This case involves what courts and commentators have described as a "cash-out merger," a "squeeze-out merger," or a "freeze-out merger." In this opinion, we will use the term "cash-out merger." Under ORS 60.551 to 60.594, majority shareholders may eliminate minority shareholders of a corporation by merger procedures that allow dissenting minority shareholders to receive "fair value" for their shares.
Plaintiffs were minority shareholders in Consumer Data Systems, Inc. (CDS), an Oregon corporation. They filed this action, claiming a violation of various rights incident to a cash-out merger involving CDS and another corporation, Car Data Systems, Inc. (Car Data). Plaintiffs allege that other CDS shareholders and directors breached a fiduciary duty owed to plaintiffs as minority shareholders. They seek compensatory and punitive damages.
Before turning to the facts, a brief summary of cash-out mergers is appropriate.
At common law, each shareholder of a corporation was considered to have a "vested right" in the corporation. As a result, the rule in many jurisdictions was that a single shareholder could veto a proposed business combination. See Annot, Valuation of Stock of Dissenting Shareholders in Case of Consolidation or Merger of Corporation, Sale of its Assets, or the Like, 48 ALR3d 430, 435 (1973); Chicago Corp. v. Munds, 20 Del.Ch. 142, 172 A. 452, 455 (1934).
Legislatures, courts, and commentators found that the right of a single shareholder to veto business transactions trammeled the concept of corporate democracy. The veto was therefore eliminated. The general rule today is that decision-making by the majority must take precedence over the objection of a lone dissenter. See Revised Model Business Corporation Act § 13.02 (1984) (the "Model Act"); ORS 60.554(1).
The rejection of a minority veto and the recognition of majority rule has not occurred without regard for the potential abuses of a majority's power directed against minority interests. The linchpin of a dissenter's protection in merger cases is found in the statutory appraisal remedy. This remedy is designed to provide statutory protection to those minority shareholders who do not concur with the decision of the majority shareholders.
One device commonly used to eliminate minority shareholders who disagree with the majority shareholders about corporate decision-making is the cash-out merger. A typical cash-out merger, and the appraisal remedy, are described in 1 F.H. O'Neal & R. Thompson, O'Neal's Oppression of Minority Shareholders 21-22, § 5:04 (2d ed):
"* * * * *
Undeniably, such mergers have a coercive element.
The Oregon statutes that permit cash-out mergers, ORS 60.481 to 60.501, contain procedural protections for minority shareholders. ORS 60.554 provides in part:
"(b) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares
Dissenters from a proposed merger have a right to demand payment for their shares. ORS 60.571. If they do so, the corporation is then required to pay each dissenter "the fair value of the shareholder's shares, plus accrued interest." ORS 60.577(1). If the parties do not agree as to fair value for the shares, the corporation "shall commence a proceeding * * * to determine the fair value of the shares and accrued interest." ORS 60.591(1). A court then determines the fair value of the shares. The appraisal procedure is the sole remedy for dissenting shareholders in the absence of "unlawful or fraudulent" conduct. ORS 60.554(2) provides:
Plaintiffs brought this action, claiming that defendants acted unlawfully incident to the transfer of CDS shares to Car Data, squeezing out plaintiffs. The trial court granted defendants' motions to dismiss for failure to state a claim. ORCP 21 A(8).
Plaintiffs' complaint alleges that plaintiffs Stringer and Schubert and two other shareholders owned 43 percent of the shares of CDS. Thirty-two individuals, including the six directors of CDS, owned the remaining 57 percent of CDS. According to the complaint, "[i]n late 1988 or early 1989, the CDS Directors and the larger CDS shareholders, Donald Smith, Mark Kallenberger and Lawrence Custer * * *, decided to squeeze the Minority Shareholders out of their ownership in CDS and to offer them a nominal sum for their stock, which sum was significantly below the fair market value of the stock." The directors and larger shareholders formed a new company that subsequently became Car Data, transferred their shares in CDS to Car Data in exchange for its stock, and solicited all the remaining shareholders, except for the four minority shareholders, to participate in their plan. A total of 32 CDS shareholders transferred their stock, amounting to 57 percent of the CDS shares, to Car Data. Car Data shareholders then voted for a merger between Car Data and CDS. Pursuant to the merger proposal, each CDS shareholder would receive $0.002 per share. As owner of 57 percent of CDS, Car Data voted for the merger. The merger was approved over the objections of plaintiffs and two other minority shareholders.
Plaintiffs claimed that their shares were worth at least $0.10 per share and refused to accept the $0.002 offered them. Car Data rejected plaintiffs demand for $0.10 per share and instituted an appraisal proceeding in the circuit court pursuant to ORS 60.591.
The circuit court stayed the proceedings in the present case pending trial of the appraisal case. The appraisal case was concluded, and this case then proceeded.
Defendants moved to dismiss plaintiffs' claim on the grounds that (1) plaintiffs' sole remedy is under the appraisal procedure, and (2) even if appraisal is not the sole remedy, plaintiffs' complaint "fail[s] to state facts to support a claim for relief * * * for breach of fiduciary duty." The circuit court dismissed plaintiffs' complaint.
Plaintiffs appealed, pursuing their damages claims on theories of breach of fiduciary duty and civil conspiracy, but abandoned their derivative claim and rescission claim. The Court of Appeals affirmed. Stringer v. Car Data Systems, Inc., supra, 108 Or.App. at 527-28, 816 P.2d 677; id., 110 Or.App. at 17, 821 P.2d 418 (on reconsideration).
Because this case comes to us on appeal of an order of dismissal, we must determine whether the complaint states a claim. In considering the sufficiency of plaintiffs' complaint, we accept all well-pleaded allegations of the complaint as true and give plaintiffs the benefit of all favorable inferences that may be drawn from the facts alleged. Madani v. Kendall Ford, Inc., 312 Or. 198, 201, 818 P.2d 930 (1991). We quote pertinent portions of plaintiffs' complaint:
"* * * * *
"In early 1989, CDS received an offer from a third party to purchase substantially all of the corporation's assets.
The thrust of plaintiffs' claims here is this (quoting from their brief):
As stated above, ORS 60.554(2) provides that a dissenting shareholder "may not challenge the corporate action creating the shareholder's entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation." The dispositive question here is whether plaintiffs have alleged facts that would establish that defendants' conduct was "unlawful or fraudulent" within the meaning of ORS 60.554(2).
We start with the observation that this court may not question the wisdom of the Legislative Assembly in enacting the Oregon Business Corporation Act. That law drew upon the Model Business Corporation Act and contains procedures for majority shareholders to "squeeze out" minority shareholders. The legislative decision involved considerations affecting both majority shareholders and dissenting shareholders.
In order to decide whether plaintiffs have a claim in addition to their rights under the appraisal procedure statutes, we must look more closely at those statutes. After both corporations have "consummated" a plan of merger, ORS 60.487, the appraisal procedures of ORS 60.551 to 60.594 may be invoked by dissenting shareholders. The procedures are:
First, a dissenting shareholder must give notice of intent to demand payment for his or her shares, ORS 60.564(1), and then demand payment and deposit the share certificates, ORS 60.571. The surviving corporation is required to "pay each dissenter * * * the amount the corporation estimates to be the fair value of the shareholder's shares, plus accrued interest." ORS 60.577(1). The payment must be accompanied by the "corporation's balance sheet," a "statement of the corporation's estimate of the fair value of the shares," and "explanation of how the interest was calculated," a "statement of the dissenter's right to demand payment under ORS 60.587," and a "copy of ORS 60.551 to 60.594." ORS 60.577(2).
A dissenter who is dissatisfied with the price paid may notify the corporation and demand payment of the dissenter's estimate of the shares' "fair value."
In circuit court appraisal proceedings, dissenting shareholders who have been paid less than fair value of their shares by the corporation are entitled to a court award of the difference between the amount paid by the corporation and the fair value of the shares, plus interest. With exceptions not relevant here, the corporation also is required to pay "all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court." ORS 60.594(1), 60.591(5)(a).
In addition, dissenters are entitled to "fees and expenses of [their] counsel and experts" if (1) "the corporation did not substantially comply with * * * ORS 60.561 to 60.587," or (2) the corporation "acted arbitrarily, vexatiously or not in good faith with respect to the rights provided by this chapter." ORS 60.594(2).
Under ORS 60.591(5), a dissenting shareholder is entitled to payment for that which has been taken, the fair value of the stock. In determining the fair value of a stock immediately before the merger, many factors are relevant, including, but not limited to, the following:
The fair value of corporate stock may be more or less than the sum of the parts of the corporation, depending on a host of factors. In determining the fair value of stock in a closely held corporation, ORS 60.551(4), the court's responsibility and authority is similar to that of a judge in a tax case or a domestic relations case involving the fair market value of stock of a corporation. In short, the court should take into account all relevant factors.
Plaintiffs' complaint in this case alleged neither fraud nor misleading representations that were relied upon by plaintiffs. From plaintiffs' complaint, one can infer only that the amount paid by CDS was unfair and unreasonably low, in an attempt to avoid paying fair value to plaintiffs for their shares.
Cases such as this are the very kind addressed by the statutory scheme. With the exception of punitive damages, every element of damages that plaintiffs seek herein is recoverable under ORS 60.551 to 60.594. The complaint contains no allegations of fact that, if proved, would support a punitive damages award.
The last clause of ORS 60.551(4) also is significant. To the extent, if any, that plaintiffs seek damages for "any appreciation or depreciation in anticipation of the corporate action," those damages can be considered if "exclusion would be inequitable." We agree with the Delaware Supreme Court that "there is a legislative intent to fully compensate shareholders for whatever their loss may be, subject only to the narrow limitation that one can not take speculative effects of the merger into account." Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del.1983).
In Weinberger, the Delaware court also stated:
Plaintiffs' complaint clearly alleges a disagreement as to valuation, and we also can infer payment by Car Data of an unreasonably low price. Where the allegations show only a disagreement as to price, however, with no allegations that permit any inference of self-dealing, fraud, deliberate waste of corporate assets, misrepresentation, or other unlawful conduct, the remedy afforded by ORS 60.551 to 60.594 is exclusive. That is true even if the majority shareholders acted arbitrarily or vexatiously or not in good faith. Stepak v. Schey, 51 Ohio St.3d 8, 553 N.E.2d 1072, 1075 (1990) (remedy for breach of fiduciary duty involving only the price that a shareholder receives is limited to appraisal statute); Schloss Associates v. C & O Ry., 73 Md.App. 727, 536 A.2d 147, 158 (1988) ("What we have then is essentially a complaint over price—the amount and how it was established—for which the statutory appraisal right is a wholly adequate remedy."); Green v. Santa Fe Industries, Inc., 70 N.Y.2d 244, 519 N.Y.S.2d 793, 800, 514 N.E.2d 105, 112 (1987) ("Here, * * * 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 18 Del.Ch. 47, 156 A. 183, 187-88 '").
The decision of the Court of Appeals and the judgment of the circuit court are affirmed.
UNIS, Justice, concurring in part, dissenting in part.
The issue in this case is whether plaintiffs' complaint states a claim for breach of fiduciary duty and civil conspiracy. I cannot agree with the majority's holding that plaintiffs' complaint fails to state a claim under either theory. I would hold that plaintiffs' complaint states a claim for breach of fiduciary duty and civil conspiracy against all defendants
Because plaintiffs' complaint was dismissed for failure to state a claim pursuant to ORCP 21 A(8),
Plaintiffs Stringer and Schubert and three others founded CDS in 1986. Stock was sold in the corporation until, in 1989, there were 36 shareholders. Stringer and Schubert, along with the two nominal defendants in this case, retained about 43 percent of the stock. The stock was sold at about 10 cents a share during this period.
According to the complaint, CDS was successful during this period, and revenues were increasing faster than expenses. In early 1989, again according to the complaint, a third party made a written offer to purchase CDS at a price substantially above what was subsequently offered during the "squeeze-out" merger at issue here. CDS, by vote of the majority of shareholders, rejected the third party's offer.
The complaint alleges the following:
The complaint goes on to allege that the directors and the three larger majority shareholders, whom plaintiffs describe in their complaint as the "Controlling Shareholders," retained defendant attorneys to incorporate a new corporation, Car Data, as the vehicle for the completion of this plan.
The complaint also alleges that, in furtherance of the plan, the CDS directors and the "Controlling Shareholders" transferred all their CDS stock to Car Data and then solicited the participation of all CDS shareholders, except plaintiffs and the two nominal defendants. Once Car Data had obtained by these means a majority of the stock of CDS, a merger was proposed between CDS and Car Data.
As majority shareholder of CDS, Car Data approved the merger with a stock value of $0.002 per share, a price far below that previously offered by the third party. The stockholders of Car Data, i.e., the board of directors of CDS and all the former shareholders of CDS except plaintiffs and the two nominal defendants, also approved the merger. Plaintiffs allege that, as a result of this vote, the minority shareholders received $9,900 for stock with a fair market value of $290,000.
BREACH OF FIDUCIARY DUTY CLAIM
In plaintiffs' claim for breach of fiduciary duty, plaintiffs allege that the above acts by the directors, the collective majority of CDS shareholders and Car Data, constitute a breach of their fiduciary duty to the minority shareholders, including plaintiffs. Plaintiffs seek, inter alia, rescission of the merger or, in the alternative, damages equal to the fair market value of plaintiffs' proportionate share of defendant Car Data on the date of trial, plus punitive damages.
The majority holds that the allegations in plaintiffs' complaint "show only a disagreement as to price" and do not "permit any inference of self-dealing, fraud, deliberate waste of corporate assets, misrepresentation, or other unlawful conduct." 314 Or. at 590, 841 P.2d at 1190. The majority concludes that plaintiffs have no claim against defendants apart from their remedy under the appraisal statutes, ORS 60.551 to 60.594. This conclusion, in my judgment, ignores allegations that we must accept on an ORCP 21 A(8) motion as "true" pleaded "facts," and it ignores inferences favorable to plaintiffs that may be drawn from those allegations.
In 1987, the legislature adopted the Revised Model Business Corporation Act (RMBCA) sections 13.30 and 13.31, Or. Laws 1987, ch. 52, §§ 136 and 137, except for modifications necessary to conform to Oregon's judicial system. See Report of the Revised Model Business Corporation Act Task Force of the Business Law Section of the Oregon State Bar 63 (March 24, 1987). The sections became ORS 60.591 and ORS 60.594. These statutory provisions provide a dissenting shareholder with an appraisal remedy to secure "fair value" for shares in the event of a corporate act resulting in a merger.
The statutory provisions relating to the appraisal procedure are subject to ORS 60.554(2) and must be read in conjunction with that provision. ORS 60.554(2), which is taken from RMBCA section 13.02(b), provides that a dissenting shareholder "may not challenge the corporate action creating the shareholder's entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation." (Emphasis added.) The explanation for the exception provided for in ORS 60.554(2) is that "the prospect that shareholders may be `paid off' [through the appraisal procedure] does not justify the corporation in proceeding unlawfully or fraudulently." Official Comment to RMBCA section 13.02 at 1366 in 3 Model Business Corporation Act Annotated (3d ed, 1992 Supp).
Although the type of "unlawful" or "fraudulent" conduct required by ORS 60.554(2) to overcome the exclusive remedy of appraisal is not precisely defined, the Official Comment to RMBCA section 13.02 provides
Thus, "[i]f the corporation attempts an action in violation of the corporation law on voting, in violation of clauses in articles of incorporation prohibiting it, by deception of shareholders, or in violation of a fiduciary duty," it cannot later hide behind the appraisal remedy provision of the RMBCA. Id. at 1366.
The Official Comment to RMBCA section 13.02(b) singles out Weinberger v. UOP, Inc., 457 A.2d 701 (Del.Supr.1983), as an example of the case law that section 13.02(b) was designed to recognize and preserve. Id. at 1367. Weinberger recognizes that the statutory appraisal remedy may not be adequate, "particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets or gross and palpable overreaching are involved." Weinberger v. UOP, Inc., supra, 457 A.2d at 714. Post-Weinberger Delaware decisions clearly recognize that appraisal rights are not the exclusive remedy in the face of allegations of misconduct.
In Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., 532 A.2d 1324 (Del.Ch.1987), the Delaware Court of Chancery held that the minority shareholders were entitled to a preliminary injunction enjoining a squeeze-out merger. According to the court, "[a]s fiduciaries seeking to `cash out' the minority stockholders of a Delaware corporation in a non-arm's length merger, the defendants had a duty to be entirely and scrupulously fair to the plaintiffs in all respects." Id. at 1335. (citing Weinberger v. UOP, Inc., supra, 457 A.2d at 710). The Delaware court was concerned that the majority stockholder not be allowed to "time or structure the transaction, or to manipulate the corporation's values, so as to permit or facilitate the forced elimination of the minority stockholders at an unfair price." Id.
In Sealy Mattress, the court noted that the corporation's directors "were obliged to make an informed, deliberate judgment, in good faith, that the merger terms, including the price, were fair and that the merger would not become a vehicle for economic oppression." Id. Moreover, noted the Delaware court, "the directors (and the majority stockholder, to the extent that it involved itself in such matters) were obliged to disclose with entire candor all material facts concerning the merger, so that the minority stockholders would be able to make an informed decision as to whether to accept the merger price or to seek judicial remedies such as appraisal, an injunction, or a post-merger damage action." Id.
As in Sealy, none of the fiduciary obligations owed by corporate directors and majority shareholders were satisfied in this case.
Such conduct by directors and the large shareholders does not meet duties of good
The majority admits that "[p]laintiffs' complaint clearly alleges a disagreement as to valuation, and we also can infer payment by Car Data of an unreasonably low price." 314 Or. at 590, 841 P.2d at 1190 (emphasis added). The majority, however, concludes that the only complaint plaintiffs make is the price of CDS's stock. Id. That interpretation ignores the means by which that price was alleged to have been determined, and who made that determination.
According to the allegations in plaintiffs' complaint and to inferences favorable to plaintiffs that may be drawn from those allegations, the directors of CDS hatched a plan to capture some of the corporation's stock at a bargain. This action, again taken from the complaint, was undertaken immediately following a purchase offer that these same directors, in their official capacity, had rejected. The inference drawn is that the directors of CDS, realizing the value of their stock, determined to capture as much of that value as possible for themselves. To do so, however, they needed to create a majority voting block.
To that end, the complaint alleges, the directors formed a paper corporation that had no assets whatsoever. The directors then transferred their CDS stock to the new corporation, Car Data. The complaint alleges that the purpose of the new corporation was to deprive a minority of the shareholders of CDS stock of the value of that stock. Surely the majority does not mean to hold that it is lawful for the directors of a corporation to plot unlawfully against some of the corporation's shareholders as long as those shareholders can subsequently defeat the unlawful plot through judicial action to determine the fair value of the company's stock. Yet that is the effect of the majority's holding.
I believe that the complaint alleges a breach of the fiduciary duty that the directors of CDS owed to plaintiffs as shareholders of CDS. The complaint does not allege that the directors wanted to "squeeze out" minority shareholders for the benefit of the corporation; it alleges that they conspired to steal some or most of the value of their stock by using a pseudo squeeze-out merger.
Had the three larger majority shareholders ("Controlling Shareholders") conspired with the CDS directors to reject a legitimate purchase offer and then sold all CDS's assets to Car Data at far below market value so that they could resell Car Data at a windfall price, I do not believe that the majority would find it as difficult to find "overreaching." Yet, in this case, an allegation that certain shareholders and the directors of CDS created a paper corporation in order to accomplish the same result through a "merger" is considered insufficient. I do not believe that the drafters of the RMBCA or the Oregon legislature intended to create a vehicle for this kind of business practice simply because they wished to facilitate legitimate business mergers when there is a disagreement among shareholders over the wisdom of the merger.
In Joseph v. Shell Oil Co., 498 A.2d 1117, 1122 (Del.Ch.1985), the Delaware Court of Chancery cautioned:
Appraisal actions are exclusive remedies only when the disagreement is over whether or not to accept an otherwise legitimate merger offer. When that is not the case, other courts allow actions to be pursued apart from an appraisal statute. See, e.g., Rabkin v. Phillip A. Hunt Chemical Corp., 498 A.2d 1099 (Del.Supr.1985); Coggins v. New England Patriots Football Club, Inc., 397 Mass. 525, 492 N.E.2d 1112 (1986); Edelman v. Fruehauf Corp., 798 F.2d 882, 886-87 (6th Cir.1986); Stepak v. Schey, 51 Ohio St.3d 8, 553 N.E.2d 1072 (1990).
CIVIL CONSPIRACY CLAIM
Plaintiffs' complaint, in my opinion, also states a claim for civil conspiracy. In Bonds v. Landers, 279 Or. 169, 566 P.2d 513 (1977), this court upheld a judgment based on a theory of civil conspiracy,
"`A civil conspiracy is a combination of two or more persons by concerted action to accomplish an unlawful purpose, or to accomplish some purpose not in itself unlawful by unlawful means.' 15A CJS 596, Conspiracy § 1(1), citing Bliss v. Southern Pacific Co., 212 Or. 634, 321 P.2d 324 (1958); Pitts v. King, 141 Or. 23, 15 P.2d 379, modified 141 Or. 23, 15 P.2d 472 (1932)." 279 Or. at 174, 566 P.2d 513.
Plaintiffs allege that defendants adopted a "plan" to deprive plaintiffs of the value of their stock. The underlying wrongful act was the breach of fiduciary duty by the directors and the collective majority of shareholders. Thus, the "concerted action" or "plan" of defendants to accomplish this unlawful act constitutes civil conspiracy.
In sum, I concur in that part of the majority's opinion that holds that plaintiffs'
FADELEY, J., joins in this opinion.
"[I]f punitive damages are sought, facts must be alleged which, if proved, will establish the right to recover punitive damages." Davis v. Tyee Industries, Inc., 295 Or. 467, 477, 668 P.2d 1186 (1983). A mere recitation that a defendant's conduct was wanton or malicious is a mere conclusion of the pleader. "Where punitive damages are sought, the complaint should set forth the ultimate facts which are claimed to support the recovery of punitive damages." Id. at 479, 668 P.2d 1186; accord: Holden v. Pioneer Broadcasting Co., 228 Or. 405, 418, 365 P.2d 845 (1961).