M. Lowell HARMAN, Plaintiff Below, Appellant, v. MASONEILAN INTERNATIONAL, INC., Studebaker-Worthington, Inc. and Worthington Corporation, Defendants Below, Appellees.
Supreme Court of Delaware.
Submitted Feb. 9, 1981. Decided Feb. 9, 1982.
442 A.2d 487
Jeffrey B. Rudman (argued), of Hale & Dorr, Boston, Mass., of counsel, and A. Gilchrist Sparks, III, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant-appellee Masoneilan Intern., Inc.
Before DUFFY, QUILLEN and HORSEY, JJ.
HORSEY, Justice, with DUFFY, Justice, joining:**
This appeal from our Court of Chancery raises an issue not explicitly addressed by this Court in Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107 (1952) and its progeny. Specifically, the issue is whether a complaint alleging breach of fiduciary duty by a majority shareholder in approving a merger allegedly fraudulent to the minority states a cause of action cognizable in equity when monetary relief is the only practicable remedy available and when defendants establish that the minority shareholders have themselves overwhelmingly approved the merger.
The Chancellor dismissed the complaint for lack of subject matter jurisdiction. He ruled: that plaintiff was barred as a matter of law by laches from rescission—the “only” equitable remedy sought;1 that the complaint failed to state a claim in equity‘s exclusive jurisdiction for breach of fiduciary duty of majority to minority shareholders; and that plaintiff had an adequate remedy at law. The Chancellor so ruled for two reasons: (1) because the merger required and received the approval of a majority of the minority shareholders voting as a class; and (2) because he found damages to be the only feasible relief. We reverse.
For the purposes of this appeal, the factual allegations of the complaint must be taken to be true and all inferences therefrom construed in plaintiff‘s favor. duPont v. duPont, Del.Supr., 90 A.2d 467 (1952); Jefferson Chem. Co. v. Mobay Chem. Co., Del.Ch., 253 A.2d 512 (1969). So viewed, the pertinent facts as pleaded are:
Masoneilan International, Inc. (Masoneilan) was a Delaware corporation engaged in the manufacture and service of automobile process control equipment. Masoneilan first offered its common stock for public sale in 1971. By May 26, 1977, the date of the merger, Masoneilan had outstanding two types of common stock: approximately 400,000 shares of publicly traded stock and 1,470,000 shares of Class B common stock. All of the Class B stock was owned by Worthington Corp. (Worthington), a wholly owned Delaware subsidiary of Studebaker-Worthington, Inc. (S-W), a Delaware corporation. The holders of the publicly traded common stock were entitled to one vote per share while the holders of Class B stock were entitled to four votes for each share held. Through its ownership of all the Class B stock, Worthington exercised more than 93 percent of the total voting power of Masoneilan and elected the majority of Masoneilan directors. By its control of Worthington, S-W controlled Masoneilan.
On May 26, 1977 Masoneilan merged with another Delaware corporation, a wholly owned subsidiary of S-W in a stock-for-stock exchange. Masoneilan shareholders received .8471 of a share of S-W stock for each share of Masoneilan stock. The merger was approved by vote of about 64 percent of the outstanding minority shares with 7 percent opposed. Prior to the minority‘s vote, a proxy statement was issued by Masoneilan, endorsing the merger.
The present action was filed in July 1979 by M. Lowell Harman, a former Masoneilan shareholder, on behalf of himself and other Masoneilan shareholders.2
The complaint alleges that the three corporate defendants, Worthington, its parent, S-W, and Masoneilan, breached their respective fiduciary and common law duties owed Masoneilan‘s minority shareholders in
In support of its “inadequate exchange” charge, the complaint alleges that defendants first deliberately depressed the market value of Masoneilan stock by failing to pay adequate dividends and then used the stock‘s depressed value to fix the exchange ratio for S-W stock; and then failed to take into consideration, in fixing the exchange ratio, Masoneilan‘s historic and projected growth rate, its price-earnings ratio and its bright prospects for future sales and earnings.
In support of its proxy statement charge, the complaint alleges that Masoneilan‘s proxy statement soliciting approval of the merger was materially false and misleading in its failing to disclose to the minority shareholders five items of pertinent information; i.e., (1) management‘s prediction of near-term significant increases in Masoneilan‘s sales and earnings; (2) pertinent price/earnings ratio information; (3) the existence of a conflict of interest between Masoneilan‘s management and its public shareholders (evidenced by the fact that certain directors favored, for personal tax reasons, a “lower tax-free exchange ratio” over a cash purchase at a higher price); (4) Masoneilan‘s President‘s opinion (previously privately expressed) that its minority shareholders were entitled to a cash price of not less than $80 per share, or about 16 times earnings, in contrast with the $39.60 value of the proposed exchange of stock; and (5) that the merger served no proper business purpose.3
The complaint seeks alternative forms of relief; a declaration that the merger is void; an order permitting each class member the option of returning the S-W shares received in the merger for the Masoneilan shares relinquished; and an accounting.
Four days after plaintiff filed his complaint, on July 24, 1979, S-W and McGraw-Edison (McGraw), a Delaware corporation, issued a joint press release stating that they had reached an agreement to merge. That merger, accomplished on October 24, 1979, resulted in S-W becoming a wholly owned subsidiary of McGraw-Edison, with all S-W shareholders (including former Masoneilan shareholders) acquiring the right to receive cash. S-W then ceased to be a publicly-traded stock on the New York Stock Exchange.
II
In support of its dismissal4 of the complaint for lack of subject matter jurisdiction, the Court below made the following findings and conclusions: (1) that laches barred plaintiff from rescission, the only equitable relief sought; (2) that damages were plaintiff‘s only feasible relief and
Urging affirmance of the decision below, defendants make essentially two arguments. First, they argue that the complaint states only a claim at law for fraud or deceit. This is so, defendants say, because the essence of plaintiff‘s claim is that defendants deprived plaintiff (and others similarly situated) of an adequate consideration for their stock through defendants’ allegedly fraudulent and coercive acts. Such allegation, defendants say, states, at best, a claim within equity‘s concurrent, not its exclusive, jurisdiction; hence, the Chancellor correctly dismissed the suit because: (a) plaintiff clearly has an adequate remedy at law for damages; (b) plaintiff does not allege otherwise; and (c) the only equitable relief sought—rescission—is neither feasible nor available due to plaintiff‘s laches.
Second, defendants argue that the complaint‘s allegations of Worthington‘s breach of its fiduciary duty of fairness to the minority in a merger context fails to state a cognizable “fairness” claim under the Sterling-Singer line of cases. To state such a claim, defendants say that plaintiff was required to allege that Worthington exercised its voting control to impose the merger on the minority and did so for an improper purpose. Defendants point to uncontroverted facts that the merger was structured to require for its approval the affirmative vote of a majority of the minority public shareholders voting as a class and that such “independent” approval was overwhelmingly obtained.6 Thus, defendants say the complaint was properly dismissed.
Defendants thereby construe Delaware law relating to equity‘s recognition of a fiduciary duty of majority to minority shareholders in a merger context to be that no actionable claim for breach of fiduciary duty lies within equity‘s inherent or exclusive jurisdiction where monetary relief is the only available remedy and where it can be demonstrated that the majority shareholder has not invoked the corporate machinery to impose the merger on the majority.7
Plaintiff makes two responses: First, assuming damages to be the only feasible relief, pertinent Delaware case law does not support defendants’ position that a claim arising out of a majority shareholder‘s alleged breach of fiduciary duty to the minority states at most a claim lying within equity‘s concurrent, rather than its exclusive, jurisdiction due to the availability of an action at law for fraud or deceit. Second, assuming the correctness of defendants’ contention—that a majority shareholder‘s exercise of the corporate machinery to effect a merger is a prerequisite to finding equity to have exclusive jurisdiction—the complaint meets this exercised control test as well. Plaintiff says that the Court below and defendants have ignored the complaint‘s averments that Worthington and its designees used their controlling position to “coerce” the minority‘s approval of the merger through a materially misleading proxy statement. Plaintiff argues that such allegations, if established, vitiate defendants’ reliance on the minority‘s “independent” approval of the merger. And without the minority‘s truly independent approval of the merger, plaintiff says that
Bearing in mind that this case is before us on motion to dismiss, we hold: that the complaint states a Singer claim in equity for breach of fiduciary duty of a majority shareholder to the minority shareholder; and that the claim lies within equity‘s inherent or exclusive jurisdiction even though damages through an accounting may be the only feasible relief. We conclude that defendants’ reliance on the minority shareholders’ approval of the merger does not warrant dismissal—given plaintiff‘s allegation that the public shareholders’ approving vote was “coerced” through a materially false and misleading proxy statement. Finally, we conclude that the Court erred in ruling on motion to dismiss that any claim for rescissional relief (which may include rescissional damages) was barred by laches.
III
Defendants argue that neither the Court of Chancery, nor this Court, has ever explicitly addressed the question of equity‘s scope of jurisdiction over Singer “fairness” claims. Defendants say that Singer and its progeny mask rather than confront the jurisdictional issue here raised. And defendants say that if we apply time-honored tests for determining equity‘s jurisdiction over such claims for breach of fiduciary duty in a corporate context, we must conclude that the Chancellor properly dismissed the suit on jurisdictional grounds. Thus, defendants’ argument requires us, at the outset, to review the Sterling-Singer development of the law concerning a majority shareholder‘s fiduciary duty to the minority in a merger context—with defendants’ jurisdictional argument in mind.
In Sterling, supra, this Court recognized as a “settled” rule of law in Delaware that a majority shareholder and its director designees occupy a fiduciary relationship to the minority shareholders from which springs a duty of fairness in dealing with the minority‘s property interests. Sterling also ruled that where the majority stands “on both sides” of a transaction, the majority has the burden of establishing the transaction‘s “entire fairness” to the minority. 93 A.2d at 110.8 See also Keenan v. Eshleman, Del.Supr., 2 A.2d 904 (1938); Gottlieb v. Heyden Chem. Corp., Del.Supr., 90 A.2d 660 (1952); Bennett v. Breuil Petroleum Corp., Del.Ch., 99 A.2d 236 (1953).
In Singer, supra, we applied the Sterling fiduciary duty rule of fairness required of a majority shareholder to the minority to a “cash-out” merger under
“We hold the law to be that a Delaware Court will not be indifferent to the purpose of a merger when a freeze-out of minority stockholders on a cash-out basis is alleged to be its sole purpose. In such a situation, if it is alleged that the purpose is improper because of the fiduciary obligation owed to the minority, the Court is duty-bound to closely examine that allegation even when all of the relevant statutory formalities have been satisfied.” 380 A.2d at 979.
And we held:
“... that a
§ 251 merger, made for the sole purpose of freezing out minority stockholders, is an abuse of the corporate process; and the complaint, which so alleges in this suit, states a cause of action for violation of a fiduciary duty for which the Court may grant such relief as it deems appropriate under the circumstances.” 380 A.2d at 980.
Thus, in Singer we applied the rule in Sterling to sustain equity‘s jurisdiction over suit by a minority shareholder against a majority shareholder for alleged breach of fiduciary duty to the minority in a
The fiduciary duty of a majority shareholder to the minority in a Delaware corporation was next considered in another “freeze-out” of minority shareholders in a
However, notwithstanding a proper business purpose finding, we remanded the Tanzer appeal to the Court of Chancery for a further “fairness” hearing. The purpose of the further hearing was to determine whether the majority shareholder had met its “entire fairness” fiduciary duty to the
Elaborating upon the above statement in Tanzer, this Court in Roland Intern. Corp. v. Najjar, Del.Supr., 407 A.2d 1032 (1979) extended the rule in Singer to a short-form “cash-out” merger under
“That argument misses the point of Singer. The law of fiduciary duty, on which Singer is based, arises not from the operation of
§ 251 but independent of it.... As we have attempted to make plain, the duty arises from long-standing principles of equity and is superimposed on many sections of the Corporation Law, including, we think,§ 253 ... [W]e find nothing magic about a 90% ownership of outstanding shares which would eliminate the fiduciary duty owed by the majority to the minority. That duty existed in Singer, when the parent corporation owned about 84% of the target corporation‘s stock ... To state it another way, the shortcut to merger afforded by§ 253 may not be used to short-circuit the law of fiduciary duty. Cf. 46 Geo.Wash.L.Rev., supra at 892. The duty of the majority is not diluted as control is strengthened nor is the right of the minority determined by how small it is. Thus the fiduciary obligation owed in the context of a merger, be it long or short, is singular, and falls alike on those who control ‘at least 90% of the outstanding shares,’§ 253 , and those who control a majority but less than 90%,§ 251 .” 407 A.2d at 1036.
While the Court of Chancery‘s jurisdiction over the claim in Roland was not specifically addressed in the majority opinion of this Court, we did note that plaintiffs sought no relief other than money damages. While Justice Quillen, in dissenting, found the complaint to fail to state a claim for equitable relief, his explicit rationale for dismissal was not equity‘s lack of jurisdiction over the fairness claim but rather the adequacy of plaintiffs’ appraisal remedy which lay in equity. Moreover, this Court in Roland emphasized the majority shareholder‘s duty, apart from demonstrating a proper purpose for the merger, to show the entire fairness of all aspects of the merger to the minority shareholders.
“In other words, the fiduciary duty exists even if the majority has a bona fide purpose for eliminating the minority; ... [T]he duty of the majority is to treat the minority fairly.” 407 A.2d at 1035.
The principles enunciated in the Sterling and Singer line of cases had their most recent application in Weinberger v. UOP, Inc., Del.Ch., 409 A.2d 1262 (1979) in a context that defendants say confirms the correctness of the Chancellor‘s dismissal of this complaint. There, the initial complaint attacking a “freeze-out” merger of minority shareholders was dismissed by Vice Chancellor Grover C. Brown for failure to state a claim for relief. The complaint as originally drawn had simply charged that the terms of the cash-out merger proposed by the majority shareholder were unfair for inadequacy of consideration and that the merger lacked a business purpose apart from elimi
IV
Defendants argue that the case at bar is indistinguishable from Weinberger; and, hence, the Chancellor‘s dismissal of the instant complaint was also proper. We disagree.
Here, as in Weinberger, the merger was structured to require its approval by a majority of the minority shareholders. But the complaint before us contains an element missing from the original Weinberger complaint, namely, its allegation that the minority shareholders’ vote was “coerced” by a materially false and misleading proxy statement relating to the merger. Thus, the instant complaint goes beyond the initial complaint in Weinberger by alleging, in effect, that the majority did exercise its control over the corporate machinery to obtain the minority‘s approval of the merger through improper means.
As previously noted, the complaint before us alleges that the proxy statement disseminated to the minority shareholders was misleading in failing to inform the shareholders: (1) that the defendant directors of Masoneilan favored a lower tax-free exchange ratio of Masoneilan common stock for S-W stock over higher cash purchase; and (2) that the minority shareholders would as a consequence of the merger own a substantially smaller percentage of equity in S-W than they did in Masoneilan. The complaint further alleges that defendants falsely represented that the exchange ratio was fair and equitable. Thus, the complaint charges defendants with acts of misconduct in using their majority position to achieve the merger. Accepting such allegations of the non-moving party to be true, as we must, on defendants’ motion to dismiss, the minority shareholders state that they were misled so as not to have been given, in reality, an effective right to veto the merger.
We must agree with plaintiff that his allegations distinguish this complaint from the factual context in which Weinberger was initially decided.15 We conclude that
V
We turn to defendants’ two-prong argument (a) that plaintiff‘s claim lies within equity‘s concurrent rather than its inherent or exclusive jurisdiction; and (b) that since plaintiff has an adequate remedy at law, the suit was properly dismissed. The first argument is more difficult to grapple with than the second; but we conclude that both must be rejected.
The thrust of defendants’ concurrent jurisdictional argument is this: that in testing equity‘s exclusive jurisdiction over a fairness claim for breach of fiduciary duty asserted against a majority shareholder and corporate management, the critical inquiry relates not to the nature of the right or claim asserted but to the available remedy.18 Applying that approach to this complaint, defendants say the claim stated does not lie in equity‘s exclusive jurisdiction; and because an adequate remedy lies at law, the suit was properly dismissed. For supporting authority, defendants refer us to ancient authorities19 and basic principles on the division between law and equity.
Defendants argue that our Court of Chancery‘s jurisdiction is limited to two types of claims: (a) claims not recognized at law; and (b) claims for which the remedy available at law is insufficient. Defendants define equity‘s exclusive jurisdiction over causes solely in terms of claims that are not otherwise recognizable at law. And because this Court has recognized certain claims for breach of fiduciary duty to fall within equity‘s concurrent jurisdiction, Bovay v. H. M. Byllesby & Co., Del.Supr., 38 A.2d 808 (1944), defendants argue that all breach of fiduciary duty claims—including this suit—fall within equity‘s concurrent and not its exclusive jurisdiction.
Defendants rely upon dictum in Bovay, supra, as conclusively establishing that a claim against corporate management for breach of fiduciary duty and fraud lies only within equity‘s concurrent and not within its exclusive jurisdiction. Defendants also rely upon a statement from Pomeroy that “jurisdiction of Equity in cases of fiduciary relations is concurrent and depends upon the superiority of its remedies....” Pomeroy, Equity Jurisdiction, § 158 (5th Ed., 1941).
It is true that in Bovay the Court stated that a claim for breach of trust arising by operation of law (directors of a corporation being treated as trustees for the stockholders), “is theoretically within the concurrent jurisdiction of the law and equity courts.” 38 A.2d at 814. However, the question in Bovay was whether the Chancellor had correctly dismissed the suit by applying a statute of limitations governing equivalent actions at law. Holding that dismissal was error, the Chief Justice ruled that the suit against directors for breach of their fiduciary duty of “utmost good faith and fair dealing” towards their stockholders was governed by equitable principles. And notwithstanding that the complaint sought only money damages through an accounting, the Court concluded that the suit properly lay in equity, stating:
“An accounting is prayed; and a proper accounting and the correct inferences to be drawn from the facts developed are matters only for a court of equity in which a careful, patient and extended examination of all of the evidence can be made and a just conclusion reached by a trained mind in accordance with established equitable principles. (citation omitted).” 38 A.2d at 814.20
Further, Pomeroy‘s classification of claims for breach of fiduciary relations as falling within equity‘s concurrent rather than its exclusive jurisdiction (with ultimate jurisdiction as between equity and law depending upon the remedy sought) has been criticized and rejected by such re-known professors in the field of equity jurisprudence as Joseph Story, Austin W. Scott and Sidney P. Simpson. Scott and Simpson define equity‘s concurrent jurisdiction as covering “cases where a right exists at law but the legal remedy is inadequate.” Scott and Simpson, Cases and Judicial Remedies 616 (2nd Ed. 1946). Professor Story defines equity‘s exclusive jurisdiction as being “di
“Pomeroy, Equity Jurisprudence (4th Ed. 1918) §§ 136-143, adopts a different classification. He uses the terms ‘concurrent’ and ‘exclusive’ to refer to the remedy; thus, he would say that a money decree against a trustee was an example of the concurrent jurisdiction, while an injunction against a legal tort was an example of exclusive jurisdiction, because only equity courts grant injunctions. This classification is adopted in Clark, Equity (1919) § 34, but is of little value at best and misleading at worst.” Scott and Simpson, supra, at 616, n.2. (emphasis added).
The contention that all claims based on fraud necessarily fall within equity‘s concurrent rather than its exclusive jurisdiction, as defendants contend, has also been rejected by legal scholars. Professor Story points out that cases of fraud were actually heard in equity even before it acquired jurisdiction over uses and trusts, and that certain cases of fraud fall within equity‘s exclusive rather than its concurrent jurisdiction.
“And here it may be laid down as a general rule subject to few exceptions, that Courts of Equity exercise a general jurisdiction in cases of fraud, sometimes concurrent with and sometimes exclusive of other courts. It has been already stated that in a great variety of cases fraud is remediable, and effectually remediable at law ... But there are many cases in which fraud is utterly irremediable at law; and Courts of Equity in relieving against it often go not only beyond but even contrary to the rules of law. And with the exception of wills, as above stated, Courts of Equity may be said to possess a general and perhaps a universal concurrent jurisdiction with Courts of Law in cases of fraud cognizable in the latter; and exclusive jurisdiction in cases of fraud beyond the reach of the Courts of Law...
The Jurisdiction in matters of fraud is probably coeval with the existence of the Court of Chancery; and it is equally probable that in the early history of that court it was principally exercised in matters of fraud, not remediable at law....” 1 Story Commentaries on Equity Jurisprudence §§ 260, 261 at 256-261 (14th Ed. 1918). (emphasis added).
Our review of the Sterling-Singer development of Delaware equity law leads us to conclude that “fairness” suits for alleged fraud and breach of fiduciary duty fall within our Court of Chancery‘s exclusive and not its concurrent jurisdiction.21 In the classic Sterling-Singer minority shareholders suit where a claim for breach of fiduciary duty through exercised control over the merger is pleaded against the majority shareholder, the issues are fairness and proper purpose. And when defendants stand on both sides of the transaction through control of the corporate machinery, under Sterling, the burden of proof of fairness shifts to defendants, who must also establish there to be a business purpose for the merger other than a freeze-out of the minority.
We find the claim before us to be comparable to the claim in Singer and not materially distinguishable from the claim in Roland. (Defendants acknowledge that Roland and Singer involved “purely equitable claims not cognizable at law.“) Singer differs from the instant case only in that injunctive relief is not here sought, though equitable remedies of rescission and accounting are prayed for. However, in Roland, as here, only monetary damages were sought.
Contrary to defendants’ assertion, we find the wrong in Roland not to be materially different from the wrong pleaded in the instant case. Here, it is alleged that the minority‘s vote to approve the merger was “coerced” through a materially false and misleading proxy statement. There, in Roland, the minority shareholders were legally denied a vote by
*
However, even if the instant claim fell within equity‘s concurrent jurisdiction, we conclude that plaintiff lacks an adequate remedy at law. The elements of a Singer claim for breach of fiduciary duty of majority to minority shareholders and the relief afforded for an established breach are significantly different from their counterparts in an action at law for fraud or deceit. The issues concern not only the fairness of the cashout price but the purposes underlying the merger and are to be reviewed against a fiduciary standard requiring “complete candor” of defendants. Lynch v. Vickers Energy Corp., Del.Ch., 351 A.2d 570, 573 (1976), rev‘d on other grounds, Del.Supr., 383 A.2d 278 (1977).
“In such cases the Court will scrutinize the circumstances for compliance with the Sterling rule of ‘entire fairness’ and, if it finds a violation thereof, will grant such relief as equity may require.” Singer, supra, at 980.
In contrast, in an action at law for deceit or fraudulent misrepresentation an intent to defraud must be established. The elements of “actionable fraud” consist of a false representation of a material fact knowingly made with intent to be believed to one who, ignorant of its falsity, relies thereon and is thereby deceived. Twin Coach Company v. Chance Vought Aircraft, Inc., Del.Super., 163 A.2d 278 (1960); Restatement (Second) of Torts, § 525. The damages available for deceit or fraudulent misrepresentation are generally limited to those which are the direct and proximate result of the false representation and which represent the “loss-of-the-bargain” or actual “out-of-pocket” loss. Poole v. N. V. Deli Maatschappij, Del.Supr., 224 A.2d 260 (1966).
On the other hand, “[e]quity adopts its decrees to fit the nature and gravity of the breach and the consequences to the beneficiaries and trustee.” Bogert, Trust and Trustees § 543(V) at 387 (2nd Ed. 1978). “The choice of relief to be accorded a prevailing plaintiff in equity is largely a matter of discretion with the Chancellor, 1 Pomeroy‘s Equity Jurisprudence (5 Ed.) § 109, ...” Lynch v. Vickers Energy Corp., Del.Supr., 429 A.2d 497, 500 (1981).
Thus, the relief available in equity for tortious conduct by one standing in a fiduciary relation with another is necessarily broad and flexible. See Restatement (Second) of Torts, § 874 (1979). Where the alleged wrongdoer stands in a fiduciary relationship and an accounting is sought for a determination of the appropriate damages, if liability is established, equity will generally entertain jurisdiction on the premise that legal remedies are inadequate. See Cheese Shop International, Inc. v. Steele, Del.Ch., 303 A.2d 689, rev‘d on other grounds, Del.Supr., 311 A.2d 870 (1973); Meeker v. Bryant, supra; and 4 Pomeroy‘s Equity Jurisprudence § 1421 (5th Ed. 1941).24
Finally, were plaintiff limited to an action at law, plaintiff‘s efforts to seek relief for all members of his class similarly situated would be lost. For Superior Court lacks a class action mechanism. Thus, if plaintiff were limited to an action at law and were to prevail on the merits, its judgment would be of no benefit to other minority shareholders similarly situated. Further, since a judgment at law would be limited to plaintiff‘s loss, any award would have little deterrent effect on a wrongdoer.
For the above reasons, we hold that the complaint before us stating a claim for breach of fiduciary duty falls within equity‘s jurisdiction, notwithstanding that damages may prove to be the ultimate appropriate relief. For the complaint seeks recovery for a form of fraud which is “beyond the reach of the courts of law.”25 Story, supra. To accept defendants’ contention to the contrary, that this minority shareholder‘s Singer “fairness” claim should be limited to an action at law for deceit or fraudulent misrepresentation, would be to take a giant step backwards in equity jurisprudence.26
Turning to the issue of laches, we conclude that the Court below also erred in ruling on defendants’ motion to dismiss the action for lack of subject matter jurisdiction that plaintiff was barred by laches from seeking rescissional relief in any form.
Defendants’ motion was predicated not on the averments of the complaint but on additional facts and conclusions contained in affidavits filed by defendants in support of their motion to dismiss; to wit: that over the two-year interval between Masoneilan‘s May 1977 merger with S-W and the filing of plaintiff‘s Delaware lawsuit in July 1979, S-W stock had been actively traded, making it difficult, if not impossible, to identify Masoneilan shareholders who, in the intervening time, sold their S-W shares and more difficult to determine the price at which the sales occurred and trading dates. Secondly, because over half of Masoneilan‘s outstanding shares were held by institutions and corporations, it would be difficult, if not impossible, to determine beneficial ownership of many of the shares. Thirdly, reference is then made (for the first time) to the October 1979 merger of S-W with McGraw-Edison, under which all outstanding publicly-owned shares of S-W were converted into cash and S-W became a wholly-owned subsidiary of McGraw-Edison. Defendants argue that rescission of one merger would be difficult but rescission of two mergers would be “impossible“.
As a preface to its ruling on the Court‘s subject matter jurisdiction, the Chancellor, in effect, struck plaintiff‘s prayer for rescissional relief on the ground that plaintiff was guilty of laches in not filing a more timely suit. The Chancellor stated:
“Assuming but not deciding that a plaintiff in a situation such as the one here presented would, if successful at trial, normally be entitled to some form of rescission, I am satisfied that such form of relief is barred to plaintiff by laches, he having sat idly by while other investors drastically changed their positions. Accordingly, whether or not it would be technically possible to undo the results of the two mergers here in issue which occurred over a two year period, which is extremely doubtful, Mills v. The Electric Autolite Company, et al CCH Fed.Sec. § 93,354 (N.D.Ill. (1972), I conclude that the only feasible relief to which plaintiff would be entitled is therefore the assessment of such money damages as he may have been caused to have improperly suffered as a result of the actions complained of.”
The Court made no mention of facts contained in plaintiff‘s counter-affidavit which apprised the Court of the New York State Court litigation over Masoneilan‘s merger with S-W which preceded the Delaware litigation by nearly three years. The thrust of plaintiff‘s counter-affidavit was that the Delaware class suit only became necessary by the May 29, 1979 ruling of the New York Supreme Court, Appellate Division, reversing a 1978 certification of the New York shareholder suit as a class action on behalf of all the minority, public shareholders of Masoneilan holding stock on the date of the disputed proxy statement and the 1977 merger. (See footnote, page 4 above for particulars as to the New York suit.) Since the Delaware suit was filed within one month of the decertification of the New York class action suit, plaintiff contends that there is no merit to defendants’ laches argument.27
“Defendants having been charged with fraudulent concealment of the essential facts upon which plaintiffs propose to rely in order to establish their cause of action in a situation in which the principal actor, Roger, owed a heavy fiduciary duty to both of his sisters, statute of limitations or laches should not at this juncture be applied to bar recovery as Roger may in fact have been guilty of fraudulent breaches of trust resulting in his self-enrichment at the expense of the corporation, (citations omitted) in the light of the allegations of the complaint, statute of limitations ... as well as laches should be affirmatively pleaded, Rule 8(c), and established at trial.” 154 A.2d at 240.
A complaint may not be dismissed for alleged failure to state a claim unless it appears to a reasonable certainty that under no state of facts which could be proved would plaintiff be entitled to relief. Fish Eng‘r Corp. v. Hutchinson, Del.Supr., 162 A.2d 722 (1960). The same principle should a fortiorari apply to a motion to strike the remedy portion of a complaint on the ground that it is barred by laches. In reality, that was the predicate of defendants’ motion in this case. By asserting laches as a bar to plaintiff‘s claim for rescission, and prevailing thereon, the way was then cleared for defendants to launch their primary attack on the Court‘s subject matter jurisdiction. Yet laches is an affirmative defense which the Rules of the Court of Chancery provide a party shall raise by “pleading to a preceding pleading“, i.e., by answer, as “constituting an avoidance or affirmative defense.”28 The benefit to defendants from asserting, before answer, a defense of “impossibility” based on laches as a bar to a claim for rescissional relief was considerable. By securing a premature ruling on plaintiff‘s right to equitable relief, defendants immeasurably improved the plausibility of their jurisdictional argument as to the adequacy of plaintiff‘s remedy at law.
The ruling below also runs counter to hornbook legal principles governing modern “notice” pleading as well as well-defined standards for ruling on a motion to dismiss or for summary judgment. Here, the Court has gone outside the complaint to obtain facts (as to security trading and a second merger) on which to base its ruling on laches; and the Court has thereby treated defendants’ motion as if it were ripe for final determination. (See Court of Chancery Rule 12(b)(1) and (6); Rule 12(d).) Yet the Court has passed over the facts relating to the New York litigation submitted by plaintiff to explain the timing of the Delaware suit. We think those facts raised, at the very least, a justiciable issue as to the timeliness of plaintiff‘s suit that precluded striking, in effect, before trial, plaintiff‘s claim for rescissional relief on the ground of laches. See Brown v. Ocean Drilling & Exploration Company, Del.Supr., 403 A.2d 1114 (1979) (holding the Court of Chancery to have erred—in granting partial summary judgment for plaintiff where issues of material fact are framed and in also prematurely dismissing plaintiff‘s claim for relief based on unjust enrichment).
Any doubt as to the existence of a genuine issue of fact must be resolved against the moving parties, here defendants. Nash v. Connell, Del.Ch., 99 A.2d 242 (1953). For the Court to rule on the remedies ultimately available to plaintiff before the rights and liabilities of the parties have been tried and determined (or at least sorted out to determine if summary judgment lies) is to put the cart before the horse. That is particularly true here where rescissional relief, if found to be appropriate, may take various forms, including rescissional damages in lieu of actual rescission, if impractical. Lynch, supra, 429 A.2d at 497.
REVERSED.
QUILLEN, Justice, concurring:
I concur in the judgment of the majority. The result is in accord with the present state of Delaware law. Roland Intern. Corp. v. Najjar, Del.Supr., 407 A.2d 1032 (1979). Given the overlay of Singer v. Magnavox Co., Del.Supr., 380 A.2d 969 (1977) and its progeny on the corporate statutory merger scheme, the result is also consistent with the policy as to the jurisdiction of the Court of Chancery as expressed by the General Assembly. Compare
As to laches and the claim for rescission, given the history of the New York cause of action noted in the majority opinion, I agree it seems desirable to inquire more thoroughly into the facts in order to clarify the application of the law to the circumstances. Ebersole v. Lowengrub, Del.Supr., 180 A.2d 467 (1962).