Court Opinion

ID: 9570422
Source: CourtListenerOpinion
Date Created: 2023-08-21 20:23:03.850345+00
Date Added: 2024-06-11T12:07:40.820146
License: Public Domain

BIRD, C. J., Dissenting.
To relegate minority and dissenting shareholders to the statutory appraisal remedy as the majority suggest would strike a forceful blow against this state’s strong public policy of protecting the investing public from frauds and deceptions committed in securities transactions. Moreover, such a limited remedy cannot fairly and adequately compensate those individuals who have been damaged in a corporate merger or reorganization.
*1215Recent events have demonstrated with particularity the timeliness and significance of these issues. In the past five years, there has been an exponential rise in merger and acquisition activity. (See, e.g., Surge of Corporate Mergers Causing Concern on Wall Street, N.Y. Times (July 3, 1984) at p. 1; Merger and Acquisition Frenzy to Subside After Record Activity in 1985, Experts Say, Wall St. J. (Jan. 2, 1986) at p. 6B.) Concomitant with the increasing incidence of corporate takeovers there has been an increase in the number of opportunities for corporate fiduciaries to secure substantial and disproportionate benefits for themselves at the expense of minority shareholders.
The present case provides a disturbing illustration of how corporate directors and officers can utilize the merger process to achieve personal gain without regard to the resulting harm to dissenting shareholders. I write separately to underscore the importance of providing effective remedies to redress this problem and to reaffirm California’s and this court’s longstanding policy of protecting the investing public from fraud and deception.
Corporations Code section 1312, subdivision (a) sets forth the rules regarding actions challenging the validity of a reorganization or merger.1 As the majority admit, the language of section 1312(a) does not expressly preclude an action for fraud and breach of fiduciary duty; the bar is restricted to actions that challenge the validity of the merger or seek to rescind it. (See maj. opn., ante, at p. 1207.)
Despite this ambiguity, the majority conclude that section 1312(a) constitutes a bar to petitioner’s damage action. Since petitioner’s prayer for relief does not include a request for the rescission of the merger (nor does it attack the merger on any other grounds, i.e., antitrust violations, etc.), the majority can reach this result only by mischaracterizing petitioner’s claims.
The majority state that petitioner seeks “damages which result from the fact that he no longer has an interest in the merged corporation because a merger has been consummated.” (See maj. opn., ante, at pp. 1205, 1206.) Viewed this way, the conclusion truly must be “unavoidable” that petitioner’s claim amounts to an attack on the validity of the merger. (See maj. opn, ante, at p. 1206.) In order to reach this conclusion, the majority had *1216to construe petitioner’s claims that the prospectus was misleading and that the public offering was done solely for the purpose of attracting a merger partner as an allegation that the merger was illegal or invalid. This interpretation is wholly unfounded.
In reality, petitioner’s claim is substantially different. Contrary to the majority’s characterization, petitioner contends that he was defrauded from the outset. Prior to the public offering, there was no market for Amplica common stock. The prospectus circulated by Amplica stated that the company would use the proceeds of the offering to expand the plant, purchase equipment, and boost research and development. The prospectus did not reveal that the board of directors of the company had been seeking a merger partner continuously for at least five months before the offering.
Most of the proceeds from the offering were used to repay outstanding debts and to accumulate cash and short-term investments so as to make Amplica a more attractive merger partner. In addition, the officers and directors received substantial financial benefits, including cash bonus opportunities, retirement allowances, and options to purchase stock in the partner to the merger on very favorable terms. Shareholders with Amplica stock did not receive any of these benefits.2 .
The majority’s characterization of petitioner’s claim as an attack on the validity of the merger provides some insight into the broader theory upon which their opinion is based. As the majority, accurately note, the source of the provision proscribing actions seeking to unwind mergers lies in the approach taken in the past to the “problem” of “strike suits.” (See maj. opn., ante, at p. 1210.)
More than 40 years ago, authorities on corporate law viewed dissenting shareholders as notorious “piratical obstructionists” who would bring “extortionate corporate litigation” in an attempt to “coerce the majority” and “threaten the transaction of legitimate business.” (Ballantine & Sterling, Upsetting Mergers and Consolidations: Alternative Remedies of Dissenting Shareholders in California (1939) 27 Cal.L.Rev. 644, 649, 651, 658.) The “anachronistic assumptions” that motivated the commentators of that era have long been abandoned. (Buxbaum, The Dissenter’s Appraisal Remedy (1976) 23 UCLA L.Rev. 1229, 1244 [hereafter Appraisal Remedy]; see also *1217Brudney & Chirelstein, Fair Shares in Corporate Mergers and Takeovers (1974) 88 Harv. L.Rev. 297 [hereafter Fair Shares].) Nevertheless, the majority insist that “the risk that desirable corporate changes will be hampered by minority stockholders” is sufficient to outweigh any misconduct on the part of corporate fiduciaries. (See maj. opn., ante, at p. 1214.) The specter of a revival of the infamous “strike suit” thus takes precedent over any fraud claims brought by the investing public. (See maj. opn., ante, at p. 1211.)
Current events have more than adequately demonstrated that the out-dated portrait painted by the majority no longer applies to the corporate-shareholder relationship. More importantly, the majority’s reliance on the potential disruption of the market misses the mark entirely. The question in this case is not whether this court should permit any interference with corporate transactions that are within the scope of actions authorized by the regulations. Even if the form of the transaction does not violate any statute, a serious problem still exists; petitioner has alleged fraud and breach of fiduciary duty from the time of the issuance of the prospectus.
The Supreme Court of Massachusetts recently noted: “The dangers of self-dealing and abuse of fiduciary duty are greatest in freeze-out situations like this merger, where a controlling stockholder and corporate director chooses to eliminate public ownership. It is in these cases that a judge should examine with closest scrutiny the motives and behavior of the controlling stockholder. A showing of compliance with statutory procedures is an insufficient substitute for the inquiry of the courts when a minority stockholder claims that the corporate action ‘ will be or is illegal or fraudulent as to him.”'’ (Coggins v. New England Patriots Football Club, Inc. (1986) 397 Mass. 525 [492 N.E.2d 1112, 1117], italics added [fn. omitted].) The Coggins court ruled that even where a merger has been accomplished in technical compliance with the applicable statutes, if the possibility of violations of fiduciary duties has been alleged dissenting shareholders should not be limited to the statutory remedy of appraisal.
In fact, the holding of the Massachusetts Supreme Court merely echoes the forceful pronouncement of the principle made by this court 17 years ago, that corporate insiders owe minority shareholders a fiduciary duty which transcends technical compliance with relevant statutes.
In Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93 [81 Cal.Rptr. 592, 460 P.2d 464], controlling shareholders of a savings and loan association created another corporation and exchanged their shares in the association for shares in the new corporation. In so doing, the controlling shareholders *1218eliminated the market for the association shares thereby undercutting the value of the shares held by the minority. The minority shareholders filed a class action alleging that the majority had breached their fiduciary duty to the minority. The trial court sustained the defendants’ demurrer to the complaint.
On review, this court reversed, holding that plaintiffs’ had a valid cause of action for breach of fiduciary duty. The court noted that fiduciary obligations of directors and majority shareholders are not limited to specific statutory duties: “[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 .... Such conduct is not consistent with their duty of good faith and inherent fairness to the minority stockholders.” (Ahmanson, supra, 1 Cal.3d at p. 114.) In response to the Ahmanson defendants’ argument that plaintiffs’ had suffered no damages, this court emphatically stated that even if the plaintiffs’ could have resorted to appraisal, that remedy would be insufficient to compensate them adequately. (Id., at p. 117.)
Over the years, the courts of this state have consistently reaffirmed this policy of ensuring that shareholders are provided with effective remedies to redress corporate wrongdoing. For example, in Gaillard v. Natomas Co. (1985) 173 Cal.App.3d 410 [219 Cal.Rptr. 74], the Court of Appeal, holding that the involuntary divestment of stock due to a merger does not preclude an individual from filing a derivative suit, concluded that “the imposition of a continuing ownership requirement in this case would lead to the incongruous result of barring a lawsuit which challenges the wrongful acts of management in bringing about the merger, because of the merger itself. To hold that a merger has the effect of destroying such causes of action would be tantamount to giving free reign to deliberate corporate pilfering by management and then immunizing those responsible from liability by virtue of the merger which they arranged. This would be a grossly inequitable result. ” (Gaillard, supra, 173 Cal.App.3d at p. 420, italics added; see also Remillard Brick Co. v. Remillard-Dandini Co. (1952) 109 Cal.App.2d 405, 418 [241 P.2d 66].)
The majority admit that the weight of decisional authority favors petitioner’s position. (Maj. opn., ante, at p. 1213.) In fact, all of the cases from other jurisdictions cited by the majority—with the exception of one Washington case decided in 1952—hold that appraisal is not the exclusive remedy available to minority shareholders. (Maj. opn., ante, at pp. 1212-1213.)
*1219As the court in Twenty-Seven Trust v. Realty Growth Investors (D.Md. 1982) 533 F.Supp. 1028 concluded upon examining the many state court decisions on this issue: “The prevailing view among state courts in states having similar appraisal statutes, in the absence of statutory language making such appraisal the dissenting shareholders’ exclusive remedy, is that the statutory appraisal proceeding is not the dissenter’s exclusive remedy in cases of fraud, illegal purpose or other wrongful conduct . . . .” (Id., at p. 1036, fn. omitted; see also, Rabkin v. Philip A. Hunt Chemical Corp. (Del.Super. 1985) 498 A.2d 1099, 1104 [“‘The appraisal remedy we approve may not be adequate in certain cases, particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved’”].)
Despite the overwhelming authority supporting petitioner’s position, the majority nevertheless conclude that the “elaborate procedure for perfecting the right to appraisal” is sufficient to protect the interests of investors. (Maj. opn., ante, at p. 1209.) In light of their recognition that both public policy and decisional authority support petitioner’s position, it is difficult to understand why they insist on limiting minority shareholders to a remedy which, under the best of circumstances, would not permit them to obtain full compensation for damages suffered.
As several experts have recently noted, the appraisal process cannot provide injured shareholders with effective redress in most situations. (See, e.g., Appraisal Remedy, supra, 23 UCLA L.Rev. at pp. 1253-1254; Fair Shares, supra, 88 Harv.L.Rev. at p. 299.) In fact, according to one commentator, the remedy “where available ... is exceedingly technical and difficult to use” and the statutory “approach . . . can be understood only as symptomatic of a general effort to lessen the attractiveness of the appraisal procedure.” (Appraisal Remedy, supra, 23 UCLA L.Rev. at pp. 1236, 1253-1254.)
In order to fully comprehend the inherent limitations of the remedy, a short explication of the process is necessary. Under the current statutory scheme,3 the shareholder must first dissent from or abstain on the transaction at issue in order to remain eligible to use the appraisal mechanism. Next, provided that proper notice and legal warning were undertaken and that the shares involved are listed or are part of a class for which 5 percent of the shares have sought payment, the shareholder must make a demand for payment in cash no later than the date of the shareholder meeting. This *1220demand must contain the shareholder’s offer of a selling price. Once it is made, the dissenting shareholder no longer has the option of joining the majority in the exchange offer without the corporation’s consent.
These requirements, one commentator concluded, have the “purpose of putting the shareholder to the more stringent obligations of early dissent and . . . demand ... to give management early warning of the size and cost of impending dissension. It is achieved at substantial procedural (and tactical) cost to the shareholder.” (Appraisal Remedy, supra, 23 UCLA L.Rev. at p. 1236.)
In many instances, the voting and demand requirements force the shareholder to take an irreversible position before the outcome of the shareholders’ vote is known. Moreover, by forcing the shareholder to name a selling price, the statute shifts the “burden of coming forward with a settlement offer on the party (least) likely to be informed as to the underlying values. ...” (Id., at p. 1238.) This situation is even more problematic than it appears at first glance since the corporation is in a position to induce appraisal at a time when shareholders may have little or no capacity to ascertain whether the enterprise is currently worth more than its past record indicates.4 (See Fair Shares, supra, 88 Harv. L.Rev. at p. 306.) Inevitably, the entire process involves a large degree of delay and uncertainty, thereby causing the dissenting shareholder to incur significant expenses which may cut into his recovery.
The inescapable shortcomings of the appraisal process fully support petitioner’s position in the present case. The majority pass the buck by reasoning that all shareholders could make similar claims of undervaluation. (Maj. opn., ante, at p. 1209.) Even if this were so, this court should not ignore the fact that where fraud and breach of fiduciary duty are alleged, the problems with this remedy are considerably more egregious. “[Ajppraisal is merely an option-out alternative, and as such it focuses on the premerger value of the acquired company’s shares. In short, it neither serves nor is designed to serve as a remedy for the fiduciary misbehavior at which the fairness challenge is directed.” (Fair Shares, supra, 88 Harv. L.Rev. at p. 307.)
If this court relegates minority and dissenting shareholders to this inadequate remedy, then we will be giving corporate insiders license to commit fraud and gross breaches of their fiduciary duties with impunity. That has *1221never been the policy of this state or this court. It is, indeed, sad to see this court so insensitive to the rights of the state’s citizens.
Reynoso, J., and Grodin, J., concurred.
On February 11, 1987, the opinion was modified to read as printed above.

Section 1312, subdivision (a) (hereafter section 1312(a)) provides, in pertinent part: “No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have (either) set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof . . . .”
All future statutory references are to the Corporations Code unless otherwise noted.

The fact that the proxy statement sent to the shareholders before the approval meeting may have revealed some of these facts does not dilute the egregious nature of defendants’ conduct. Petitioner’s allegations of fraud and breach of fiduciary duty relate to statements made in the prospectus at the time of the public offering of Amplica stock.

Sections 1300 through 1312 delineate the appraisal process.

The corporation may also be able to conceal anticipated earnings or deliberately depress the market price in order to deceive the shareholder.