforts” to obtain security holder approval of the sale of the Sugar Company; (2) both federal and state law obligated United and its board of directors “to inform the security holders that, because of the change of circumstances [i.e., the increases in sugar prices and profits and the corresponding increase in the value of the Sugar Company], they believed the terms for the sale of the Sugar Company were no longer fair and equitable”; and (3) the September 14,1974, reversal in the recommendation of United’s board of directors to its security holders could not therefore constitute evidence of a breach of the “best efforts” clause.
Id. at 184-85, 613 P.2d at 877. In determining that United’s board of directors had not breached the “best efforts” clause, the Colorado Supreme Court reasoned:
The “best efforts” obligation required that United and its board of directors make a reasonable, diligent, and good faith effort to accomplish a given objective, viz., security holder approval of the purchase agreement. The obligation, however, must be viewed in the context of unanticipated events and the exigencies of continuing business development and cannot be construed to require that such events and exigencies be ignored or overcome at all costs. In short, the “best efforts” obligation was tempered by the directors’ overriding duties under sections 141(a) and 271(a) of the “General Corporation Law of the State of Delaware.”
(Emphasis supplied.) Id. at 186-87, 613 P.2d at 878-79. The court further found that the directors had “inquired into changed circumstances and determined, pursuant to the exercise of their independent good faith judgment, that the terms of the purchase agreement were no longer in the security holders’ best interests.” Id. at 187, 613 P.2d at 879.
*163Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), is inapposite on its facts alone. Van Gorkom was a corporate director engaged in negotiating a merger agreement without the knowledge or participation of the other board members. After the buy-out, which was recommended by the board and approved by a majority of the shareholders, the shareholders brought a class action suit, originally seeking rescission of the merger. The class sought alternative relief in damages against individual members of the board, the new corporation, and owners of the parents of the new corporation.
At issue in Van Gorkom was the liability of individual directors who failed to inform themselves and the stockholders of all information available and relevant to the proposed merger. The directors relied on the business judgment rule to validate their actions. Nevertheless, the court found that, under the circumstances, the directors were individually liable because they failed to inquire into the particulars of Van Gorkom’s merger and because they failed to disclose, and in fact were not able to disclose, all material information that a reasonable stockholder would consider important in deciding whether to approve the offer. In an exacting look at the business judgment rule, the court determined that the directors had not fulfilled their fiduciary duty of due care and had failed to satisfy virtually every element of the business judgment defense.
A board of directors blindly following the lead of one director to the ultimate detriment of all shareholders is a far cry from the facts in this case. Van Gorkom dealt with a board wholly uninformed and apparently uninterested in the terms of the merger agreement. Nevertheless, it recommended the merger to the shareholders, and the shareholders followed the advice.
In this case all MBPXL directors were aware of the ConAgra proposal and participated in constructing the final agreement. The MBPXL board deprived its shareholders of the opportunity to decide which was the superior offer when it canceled the promised shareholders’ meeting. Had the MBPXL board used its best efforts to hold the meeting, then, as required by Delaware law, the shareholders could have compared the merger terms and selected the superior arrangement. Indeed, *164even if the MBPXL directors, pursuant to their fiduciary duties and statutory obligation to determine in an informed and deliberate manner whether to recommend the merger before submitting the proposal to stockholders, Del. Code Ann. tit. 8, § 251(b) (rev. 1974), had ultimately recommended Cargill’s terms over ConAgra’s, the board still would have been adhering to the terms of the “best efforts” clause.
This was precisely the situation in Gt. West.Prod. v. Gt.West.United, 200 Colo. 180, 613 P.2d 873 (1980), and in another case cited by the majority, Jewel Companies v. Pay Less Drug Stores Northwest, 550 F. Supp. 770 (N.D. Cal. 1982), rev’d 741 F.2d 1555 (9th Cir. 1984). In Jewel the plaintiff, Jewel Companies, Inc., and its subsidiary, Jewel Acquisition Corporation, entered into a merger agreement with Pay Less Drug Stores of Oakland, California (Pay Less Oakland). The agreement in Jewel, as in the instant case, provided for a tax-free exchange of stock and for the directors of Pay Less Oakland to use their “best efforts” to complete the merger. After the Jewel-Pay Less Oakland agreement was publicly announced, Pay Less Drug Stores Northwest (Pay Less Northwest) sought to acquire Pay Less Oakland through a competing cash tender offer. Because the Pay Less Northwest offer was worth more per share, $24 versus $14.75, Pay Less Oakland signed an agreement with Pay Less Northwest. Jewel failed to increase its offer, and Pay Less Oakland’s board of directors unanimously recommended to its shareholders that they accept Pay Less Northwest’s tender offer. The board’s recommendation Was placed before its shareholders along with a complete history of the two offers and relevant factors in the board’s decision. Jewel then brought an action against Pay Less Northwest for tortious interference with contract.
The federal district court rejected the plaintiff’s claims and granted the defendant’s motion for summary judgment, commenting:
While it is true that the Oakland Board of Directors agreed to use their best efforts to complete the merger, it is also true that Jewel and its shareholders did not have then, and do not have now, an unequivocal right to the benefits of the merger. The power to approve the merger rested *165with the Oakland shareholders, and the Jewel agreement imposed no duty on those shareholders to ratify the merger agreement.
Jewel, supra, 550 F. Supp. at 772. The court went on to find that the merger agreement itself was not a binding contract, since the shareholders, as offerees, were the only parties with the power to accept the contract. Jewel, supra, 550 F. Supp. 770. The court further commented that “[t]he marketplace is the proper forum to resolve competing tender offers.” Jewel, supra, 550 F. Supp. at 773.
The ninth circuit reversed the holding of the district court in Jewel. In its decision the court of appeals first held that under the California Corporate Code the boards of directors of two corporations seeking to merge or reorganize “may enter into a binding merger agreement governing the conduct of the parties pending submission of the agreement to the shareholders for approval.” (Emphasis supplied.) Jewel, supra, 741 F.2d at 1561. California’s corporate code is quite similar in this regard to that of Delaware, the only difference being that board approval of the agreement need not necessarily precede shareholder approval. Cal. Corp. Code § 1001(a)(2) (West 1977). See Del. Code Ann. tit. 8, § 251.
The ninth circuit also held that, pending shareholder approval, a board may bind itself in limited areas to exert its best efforts to consummate a merger. Without delineating the full scope of a board’s “best efforts” obligation, the court determined that the term does “include at a minimum a duty to act in good faith toward the party to whom it owes a ‘best efforts’ obligation.” Jewel, supra, 741 F.2d at 1564 n.11. According to the court:
The board can bind the corporation temporarily with provisions . . . which essentially require the board of the target firm to refrain from entering any contract outside the ordinary course of business or from altering the corporation’s capital structure. Such provisions are intended, essentially, to preserve the status quo until the shareholders consider the offer.
Jewel, supra, 741 F.2d at 1564 n.12.
Like Cargill and MBPXL, the appellees in Jewel argued that *166any contractual obligations a board of directors may have are always subject to its higher fiduciary duties to the shareholders of the corporation. The district court in Jewel had held that California corporate law mandated that corporate directors observe high standards of fiduciary duty with respect to shareholders, and when presented with another offer, the directors had a duty to compare the two offers and recommend the more attractive offer to the shareholders. Jewel, supra, 550 F. Supp. 770. However, the district court specifically reserved the question of whether the board of directors’ fiduciary obligation required it to “affirmatively seek out other offers.” Jewel, supra, 550 F. Supp. at 773 n.1.
In reversing the district court’s decision, the ninth circuit acknowledged the validity and importance of fiduciary duties but concluded that a board may bind itself in a preapproval merger agreement without violating those duties. At the outset the circuit court recognized that a corporate board of directors “may not lawfully divest itself of its fiduciary obligations in a contract.” Jewel, supra, 741 F.2d at 1563 (citing Gt. West.Prod, v. Gt. West.United, 200 Colo. 180, 613 P.2d 873 (1980)). The court also acknowledged the fact that “ [e]ven 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.” (Emphasis supplied.) Jewel, supra, 741 F.2d at 1564 (citing U.S. Smelting, Refining, and Mining Co. v. Clevite Corp., [1969-1970 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,691 (N.D. Ohio 1968)). The circuit court also recognized:
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.
Jewel, supra, 741 F.2d at 1564. Nevertheless, the circuit court concluded that, consistent with its fiduciary duties and pending shareholder approval, a board may bind itself in limited areas to exert its best efforts to consummate a merger.
The majority further suggests that the record would not *167support an award of damages to ConAgra in any event because there was no evidence of proximate cause. ConAgra brought its cause of action against Cargill under a theory of tortious interference with the ConAgra-MBPXL contract, an intentional tort. To find Cargill liable for intentionally interfering with the ConAgra-MBPXL merger agreement, it must be shown that the actions of Cargill caused the interference and the loss. Prosser and Keeton on the Law of Torts, Economic Relations § 129 (5th ed. 1984) (interference with contractual relations). Causation with respect to intentional torts does not involve considerations of foreseeability or reasonableness, as is the case with proximate cause. See Restatement (Second) of Torts § 870, comments c. and d. (1979). As a general principle, liability for intended consequences will be found if the conduct of the party who intentionally causes the injury or loss is generally culpable and not justifiable under the circumstances. The Restatement, supra § 870.
Whether a defendant’s actions will be considered the legal cause of a plaintiff’s loss turns on more than the mere fact that the defendant has reaped the advantages of the broken contract. The defendant must have played a material and substantial role in causing the plaintiff to lose the benefits of the contract. Prosser and Keeton, supra. A defendant is considered to have actively participated in causing the breach of contract and the resulting damages when the defendant holds out to the third party incentives suggesting a better price or better terms. Pure Milk Ass’n v. Kraft Foods Co., 8 Ill. App. 2d 102, 130 N.E.2d 765 (1955); Cumberland Glass Mnf’g Co. v. DeWitt, 120 Md. 381, 87 A. 927 (1913), aff'd 237 U.S. 447, 35 S. Ct. 636, 59 L. Ed. 1042 (1915).
Normally, it is a question of fact whether a defendant has played a material and substantial role in causing a plaintiff’s loss of benefits of a contract. Prosser and Keeton, supra. Following the district court’s entry of the partial summary judgment, a pretrial conference was held, and the district court concluded that the question of causation was among those issues remaining for trial.
The evidence presented at trial on this issue is enlightening, *168considering that it consisted in part of testimony from Cargill’s own expert witness. When asked by plaintiff’s counsel to assume that the merger agreement had been executed and recommended by the boards and that no other party had made an intervening tender offer, whether the merger agreement would have gone through, Cargill’s expert responded, “In my opinion it would have been overwhelmingly approved and would have gone through.”
This testimony is consistent with that of ConAgra’s expert witness, Mr. Peter Kennedy, and MBPXL’s president, Mr. David La Fleur. Mr. Kennedy testified that, in his opinion, had the MBPXL shareholders been presented in December 1978 with the choices of tendering their shares for $27 each, exchanging their shares for shares of ConAgra stock pursuant to the agreement, or retaining their stock and doing nothing, the stockholders would have opted for ConAgra’s terms because they offered the highest economic value. Similarly, Mr. La Fleur testified that, in his independent judgment, ConAgra’s terms were better than Cargill’s, in part because of tax ramifications of a cash deal. Mr. La Fleur also testified that in his discussions with other board members, none seemed to believe that Cargill’s cash arrangement was worth more to MBPXL shareholders than the ConAgra shares would be after the merger with MBPXL.
In a de novo review where evidence is in conflict, this court gives weight to the fact that the trial judge heard and observed the witnesses and accepted one version of the facts over the other. Chalupa v. Chalupa, 220 Neb. 704, 371 N.W.2d 706 (1985). Here, there is ample evidence to support the district court’s finding that Cargill’s interference in the contractual relations of ConAgra and MBPXL caused the breach and ConAgra’s damages.
Based upon the majority’s sweeping declaration of a board’s fiduciary duties to its stockholders, it now appears that merger agreements, no matter how carefully drawn, are at best mere formalities, with no legal effect.
I agree with the statement in Jewel Companies v. Pay Less Drug Stores Northwest, 741 F.2d 1555, 1568-69 (9th Cir. 1984), which reads:
*169It is nowhere written in stone that the law of the jungle must be the exclusive doctrine governing sorties into the world of corporate mergers. The legitimate exercise of the right to contract by responsible boards of directors can help bring some degree of much needed order to these transactions.
Shanahan and Grant, JJ., join in this dissent.