Plaintiffs Dennis Wood, Castillian Ventures, Inc., Cardinal Capital Management, James E. Mitchell, Mitchell Partners, L.P., Daniel F. Raider, and Edward McLaughlin assert both fiduciary duty and disclosure claims against defendants Best Lock Corporation ("BLC"), Best Universal Lock Company ("BUL"), and Frank E. Best, Inc. ("FEB") (each individually a "Best Company" and collectively the "Best Companies"), as well as Walter E. Best Company Inc. ("WEBCO") and individual defendants Russell C. Best and Mariea L. Best (the "individual defendants" or the "Bests"). Pending before the Court are defendants' partial motion to dismiss the
The plaintiffs were minority shareholders of one or more of the Best Companies, all three of which were publicly traded companies incorporated in Delaware.
Plaintiffs' claims arise out of a sale of FEB stock by BLC (the "Challenged Sale") and out of three interrelated freeze-out mergers of the Best Companies consummated on March 23, 1998 (the "Freeze-Out Mergers"). In the Challenged Sale, BLC, which at the time allegedly owned a majority of FEB voting stock, sold 23,000 shares of FEB to WEBCO, which was wholly owned by Russell and Mariea Best. This sale reduced BLC's ownership of FEB to approximately 49.5%. In the Freeze-Out Mergers, three wholly owned subsidiaries of WEBCO merged with and into the three Best Companies.
I. THE CLAIMS
The plaintiffs make many allegations in the 67-page complaint, but ultimately they assert only three claims.
In Count II, plaintiffs allege that the Challenged Sale divested the public shareholders of control of BUL and BLC and delivered control to Russell and Mariea Best. This claim is based on the theory that whenever there is a circle of majority ownership among corporations (i.e., Corporation A owns a majority of Corporation B, which owns a majority of Corporation C, which, in turn, owns a majority of Corporation A), Section 160(c) of the Delaware General Corporation Law operates to "sterilize" the voting power of all shares in any of the majority-owned corporations owned by any of the other majority-owned corporations.
Finally, in Count III the plaintiffs allege that Russell and Mariea Best, as directors of the Best Companies, were obliged to seek the "maximum value reasonably attainable" in connection with the Challenged Sale as a result of the Delaware Supreme Court's holding in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.
For the reasons explained more fully below, I deny defendants' motion to dismiss with regard to the fiduciary duty claims in connection with the Freeze-Out Mergers and the Challenged Sale and grant defendants' motion with regard to the independent disclosure claims as well as the so-called Revlon claim. I also grant plaintiffs' application for class certification, albeit provisionally.
II. FACTUAL AND PROCEDURAL HISTORY
The Best Companies trace their roots to an invention of Frank E. Best, a high school janitor from Seattle, Washington. Frank Best invented a security system known as the "interchangeable core and masterkey system" in order to avoid having to carry a cumbersome collection of iron keys around his school. In 1920, he incorporated FEB to manufacture and sell locks using his security system. He formed BUL as a subsidiary of FEB in 1924, selling a minority interest in BUL to the public in order to raise additional capital for his new company while maintaining majority-voting control over the enterprise. He repeated this process in 1928, creating BLC as a subsidiary of BUL and, again, selling a minority interest to the public. Frank Best created this corporate structure in order to raise capital for the Best Companies while still retaining voting control over them.
By the early 1990s, the Best Companies had grown substantially and undergone various changes. The basic corporate forms and ownership structure, however, remained intact. FEB still owned a majority interest in BUL and BUL still owned a majority interest in BLC. FEB was no longer controlled by Frank Best, but by his son, Walter Best, and other members of the Best family, both directly and through WEBCO. At that time, Walter Best owned all of the voting shares of WEBCO and other Best family members owned non-voting shares. WEBCO functioned essentially as a holding company for shares of the Best Companies, particularly FEB, beneficially owned by Best family members.
The ownership structure of the Best Companies changed dramatically between 1994, when Walter Best's youngest son Russell Best began his bid for control of the company, and 1998, when the Freeze-Out Mergers were consummated. By the end of this period, Russell Best had the voting power necessary to accomplish the Freeze-Out Mergers and to merge all three Best Companies into WEBCO, which by that point was wholly owned by Russell and Mariea Best. The events that occurred during this period are the basis for the plaintiffs' allegations against the defendants.
In May of 1994, in an attempt to guard against outside interests one day gaining control of the family business, Walter Best allowed Russell Best to assume control of the Best Companies. Russell Best purchased 19.34% of the then-outstanding shares of FEB from the Walter E. Best Irrevocable Trust. He also purchased 1,000 voting shares of WEBCO from Walter Best directly. This purchase provided Russell Best with voting control of the
Once he had voting control of the Best Companies, Russell Best began working toward his ultimate goal of privatizing the Best Companies and merging them into one entity under his sole control. During his first year as the sole controlling stockholder of the Best Companies, Russell Best made himself and his wife, Mariea, the sole directors of BLC.
BLP was structured to give Russell Best absolute voting control over any shares of stock held by the partnership. BLP had three partners: Russell Best, WEBCO, and BLC, BLC paid cash for an 87% interest in the partnership, while Russell Best financed his share of the partnership by causing BLC to release the collateral he had given BLC in connection with the loan he used to finance his earlier acquisition of FEB and WEBCO shares. Notwithstanding the source of the funds or the disparity in equity ownership, Russell Best and WEBCO were the voting partners of BLP, and BLC maintained a non-voting interest. Thus, although BLC owned 87% of the equity of BLP, Russell Best, not BLC, had voting control over the shares held by the partnership. Plaintiffs allege that BLP was formed and organized for the sole purpose of allowing Russell Best to control shares of the Best Companies that he could not afford to buy outright.
As a result of the buyout of the other Best family members, Russell Best's direct and indirect control over the Best Companies was strengthened. In addition to the approximately 25% of FEB shares Russell Best owned directly, he indirectly controlled the voting of the approximately 29% of FEB shares owned by BLP since he had absolute voting control over that partnership. Before, Russell Best had controlled FEB in part because of his power to vote any shares of FEB held by WEBCO. Now, he controlled approximately 54% of FEB's shares through his direct ownership of FEB shares and indirect control of the FEB shares owned by BLP.
In late 1995, Russell Best caused FEB and BUL to change their states of incorporation from Washington to Delaware. Plaintiffs allege that this redomestication facilitated the privatization of the Best Companies because, in contrast to Washington,
In 1995 and 1996, Russell Best caused BLC to begin buying out public shareholders of the Best Companies, presumably to facilitate the eventual going-private transaction by eliminating some public shareholders while simultaneously increasing his pro-rata ownership of the Best Companies. In a series of transactions, he caused BLC to purchase at least 146,049 shares of FEB, 18,861 shares of BUL, and 1,000 shares of BLC.
On August 25, 1997, BLP was dissolved. The 204,053 shares of FEB held by BLP were distributed to the general partners of BLP — Russell Best, WEBCO, and BLC. As a result of this distribution, BLC's direct ownership of FEB increased to approximately 54%. Following the dissolution of BLP, BLC executed the Challenged Sale, selling 23,000 shares of FEB stock to WEBCO. This sale was enough to drop BLC's ownership of FEB to 49.5%, or just below 50%. The plaintiffs allege that this sale was executed in order to avoid circular majority ownership among the Best Companies and thereby to reverse the sterilization of all shares of any of the Best Companies owned by any other Best Company under Section 160(c) of the DGCL.
In late October of 1997, the proposed form of the going-private transaction changed. Under the new plan, each of the three Best Companies would merge with a separate, newly formed subsidiary of WEBCO. FEB would merge with Webco One, BUL would merge with Webco Two, and BLC would merge with Webco Three. Following these separate mergers, the three merged entities would be collapsed into WEBCO, which was wholly owned by Russell and Mariea Best.
Webco One, Webco Two, and Webco Three (the "Webco Subsidiaries") were formed in November of 1997 as wholly owned subsidiaries of WEBCO. Russell and Mariea Best were appointed as the sole directors of each of the Webco Subsidiaries and Russell Best was appointed as the sole officer of each company.
The Freeze-Out Mergers were consummated on March 23, 1998. Each share of BLC was converted to the right to receive either 1/15,926 of a new fully paid and non-assessable share in the surviving corporation or, for shareholders who did not hold enough shares to receive a whole share of the new BLC common stock, a cash payment of $525.43 per share of BLC stock. Similarly, each share of BUL was converted to the right to receive either 1/27,272 of a share of stock in the surviving entity or a cash payment of $120.69 per share of BUL stock. Finally, each share of FEB was converted to the right to receive either 1/115,809 of a share of stock in the surviving entity or a cash payment of $53.61 per share of FEB stock.
No shareholder other than Russell and Mariea Best, WEBCO, or other Best Companies had enough shares to elect to receive shares in the surviving entities. Thus, every unaffiliated minority shareholder, i.e., every shareholder except Russell and Mariea Best (or an entity under their control), was cashed out. The minority shareholders were presented with two options: they could accept the merger consideration or they could refuse the merger consideration and preserve their appraisal rights.
The corporations surviving the Freeze-Out Mergers were then merged into WEBCO and WEBCO was renamed Best Lock Corporation. Thus, in the end, Russell and Mariea Best became sole owners of the only surviving entity, Best Lock Corporation. Russell Best was named sole director and President of this entity.
III. STANDARD OF REVIEW ON A MOTION TO DISMISS
The applicable standard on a motion to dismiss is clear. The Court must assume the truthfulness of all well-pled facts alleged in the complaint, view all inferences from those facts in the light most favorable to the plaintiffs, and determine with "reasonable certainty" that the plaintiffs would not be entitled to relief under any set of facts that could be proven.
IV. COUNT I: BREACH OF FIDUCIARY DUTIES IN CONNECTION WITH THE FREEZE-OUT MERGERS
Plaintiffs allege that the defendants engaged in unfair dealing in connection with the Freeze-Out Mergers in six ways: (1) by favoring their own financial interests over those of the Best Companies and the public shareholders;
Because plaintiffs' second claim of unfair dealing is essentially the same as Count II of the consolidated complaint, which alleges that the defendants breached their fiduciary duties in connection with the Challenged Sale, I will defer consideration of that claim until I address the merits of the second cause of action later in this opinion. Plaintiffs' first, fifth, and sixth claims of unfair dealing, as well as their claims of unfair price and unfair process, present variations on a basic underlying claim of self-dealing. I will consider these claims first. Plaintiffs' third and fourth claims of unfair dealing both address the disclosures in connection with the Freeze-Out Mergers. These claims are related to one another and independent of the self-dealing claims. I will consider them second. Finally, defendants have raised a defense of acquiescence. I will consider this defense third.
A. Allegations Based on Self-Dealing
The complaint alleges self-dealing by the defendants in several forms, as set forth in more detail above and in this Court's earlier opinion in Wood v. Frank E. Best, Inc.
B. Allegations Based on Inadequate Disclosure
The plaintiffs allege that defendants made several material misrepresentations in the Information Statement. In order for alleged misrepresentations to be material, there must be "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available" to the shareholders.
In order to state a disclosure claim, the plaintiffs must "`allege that facts are missing from the [Information Statement], identify those facts, state why they meet the materiality standard and how the omission caused injury.'"
I turn first to the disclosure claims in connection with the sale of FEB stock to WEBCO by BLC. The plaintiffs were never asked to make any decisions about the Challenged Sale. The only decision faced by the plaintiffs in this case was whether to tender their shares in the Freeze-Out Mergers or to keep their shares and perfect their appraisal rights. Further disclosure regarding the Challenged Sale would not have been helpful with respect to this decision because it would not have altered the total mix of information available to the plaintiffs. Moreover, the additional disclosure sought by the plaintiffs would have forced the Boards of Directors of the Best Companies to engage in "self-flagellation" and to draw adverse legal conclusions potentially implicating themselves in breaches of fiduciary duty. Such disclosure is not required under well-established principles of Delaware law.
Second, plaintiffs challenge the disclosure concerning Piper's valuation methodology. Plaintiffs contend that the defendants made an "egregious misrepresentation" by stating that "`[Piper's] evaluation of the price ranges were established... in terms of valuation methods employed in appraisal proceedings under Section 262 of the DGCL and applicable case law.'"
Although Piper may have used methods to appraise the shares that would differ from methods used by this Court in a statutory appraisal proceeding, I do not believe that the alleged misrepresentations made about Piper's valuation methodologies are material. The language of the Information Statement cited by the plaintiffs could only mislead shareholders into thinking that they might not receive more money for their shares in a statutory appraisal, as plaintiffs contend, if these statements were isolated from the rest of the Information Statement. Read as a whole, the Information Statement directly contradicts such a conclusion. Specifically, the Information Statement states prominently and in capital letters, in a section entitled "Stockholders' Rights of Appraisal," that "STOCKHOLDERS CONSIDERING SEEKING APPRAISAL SHOULD BE AWARE THAT THE FAIR VALUE OF THEIR SHARES AS DETERMINED UNDER SECTION 262 COULD BE MORE THAN, THE SAME AS OR LESS THAN THE CONSIDERATION THEY WOULD RECEIVE PURSUANT TO THE MERGER AGREEMENT IF
Next, plaintiffs allege that Piper was not independent, contrary to the defendants' representations in the Information Statement. This is important to the public shareholders of the Best Companies, plaintiffs contend, because they may rely on Piper's independence to "conclude that the merger consideration and the methodology by which it was determined are fair to the public stockholders."
Fourth and fifth, the plaintiffs contend that the Information Statement contains misrepresentations about the financial data supplied to Piper by the management of the Best Companies and also fails to disclose that data. It is uncontested that Piper used data prepared by management to create its own financial projections. This fact is clearly disclosed in the Information Statement.
Delaware courts have held repeatedly that a board need not disclose specific details of the analysis underlying a financial advisor's opinion.
Finally, plaintiffs allege that the Information Statement contains various miscellaneous omissions and misrepresentations. I have carefully reviewed each of these
First, plaintiffs contend that the assertion in the Information Statement that "the Companies structured the transaction in a way to ensure that the Unaffiliated Stockholders of each Company would have dissenter's rights under Delaware law (as compared to accomplishing a similar transaction via a reverse stock split which would not have provided stockholders with the ability to have their shares appraised)" is misleading because it falsely suggests that management intended to benefit the public shareholders by structuring the transaction as it did.
Second, plaintiffs contend that the Information Statement is materially incomplete because it fails to explain why Piper added a 15% premium to its comparable public company analysis or how such a premium was derived.
Third, plaintiffs claim that the Information Statement should have disclosed the SEC's views of the Freeze-Out Mergers. Defendants need not include information that is prospective or hypothetical in nature, such as the SEC's concerns about the merger that do not constitute a final judgment. Moreover, the Information Statement discloses, as required by law, that "THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL."
Finally, the plaintiffs allege three miscellaneous misrepresentations or omissions.
C. Defendants' Acquiescence Defense
Defendants contend that the claims raised by plaintiffs who have tendered their shares and accepted the merger consideration should be dismissed because those plaintiffs have acquiesced in the Freeze-Out Mergers. Plaintiffs respond by claiming that they did not tender their shares voluntarily and that they were not fully informed when they tendered their shares. I note initially that any plaintiffs who have not tendered their shares will be able to pursue the self-dealing claims in connection with the Freeze-Out Mergers regardless of my decision on this point.
I turn first to the argument that the plaintiffs who tendered their shares after the merger was consummated did not do so voluntarily. Defendants maintain that the plaintiffs had a choice: they could hold their shares and seek appraisal or they could tender their shares for the merger consideration. It is not clear, however, that these alternatives presented the plaintiffs with a meaningful choice.
Defendants rely on Trounstine v. Remington Rand, Inc.
The Court of Chancery explained that Trounstine could not be deprived of his contractual rights by the corporation in this way, describing Remington Rand's action as "nugatory as to him."
The Court then explained that Trounstine waived his old rights by choosing to exchange them for the new rights.
Defendants argue forcefully that the Delaware Supreme Court's decisions in Bershad v. Curtiss-Wright Corp.
Bershad involved a freeze-out merger conditioned on the vote of a majority of the minority shareholders. Significantly, the plaintiff in Bershad did not raise a claim of self-dealing, as in this case;
The Court of Chancery's holding in Bershad was unremarkable: only those shareholders
The Supreme Court affirmed this decision four years later. The narrow issue addressed by the Supreme Court in the portion of its decision that is relevant to this discussion was whether Weinberger provided a quasi-appraisal remedy for all shareholders challenging the fairness of the merger or only those shareholders who neither voted in favor of the merger nor accepted its benefits.
The Supreme Court's analysis, however, is consistent with the interpretation of Trounstine set forth above. The plaintiffs in Bershad were challenging only the fairness of the price paid in the merger. Those plaintiffs would have been entitled to do exactly that in a statutory appraisal action if they had perfected their appraisal rights rather than voting in favor of the merger or tendering their shares. By voluntarily and knowingly exchanging their shares (and their appraisal rights) for the merger consideration, however, plaintiffs like Bershad lost any right in equity to seek a quasi-appraisal. The result in Bershad would, in my opinion, have been different had the plaintiffs raised a colorable duty of loyalty claim, as the plaintiffs in this case have done,
The Supreme Court's decision in Kahn v. Household Acquisition Corp., when considered in context, is no more helpful for the defendants. As in Bershad, the defendants in Kahn did not breach their fiduciary duties in connection with the freeze-out merger at issue and the plaintiffs were left challenging only the fairness of the price paid.
The Supreme Court affirmed the decision of the Court of Chancery in Kahn, concluding that the directors did not breach their fiduciary duties and prohibiting shareholders who voted in favor of the merger from seeking a quasi-appraisal. The Supreme Court reversed the Court of Chancery, however, to the extent that it precluded shareholders who tendered shares between the consummation of the merger and the Court's 1982 decision from sharing in the quasi-appraisal award. Because of the "unusual history and circumstances" of the case, the Supreme Court held, all members of the class who tendered their shares after consummation of the merger would be entitled to participate in the increased quasi-appraisal valuation.
The Kahn decision, unlike the Bershad decision, did contain a discussion of acquiescence, but much of that discussion focused on the particular facts of that case. Nothing in that discussion is inconsistent with the reasoning set forth above. The Supreme Court did note, however, that before a plaintiff's claim will be barred by acquiescence, it must be shown that the plaintiff engaged in "inequitable conduct that precludes assertion of rights to attack the underlying merger."
Moreover, in this case an essential element of acquiescence — that the acquiescing party shows unequivocal approval of the transaction
The result advocated by the defendants would be anomalous for several other reasons in addition to those discussed previously.
Allowing acceptance of the merger consideration in a freeze-out merger to extinguish equitable claims would also be inconsistent with Kahn v. Lynch Communication Systems, Inc.
If this is the logical basis for our law, there are important implications for situations like this one. It would be a very strange result indeed if a unanimous ratifying vote of the minority shareholders (when they were still in a position to prevent the merger from happening, if the merger were conditioned on the ratifying vote) did not extinguish an equitable claim but the simple act of tendering shares once the merger was consummated did. Regardless of the potentially coercive atmosphere undercutting its legitimacy, a ratifying vote seems both to be more voluntary and to provide more unequivocal approval of a transaction than tendering shares in the face of a Hobson's choice between pursuing a potentially inadequate appraisal remedy and accepting potentially unfair merger consideration tainted by self-dealing. Majority shareholders who elect to freeze out minority shareholders should not be made better off by choosing to forego protective structural mechanisms. Stated differently, acquiescence (or ratification implied from the actions of shareholders) should not be given greater force than explicit ratification. It would be anomalous, to say the least, to extinguish equitable claims based on implied approval (or acquiescence) when such claims are not extinguished by explicit approval (or ratification). Under defendants' interpretation of Bershad and Kahn, however, any fully informed shareholder who tendered shares would be barred from pursuing an equitable claim, even if that shareholder explicitly disapproved of the transaction. This cannot be the proper result.
Because I have determined that the plaintiffs did not voluntarily tender their shares in a way that showed their approval of the Freeze-Out Mergers, I need not reach plaintiffs' argument that the defendants must prove the accuracy and completeness of the Information Statement before I can conclude that the plaintiffs were fully informed when they tendered their shares. Defendants' motion to dismiss the claims of plaintiffs who have tendered their shares is denied.
V. COUNT II: BREACH OF FIDUCIARY DUTIES IN CONNECTION WITH THE CHALLENGED SALE
In Count II of the consolidated complaint, plaintiffs allege that the Bests breached their fiduciary duty of loyalty and good faith in connection with the Challenged Sale of 23,000 shares of FEB by BLC to a separate company, WEBCO, controlled by the Bests. The Challenged Sale, plaintiffs assert, served to transfer control over BUL and BLC from the public shareholders to the Bests who would not otherwise have had the voting power to consummate the Freeze-Out Mergers.
The public stockholders' control of the Best Companies allegedly resulted from the action of Section 160(c) of the DGCL. As will be fully explained below, Section 160(c) generally nullifies the voting power of a corporation's capital stock when that corporation directly owns shares of its own capital stock (treasury stock) or could control the voting of its own stock indirectly through a majority-owned subsidiary.
The defendants respond that there was never any point at which the alleged circular majority ownership structure subject to Section 160(c) sterilization could have existed. In their view, there was one section of the circle that was never closed for purposes of the statute. The defendants insist that shares of FEB owned by BLC were at all times sterilized by Section 160(c). Therefore, BLC never owned a majority of FEB shares "entitled to vote" in the election of directors as required to trigger the Section 160(c) sterilization of the BLC shares owned by FEB. That being the case, the circle of majority voting control among the three Best Companies never closed, the public shareholders' voting percentages were not affected by the sale of 23,000 shares of FEB from BLC to WEBCO and, consequently, the public shareholders of BUL and BLC never gained voting control over those companies.
A. The History of Section 160(c)
It is a long-standing tenet of corporate jurisprudence that shares issued by a corporation that are owned or controlled
Delaware's current version of this rule is embodied in Section 160(c) of the DGCL and states in its entirety as follows:
The statute not only prevents a company from voting its own treasury shares,
B. The Parties' Contentions
FEB was the top-tier parent of the three Best Companies. For all periods pertinent to this litigation, FEB held a majority interest in BUL that in turn held a majority interest in BLC. The plaintiffs acknowledge in their complaint that Russell Best gained voting control over FEB, and therefore BUL and BLC, through transactions executed on May 18, 1994.
The plaintiffs allege that in response to this development Russell and Mariea Best breached their fiduciary duty to the public shareholders by causing BLC to sell just enough FEB shares to reduce BLC's ownership of FEB below the Section 160(c) triggering level of greater than fifty percent.
Defendants counter that the circular sterilization model put forth by the plaintiffs could not have occurred here because any shares of FEB owned by BLC were at all times sterilized by Section 160(c). Therefore, the public never gained control of BUL and BLC because BLC never owned the "majority of the shares entitled to vote for the directors of [FEB]" necessary to trigger the statutory sterilization asserted by plaintiffs.
C. The Language and Purpose of Section 160(c)
I must first address the defendants' argument that BLC's ownership of FEB shares never constituted a "majority of the shares entitled to vote in the election of directors of [FEB]" to trigger the sterilizing effect of Section 160(c), for were I to find it persuasive the other issues raised by the plaintiffs with respect to when the alleged circular sterilization could have occurred become moot. The language of Section 160(c) which is key to my decision in this case is: "[s]hares of its own capital stock belonging to ... another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes."
When interpreting a statute, the Supreme Court of Delaware has observed that:
Section 160(c)'s language is clear. Before any sterilization of shares occurs through the action of Section 160(c), a corporation must own "a majority of the shares entitled to vote in the election of directors." Indeed, the plaintiffs understand the critical importance of the difference between the mere ownership of a share of stock, or even a majority of the shares issued, and the ability to vote those shares for control purposes. Their entire argument is that there were times when the public shareholders of BUL and BLC had voting control over those two companies. The plaintiffs assert that during these times the public shareholders, who only owned a minority of the shares issued
When arguing that the public shareholders of BUL and BLC had control over those companies, the plaintiffs correctly focus on the number of shares entitled to vote, not merely on the percentage of issued shares owned by the public. When arguing for circular sterilization, however, the plaintiffs ignore the question of whether the FEB shares owned by BLC were entitled to be voted by BLC and, instead, look only to the percentage of the issued FEB shares owned by BLC. Section 160(c) is triggered by "a majority of the shares entitled to vote in the election of directors," not by raw ownership of a majority of the shares issued by a corporation. The Legislature made the distinction between these two kinds of "majority" ownership interests with the language it chose to include in Section 160(c) and this Court will not ignore that distinction.
In their complaint, the plaintiffs acknowledge the action of Section 160(c) sterilizing the shares of FEB owned by BLC. The structure of the Best Companies at all times pertinent to this action was such that FEB owned greater than 70% of the shares entitled to vote in the election of directors of BUL. BUL in turn owned greater than 70% of the shares entitled to vote in the election of directors of BLC. Therefore, as a second-tier subsidiary of FEB, any shares of FEB owned by BLC would be subject to Section 160(c) and would "neither be entitled to vote nor be counted for quorum purposes."
Although the literal meaning of the words of the statute serves as the foundation upon which a court is to apply the facts of the case, a final determination should not be made "until the court has attempted to understand the purposes sought to be achieved by the legislative branch and the words chosen interpreted sympathetically to the achievement of that end."
The result described above fulfills the purpose of the statute in that the directors of FEB would not be permitted to cause FEB's shares owned by BUL, its second-tier subsidiary, to be voted according to the wishes of FEB's directors. That purpose, however, is not further advanced by the plaintiffs' corollary assertion that the sterilized shares of FEB owned by BLC are somehow "entitled to vote" when applying Section 160(c) to the other Best Companies with the result that FEB becomes a majority-owned first-tier subsidiary of BLC. This theory would lead to the inequitable and anomalous result that the shares of the parent company owned by the subsidiary are sterilized and the shares of the subsidiary owned by the parent are also sterilized. Under plaintiffs' view, the parent company not only loses the ability to vote its shares owned by the subsidiary, as contemplated by the statute, but also loses voting control over its subsidiary as well. Accepting this contention leads to a result that could not have been intended by the Legislature and does not advance the statute's purpose.
To illustrate the inequity that would result if the plaintiffs' view of Section 160(c) were accepted, consider the further implications of their argument. As plaintiffs would have it, Section 160(c) would sterilize the BUL shares held by FEB and the BLC shares held by BUL. The purpose of the statute, as noted above, is to prevent entrenchment of directors who might try, directly through treasury stock or indirectly through a subsidiary or otherwise, to
The correct result in this case is that FEB still controls 78% of the voting power of BUL, BUL retains control over 79% of the voting power of BLC, and the public shareholders maintain their minority interests in all three companies. Section 160(c) sterilizes the shares of FEB owned by BLC, leaving approximately 46% of FEB's outstanding shares "entitled to vote." This leaves Russell Best with a majority of the FEB shares entitled to vote despite his ownership and control of only approximately 28% of the equity of FEB. The action of Section 160(c) transforms the individual defendants' ownership of less than 30% of FEB's equity into a majority-voting block in all three Best Companies. This result is entirely consistent with the language and purpose of Section 160(c).
As this Court acknowledged in Uni-Marts, however,
Here, Russell and Mariea Best engaged in a course of conduct intended to use the assets of companies under their control to leverage their voting power through the effects of Section 160(c). Although claims relating to many of the transactions they entered into are time-barred, the Challenged Sale nevertheless raises equitable issues that will survive a motion to dismiss. Because the Challenged Sale was clearly a self-dealing transaction with no protective measures taken, the defendants will bear the burden of proving that the price paid was entirely fair. The Challenged Sale may raise other equitable issues as well. For example, BLC's majority equity interest in FEB, although not a controlling interest in the hands of BLC because of the operation of Section 160(c), would have been a controlling interest in the hands of anyone outside the chain of ownership in the Best Companies. The sale of a small portion of that interest at a modest premium in a self-dealing transaction may implicate the directors' duty of loyalty and good faith.
Applying Section 160(c) correctly and in accordance with its language and purpose, it is clear that BLC never owned a majority of FEB shares entitled to vote in the election of directors as required to trigger Section 160(c) sterilization.
At a later stage in these proceedings, it will therefore be the defendants' burden to demonstrate that the process of implementing these transactions, as well as the resulting merger consideration, were entirely fair to the minority public stockholders.
V. COUNT III: THE REVLON CLAIM
In Count III of the consolidated complaint, plaintiffs contend that Russell and Mariea Best are liable for breach of their
Although Count III is labeled a Revlon
Accordingly, I grant defendants' motion to dismiss Count III to the extent, if at all, that it purports to state a Revlon claim, but otherwise the defendants' motion to dismiss Count III is denied insofar as Count III, as a substantive matter, reiterates an entire fairness claim similar to that which appears in Counts I and II of the consolidated complaint.
VI. PLAINTIFFS' MOTION FOR CLASS CERTIFICATION
The plaintiffs have asked the Court to certify, as one class, all shareholders of the former Best Companies other than Russell and Mariea Best or an entity under their control. They have submitted a proposed Order to this Court that would certify each of the seven named plaintiffs as class representatives. Four of
The defendants oppose plaintiffs' motion on four grounds. First, the defendants argue that the claims of the representative parties are not typical of the claims of the class. Second, they contend that the former shareholder class members who are still employees of Best Lock Corporation (as it exists today) have materially different interests than the proposed plaintiff class representatives. Third, they argue that the representative parties cannot adequately represent the class because of potential conflicts of interest that may emerge. Fourth and finally, defendants insist that class certification is premature. I will deal with each of these arguments in turn.
A. Standard of Review
Chancery Court Rule 23(a) requires a plaintiff to establish four elements before the Court will certify a plaintiff class:
1. Numerosity and Commonality
The first two of these requirements, numerosity and commonality of questions of law or fact, are easily established in this action. Each of the Best Companies had hundreds of public shareholders, all of whom are affected in the same way by the acts of defendants. The issues raised in this case relate to the third and fourth requirements, typicality and adequacy of representation.
Rule 23(a)(3) focuses on whether the claims or defenses of the class representatives fairly present the issues on behalf of the represented class. The Supreme Court of Delaware has stated that "[a] representative's claim or defense will suffice if it `arises from the same event or course of conduct that gives rise to the claims [or defenses] of other class members and is based on the same legal theory.'"
Plaintiffs contend that the legal issues that they raise are identical to the claims of all other members of the proposed class. Defendants argue that this is untrue because certain shareholders are subject to the acquiescence defense discussed previously in this opinion and because the viability of the claims of some of the would-be class members is tied to the alleged disclosure violations. Because I have determined that shareholders who tendered their shares cannot be held to have acquiesced and because I am dismissing the disclosure claims, defendants arguments are now moot. The plaintiffs' fiduciary
3. Adequacy of Representation
The requirement that the class representative adequately represent the interests of the class is similar to the typicality requirement, but it focuses more directly on whether the proposed class representative has any conflict of interest with the class.
The purported conflict of interest with the employee-shareholders is based on the interest of those employees in the continuing financial health of Best Lock Corporation, their employer. These shareholders, defendants contend, may not be seeking to obtain the highest possible value for their shares because a large damage award could bankrupt the company. Plaintiffs note, however, that these employees, who owned shares through BLC's Stock Bonus Plan before the Freeze-Out Mergers, comprise at most 9% of the class. This is because the Bonus Plan owned less than 9% of the shares of BLC held by all members of the putative class. Moreover, as plaintiffs point out, the class action would continue, albeit on a slightly smaller scale, if the current employees were carved out of the class. Excluding these employees from the class would not materially reduce the risk faced by Best Lock Corporation. Additionally, if a damage award was to result from continued class action litigation and this award was large enough to threaten the vitality of Best Lock Corporation, the exclusion of these employee-shareholders from the class would preclude them from sharing in such award. Moreover, adjudication of the issues in a class action setting excluding the employee-shareholders would eliminate the possibility of those employees from separately pursuing what might have been their legitimate claims.
For these reasons, I am not convinced that any conflict of interest which these employees may have with the proposed class representatives is outweighed by the harm the employee-shareholders might suffer were they excluded from the class. This is particularly true in light of the fact that their exclusion would not likely benefit
The alleged conflict of interest among shareholders of the different Best Companies stems from the assertion that differing recoveries could result for shareholders of each of these companies in two ways. The first is that one set of shareholders may demand a control premium for their shares. The second is that inconsistent recoveries might flow from the various theories of recovery put forth by the plaintiffs. Defendants contend, for example, that former shareholders of BUL would want to obtain a control premium for BUL's shares of BLC, thereby disadvantaging former shareholders of BLC. Moreover, defendants argue that plaintiffs' various theories of recovery would lead to inconsistent recoveries among shareholders of the different Best Companies. I am not convinced, however, that either of these challenges to certification of a single class amounts to a fatal conflict. With respect to the possibility of different recoveries resulting from different theories of recovery put forth by the plaintiffs, my ruling that Counts II and III merely reiterate an entire fairness claim similar to that which appears in Count I means that there will be only one theory of recovery applicable to all plaintiff shareholders.
With respect to the payment of a control premium, it is not apparent that recovery by one group of shareholders would necessarily come at the expense of another group. If an additional premium of, for the sake of argument, 20%
4. Rule 23(b)
Because the elements of Rule 23(a) appear to be satisfied, I turn briefly to Rule 23(b). Plaintiffs seek class certification under Rule 23(b)(1), which permits class certification when the prosecution of separate actions by individual members of the class would risk inconsistent adjudications or adjudications with respect to individual members of the class that would be dispositive of the interests of other class members not parties to those adjudications or would substantially impair the ability of nonparties to protect their interests. Defendants make no objection to this claim. Class certification under Rule 23(b)(1) is proper in this case because the multiple lawsuits that would follow were this motion denied would be both prejudicial to nonparties and inefficient.
For these reasons, I am prepared to certify the class provisionally, subject to re-evaluation should an unforeseen conflict between the different groups of shareholders arise.
For the reasons stated above defendants' motion to dismiss the fiduciary duty claims stated in Count I in connection with the Freeze-Out Mergers and the Challenged Sale is denied. The motion to dismiss all of the disclosure claims of Count I is granted. Defendants' motion to dismiss the claims of plaintiffs who have tendered their shares on the grounds of acquiescence is denied. As to Count II, defendants' motion to dismiss with regard to the Challenged Sale is granted to the extent Count II alleged a transfer of control to and from the public shareholders by the action of Section 160(c), but the motion is denied to the extent that Count II reiterates the same entire fairness claim that appears in Count I. As to Count III, defendants' motion to dismiss is granted to the extent that Count III purports to assert a Revlon claim, but, as with Count II, the motion is denied to the extent that Count III reiterates an entire fairness claim similar to that which survived in Counts I and II. Finally, this Court will provisionally certify the class under Rule 23(b)(1).
Counsel for the plaintiffs shall submit a form of Order, on notice to defendants, that implements the conclusions reached in this decision.
Kahn, Del.Ch., C.A. No. 6293, slip op. at 4-5, Brown, V.C., 1982 WL 8778 (Jan. 19, 1982); see also Clements v. Rogers, Del.Ch., C.A. No. 15711, slip op. at 32 n. 46, Strine, V.C., 790 A.2d 1222 (Aug. 14, 2001) (noting the "pragmatic approach" taken by then-Vice Chancellor Brown in Kahn and by then-Vice Chancellor Walsh in Serlick v. Pennzoil Co., Del.Ch., C.A. No. 5986, Walsh, V.C., 1984 WL 8267 (Nov. 27, 1984)).
The second point in time during which the plaintiffs insist BLC gained a majority of FEB shares was some instant in time on August 25, 1997 between (1) the dissolution of BLP and later proportional distribution of FEB shares held by the partnership to its general partners and (2) the sale of 23,000 shares of FEB from BLC to WEBCO. The plaintiffs assert that the first transaction was consummated for tax purposes and the second to cure the circular ownership problem caused by the first transaction. The defendants counter that both transactions were consummated for the same reason, tax benefits, and should be viewed as a single, unified transaction by operation of the step-transaction doctrine. So viewed, there was not a time when BLC, even briefly, held a majority of FEB's shares. A resolution of this dispute over when BLC might have owned a majority of the issued FEB stock is irrelevant, however, if it is determined that the plaintiffs are incorrect in their assertions as to the action of Section 160(c) upon any shares of FEB owned by BLC.
If the premium is applied at the level of BLC, as plaintiffs advocate, recovery is maximized for all public shareholders: BLC's value increases to $120, which in turn increases the value of BUL to $96 and the value of FEB, once again, to $76.80. Applying a control premium at the level of BLC does not come at the expense of the shareholders of either BUL or FEB. All it does, in fact, is increase the amount the defendants would be forced to pay, which presumably is at least one of the reasons they challenge that result. In any case, there is no conflict among shareholders of the different Best Companies regarding the allocation of a control premium.