Court Opinion

ID: 9754458
Source: CourtListenerOpinion
Date Created: 2023-08-28 20:01:31.633879+00
Date Added: 2024-06-11T07:27:53.649654
License: Public Domain

*1081MOORE, Justice,
concurring.
I concur in the judgment. But for (1) the pendency of companion actions in the Court of Chancery, at least two of which were brought by the intervenors, (2) the representations made to us at reargument that News would unconditionally submit itself to the jurisdiction of the Delaware Courts in those actions, and (3) the trial court’s ruling that the settlement and dismissal of this case will not prejudice the rights of any Warner shareholders, other than News, to pursue their pending claims in those actions, I doubt that today’s result would have obtained.
Nonetheless, my concerns are several, and they persist. Because of their apparent pragmatic result, both the majority opinion and that of the trial court may be interpreted as sanctioning one rule for the large shareholder litigant, who by guile and artful pleading gives the impression of championing the rights of all stockholders without any such intention, while the small stockholder is firmly held to the strictures of Chancery Rule 23.1. Future reliance on this case as creating that sort of distinction, thus opening the door to collusive settlements, would be ill-advised and contrary to our earlier warnings in Wied v. Valhi, Inc., Del.Supr., 466 A.2d 9, 15 (1983), cert. denied, 465 U.S. 1026, 104 S.Ct. 1284, 79 L.Ed.2d 687 (1984). Carried to its ultimate conclusion, any such principle would destroy the efficacious intent of Rule 23.1.
The troubling aspects of this case are both factual and legal. In its pleadings, other filings, and the public statements of its chairman and managing director, Mr. K. Rupert Murdoch, News clearly conveyed the message that it was bringing this action to vindicate the rights of all Warner shareholders, and to protect Warner as a corporate entity. In that regard Mr. Murdoch’s statements were widely and carefully directed to appropriate audiences. The Wall Street Journal reported him to say:
“We’ve decided to fight but we haven’t settled on our tactics or.... As far as I’m concerned, this has been a dirty deal done to me and all the shareholders. I’m going to fight it in every court and agency I can, and if necessary before all the [Warner] shareholders.”
In connection with his efforts to have the Federal Communications Commission block the proposed transaction, Mr. Murdoch stated that it “is not in the best interest of Warner and its stockholders.” Speaking to the New York chapter of the Public Relations Society of America, Mr. Murdoch said:
“We will oppose and expose gross mismanagement, fraud, racketeering and abuse of shareholder funds wherever we find it.”
In the Chicago Tribune Mr. Murdoch termed the Warner/Chris-Craft agreement “a rinky-dink deal, a terrible one for Warner’s shareholders ... We’ll go to every court in the country to stop it”, and that Warner “should be protected at all costs.” Finally, he observed of those controlling Warner that he had “never seen such mismanagement and corporate waste.”
In its Schedule 13D filings with the Securities and Exchange Commission, News represented that its acquisition of Warner stock was “to make an investment” with no “present intention to seek to acquire control of [Warner] or to request representation on [its] Board of Directors.” While News reserved the right to take any action deemed “necessary or desirable” to protect its investment, the disclaimer of any intent to acquire control or seek representation on Warner’s Board was repeated in both the original filing and a subsequent amended Schedule 13D.
Although there was a later filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with the Federal Trade Commission and the Antitrust Division of the Department of Justice, which could imply that News might attempt to gain control of Warner, News did not mount any effort to actually do so.
*1082Through artful drafting, News’ complaint in the Court of Chancery appears to speak derivatively on behalf of the corporate enterprise, while subtly mixing in certain language upon which it now relies to stake out “individual” claims. Thus, we find such allegations as:
“Warner’s Wasteful Give-Away of Corporate Assets, Including Control * * * # * *
29. The Exchange Agreement reveals a gross waste of corporate assets, lacks any valid business purpose and is obviously intended to entrench Warner’s management to the detriment of Warner shareholders. It is clearly aimed at countering any effort of plaintiff to acquire a voice in management of Warner. Warner is required by the Exchange Agreement to issue to BHC 15.2 million shares of a new series of non-convertible preferred stock, with 19% of the total Warner voting power (21.9% of dividends are in default) which cannot be diluted irrespective of how many additional voting shares are issued in the future by Warner, with a dividend of 12% (or $33.1 million per year) or 1% over a prime rate (whichever is higher) and in a form which cannot be redeemed at any time. The Warner non-convertible preferred has 1 vote per share (1.2 votes in the event of 2 quarterly dividend defaults) and an absolute veto on any dividend to Warner’s common shareholders except cash dividends below a defined amount, and dividends payable in common stock.
* * * * * *
37. In addition, Warner’s management has put in jeopardy Warner’s filmed entertainment operations, acknowledged to be among the company’s most valuable assets, while dissipating the company’s assets on Atari and other unprofitable adventures including the Proposed Transaction. Since the filmed entertainment operations constitute a substantial portion of Warner’s shareholders equity, it is abusive and wasteful for Warner management to put them in such jeopardy.
COUNT I
THE PRIMARY PURPOSE OF THE PROPOSED TRANSACTION IS TO ENTRENCH WARNER MANAGEMENT
39. The Proposed Transaction has been entered into by Warner management for the primary purpose of entrenching Warner management in their enormously lucrative positions of employment. Moreover, although the Proposed Transaction would damage all Warner shareholders other than the defendants by improperly hindering their ability to control or replace present Warner management, the Proposed Transaction is specifically designed to ensure that plaintiff cannot exercise the rights that accompany its 7% interest in Warner.
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41. Because the Proposed Transaction and the Exchange Agreement have been agreed to by Warner management for the sole purpose of entrenching itself and would have the effect of minimizing or eliminating plaintiff’s and other shareholders’ voting and other rights in Warner and was especially intended to thwart plaintiff’s right to seek to replace current management, consummation of the Proposed Transaction would violate plaintiff’s rights as a shareholder of Warner.
****** COUNT II
THE PROPOSED TRANSACTION DISENFRANCHISES WARNER SHAREHOLDERS AND IS CONTRARY TO DELAWARE LAW ******
45. If, after having caused the corporation to adopt the super-majority voting *1083requirements described above in paragraphs 19 to 23, management is permitted to proceed with the Proposed Transaction, thereby placing a bloc of twenty percent or more of Warner’s stock with management and its “co-venturer” Chris-Craft, then the remaining shareholders (who are 100% of its present shareholders), even if in unanimous agreement, would thereafter be prevented from causing the company to pursue certain courses of action which it may now pursue by an 80% vote of shareholders. * * * * * *
46. The attempted creation of such new strictures on the voting rights of existing shareholders without first seeking shareholder approval violates fundamental principles of Delaware law. ******
COUNT III
CONSUMMATION OF THE PROPOSED TRANSACTION WOULD CAUSE WARNER TO BREACH ITS CONTRACT WITH PLAINTIFF TO MAINTAIN WARNER’S NEW YORK STOCK EXCHANGE LISTING * * * * * *
52. Warner’s proposed issuance of the non-convertible Preferred infringes upon the voting rights of and discriminates against existing shareholders, including plaintiff, by substantially reducing, if not Sliminating, shareholder voting rights in Warner without shareholder approval, and renders the acquisition of shares of common stock less attractive to plaintiff and any other person who might seek to acquire an interest in Warner. * * * * * *
62. The Proposed Transaction is, indeed, a sham designed to thwart plaintiff (or involves the issuance of voting debt in violation of Delaware law) and was intended to minimize and thwart plaintiff’s right as a shareholder to seek to influence the management of Warner.
63. Since the true nature of the Proposed Transaction is not what it has been reported to be, it can be said to constitute a fraud upon plaintiff and Warner’s other public shareholders.
The testimony of one of Mr. Murdoch’s chief financial officers supports the derivative nature of News’ claims. Thus, Richard A. Sarazen, Director/Executive Vice President — Finance of News America Publishing Incorporated, a News affiliate, testified:
Q. Is it your belief that Warner grossly overpaid for the position in BHC that is contemplated by this transaction?
A. Yes.
Q. I suppose you also believe that that is detrimental to the interests of all Warner shareholders; is that correct?
A. Yes, I do.
Q. Do you think that the fact, as you believe it to be, that Warner grossly overpaid for the interest in BHC particularly affects Mr. Murdoch more than other shareholders?
A. Yes, but only to the extent that we have a larger shareholder than other shareholders.
Q. It affects all the shareholders equally on a share-for-share basis, but you have more shares; is that what you are saying?
A. Yes.
******
Q. Is it true that the Murdoch companies currently are concerned or unhappy about the various provisions in the articles and bylaws of Warner Communications that provide for 80 percent vote levels with respect to certain kinds of events?
A. What does “concerned” mean?
Q. Unhappy.
A. Yes.
Q. All right.
Isn’t it the Murdoch companies’ view that these provisions are unfair to all the shareholders of Warner Communications?
*1084A. Yes.
Q. Would it be correct to say that the Murdoch companies believe that the primary purpose of the Chris-Craft transaction is to entrench the existing management of Warner Communications?
A. Yes.
Q. I take it it is also fair to say that it is the Murdoch companies’ view that that is unfair to all shareholders of Warner Communications; is that correct?
A. Yes.
Q. Is it true, to your understanding, that there is concern by Murdoch companies about the possible impact on New York Stock Exchange listing of the common shares as a result of the Chris-Craft proposed transaction?
A. Yes.
Q. If Warner would be delisted, that would have a bad impact in the Murdoch companies’ views on all shareholders; is that correct?
A. Yes.
Q. Isn’t it true that the Murdoch companies believe that the Chris-Craft transaction, in effect, affects the voting rights of all shareholders of Warner Communications?
A. Yes.
In affidavits filed on News’ behalf by its investment bankers, a similar theme of damage to Warner and all its stockholders was stressed. Stanley S. Shuman of Allen & Company stated:
“[T]he transaction is grossly unfair to Warner and its shareholders.
Jje * * * * *
Thus, whether one views this transaction from the perspective of the value of what Warner is to give up or the perspective of the value of what it will receive in return, the transaction is grossly unfair to Warner shareholders. The minimum difference between the value of Warner’s contribution and the value of the consideration it is to receive is $90 million.
Arthur H. Rosenbloom of MMG Capital Corporation, opined that the Warner/Chris-Craft deal:
[I]s materially unfair to Warner and its shareholders from a financial point of view.
In light of our conclusions that the fair market value of the BHC securities to be received by Warner in the Proposed Transaction is about $115 million less than those to be transferred by Warner to BHC; the potentially materially dilu-tive loss to Warner’s shareholders by reason of BHC’s put option; the current year’s earnings per share dilution to be sustained by Warner as a result of the Proposed Transaction; and the materially greater market capitalization of the Warner common into which the Warner convertible preferred converts versus Chris-Craft’s total market capitalization, we, in our professional judgment, believe that the transaction is materially unfair to Warner and its shareholders.
Given the foregoing record, including the fact that News never actually attempted to gain control of Warner, and thus be in a position to claim a distinct injury to its stock position, I find it very difficult to square what was permitted here with the trial court’s earlier conclusions in Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059, 1070-71 (1985), aff'd, Del. Supr., 500 A.2d 1346 (1985). There, the Court of Chancery ruled:
Plaintiffs’ complaints, fairly read, reflect causes of action which are derivative in nature, not individual. Moran's first claim alleges that a majority of Household’s directors manipulated the corporate machinery to entrench themselves in office by restricting the shareholders’ right to make use of the proxy machinery to gain control of Household. ******
Because the plaintiffs are not engaged in a proxy battle, they suffer no injury distinct from that suffered by other shareholders as a result of this alleged *1085restraint on the ability to gain control of Household through a proxy contest. Furthermore, although D-K-M is Household’s largest shareholder, holding approximately 5% of its stock, it does not suffer any unique injury merely by virtue of its holdings. There is no allegation that D-K-M desires to employ its block position as a means of gaining control of Household. I conclude, therefore, that this claim must be brought derivatively.
The plaintiffs’ second cause of action alleges a manipulation of corporate machinery which acts to deprive shareholders of their right to receive and consider takeover proposals. Although the Plan may indeed have the effect of limiting a shareholder’s ability to consider takeover proposals, shareholders do not possess a contractual right to receive takeover bids. The shareholders’ ability to gain premiums through takeover activity is subject to the good faith business judgment of the board of directors in structuring defensive tactics. Absent an allegation that the Rights Plan directly restricts transferability, there is no deprivation of a distinct contractual right of the shareholders. Because plaintiffs do not allege any distinct injury from the alleged restriction on their ability to receive takeover bids, this claim may only be brought derivatively on behalf of Household.
The third cause of action alleges that the issuance of the rights is invalid under Delaware law. This claim clearly is derivative since it calls into question the authority of the Board to alter the capital structure of the corporation, not any contractual right of the shareholders or any distinct injury to the plaintiff. 490 A.2d at 1070-71.
Indeed, at reargument counsel for Warner admitted to having had a difficult time distinguishing this case and Household, and neither Warner nor News ever satisfactorily explained the difference. Thus, I find it a very slender reed to justify the result here by grasping at the dicta in Elster v. American Airlines, 34 Del.Ch. 94, 100 A.2d 219, 222 (1953), that:
There are cases, of course, in which there is injury to the corporation and also special injury to the individual stockholder. In such case a stockholder, if he should so desire, may proceed on his claim for the protection of his individual rights rather than in the right of the corporation. The action would then not constitute a derivative action. 100 A.2d at 222.
While I accept the foregoing principle, it seems to me that when a party seeks to enforce, solely as an individual claim, one having derivative implications, equity and fairness require that the plaintiff so state — clearly and without equivocation — in order that other stockholders may not be led to believe that their rights are being championed when the opposite is the case. This Court’s mandate in Schnell v. Chris-Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971), that “inequitable action does not become permissible simply because it is legally possible”, finds considerable application to such circumstances.
I suggest no criticism here. My concern is for the future. Delaware has a proud record of preserving shareholder rights in derivative actions even when dismissal was technically warranted. See Hutchison v. Bernhard, 43 Del.Ch. 139, 220 A.2d 782, 784 (1965). Certainly in the past the Court of Chancery has been loath to permit private settlements between litigants in actions having representative overtones. This is so even though the Court has noted the parties’ good faith and complete candor. See Raynor v. LTV Aerospace Corporation, Del.Ch., 317 A.2d 43, 44 (1974).
It would be unfortunate if this case was viewed as authority presaging a means for the destruction of Chancery Rule 23.1. I do not believe that is the intent, and I trust it will not be the result — and all the latter would imply for the future of Delaware corporate law.