70 N.Y.2d 244 | NY | 1987
Plaintiffs,
We hold that plaintiffs’ action is not barred by the prior dismissal of the Greens’ Federal court action and that the courts below erred in dismissing the complaint on that ground; we hold, however, that plaintiffs have shown no basis for recovery under the Martin Act or Delaware common law, and that summary judgment dismissing the complaint should, therefore, have been granted for that reason. Accordingly, the order of the Appellate Division should be affirmed on that ground.
Procedural History and Facts as Shown In the Complaint and Supporting Papers
In 1974 Santa Fe Resources, Inc., a wholly owned subsidiary of Sante Fe Industries, Inc., owned 95% of the stock of Kirby. Pursuant to Delaware Corporation Law § 253, Santa Fe effected a short-form merger as a result of which Kirby became a wholly owned subsidiary of Santa Fe.
The Greens (former stockholders in Kirby and nonappealing plaintiffs in this action) brought an action in Federal District Court, alleging that the freeze-out merger was violative of section 10 (b) of the Securities and Exchange Act of 1934 (15
The second Circuit Court of Appeals reversed and reinstated the complaint (533 F2d 1283), holding that where a complaint alleges, "in connection with a Delaware short-form mérger, that the majority has committed a breach of its fiduciary duty to deal fairly with minority shareholders by effecting the merger without any justifiable business purpose”, plaintiffs state a cause of action "under Rule 10b-5” (id., at 1291). The Supreme Court reversed (430 US 462) on the ground that "the transaction, if carried out as alleged in the complaint, was neither deceptive nor manipulative and, therefore, did not violate § 10(b) of the Act or Rule 10b-5.” (Id., at 474.)
Following the Supreme Court’s decision, the Greens amended their complaint, keeping the Delaware common-law claim and replacing the Federal cause of action with allegations that acts done in furtherance of the merger violated section 352-c of the Martin Act (General Business Law § 352-c). The Borgs, who had been aware of the Greens’ efforts at least from the 1976 decision of the Second Circuit, made no motion to intervene but did move, in 1979 and in 1980, for class certification. Both motions were denied (82 FRD 688; 88 FRD 575). On defendants’ motion for summary judgment dismissing the amended complaint, District Court held that plaintiffs failed to state a cause of action for breach of fiduciary obligations under Delaware law and found it unnecessary to address the Martin Act claims (576 F Supp 269 [SD NY], supra). The Second Circuit affirmed, without opinion (742 F2d 1434 [2d Cir], reh denied No. 83-9072 [May 25, 1984], supra), and the Supreme Court denied certiorari (469 US 917). The Second Circuit subsequently denied a motion for recall of the mandate (No. 83-9072 [Nov. 1, 1984], supra).
Plaintiffs — then both the Greens and the Borgs — brought this action in Supreme Court in 1977, alleging that the sole purpose of the merger was to freeze out public stockholders in Kirby at $150 per share, "a deliberately undervalued price,
This State action lay dormant until the unsuccessful termination of the Green litigation when the Second Circuit, in 1983, affirmed the dismissal of the amended complaint which had been filed in Federal court after the reversal by the Supreme Court. Plaintiffs then moved, and defendants cross-moved, for summary judgment. Special Term denied plaintiffs’ motion and granted defendants’ cross motion for summary judgment and dismissed the complaint, finding that the Borgs were in privity with the Greens during the Greens’ unsuccessful action in Federal court, and that because the Green and Borg claims were identical, the dismissal of the Greens’ action operated as a complete bar. The Appellate Division affirmed, without opinion (118 AD2d 1054), and leave to appeal was granted by our court (68 NY2d 612).
I
We first address defendants’ contention that plaintiffs’ claim was properly dismissed as barred by res judicata or collateral estoppel. Defendants rely on the final dismissal of the Greens’ Federal court action in which the Greens, as minority shareholders in Kirby, made claims identical in legal theory to those plaintiffs assert here. Since the Borgs were not parties to the Federal litigation, the question of whether they should be precluded by its unsuccessful outcome turns on whether they can be said to have been in privity with the Greens. We think it is clear that the Borgs were not in privity.
Preliminarily, we observe that the District Court granted summary judgment to defendants and dismissed the Greens’
It is fundamental that a judgment in a prior action is binding not only on the parties to that action, but on those in privity with them (see, Commissioners of State Ins. Fund v Low, 3 NY2d 590, 595; Matter of Shea, 309 NY 605, 616; 5 Weinstein-Korn-Miller, NY Civ Prac j| 5011.32, at 50-192). Generally, to establish privity the connection between the parties must be such that the interests of the nonparty can be said to have been represented in the prior proceeding (see, Israel v Wood Dolson Co., 1 NY2d 116, 118-120; Restatement [Second] of Judgments §§ 41, 42; 5 Weinstein-Korn-Miller, NY Civ Prac [j 5011.32). Thus, there can be privity to make a legal determination in a declaratory judgment action brought by a union binding in a subsequent action by a member (see, Weisz v Levitt, 59 AD2d 1002); to cause a judgment against an insured to have binding effect in a subsequent action against his liability insurer (see, Hinchey v Sellers, 7 NY2d 287, 295; Baldwin v Brooks, 83 AD2d 85, 87-89; Fadden v Cambridge Mut. Fire Ins. Co., 51 Misc 2d 858 [Cooke, J.], affd 27 AD2d 487); to make a judgment in an action brought by a trustee in bankruptcy a bar in a subsequent action by a creditor (see, Stissing Natl. Bank v Kaplan, 28 AD2d 1159, 1160); or to make a dismissal on the merits of a shareholders’ derivative action binding on other shareholders as members of a represented class so as to preclude them from bringing a similar action (see, Parkoff v General Tel. & Elecs. Corp., 53 NY2d 412, 415). Here, the Borgs cannot be said to have been barred as members of a class of shareholders. The Greens sued in their own behalf — not in a stockholders’ derivative action — and attempts at class certification were denied (82 FRD 688, 88 FRD 575, supra). The only relationship between the Greens
In addition to the conventional privity found in the foregoing cases, courts have also precluded parties from raising claims previously litigated when the party to be precluded can be said to have controlled the conduct of the prior action to further his own interests (see, 5 Weinstein-Korn-Miller, NY Civ Prac If 5011.33). It is this sort of privity which defendants assert here, relying principally on Watts v Swiss Bank Corp. (27 NY2d 270). Defendants contend that the Borgs, who were aware of the Greens’ lawsuit, at least from the date of the Second Circuit decision in 1976, were deeply involved in the Federal action, and that they monitored the proceedings and received reports from the Greens’ counsel (now the Borgs’ attorneys in this action) who, defendants claim, also represented the Borgs’ interests in the Federal court action in which they were not parties.
For several reasons, we reject defendants’ argument. First, Watts v Swiss Bank Corp. (27 NY2d 270, supra) is inapposite. There, both actions — the French action which was completed first and the New York action in which the French action was sought to be made binding — involved claims to the identical property, the proceeds of a joint bank account. Further, not only were the attorneys in the French and New York actions the same, but there was a practical identity of parties. Indeed, except for the substitution of Rose Lanari’s legatees as defendants in the French action and of the executor of her estate in the New York action, the opposing parties were at all times the same.
In this case, as contrasted with Watts, the claims asserted and the interests represented by the Borgs, are not in all respects identical to those in the Green Federal court action. Although the theories of recovery were the same for both the Greens and the Borgs, the stock was separately owned and the claims discrete. In addition, although counsel was the same for both the Greens and the Borgs, there is no indication that the prior action "was managed as [the Borgs] thought it should be” (Watts v Swiss Bank Corp., supra, at 278).
Moreover, even if it could be shown that during the Green litigation the Borgs were "not merely standing on the sidelines” (defendants’ brief, at 65), the fact that applying res judicata here would result in imposing the Federal legal
In any event, whether the Borgs were in privity with the Greens in the Federal litigation is a question of fact, which would preclude summary judgment (see, Watts v Swiss Bank Corp., supra, at 277).
II
We turn to the merits of plaintiffs’
Initially, the question whether plaintiffs have stated a basis for recovery for defendants’ alleged violation of the Martin Act is decided by our holding today in CPC Intl. v McKesson Corp. (70 NY2d 268) that there is no implied private action for fraudulent acts under section 352-c of the General Business Law. For that reason, defendants’ motion for summary judgment was properly granted as to this cause of action, and we need not reach the other Martin Act issues raised by the parties.
Whether plaintiffs’ second cause of action for breach of a fiduciary duty was, likewise, properly dismissed, depends on an analysis of Delaware law. As noted, Supreme Court, in granting summary judgment, and the Appellate Division in its affirmance, held that plaintiffs’ claim was entirely precluded by the prior dismissal of the Green Federal court action. In effect, this grant of summary judgment based upon the Green dismissal is an adoption by our lower courts of the legal conclusion reached by the Federal courts in their grant of summary judgment and dismissal of the Greens’ Federal court action that there was no breach of fiduciary duty under Delaware law (Green v Santa Fe Indus., 576 F Supp 269, supra). Based upon an independent analysis, we reach the same conclusion as District Judge Duffy — that plaintiffs have no claim against Santa Fe under Delaware common law.
At the time of the merger in 1974, under Delaware law, a parent corporation, which owned 90% or more of the stock of a subsidiary, could merge with that subsidiary without advance notice or consent of the minority stockholders upon approval by the parent’s board of directors (see, Delaware Corporation Law §§ 253, 262; see also, Santa Fe Indus, v Green, 430 US 462, 465, supra). No corporate purpose was statutorily required for a short-form merger, rather the very purpose of such mergers was to "provide the parent corporation with a means of eliminating the minority shareholder’s interest in the enterprise” (Stauffer v Standard Brands, 41 Del Ch 7, 9-10, 187 A2d 78, 80 [Del 1962]). Upon approval of the merger, the parent corporation was required to make payment in cash to the minority for their stock (see, Delaware Corporation Law § 253 [a]; Santa Fe Indus. v Green, supra). If a minority stockholder was dissatisfied with the offer made by the parent corporation for his shares, he had the right to have
It is not disputed that the merger here was in all respects permissible under the Delaware Corporation Law. Plaintiffs assert no statutory violation. They contend, however, despite defendants’ compliance with the statute, that under case law existing at the time of the merger in 1974, an allegation that the majority effected the merger solely for the purpose of freezing out the minority and without any business purpose was, without more, a sufficient basis for a claim of breach of fiduciary duty. Plaintiffs base their claim on the so-called "business purpose” rule established by three Delaware decisions (Singer v Magnavox Co., 380 A2d 969 [Del 1977]; Tanzer v International Gen. Indus., 379 A2d 1121 [Del 1977]; Roland Intl. Corp. v Najjar, 407 A2d 1032 [Del 1979]) which stated the law in Delaware until expressly overruled by the Delaware Supreme Court on February 1, 1983 (Weinberger v UOP, Inc., 457 A2d 701 [Del 1983]). Judge Duffy, it is noted, refused to apply the Singer-Tanzer-Roland "business purpose” rule which the Weinberger court had rejected. Instead, he applied the previously existing Delaware rule as stated in Stauffer v Standard Brands (41 Del Ch 7, 187 A2d 78, supra) and Greene & Co. v Schenley Indus. (281 A2d 30 [Del Ch 1971]) which, he noted, the Weinberger court had expressly readopted and under which "no corporate purpose is required under Delaware’s short-form merger statute, and * * * minority shareholders are limited to an appraisal remedy” (Green v Sante Fe Indus., 576 F Supp 269, 270-271, supra). For reasons which follow, we agree.
Plaintiffs argue, pointing to language in the Weinberger opinion, that because the merger took place in 1974 their claim should be governed by Singer-Tanzer-Roland and not, as held by Judge Duffy, by the prior cases of Stauffer and Greene & Co. We disagree. The "savings clause” language in the Weinberger opinion on which plaintiffs rely is as follows: "Obviously, there are other litigants, like the plaintiff, who abjured an appraisal and whose rights to challenge the element of fair value must be preserved. Accordingly, the quasi-appraisal remedy we grant the plaintiff here will apply only to * * * (4) any case challenging a cash-out merger, the effective
Plaintiffs, construing the language of the Weinberger opinion literally, contend that they should have the benefit of the Singer-Tanzer-Roland rule because the merger was prior to the February 1, 1983 cut-off date. We do not believe the Delaware Supreme Court had such intention. We interpret the savings clause language in the Weinberger opinion as intended only to benefit those plaintiffs "who abjured an appraisal” in reliance on the so-called "business purpose” rule first adopted by Singer in 1977. Because the rule was not in existence at the time of the Kirby-Forest Products merger, plaintiffs could not have given up their appraisal rights in reliance on that rule. We agree with Judge Duffy’s reasoning that: "[a]lthough the Weinberger court, appeared to limit the reach of its holding to all mergers effected before 1983, the policy considerations behind the court’s decision to allow certain plaintiffs to continue to seek remedies other than appraisal would not be promoted by a blind application of the court’s provision for retroactive relief. Further, plaintiffs would reap a windfall that the Delaware Supreme Court could not have intended” (576 F Supp 269, 271, supra).
Plaintiffs argue, nevertheless, that even without the benefit of the Singer-Tanzer-Roland "business purpose” rule, they have presented a sufficient basis for denial of summary judgment under the prior Delaware decisions (Stauffer v Standard Brands, supra; Greene & Co. v Schenley Indus., supra) as interpreted in the more recent decisions of the Delaware Supreme Court (see, Weinberger v UOP, Inc., supra; Rabkin v Hunt Chem. Corp., 498 A2d 1099 [Del 1985]). Again, we disagree.
As we read the post-Weinberger Delaware case law, in the event of a properly conducted cash-out merger (Delaware Corporation Law § 253) — even one effected solely for the purpose of freezing out the minority stockholders — the minority has no claim beyond its statutory right to seek an appraisal of its shares absent a demonstration of "fraud or blatant overreaching” (Greene & Co. v Schenley Indus., supra, at 35). The rationale for limiting minority stockholders to their appraisal rights in the ordinary case, a Delaware court has noted, is "the policy of the courts * * * to permit contracting corporations to take advantage of statutory devices for corporate consolidation furnished by legislative act” (Bruce v Bruce Co.,
Upon examination of the complaint, affidavits and other documents in the record, including the excerpts from the examination before trial of plaintiff Cecil R. Borg, we conclude that there is no such demonstration of "fraud or blatant overreaching” as would bring the case within the exception to the general rule making the statutory appraisal proceeding plaintiffs’ exclusive remedy. There is no claim of any misrepresentation or false statement or any specific conduct which could constitute actual fraud. Plaintiffs were provided with the appraisal of the asset value of the corporation and copies of the Morgan Stanley appraisal of the stock as being worth $125 per share. Plaintiffs consulted their attorneys and immediately formed their own conclusions that the Morgan Stanley appraisal
Here, in contrast to Rabkin, all of the actions with which defendant corporations are charged relate to price; there are no claims asserted against individual defendants based on dual representation; and it cannot be said that the "defendants are charged with bad faith which goes beyond issues of 'mere inadequacy of price’. Cole v National Cash Credit Association, Del. Ch., 156 A. 183, 187-88 [1931]” (id., at 1107). In short, in Rabkin there was good reason to deny the dismissal motion addressed to plaintiffs’ complaint because it appeared from the allegations that appraisal might not be an adequate remedy. Here, on analysis not only of plaintiffs’ complaint but of the factual material submitted to Supreme Court on the motion for summary judgment, it appears that an appraisal, if plaintiffs had sought one, would have completely obviated their objections to the unreasonably low offer.
Nor does anything in Weinberger call for a different result. As in Rabkin the complaint was based, in large measure, on the breach of faith of directors acting in a dual capacity and, again, like Rabkin and unlike the case at bar, there were specific allegations of fraud, including the claim that a critical memorandum prepared by two directors of UOP, the merged company from which plaintiffs were frozen out, had been
In sum, this is a case involving one issue, the price of Kirby stock. To be sure, there are conclusory allegations of fraud and overreaching. But the record shows that plaintiffs had the necessary information on which they could and did make an informed judgment as to the fairness of the offer, that after consulting their lawyers and others they decided to forego their appraisal rights and accept the offered price, and that their acceptance of the offer at that price was not made in reliance on any deception or omission on the part of defendants but was, on the contrary, the result of an informed judgment that resorting to an appraisal proceeding would be too costly and time-consuming.
Because we conclude that the order should be affirmed, questions pertaining to the denial of plaintiffs’ motions for class action certification are academic.
The order should, therefore, be affirmed with costs.
Chief Judge Wachtler and Judges Simons, Alexander, Titone and Bellacosa concur; Judge Kaye taking no part.
Order affirmed, with costs.
. The action was commenced by S. William Green, Evelyn Green and Cynthia Colin as executors of the estate of Louis A. Green, deceased, and Evelyn Green (the Greens) and Cecil R. Borg, and Janette Dean, trustees under the will of Myron Borg, Jr., and Cecil R. Borg, individually (the Borgs).
Special Term dismissed the complaint of all plaintiffs and the Appellate Division affirmed. Only the Borgs have appealed from the Appellate Division order.
. For the purpose of this opinion, the name Santa Fe will be used to refer to both Santa Fe Industries and its wholly owned subsidiary Santa Fe Resources, which actually held 95% of Kirby’s stock.
. Santa Fe Resources, Inc. transferred its Kirby stock and cash to a newly formed subsidiary corporation, Forest Products, Inc., in exchange for 100% of Forest Products stock. Forest Products was then merged into Kirby, with Kirby the surviving corporation. The cash transferred from Santa Fe Resources was used to buy out the minority stockholders.
. Since only the Borgs are before the court on this appeal (see, n 1, supra), "plaintiffs” will be used to refer only to the Borgs.
. The Morgan Stanley appraisal assigned the asset value a 5% weight in determining the fair value of a share of Kirby stock. In Bell v Kirby Lbr. Corp. (413 A2d 137, 147 [Del]), the Delaware Supreme Court stated "we are satisfied that the Morgan Stanley appraisal is the product of an orderly and logical deductive process in accordance with approved methodology properly accepted by the Appraiser and the Vice-Chancellor.”
. The emphasis which the Delaware court placed on the withholding of this memorandum from the other UOP directors is evident from the following excerpt in the Weinberger opinion:
"The Arledge-Chitiea report speaks for itself in supporting the Chancellor’s finding that a price of up to $24 was a 'good investment’ for Signal. It shows that a return on the investment at $21 would be 15.7% versus 15.5% at $24 per share. * * *
"Certainly, this was a matter of material significance to UOP and its shareholders. Since the study was prepared by two UOP directors, using UOP information for the exclusive benefit of Signal, and nothing whatever was done to disclose it to the outside UOP directors or the minority shareholders, a question of breach of fiduciary duty arises. This problem occurs because there were common Signal-UOP directors participating, at least to some extent, in the UOP board’s decision-making processes without full disclosure of the conflicts they faced.” (Weinberger v UOP, Inc., 457 A2d 701, 709 [Del].)
