The opinion of the court was delivered by: TENNEY
In this action which has been brought derivatively on behalf and for the benefit of Baldwin-Lima-Hamilton Corporation (hereinafter referred to as "BLH"), individually on plaintiff's own behalf and representatively on behalf of all former BLH shareholders similarly situated with plaintiff except for those shareholders who participated in the transactions complained of, defendants have moved for an order: (a) under Rules 9(a) and 12(b) of the Federal Rules of Civil Procedure striking all matter from the complaint purporting to state a claim derivately on behalf of BLH; (b) under Rule 12(b) (6) of said Rules dismissing the complaint (or granting summary judgment pursuant to Rule 56) for failure to state a claim on which relief can be granted; (c) transferring this action, pursuant to 28 U.S.C. § 1404(a) (1964) to the United States District Court for the Eastern District of Pennsylvania if any matters remain for determination after (a) and (b) have been resolved; and (d) compelling plaintiff, pursuant to Rule 19(a) of the Federal Rules of Civil Procedure, to join as an indispensable party one Nathan Saks who is alleged by plaintiff (plaintiff's affidavit of June 21, 1966; see Exhibit A to White affidavit of April 25, 1966) to have been the joint owner with plaintiff of the shares upon which he bases his standing to sue, and if plaintiff fails to join this additional party, to dismiss the complaint under Rule 12(b) (3). The purpose of plaintiff's action is to recover damages for a merger between BLH and Armour & Company (hereinafter referred to as "Armour") which was consummated in July, 1965, and which plaintiff contends was in violation of the Federal Securities Laws and was "unfair".
Plaintiff was the joint owner with Nathan Saks of BLH shares since October 5, 1960 (Miller affidavit of June 21, 1966; cf. Complt. Para. 3) until the 1965 merger at which time his shares were exchanged for Armour securities as will be more fully developed infra. The defendant Armour is a corporation organized and existing under the laws of the State of Delaware. It is authorized to do business and does business in the State of New York.
Defendant William Wood Prince was a director of BLH and a member of its executive committee, chairman of the Armour board of Directors, Armour's president, and a member of said defendant's executive committee (Complt. Para. 4, 5). The defendant George A. Rentschler was a director of BLH and chairman of its executive committee as well as a member of the Armour executive committee (Complt. Para. 4, 6). The defendant Milton Steinbach was similarly a director of BLH, a member of the executive committees of both BLH and Armour and was also a partner in Wertheim & Company (hereinafter referred to as "Wertheim") which company's alleged role in the "conspiracy" will be discussed more fully hereinafter (Complt. Para. 4, 7). The defendant Francis L. Elmendorf, another director of BLH, was a limited partner of and consultant to Wertheim and a director of International Packers Ltd. (hereinafter referred to as "Packers") a company in which Armour has a substantial financial interest (Complt. Para. 4, 8). The defendants Perry A. White, James M. White and Andrew Liston, directors of BLH, were president and vice presidents, respectively, of that corporation (Complt. Para. 4, 9). Arthur Littleton, named as a defendant in the within action, was both a director of BLH and a member of the Law firm of Morgan, Lewis and Bockius, Esqs., counsel to BLH (Complt. Para. 4, 10).
The defendant Goldman, Sachs & Company (hereinafter referred to as "Goldman, Sachs") is a New York partnership engaged in investment banking in the State of New York which allegedly took part in the transactions complained of (Complt. Para. 11). Wertheim plays a substantially similar role to that of Goldman, Sachs (Complt. Para. 12). All other defendants, with the exception of T. M. Evans,
were directors of BLH. The relationship of Evans to the transactions will also be examined infra.
Plaintiff alleges that on or about February 1, 1965, the defendants Prince, Rentschler, Steinbach, Perry A. White and Armour entered into negotiations looking toward the eventual merger of BLH into Armour (Complt. Para. 16).
Wertheim took part in these negotiations and acted as financial adviser to both parties.
The merger plan envisioned a conversion of BLH common stock into a fractional share of Armour common stock and a fractional share of a preferred stock with a par value of $100. This preferred stock was to be traded for the first time on the New York Stock Exchange immediately after the consummation of the merger.
On April 1, 1965, a merger was approved in principle by the board of directors of BLH. Under this agreement, each share of BLH would be converted into one-sixth (1/6) share of Armour common stock then selling at $47.00 and 13/100 share of Armour $4.75 preferred.
Prior to this date, the defendant Goldman, Sachs was consulted by both corporations for the purpose of rendering an opinion as to the fairness of the merger. An oral opinion was obtained wherein Goldman, Sachs stated that if the dividend rate were fixed at $4.75 - rather than the $4.65 dividend originally proposed - the exchange would be fair and the preferred stock would sell at par.
Said opinion was reduced to writing in a letter of April 14, 1965, wherein Goldman, Sachs stated "we are of the opinion that the proposed terms of conversion are fair and equitable to the stockholders of both Armour and Company and Baldwin-Lima-Hamilton Corporation." (Exhibit L to White affidavit of April 25, 1966). No statement was therein made about the future market price of the preferred stock.
On April 20, 1965, the boards of directors of both Armour and BLH formally approved the merger. Pursuant to this action of the boards, a detailed proxy statement was prepared and filed purportedly in accordance with the rules of the Securities and Exchange Commission (White affidavit of April 25, 1966 at Para. 11). The statement was mailed to the shareholders of BLH accompanied by a letter from Perry A. White, BLH president, in which he described the merger, urged a careful reading of the proxy statement and characterized Armour's record as "impressive" over the last five to six years.
The proxy statement noted that a special meeting of shareholders would be held on June 10, 1965 to vote on the proposed merger.
On May 13, 1965, defendant T. M. Evans, a shareholder of BLH with holdings of approximately 89,000 shares,
commenced a shareholder's derivative action in the United States District Court for the Eastern District of Pennsylvania. All the defendants named herein were similarly named as defendants in the Evans action except for Goldman, Sachs,
Wertheim and, of course, Evans. The action was brought on behalf and for the benefit of BLH and its shareholders and sought compensatory damages of not less than $25 million and punitive damages in a like amount because of the proposed merger. The gravamen of Evans' complaint was that the defendants had conspired to defraud the BLH shareholders and had violated and breached their fiduciary duties to the shareholders for their own personal interests. In addition, Evans alleged that the proxy statement contained false and misleading statements in violation of the Federal Securities Laws. Depositions of fifteen of the defendants were taken in Philadelphia during the week of May 24, 1965 (White affidavit of April 25, 1966 at Para. 13).
On May 19, 1965, Evans attended a special BLH board of directors' meeting in Philadelphia wherein he was permitted to present his objections to the proposed merger. The BLH board, after considering Evans' position, ratified and reaffirmed the previous approval of the proposed merger. Id. at Para. 15. On May 21, 1965, following filing of a proposed letter with the Securities and Exchange Commission, Perry A. White wrote to the BLH shareholders informing them inter alia of the institution of the Evans action and advising them of the reaffirmance of the merger agreement hereinbefore discussed.
Id. at Para. 16.
On May 25, 1965, Evans sought a temporary injunction enjoining the meeting of BLH shareholders scheduled for June 10, 1965. The motion was set down for a hearing to commence on June 1, 1965 after plaintiff had completed his discovery. The hearing began on that date and was concluded on June 4, 1965 with Chief Judge Clary of the United States District Court for the Eastern District of Pennsylvania reserving decision.
On June 8, 1965, Evans' motion for a preliminary injunction was denied, the Court stating that "plaintiff herein has not established fraud, violation of the Securities and Exchange Commission regulations, breach of fiduciary duty, or conflict in interest, which would warrant this Court in entering a preliminary injunction." Evans v. Armour & Co., 241 F. Supp. 705, 715 (E.D. Pa. 1965). Following Chief Judge Clary's determination and on that same day, Evans filed written objection to the plan of merger asserting his right as a dissenting shareholder pursuant to the Pennsylvania Business Corporation Law §§ 908, 515, 15 Purd. Stat. §§ 2852-908, 2852-515 (Supp. 1966).
On June 10, 1965, the BLH shareholders approved the proposed merger and similar action was taken by the Armour shareholders on the next day.
Evans, following the procedures provided by the abovementioned sections of the Pennsylvania Business Corporation Law, on June 24, 1965, made written demand for payment of the fair value of his shares as of the date prior to the shareholder approval of the disputed merger - June 9, 1965 (Exhibit G to White affidavit of April 25, 1966).
On July 2, 1965, the merger was consummated. In all, twenty-nine shareholders of BLH with aggregate holdings of 114,535 shares (including the Evans shares)
dissented pursuant to the Pennsylvania statute.
Milton Berzin, who had owned 3,900 shares of BLH stock, commenced a derivative action in the District Court in this district on August 27, 1965. Berzin v. Armour & Co., 65 Civ. 2604, S.D.N.Y. 1965. Berzin had not dissented to the merger. Named as defendants in the Berzin action were all the defendants sued in the instant case with the exception of Evans. The complaint charged defendants, as here, with conspiring to violate the Securities Act of 1933 and the Securities Exchange Act of 1934 for the purpose of merging BLH into Armour on terms favorable to the latter and for the individual defendants' own personal benefit. Berzin also alleged that the proxy statement was inadequate for reasons not relevant herein.
Settlement of the Various Claims.
Pursuant to § 515(D) of the Pennsylvania Business Corporation Law, 15 Purd. Stat. § 2852-515(D) (Supp. 1966), Armour, as successor to the BLH obligations, sent a notice and offer to all 29 dissenting shareholders offering to pay them $17.50 per share - the closing market price of BLH on June 9, 1965.
This offer was accepted by two shareholders. One dissenter made a counter-offer of $18.50 per share which was accepted by Armour. Said corporation then wrote to the 26 remaining dissenters making an increased offer of $18.50 per share which was accepted by five additional dissenters.
(White affidavit of April 25, 1966 at Para. 26-28.) From July to October 1965, Armour settled with all the remaining dissenters who had perfected their appraisal rights under the Pennsylvania statute. The settlements reached were as follows:
2 dissenters settled for $17.50 per share.
6 " " " $18.50 " "
12 " " " $22.00 " "
2 " " " $22.10 " "
2 " " " $22.16 " "
1 " " " $22.51 " "
3 " " " $24.00 " "
1 " " " $25.89 " "
Settlement of the Evans and Berzin Claims
During August and September 1965, negotiations ensued between Armour and Evans with Armour eventually making an oral offer to Evans of $22.00 per share. Under § 515(F) of the Pennsylvania Business Corporation Law, 15 Purd. Stat. § 2852-515(F) (Supp. 1966), "a dissenting shareholder who is unable to agree with the corporation on the fair value of his shares may demand proceedings to value his shares at any time after sixty days and within ninety days after the date on which the plan became effective." Therefore, negotiators of a settlement were faced with a problem of the time running out in which Evans could seek court valuation proceedings if an agreement with the corporation could not be reached.
On September 29, 1965, Armour agreed to pay Evans $22.51 per share in settlement of his claim as a dissenter and Evans agreed to dismissal of the action he had brought. This, of course, was conditioned on approval of the Pennsylvania court. Evans, on September 30, 1965, surrendered 89,100 BLH shares to Armour, executed a release to Armour, and delivered a release and covenant not to sue to the defendant directors.
I am informed by counsel for Armour that Berzin made himself a part of the Evans negotiations, was treated as a dissenter in the same manner as Evans and received a substantially similar price for his BLH shares (Transcript of June 22, 1966 hearing, at 26). It also appears that in these negotiations Berzin was represented by the same Pennsylvania counsel as Evans (see Exhibit J to White affidavit of April 25, 1966). The only difference in the treatment accorded them was that the Evans action was to be dismissed with prejudice while the Berzin dismissal was to be without prejudice. Ibid.
On September 29, 1965, a stipulation providing for the dismissal of the Evans action was presented to Chief Judge Clary, who, on the following day, ordered said action dismissed with prejudice, found the settlement to be "fair and just and in the best interests of all interested parties" and required that no notice of settlement "be given to any person other than the parties of record to the proceeding." (Exhibit K to White affidavit of April 25, 1966.) Similarly, on September 30, 1965, a stipulation was presented to Judge Tyler of this Court for signature on the ground that Berzin had failed to comply with Rule 23(b) of the Federal Rules of Civil Procedure which required verification of the complaint in a shareholders' derivative action.
Judge Tyler ordered the action dismissed without prejudice on that date with no provision made for notice to shareholders.
Plaintiff's verified complaint contains two causes of action. The gravamen of the first cause of action is that defendants engaged in a plan and conspiracy to consummate a merger of BLH into Armour to the damage of BLH and its shareholders in violation of the Securities Exchange Act of 1934 and the Securities Act of 1933. Plaintiff contends that the conspiracy was implemented by means of a false and misleading proxy statement and other fraudulent, manipulative and deceptive devices, including the "buying off" of Evans and Berzin. It is alleged in the second cause of action that Evans, in instituting a derivative action became a fiduciary of BLH and its shareholders (Complt. Para. 68), and that he committed a breach of trust by preferring himself to the other shareholders in negotiating a settlement. It is further contended that the consideration paid to BLH by Armour was inadequate in an amount of at least $11,603,312.00 (Complt. Para. 76, 79).
More specifically, plaintiff claims that the merger negotiations in February and March, 1965, took place during the course of a distribution of Armour stock and as such violated Section 10 of the Securities Exchange Act of 1934, 48 Stat. 891 (1934), 15 U.S.C. § 78j (1964) and Rule 10b-6 promulgated pursuant thereto (17 C.F.R. § 240.10b-6). In addition, it is alleged that the proxy statement and the accompanying letter of defendant Perry A. White contained statements which were false and misleading with respect to material facts and omitted to state material facts necessary therein to the detriment of BLH and its shareholders in violation of Section 14(a) of the Securities Exchange Act of 1934, 78 Stat. 569 (1964), as amended, 15 U.S.C. § 78n(a) (1964) and Rule 14a-9 promulgated pursuant thereto (17 C.F.R. § 240.14a-9).
Plaintiff, in his counsel's answering memorandum, for the first time alleges that Rule 10b-5 (17 C.F.R. § 240.10b-5) has been violated. No reference whatsoever has been made to this Rule in the complaint. Finally, it is claimed that the Evans action was improperly discontinued without notice to shareholders.
Grounds for Defendants' Motions
Counsel for defendant Evans argue that (1) plaintiff lost his capacity to sue derivatively on behalf of BLH when the merger was approved; (2) plaintiff has failed to state a claim upon which relief can be granted since Evans had no choice to continue his suit under Pennsylvania law once he had sought appraisal; (3) plaintiff's action is barred by the doctrine of res judicata since another action commenced by a BLH shareholder against Evans had been dismissed for lack of standing to sue (Sonnenschein v. Evans, 155 N.Y.L.J. 16 (N.Y. Sup. Ct. April 21, 1966)); and (4) plaintiff has failed to join an indispensable party.
Counsel for all other defendants join in Evans' point (1), and further argue that since plaintiff did not elect to dissent to the merger but exchanged his BLH shares for Armour shares, he cannot now object to the terms of the merger; that plaintiff fails to allege any material omission from the May 1965 proxy statement; and that if any matter remains for determination, the action should be transferred to the Eastern District of Pennsylvania since all prior proceedings were held there, BLH was incorporated there, and most parties, witnesses and relevant documents are to be found there.
Plaintiff's Capacity to Sue Derivatively
Defendants argue that plaintiff has no capacity to sue derivatively on behalf of BLH because BLH is no longer in existence. It is contended that Pennsylvania law applies in determining the capacity of the corporation to have brought suit (and, a fortiori, the capacity of the shareholders to likewise sue on behalf of the corporation) since BLH was a Pennsylvania corporation, and under the applicable Pennsylvania law, BLH ceased to exist as a corporate entity upon the consummation of the merger. Accordingly, defendants maintain that since BLH is no longer in existence, there is no corporation on whose behalf plaintiff can sue or who can receive any recovery.
Section 907 of the Pennsylvania Business Corporation Law, 15 Purd. Stat. § 2852-907 (Supp. 1966) provides in part: "The separate existence of all corporations parties to the plan of merger or consolidation shall cease, except that of the surviving corporation, in the case of a merger." It is apparent that this portion of the statute merely codifies the Pennsylvania common law as promulgated in Lauman v. Lebanon Valley R.R., 30 Pa. 42 (1858), wherein the Pennsylvania Supreme Court stated that when the merger is consummated, the merged company "loses its actual identity, abandons its name and therefore its legal identity and its corporate existence, and can no longer claim any legal recognition." Id. at 45; see Pennsylvania Util. Co. v. Public Serv. Comm'n, 69 Pa. Super. 612, 619-620 (1918); National Dairy Prods. Corp. v. Gleeson, 16 Pa.Dist. & Co.R.2d 390, 72 Dauph. 112 (Pa. Commonwealth Ct. 1958).
Defendants contend that on the authority of Braasch v. Goldschmidt, 41 Del. Ch. 519, 199 A. 2d 760 (1964) and Arnstein v. Bethlehem Steel Corp., 18 F. Supp. 916 (E.D.N.Y. 1937), once the merger has taken place, any derivative rights passed to the surviving corporation, and the old corporation itself would be barred from bringing suit and, therefore, its shareholders could not sue derivatively. I believe that under the facts presented in the case at bar, Braasch and Arnstein should not be applied and this conclusion is reached for two reasons:
First, the shareholder's derivative action is usually considered to be an action in equity. Koster v. (American) Lumbermens Mut. Cas. Co., 330 U.S. 518, 519, 91 L. Ed. 1067, 67 S. Ct. 828 (1947); Andrews v. Drake, 83 F.2d 767, 773 (6th Cir.) cert. denied, 299 U.S. 572, 81 L. Ed. 421, 57 S. Ct. 35 (1936); 13 Fletcher, Private Corporations § 5990 (rev. vol. 1961). It would appear to me that a grossly inequitable decision would be reached if I were to hold that a merged corporation and/or its shareholders are barred from suing where the very merger itself took place because of the allegedly wrongful activities of the directors of the old corporation and the management of the surviving corporation among others. Cf. May v. Midwest Ref. Co., 121 F.2d 431 (1st Cir.), cert. denied, 314 U.S. 668, 86 L. Ed. 534, 62 S. Ct. 129 (1941). To hold that the surviving corporation inherits a derivative right of action where said corporation has wrongfully taken part in the very acts complained of would be to reach an incongruous and highly inequitable result. Defendants in their extremely thorough memoranda have failed to cite one decision of a Pennsylvania court where such an anamolous result was reached.
However, without pursuing the equities involved any more thoroughly, I think the second reason is dispositive of the issue of plaintiff's derivative standing with respect to the first cause of action.
Defendants' basic premise is that since BLH was organized and existed under the Pennsylvania Corporation Law and had its corporate offices in Philadelphia, Pennsylvania law governs its corporate existence and its capacity to sue on the authority of Lowell Wiper Supply Co. v. Helen Shop, Inc., 235 F. Supp. 640, 643 (S.D.N.Y. 1964) (status of stockholder to bring derivative action under Fed. R. Civ. P. determined by law of state of incorporation) and Hausman v. Buckley, 299 F.2d 696, 702 (2d Cir.), cert. denied, 369 U.S. 885, 8 L. Ed. 2d 286, 82 S. Ct. 1157 (1962).
Defendants then contend that under the applicable Pennsylvania law, plaintiff lacks capacity to sue derivatively. Both the Lowell Wiper case and the Hausman case involved Federal suits wherein jurisdiction was founded upon diversity of citizenship rather than upon violations of the Federal securities laws.
However, "where legal rights have been invaded, and a federal statute provides for a general right to sue for such invasion, federal courts may use any available remedy to make good the wrong done." Bell v. Hood, 327 U.S. 678, 684, 90 L. Ed. 939, 66 S. Ct. 773 (1946). (Footnote omitted.) Congress has determined that
"[Transactions] in securities as commonly conducted upon securities exchanges and over-the-counter markets are affected with a national public interest which makes it necessary to provide for regulation and control of such transactions and of practices and matters related thereto, including transactions by officers, directors, and principal security holders, to require appropriate reports, and to impose requirements necessary to make such regulation and control reasonably complete and effective, in order to protect interstate commerce, the national credit, the Federal taxing power, to protect and make more effective the national banking system and Federal Reserve System, and to insure the maintenance of fair and honest markets in such transactions . . . ." Securities Exchange Act of 1934, § 2, 48 Stat. 881 (1934), 15 U.S.C. § 78b (1964).
The Federal Courts have a duty to "be alert to provide such remedies as are necessary to make effective the congressional purpose." J.I. Case Co. v. Borak, 377 U.S. 426, 433, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964). Despite a Pennsylvania statute to the contrary (and has been hereinbefore mentioned, it is highly speculative that the law of that state would require such a contrary result), where there is an overriding federal law applicable, that federal law will "control the appropriateness of redress." Id. at 434, 84 S. Ct. 1555. In other words, where an action is based on the federal securities laws, state substantive or procedural laws may not impede the application of the federal statute. Fleischer, "Federal Corporation Law": An Assessment, 78 Harv. L. Rev. 1146, 1168 (1965). However, "Federal law should be deemed to limit the applicability of state laws only when they tend to impede the congressional purpose." Id. at 1170; cf. Eagle v. Horvath, 241 F. Supp. 341, 344-45 (S.D.N.Y. 1965) (Herlands, J.). See also Voege v. American Sumatra Tobacco Corp., 241 F. Supp. 369 (D. Del. 1965); Kane v. Central Am. Mining & Oil, Inc., 235 F. Supp. 559, 569 (S.D.N.Y. 1964). It is clear from the allegations of the instant case that application of Pennsylvania law in such a manner as to deprive a defrauded corporation of its rights under the federal securities laws, would be repugnant to the application of the Borak decision, supra. But cf. Rosenfeld v. Schwitzer Corp., 251 F. Supp. 758 (S.D.N.Y. 1966).
Accordingly, it is my opinion that plaintiff has capacity to sue derivatively on behalf of BLH under the federal securities laws. I reach this conclusion in spite of the decisions reached in the older cases which have required the corporation on whose behalf the action is brought to be a party-defendant. E.g., Arnstein v. Bethlehem Steel Corp., supra; see 2 Hornstein, Corporation Law & Practice § 714, at 199 (1959). See generally 13 Fletcher, op. cit. supra at § 5997. However, since BLH is merely a nominal party, Halpern v. Pennsylvania R.R. Co., 189 F. Supp. 494 (E.D.N.Y. 1960), and the Borak decision requires the Court to mold a remedy for a violation of the federal securities laws, 377 U.S. at 433, 84 S. Ct. 1555, under the facts herein, the failure to serve BLH should not be fatal especially since the recovery in this type of case can go directly to the shareholders of old BLH. Cf. Perlman v. Feldmann, 219 F.2d 173, 178 (2d Cir.), cert. denied 349 U.S. 952, 75 S. Ct. 880, 99 L. Ed. 1277 (1955); Burg v. Horn, 37 F.R.D. 562 (E.D.N.Y. 1965); Societe Magnus & Co. v. Einstein, 20 F.R.D. 38, 40 (S.D.N.Y. 1956).
Compare Vine v. Beneficial Fin. Co., 374 F.2d 627 (2d Cir., 1967). See generally Grenier, Prorata Recovery by Shareholders on Corporate Causes of Action as a Means of Achieving Corporate Justice, 19 Wash. & Lee L. Rev. 165 (1962); Winer, Jurisdiction Over the Beneficiary Corporation in Stockholders' Suits, 22 Va. L. Rev. 153 (1935); Developments in the Law, Multiparty Litigation in the Federal Courts, 71 Harv. L. Rev. 874, 946-50 (1958); Note, 69 Harv. L. Rev. 1314 (1956).
Accordingly, for the reasons set forth herein, this portion of defendants' motions is denied.
Plaintiff's Failure to Dissent to the Merger.
Defendants, still relying on Pennsylvania law, argue that if plaintiff disagreed in any way with the merger, his sole remedy under Pennsylvania law was to dissent and demand an appraisal of his shares pursuant to §§ 908 and 515 of the Pennsylvania Business Corporation Law, 15 Purd. Stat. §§ 2852-908, 2852-515 (Supp. 1966). § 515(B) of said statute provides that "unless a shareholder files such written objection and also makes such demand within the twenty-day period, he shall be conclusively presumed to have consented to the plan, and shall be bound by the terms thereof." Defendants state that the Pennsylvania courts have uniformly held that the remedy of appraisal is the exclusive remedy for those shareholders who disagree with corporate action which allows appraisal. Duddy v. Conshohocken Printing Co., 171 Pa. Super. 140, 90 A. 2d 394 (1952); Gerstell v. Allentown Portland Cement Co., 30 Pa. D. & C. 2d 223, 228 (1963); Newburger, Loeb & Co. v. Baldwin Sec. Corp., 15 Pa. D. & C. 2d 614 (1958); Bloch v. Baldwin Locomotive Works, 75 Pa. D. & C. 24 (1950). Defendants further rely on Hubbard v. Jones & Laughlin Steel Corp., 42 F. Supp. 432 (W.D. Pa. 1941) and Troupiansky v. Henry Disston & Sons, Inc., 151 F. Supp. 609 (E.D. Pa. 1957).
For the same reasons that I have previously found plaintiff had capacity to sue, I find that this contention of defendants is without merit. First, to conclusively bind a corporate shareholder to a plan of merger where that shareholder has been lulled into a false sense of security because of the issuance of a glowing and misleading proxy statement, would be to reach a highly inequitable result, a result not required by the Pennsylvania statute, and as will be demonstrated shortly, a result not warranted by the Pennsylvania decisions relied on by defendants. Even where a statute by its terms stated that the remedy of appraisal was exclusive, it has been held to relate only to a "good-faith sale" and will not include "a sham sale or legal subterfuge." Weckler v. Valley City Mill. Co., 93 F. Supp. 444, 455-456 (W.D. Mich. 1950), aff'd per curiam, 188 F.2d 367 (6th Cir. 1951); cf. Porges v. Vadsco Sales Corp., 27 Del. Ch. 127, 32 A. 2d 148 (1943); Cole v. National Cash Credit Ass'n, 18 Del. Ch. 47, 156 Atl. 183 (1931).
Although the courts interpreting the Pennsylvania statute have echoed the phrase that appraisal is the exclusive remedy under the law of that state, and the cases appear to be correct in the statement as applied to the peculiar facts of each of those cases, it is submitted that the facts of this case require no strict adherence to the doctrine of exclusivity of the appraisal remedy. Thus, in Duddy v. Conshohocken Printing Co., supra, plaintiff, after dissenting, attacked the fairness of the appraisal proceeding. No allegation was made that the dissenter was not fully informed of the proposed corporate action; i.e., nothing more had been claimed than a disagreement with corporate policy. The holding of the Court is solely that a determination by an appraisal court of the fair value of a dissenter's shares will be set aside only for fraud. Id. 171 Pa.Super. at 142-43 90 A.2d 394. There is no statement in Duddy or in any of the other cases cited by defendants that the appraisal statute would be exclusive where the events leading up to the merger or the merger itself were tainted with fraud.
In Gerstell v. Allentown Portland Cement Co., supra, plaintiff sought to have a merger declared void. The Court held appraisal to be plaintiff's exclusive remedy. The action alleged that the purpose of the merger was to freeze out
minority shareholders. In such a situation, especially where the dissenter is aware of all the material facts, courts have concluded "that the minority stockholder may have to settle for cash." Vorenberg, Exclusiveness of the Dissenting Stockholder's Appraisal Right, 77 Harv. L. Rev. 1189, 1204 (1964) (Footnote omitted); see Blumenthal v. Roosevelt Hotel, Inc., 202 Misc. 988, 115 N.Y.S. 2d 52 (1952); Matteson v. Ziebarth, 40 Wash. 2d 286, 242 P. 2d 1025 (1952). See generally Note, Freezing Out Minority Shareholders, 74 Harv. L. Rev. 1630, 1631 (1961). In Gerstell, supra, there was no showing that the action taken would not have been approved but for fraud on the shareholders. Accordingly, I conclude that in that situation the Court was correct in limiting the dissenter to appraisal.
The case of Newburges, Loeb & Co. v. Baldwin Sec. Corp., supra, stands only for the proposition that a person who does not dissent within the statutory time period will be barred from so doing. The decision does not indicate that the time period will be applied where a plaintiff does not dissent because of a misrepresentation or omission concerning the proposed corporate action.
In Bloch v. Baldwin Locomotive Works, supra, plaintiffs sought to enjoin a merger between Baldwin Locomotive Works and Lima-Hamilton Corporation (which merger caused the formation of BLH). The Pennsylvania court found that the injunction would not issue since appraisal was the dissenters' exclusive right. Again, there was no allegation that the transaction was fraudulent and that this was the reason the action had been approved by the shareholders. Plaintiffs had only alleged that they disagreed with the decision of the majority.
Hubbard v. Jones & Laughlin Steel Corp., supra, involved an attempt to void a merger by preferred shareholders on the grounds that recapitalization was unlawful. Before stating that the dissenter's exclusive remedy was the right of appraisal, the Court specifically found the merger fair. Id. 42 F. Supp. at 436. Again, there was no showing of fraud on the shareholders in their approval of the merger. If such a showing had been made, it is submitted that the result might very well have been different.
Finally, Troupiansky v. Henry Disston & Sons, Inc., supra, held that if the merger complied with §§ 901-909 of the Pennsylvania Business Corporation Law, 15 Purd. Stat. §§ 2852-901 - 2852-909, then § 908, dealing with the dissenter's remedies must be complied with. The case did not in any way deal with the issue of fraud present in the case at bar.
In summary, I think the following statement of Professor Vorenberg would best predict the position that would be taken if a Pennsylvania court were faced with the problem herein:
"[ If ] adequate notice of the transaction has not been given to the stockholders or if the required number of votes has not been validly cast it seems clear enough that a dissenter ought not to be limited to appraisal. Only when a duly constituted and adequately informed majority has in fact spoken should the minority's right to elect appraisal be permitted to ...